UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
| x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2005
or
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission File Number 0-11733
CITY HOLDING COMPANY
(Exact name of registrant as specified in its charter)
| West Virginia | 55-0619957 | |
|
(State of 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) | |
Registrant’s telephone number,
including area code: (304) 769-1100
Securities registered pursuant to Section 12(b) of the Act:
|
Title of Each Class |
Name of Each Exchange on Which Registered: |
|
|
None |
None |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $2.50 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ¨ Yes x No
Indicate by check mark whether the registrant (1) has 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. x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No
As of June 30, 2005, the last business day of the registrant’s most recently completed second quarter, the aggregate market value of the shares of common stock held by non-affiliates, based upon the closing price per share of the registrant’s common stock as reported on the Nasdaq National Market System, was approximately $627.9 million. (Registrant has assumed that all of its executive officers and directors are affiliates. Such assumption shall not be deemed to be conclusive for any other purpose.)
As of February 27, 2006, there were 18,015,292 shares of the Company’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual report to security holders for the fiscal year ended December 31, 2005 are incorporated by reference into Part I, Item 1 and Part II, Items 5, 6, 7, 7A, and 8. Portions of the Proxy Statement for the 2006 annual shareholders’ meeting are incorporated by reference into Part III, Items 10, 11, 12, 13, and 14.
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City Holding Company (the “Company”) is a bank holding company headquartered in Charleston, West Virginia. The Company conducts its principal activities through its wholly-owned subsidiary, City National Bank of West Virginia (“City National”). Through its network of 67 banking offices in West Virginia (55 offices), Kentucky (9 offices), and Ohio (3 offices), City National provides credit, deposit, trust and investment management, and insurance products and services to its customers. In addition to its branch network, City National’s delivery channels include ATMs, check cards, interactive voice response systems, and internet technology. City National has approximately 7% of the deposit market share in West Virginia and the Company is the third largest bank holding company headquartered in West Virginia based on deposit share. The Company’s business activities are currently limited to one reportable business segment, which is community banking.
No portion of City National’s deposits are derived from a single person or persons, the loss of which could have a material adverse effect on liquidity, capital, or other elements of financial performance. Although no portion of City National’s loan portfolio is concentrated within a single industry or group of related industries, it historically has held residential mortgage loans as a significant portion of its loan portfolio. At December 31, 2005, 55% of the Company’s loan portfolio was categorized as residential mortgage and home equity loans. However, due to the fractionated nature of residential mortgage lending, there is no concentration of credits that would be considered materially detrimental to the Company’s financial position or operating results.
The Company’s business is not seasonal and has no foreign sources or applications of funds. There are no anticipated material capital expenditures, or any expected material effects on earnings or the Company’s competitive position as a result of compliance with federal, state and local provisions enacted or adopted relating to environmental protection.
Competition
As noted previously, the Company’s principal markets are located in West Virginia. The majority of the Company’s banking offices are located in the areas of Charleston, Huntington, Beckley and Martinsburg where there is a significant presence of other financial service providers. In its markets, the Company competes with national, regional, and local community banks for deposit, credit, trust and investment management, and insurance customers. In addition to traditional banking organizations, the Company competes with credit unions, finance companies, insurance companies and other financial service providers who are able to provide specialty financial services to targeted customer groups. As further discussed below, changes in laws and regulations enacted in recent years have increased the competitive environment the Company faces to retain and attract customers.
Regulation and Supervision
Overview : The Company, as a registered bank holding company, and City National, as an insured depository institution, operate in a highly regulated environment and are regularly examined by federal and state regulators. The following description briefly discusses certain provisions of federal and state laws and regulations and the potential impact of such provisions to which the Company and City National are subject. These federal and state laws and regulations are designed to reduce potential loss exposure to the depositors of such depository institutions and to the Federal Deposit Insurance Corporation’s insurance fund and are not intended to protect the Company’s security holders. Proposals to change the laws and regulations governing the banking industry are frequently raised in Congress, in state legislatures, and before the various bank regulatory agencies. The likelihood and timing of any changes and the impact such changes might have on the Company are impossible to determine with any certainty. A change in applicable laws or regulations, or a change in the way such laws or regulations are interpreted by regulatory agencies or courts, may have a material impact on the business, operations and earnings of the Company. To the extent that the following information describes statutory or regulatory provisions, it is qualified entirely by reference to the particular statutory or regulatory provision.
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As a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”), the Company is subject to regulation by the Federal Reserve Board. Federal banking laws require a bank holding company to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. Additionally, the Federal Reserve Board has jurisdiction under the BHCA to approve any bank or nonbank acquisition, merger or consolidation proposed by a bank holding company. The BHCA generally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is so closely related to banking or to managing or controlling banks as to be a proper incident thereto. The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring more than 5% of the voting shares of any company and from engaging in any business other than banking or managing or controlling banks. The Federal Reserve Board has by regulation determined that certain activities are closely related to banking within the meaning of the BHCA. These activities include: operating a mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing investment and financial advice; and acting as an insurance agent for certain types of credit-related insurance.
The Gramm-Leach-Bliley Act (“Gramm-Leach”) became law in November 1999. Gramm-Leach established a comprehensive framework to permit affiliations among commercial banks, investment banks, insurance companies, securities firms, and other financial service providers. Gramm-Leach permits qualifying bank holding companies to register with the Federal Reserve Board as “financial holding companies” and allows such companies to engage in a significantly broader range of financial activities than were historically permissible for bank holding companies. Although the Federal Reserve Board provides the principal regulatory supervision of financial services permitted under Gramm-Leach, the Securities and Exchange Commission and state regulators also provide substantial supervisory oversight. In addition to broadening the range of financial services a bank holding company may provide, Gramm-Leach also addressed customer privacy and information sharing issues and set forth certain customer disclosure requirements. The Company has no current plans to petition the Federal Reserve Board for consideration as a financial holding company.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle-Neal”) permits bank holding companies to acquire banks located in any state. Riegle-Neal also allows national banks and state banks with different home states to merge across state lines and allows branch banking across state lines, unless specifically prohibited by state laws.
The International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (USA “Patriot Act”) was adopted in response to the September 11, 2001 terrorist attacks. The Patriot Act provides law enforcement with greater powers to investigate terrorism and prevent future terrorist acts. Among the broad-reaching provisions contained in the Patriot Act are several designed to deter terrorists’ ability to launder money in the United States and provide law enforcement with additional powers to investigate how terrorists and terrorist organizations are financed. The Patriot Act creates additional requirements for banks, which were already subject to similar regulations. The Patriot Act authorizes the Secretary of Treasury to require financial institutions to take certain “special measures” when the Secretary suspects that certain transactions or accounts are related to money laundering. These special measures may be ordered when the Secretary suspects that a jurisdiction outside of the United States, a financial institution operating outside of the United States, a class of transactions involving a jurisdiction outside of the United States or certain types of accounts are of “primary money laundering concern.” The special measures include the following: (a) require financial institutions to keep records and report on transactions or accounts at issue; (b) require financial institutions to obtain and retain information related to the beneficial ownership of any account opened or maintained by foreign persons; (c) require financial institutions to identify each customer who is permitted to use a payable-through or correspondent account and obtain certain information from each customer permitted to use the account; and (d) prohibit or impose conditions on the opening or maintaining of correspondent or payable-through accounts. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
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Capital Adequacy : Federal banking regulations set forth capital adequacy guidelines, which are used by regulatory authorities to assess the adequacy of capital in examining and supervising a bank holding company and its insured depository institutions. The capital adequacy guidelines generally require bank holding companies to maintain total capital equal to at least 8% of total risk-adjusted assets, with at least one-half of total capital consisting of core capital (i.e., Tier I capital) and the remaining amount consisting of “other” capital-eligible items (i.e., Tier II capital), such as perpetual preferred stock, certain subordinated debt, and, subject to limitations, the allowance for loan losses. Tier I capital generally includes common stockholders’ equity plus, within certain limitations, perpetual preferred stock and trust preferred securities. For purposes of computing risk-based capital ratios, bank holding companies must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items, calculated under regulatory accounting practices. The Company’s and City National’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
In addition to total and Tier I capital requirements, regulatory authorities also require bank holding companies and insured depository institutions to maintain a minimum leverage capital ratio of 3%. The leverage ratio is determined as the ratio of Tier I capital to total average assets, where average assets exclude goodwill, other intangibles, and other specifically excluded assets. Regulatory authorities have stated that minimum capital ratios are adequate for those institutions that are operationally and financially sound, experiencing solid earnings, have high levels of asset quality and are not experiencing significant growth. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels. In those instances where these criteria are not evident, regulatory authorities expect, and may require, bank holding companies and insured depository institutions to maintain higher than minimum capital levels.
Additionally, federal banking laws require regulatory authorities to take “prompt corrective action” with respect to depository institutions that do not satisfy minimum capital requirements. The extent of these powers depends upon whether the institutions in question are “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized” or “critically undercapitalized”, as such terms are defined under uniform regulations defining such capital levels issued by each of the federal banking agencies. As an example, a depository institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. Additionally, a depository institution is generally prohibited from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company, may be subject to asset growth limitations and may be required to submit capital restoration plans if the depository institution is considered undercapitalized. The Company’s and City National’s regulatory capital ratios are presented in the following table:
| December 31, | ||||||
| 2005 | 2004 | |||||
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City Holding: |
||||||
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Tier I Risk-based |
15.41 | % | 15.47 | % | ||
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Total |
16.38 | 16.64 | ||||
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Tier I Leverage |
10.97 | 10.74 | ||||
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City National: |
||||||
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Tier I Risk-based |
13.01 | % | 13.32 | % | ||
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Total |
13.99 | 14.49 | ||||
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Tier I Leverage |
9.24 | 9.25 | ||||
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Dividends and Other Payments : The Company is a legal entity separate and distinct from City National. Dividends from City National are essentially the sole source of cash for the Company. The right of the Company, and shareholders of the Company, to participate in any distribution of the assets or earnings of City National through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of City National, except to the extent that claims of the Company in its capacity as a creditor may be recognized. Moreover, there are various legal limitations applicable to the payment of dividends to the Company as well as the payment of dividends by the Company to its shareholders. Under federal law, City National may not, subject to certain limited expectations, make loans or extensions of credit to, or invest in the securities of, or take securities of the Company as collateral for loans to any borrower. City National is also subject to collateral security requirements for any loans or extensions of credit permitted by such exceptions.
City National is subject to various statutory restrictions on its ability to pay dividends to the Company. Specifically, the approval of the Office of the Comptroller of the Currency (“OCC”) is required prior to the payment of dividends by City National in excess of its earnings retained in the current year plus retained net profits for the preceding two years. The payment of dividends by the Company and City National may also be limited by other factors, such as requirements to maintain adequate capital above regulatory guidelines. The OCC has the authority to prohibit any bank under its jurisdiction from engaging in an unsafe and unsound practice in conducting its business. Depending upon the financial condition of City National, the payment of dividends could be deemed to constitute such an unsafe or unsound practice. The Federal Reserve Board and the OCC have indicated their view that it generally would be an unsafe and unsound practice to pay dividends except out of current operating earnings. The Federal Reserve Board has stated that, as a matter of prudent banking, a bank or bank holding company should not maintain its existing rate of cash dividends on common stock unless (1) the organization’s net income available to common shareholders over the past year has been sufficient to fund fully the dividends and (2) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality, and overall financial condition. Moreover, the Federal Reserve Board has indicated that bank holding companies should serve as a source of managerial and financial strength to their subsidiary banks. Accordingly, the Federal Reserve Board has stated that a bank holding company should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of bank subsidiaries, or that can be funded only through additional borrowings or other arrangements that may undermine the bank holding company’s ability to serve as a source of strength.
At December 31, 2005, City National could pay dividends up to $14.1 million plus net profits for 2006, as defined by statute, up to the dividend declaration date without prior regulatory approval. The Company used cash obtained from these dividends primarily to: (1) pay common dividends to stockholders; (2) fund the acquisition of Classic Bankshares, Inc.; and (3) fund repurchases of the Company’s common shares. Management believes that the Company’s available cash balance, together with cash dividends from City National, is adequate to satisfy its funding and cash needs in 2006.
Governmental Policies
The Federal Reserve Board regulates money and credit and interest rates in order to influence general economic conditions. These policies have a significant influence on overall growth and distribution of bank loans, investments and deposits and affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.
Various other legislation, including proposals to overhaul the banking regulatory system and to limit the investments that a depository institution may make with insured funds, are from time to time introduced in Congress. The Company cannot determine the ultimate effect that such potential legislation, if enacted, would have upon its financial condition or operations.
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Executive Officers of the Registrant
At December 31, 2005, the executive officers of the Company were as follows:
| Name |
Age |
Business Experience |
||
| Charles R. Hageboeck | 43 | President and Chief Executive Officer, City Holding Company and City National Bank, Charleston, WV since February 2005. Executive Vice President and Chief Financial Officer, City Holding Company and City National Bank, Charleston, WV from June 2001 – January 2005. Director of Forecasting, Roche Diagnostics Corp. (a medical diagnostic manufacturer), Indianapolis, IN from 2000 - 2001. Chief Financial Officer, Peoples Bank Corp. of Indianapolis, IN from 1997 - 1999. | ||
| Craig G. Stilwell | 50 | Executive Vice President of Retail Banking, City Holding Company and City National Bank, Charleston, WV since February 2005. Executive Vice President of Marketing & Human Resources, City Holding Company and City National Bank, Charleston, WV from May 2001 – February 2005. Olive LLP (a regional accounting and consulting firm specializing in financial institutions), Indianapolis, IN from 1999 - 2001. Senior Vice President, Human Resources & Marketing, Peoples Bank Corp. of Indianapolis, IN from 1978 - 1999. | ||
| John A. DeRito | 56 | Executive Vice President of Commercial Banking, City Holding Company and City National Bank, Charleston, WV since June 2004. Regional Credit Officer for the West Virginia Central Region of BB&T, Charleston, WV from 2000 - 2004. Senior Vice President and Credit Officer, One Valley Bank, Charleston, WV from 1998 - 2000. Vice President and Credit Officer, One Valley Bank, Charleston, WV from 1983 – 1998. | ||
| John W. Alderman, III | 41 | Senior Vice President and Chief Legal Counsel, City Holding Company and City National Bank since April 1997. | ||
| David L. Bumgarner | 40 | Senior Vice President and Chief Financial Officer, City Holding Company and City National Bank since 2005. Audit Senior Manager, Arnett & Foster, PLLC from August 2000 – January 2005. Assistant Controller/Director of Accounting, Eastern States Oil & Gas, Inc. from May 1998 – August 2000. | ||
Employees
The Company had 770 full-time equivalent employees at December 31, 2005.
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Available Information
The Company’s Internet website address is www.cityholding.com . The Company makes available free of charge through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission. The information on the Company’s website is not, and shall not be deemed to be, a part of this report or incorporated into any other filing with the Securities and Exchange Commission. Copies of the Company’s annual report will be made available, free of charge, upon written request.
Statistical Information
The information noted below is provided pursuant to Guide 3 — Statistical Disclosure by Bank Holding Companies. Page references are to the Annual Report to Shareholders for the year ended December 31, 2005 and such pages have been filed as an exhibit to this Form 10-K and are incorporated herein by reference.
|
Description of Information |
Page
Reference |
|||||
|
1. |
Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential | |||||
| a. | Average Balance Sheets | 5 | ||||
| b. | Analysis of Net Interest Earnings | 6-7 | ||||
| c. | Rate Volume Analysis of Changes in Interest Income and Expense | 7 | ||||
|
2. |
Investment Portfolio | |||||
| a. | Book Value of Investments | 13 | ||||
| b. | Maturity Schedule of Investments | 13 | ||||
| c. | Securities of Issuers Exceeding 10% of Stockholders’ Equity | 13 | ||||
|
3. |
Loan Portfolio | |||||
| a. | Types of Loans | 14 | ||||
| b. | Maturities and Sensitivity to Changes in Interest Rates | 14 | ||||
| c. | Risk Elements | 17 | ||||
| d. | Other Interest Bearing Assets | N/A | ||||
|
4. |
Summary of Loan Loss Experience | 17 | ||||
|
5. |
Deposits | |||||
| a. | Breakdown of Deposits by Categories, Average Balance and Average Rate Paid | 5 | ||||
| b. | Maturity Schedule of Time Certificates of Deposit and Other Time Deposits of $100,000 or More | 20 | ||||
|
6. |
Return on Equity and Assets | 4 | ||||
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7. |
Short-term Borrowings | 20 | ||||
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An investment in the Company’s common stock is subject to risks inherent to the Company’s business. The material risks and uncertainties that management believes affect the Company are described below. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations. You should carefully consider the risks described below, as well as the other information included or incorporated by reference in this Annual Report on Form 10-K, before making an investment in the Company’s common stock. If any of the following risks occur, the Company’s financial condition and results of operations could be materially and adversely affected, and you could lose all or part of your investment.
The Value of the Company’s Common Stock May Fluctuate
The market for the Company’s common stock may experience significant price and volume fluctuations in response to a number of factors including actual or anticipated quarterly variations in operating results, changes in expectations of future financial performance, changes in estimates by securities analysts, governmental regulatory action, banking industry reform measures, customer relationship developments and other factors, many of which will be beyond the Company’s control.
Furthermore, the stock market in general, and the market for financial institutions in particular, have experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of the Company’s common stock, regardless of actual operating performance.
The Trading Volume In The Company’s Common Stock Is Less Than That Of Other Larger Financial Services Companies
Although the Company’s common stock is listed for trading on the Nasdaq Stock Market, Inc. (NASDAQ), the trading volume in its common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Company’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. Given the lower trading volume of the Company’s common stock, significant sales of the Company’s common stock, or the expectation of these sales, could cause the Company’s stock price to fall.
Future Sales of Shares of the Company’s Common Stock Could Negatively Affect its Market Price
Future sales of substantial amounts of the Company’s common stock, or the perception that such sales could occur, could adversely affect the market price of the Company’s common stock in the open market. We make no prediction as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Company’s common stock.
Shares of the Company’s Common Stock Are Not FDIC Insured
Neither the Federal Deposit Insurance Corporation nor any other governmental agency insures the shares of the Company’s common stock. Therefore, the value of your shares in the Company will be based on their market value and may decline.
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Anti-takeover Defenses May Delay or Prevent Future Mergers
The Company has entered into a Rights Agreement with SunTrust, as its rights agent, designed to discourage the accumulation of shares in excess of 15% of the Company’s outstanding shares. This agreement could limit the price that some investors might be willing to pay in the future for shares of the Company’s common stock and may have the effect of delaying or preventing a change in control.
The Company’s Ability To Pay Dividends Is Limited
Holders of shares of the Company’s common stock are entitled to dividends if, and when, they are declared by the Company’s Board of Directors out of funds legally available for that purpose. Although the Board of Directors has declared cash dividends in the past, the current ability to pay dividends is largely dependent upon the receipt of dividends from the City National. Federal and state laws impose restrictions on the ability of the City National to pay dividends. Additional restrictions are placed upon the Company by the policies of federal regulators, including the Federal Reserve Board’s November 14, 1985 policy statement, which provides that bank holding companies should pay dividends only out of the past year’s net income, and then only if their prospective rate of earnings retention appears consistent with their capital needs, asset quality, and overall financial condition. In general, future dividend policy is subject to the discretion of the Board of Directors and will depend upon a number of factors, including the Company’s and City National’s future earnings, capital requirements, regulatory constraints and financial condition.
An Economic Slowdown in West Virginia, Kentucky, and Ohio Could Hurt Our Business
Because the Company focuses its business in West Virginia, Kentucky, and Ohio, an economic slowdown in these states could hurt our business. An economic slowdown could have the following consequences:
| • | Loan delinquencies may increase; |
| • | Problem assets and foreclosures may increase; |
| • | Demand for the products and services of City National may decline; and |
| • | Collateral (including real estate) for loans made by City National may decline in value, in turn reducing customers’ borrowing power, and making existing loans less secure. |
The Company and City National are Extensively Regulated
The operations of the Company and City National are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on them. Policies adopted or required by these governmental authorities can affect the Company’s business operations and the availability, growth and distribution of the Company’s investments, borrowings and deposits. In addition, the Office of the Comptroller of the Currency periodically conducts examinations of the Company and City National and may impose various requirements or sanctions.
Proposals to change the laws governing financial institutions are frequently raised in Congress and before bank regulatory authorities. Changes in applicable laws or policies could materially affect the Company’s business, and the likelihood of any major changes in the future and their effects are impossible to determine. Moreover, it is impossible to predict the ultimate form any proposed legislation might take or how it might affect the Company.
The Company is Subject to Interest Rate Risk
The Company’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Company’s ability to originate loans and obtain deposits, (ii) the fair value of the Company’s financial assets and
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liabilities, and (iii) the average duration of the Company’s mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.
Although management believes it has implemented effective asset and liability management strategies, including the use of derivatives as hedging instruments, to reduce the potential effects of changes in interest rates on the Company’s results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Company’s financial condition and results of operations. See the section captioned “Risk Management” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations located elsewhere in this report for further discussion related to the Company’s management of interest rate risk.
The Company’s Allowance for Loan Losses May Not Be Sufficient
The Company maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense that represents management’s best estimate of probable losses in the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Company’s control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review the Company’s allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, the Company will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on the Company’s financial condition and results of operations.
Management evaluates the adequacy of the allowance for loan losses at least quarterly, which includes testing certain individual loans as well as collective pools of loans for impairment. This evaluation includes an assessment of actual loss experience within each category of the portfolio, individual commercial and commercial real estate loans that exhibit credit weakness; current economic events, including employment statistics, trends in bankruptcy filings, and other pertinent factors; industry or geographic concentrations, and regulatory guidance. See the section captioned “Allowance and Provision for Loan Losses” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations located elsewhere in this report for further discussion related to the Company’s process for determining the appropriate level of the allowance for loan losses.
Customers May Default On The Repayment Of Loans
City National’s customers may default on the repayment of loans, which may negatively impact the Company’s earnings due to loss of principal and interest income. Increased operating expenses may result from the allocation of management time and resources to the collection and work-out of the loan. Collection efforts may or may not be successful causing the Company to write off the loan or repossess the collateral securing the loan, which may or may not exceed the balance of the loan.
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Previously Securitized Loans May Become Impaired
City National’s previously securitized loans may become impaired, requiring an impairment charge to be recognized through the Company’s provision for loan losses. The Company accounts for the previously securitized loans by accreting into income the original discount on these loans based on their estimated collectibility. This requires the Company to make estimates for prepayments and defaults on previously securitized loans. Should any of the actual prepayments or defaults adversely impact collectibiltiy of these loans, the Company would be required to take an impairment charge on the previously securitized loans. See the section captioned “Retained Interests and Previously Securitized Loans” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations located elsewhere in this report for further discussion related to the Company’s process for determining the appropriate valuation of the Company’s previously securitized loans.
Due To Increased Competition, the Company May Not Be Able To Attract And Retain Banking Customers At Current Levels
The Company faces competition from the following:
| • | local, regional and national banks; |
| • | savings and loans; |
| • | internet banks; |
| • | credit unions; |
| • | finance companies; and |
| • | brokerage firms serving the Company’s market areas. |
In particular, City National’s competitors include several major national financial and banking companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions may have products and services not offered by the Company, which may cause current and potential customers to choose those institutions. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits and range and quality of services provided. If the Company is unable to attract new and retain current customers, loan and deposit growth could decrease causing the Company’s results of operations and financial condition to be negatively impacted.
The Company May Be Required To Write Down Goodwill And Other Intangible Assets, Causing Its Financial Condition And Results To Be Negatively Affected
When the Company acquires a business, a portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets. The excess of the purchase price over the net identifiable assets acquired determines the amount of the purchase price that is allocated to goodwill and other intangible assets acquired. At December 31, 2005, the Company’s goodwill and other identifiable intangible assets were approximately $59.6 million. Under current accounting standards, if the Company determines goodwill or intangible assets are impaired, it would be required to write down the value of these assets. The Company conducts an annual review to determine whether goodwill and other identifiable intangible assets are impaired. The Company recently completed such an impairment analysis and concluded that no impairment charge was necessary for the year ended December 31, 2005. The Company cannot provide assurance whether it will be required to take an impairment charge in the future. Any impairment charge would have a negative effect on its shareholders’ equity and financial results and may cause a decline in our stock price.
12
Acquisition Opportunities May Present Challenges
The Company continually evaluates opportunities to acquire other businesses. However, the Company may not have the opportunity to make suitable acquisitions on favorable terms in the future, which could negatively impact the growth of its business. The Company expects that other banking and financial companies, many of which have significantly greater resources, will compete with it to acquire compatible businesses. This competition could increase prices for acquisitions that the Company would likely pursue, and its competitors may have greater resources than it does. Also, acquisitions of regulated businesses such as banks are subject to various regulatory approvals. If the Company fails to receive the appropriate regulatory approvals, it will not be able to consummate an acquisition that it believes is in its best interests.
Any future acquisitions may result in unforeseen difficulties, which could require significant time and attention from our management that would otherwise be directed at developing our existing business. In addition, we could discover undisclosed liabilities resulting from any acquisitions for which we may become responsible. Further, the benefits that we anticipate from these acquisitions may not develop.
The Company’s Controls and Procedures May Fail or Be Circumvented
Management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, no matter how well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition.
The Company May Not Be Able To Attract and Retain Skilled People
The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by the Company can be intense and the Company may not be able to hire people or to retain them. The unexpected loss of services of one or more of the Company’s key personnel could have a material adverse impact on the Company’s business because of their skills, knowledge of the Company’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
Item 1B Unresolved Staff Comments
None
City National owns the Company’s executive offices, located at 25 Gatewater Road, Charleston, West Virginia. City National operates 67 branch offices, with 55 offices in West Virginia, nine in Kentucky, and three offices in Ohio. The West Virginia locations are primarily centered in the Charleston, Huntington, Beckley, and Martinsburg markets. City National owns 48 locations and leases 19 locations, pursuant to operating leases. All of the properties are suitable and adequate for their current operations and are generally being fully utilized.
City National also owns a thirty thousand square foot office building in an unincorporated area approximately fifteen miles west of Charleston, West Virginia. This facility formally housed loan operations personnel, but has since been vacated. The building is currently being marketed for sale.
13
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, the Company could realize positive and/or negative impact to its financial performance in the period in which these legal actions are ultimately decided. There can be no assurance that current actions will have immaterial results, either positive or negative, or that no material actions may be presented in the future.
Item 4 Submission of Matters to a Vote of Security Holders
None
14
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Pages 2 and 44-45 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 2005, included in this report as Exhibit 13, are incorporated herein by reference.
Item 6 Selected Financial Data
Selected Financial Data on page 1 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 2005, included in this report as Exhibit 13, is incorporated herein by reference.
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 2 through 22 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 2005, included in this report as Exhibit 13, is incorporated herein by reference.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Information appearing under the caption “Risk Management” appearing on pages 10-11 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 2005, included in this report as Exhibit 13, is incorporated herein by reference.
Item 8 Financial Statements and Supplementary Data
The consolidated financial statements, notes to consolidated financial statements, reports of management and the independent registered public accounting firm included on pages 23 through 52 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 2005, included in this report as Exhibit 13, are incorporated herein by reference.
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
Item 9A Controls and Procedures
Pursuant to Rule 13a-15b 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 Rules 13a-15(e) and 15d-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 Securities and Exchange Commission filings.
| (a) | Management’s annual report on internal control over financial reporting appears on page 23 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 2005, included in this report as Exhibit 13, is incorporated herein by reference. |
| (b) | The attestation report of the registered public accounting firm on management’s assessment of the Company’s internal control over financial reporting appears on page 24 of the Annual Report to Shareholders of City Holding Company for the year ended December 31, 2005, included in this report as Exhibit 13, is incorporated herein by reference. |
| (c) | The Company did not have any changes in internal control over financial reporting during its fourth quarter for the year ending December 31, 2005, that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting. |
None
15
Item 10 Directors and Executive Officers of the Registrant
Information concerning the directors of the Company will appear under the caption “ELECTION OF DIRECTORS” in the Company’s 2006 Proxy Statement that will be filed within 120 days of fiscal year end and is hereby incorporated by reference.
Certain information regarding executive officers is included under the section captioned “Executive Officers of The Registrant” in Part I, Item 1, elsewhere in this Annual Report on Form 10-K.
Information concerning the Company’s audit committee is included under the caption “AUDIT COMMITTEE” in the Company’s 2006 Proxy Statement that will be filed within 120 days of fiscal year end and is hereby incorporated by reference.
Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 will be provided under the caption “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in the Company’s 2006 Proxy Statement that will be filed within 120 days of fiscal year end and is hereby incorporated by reference.
The Company has adopted a Code of Ethics that applies to the Company’s chief executive officer, chief financial officer, chief accounting officer, and all directors, officers and employees of the Company and has posted such Code of Ethics on its website at www.cityholding.com under the “Corporate Governance” link. A copy of the Company’s Code of Ethics covering all employees will be mailed upon request to Investor Relations, City Holding Company, 25 Gatewater Road, P. O. Box 7520, Charleston, WV 25356-0520. Any amendments to or waivers from any provision of the Code of Ethics applicable to the Company’s chief executive officer, chief financial officer, or chief accounting officer will be disclosed by timely posting such information on the Company’s internet website.
Item 11 Executive Compensation
The information required by Item 11 of FORM 10-K appears under the captions “EXECUTIVE COMPENSATION”, “COMPENSATION OF DIRECTORS”, “COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION”, and “OTHER EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS” in the Company’s 2006 Proxy Statement that will be filed within 120 days of fiscal year end and is hereby incorporated by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 of FORM 10-K appears under the captions “STOCK OWNERSHIP OF DIRECTORS, NOMINEES FOR DIRECTOR AND NAMED EXECUTIVE OFFICERS” and “EQUITY COMPENSATION PLAN INFORMATION” in the Company’s 2006 Proxy Statement that will be filed within 120 days of fiscal year end and is hereby incorporated by reference.
Item 13 Certain Relationships and Related Transactions
The information required by Item 13 of FORM 10-K appears under the caption “CERTAIN TRANSACTIONS INVOLVING DIRECTORS AND EXECUTIVE OFFICERS” in the Company’s 2006 Proxy Statement that will be filed within 120 days of fiscal year end and is hereby incorporated by reference.
Item 14 Principal Accounting Fees and Services
The information required by Item 14 of FORM 10-K appears under the caption “PRINCIPAL ACCOUNTING FEES AND SERVICES” in the Company’s 2006 Proxy Statement that will be filed within 120 days of fiscal year end and is hereby incorporated by reference.
16
Item 15 Exhibits, Financial Statement Schedules
|
(a) |
(1) Financial Statements: Reference is made to Part II, Item 8, of this Annual Report on Form 10-K. |
|
|
(2) Financial Statement Schedules: These schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. |
||
|
(3) Exhibits: The exhibits listed in the “Exhibit Index” on pages 21-23 of this Annual Report on Form 10-K included herein are filed herewith or incorporated by reference from previous filings. |
||
|
(b) |
See (a) (3) above. | |
| (c) | See (a) (1) and (2) above. | |
17
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| City Holding Company |
|
(Registrant) |
|
/s/ Charles R. Hageboeck |
|
Charles R. Hageboeck |
|
President and Chief Executive Officer |
|
(Principal Executive Officer) |
|
/s/ David L. Bumgarner |
|
David L. Bumgarner |
|
Senior Vice President and Chief Financial Officer |
|
(Principal Financial Officer) |
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 22, 2006. Each of the directors and/or officers of City Holding Company whose signature appears below hereby appoints E. M. Payne, III, and/or Charles R. Hageboeck, as his attorney-in-fact to sign in his name and behalf, in any and all capacities stated below and to file with the Securities and Exchange Commission, any and all amendments to this report on Form 10-K, making such changes in this report on Form 10-K as appropriate, and generally to do all such things in their behalf in their capacities as officers and directors to enable City Holding Company to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission.
|
/s/ E. M. Payne, III |
/s/ Charles R. Hageboeck |
|
| E. M. Payne, III | Charles R. Hageboeck | |
| Chairman | Director, President, and Chief Executive Officer | |
|
/s/ Samuel M. Bowling |
/s/ C. Dallas Kayser |
|
| Samuel M. Bowling | C. Dallas Kayser | |
| Director | Director | |
|
/s/ Hugh R. Clonch |
/s/ Philip L. McLaughlin |
|
| Hugh R. Clonch | Philip L. McLaughlin | |
| Director | Director | |
18
|
/s/ Oshel B. Craigo |
/s/ James L. Rossi |
|
| Oshel B. Craigo | James L. Rossi | |
| Director | Director | |
|
/s/ William H. File, III |
/s/ Sharon H. Rowe |
|
| William H. File, III | Sharon H. Rowe | |
| Director | Director | |
|
/s/ Robert D. Fisher |
/s/ James E. Songer, II |
|
| Robert D. Fisher | James E. Songer, II | |
| Director | Director | |
|
/s/ Jay C. Goldman |
|
|
| Jay C. Goldman | Albert M. Tieche, Jr. | |
| Director | Director | |
|
/s/ David W. Hambrick |
/s/ Mary H. Williams |
|
| David W. Hambrick | Mary H. Williams | |
| Director | Director | |
|
/s/ Tracy W. Hylton, II |
||
| Tracy W. Hylton, II | ||
| Director | ||
19
The following exhibits are filed herewith or are incorporated herein by reference.
| Exhibit |
Description |
|
| 3(a) | Articles of Incorporation of City Holding Company (attached to, and incorporated by reference from, Amendment No. 1 to City Holding Company’s Registration Statement on Form S-4, Registration No. 2-86250, filed November 4, 1983 with the Securities and Exchange Commission). | |
| 3(b) | Articles of Amendment to the Articles of Incorporation of City Holding Company, dated March 6, 1984 (attached to, and incorporated by reference from, City Holding Company’s Form 8-K Report dated March 7, 1984, and filed with the Securities and Exchange Commission on March 22, 1984). | |
| 3(c) | Articles of Amendment to the Articles of Incorporation of City Holding Company, dated March 4, 1986 (attached to, and incorporated by reference from, City Holding Company’s Form 10-K Annual Report for the year ended December 31, 1986, filed March 31, 1987 with the Securities and Exchange Commission). | |
| 3(d) | Articles of Amendment to the Articles of Incorporation of City Holding Company, dated September 29, 1987 (attached to and incorporated by reference from, City Holding Company’s Registration Statement on Form S-4, Registration No. 33-23295, filed with the Securities and Exchange Commission on August 3, 1988). | |
| 3(e) | Articles of Amendment to the Articles of Incorporation of City Holding Company, dated May 6, 1991 (attached to, and incorporated by reference from, City Holding Company’s Form 10-K Annual Report for the year ended December 31, 1991, filed March 17, 1992 with the Securities and Exchange Commission). | |
| 3(f) | Articles of Amendment to the Articles of Incorporation of City Holding Company, dated May 7, 1991 (attached to, and incorporated by reference from, City Holding Company’s Form 10-K Annual Report for the year ended December 31, 1991, filed March 17, 1992 with the Securities and Exchange Commission). | |
| 3(g) | Articles of Amendment to the Articles of Incorporation of City Holding Company, dated August 1, 1994 (attached to, and incorporated by reference from, City Holding Company’s Form 10-Q Quarterly Report for the quarter ended September 30, 1994, filed November 14, 1994 with the Securities and Exchange Commission). | |
| 3(h) | Articles of Amendment to the Articles of Incorporation of City Holding Company, dated December 9, 1998 (attached to, and incorporated by reference from, City Holding Company’s Form 10-K Annual Report for the year ended December 31, 1998, filed March 31, 1999 with the Securities and Exchange Commission). | |
| 3(i) | Articles of Amendment to the Articles of Incorporation of City Holding Company, dated June 13, 2001 (attached to, and incorporated by reference from, City Holding Company’s Registration Statement on Form 8-A, filed June 22, 2001 with the Securities and Exchange Commission). | |
| 3(j) | Amended and Restated Bylaws of City Holding Company, revised December 21, 2005. | |
| 4(a) | Rights Agreement, dated as of June 13, 2001 (the “Rights Agreement”), between City Holding Company and SunTrust Bank, as Rights Agent (attached to, and incorporated by reference from, City Holding Company’s Registration Statement on Form 8-A, filed June 22, 2001 with the Securities and Exchange Commission). | |
20
| 4(b) | Amendment No. 1 to the Rights Agreement dated as of November 30, 2005 (attached to, and incorporated by reference from City Holding Company’s Amendment No. 1 on From 8-A, filed December 21, 2005, with the Securities and Exchange Commission). | |
| 10(a) | Directors’ Deferred Compensation Plan for the Directors of the Bank of Raleigh, dated January 1987 (attached to and incorporated by reference from, City Holding Company’s Form 10-K Annual Report for the year ended December 31, 2004, filed March 2, 2005 with the Securities and Exchange Commission). | |
| 10(b) | Form of Deferred Compensation Agreement for the Directors of the National Bank of Summers, dated January 15, 1987 (attached to and incorporated by reference from, City Holding Company’s Form 10-K Annual Report for the year ended December 31, 2004, filed March 2, 2005 with the Securities and Exchange Commission). | |
| 10(c) | Junior Subordinated Indenture, dated as of March 31, 1998, between City Holding Company and The Chase Manhattan Bank, as Trustee (attached to, and incorporated by reference from, City Holding Company’s Registration Statement on Form S-4, Registration No. 333-62419, filed with the Securities and Exchange Commission on August 28, 1998). | |
| 10(d) | Form of City Holding Company’s 9.15% Debenture due April 1, 2028 (attached to, and incorporated by reference from, City Holding Company’s Registration Statement on Form S-4, Registration No. 333-62419, filed with the Securities and Exchange Commission on August 28, 1998). | |
| 10(e) | City Holding Company’s 1993 Stock Incentive Plan (attached to, and incorporated by reference from, Exhibit 4.1 to City Holding Company’s Registration Statement on Form S-8, Registration No. 333-87667, filed with the Securities and Exchange Commission on September 23, 1999). | |
| 10(f) | Amendment No. 1 to City Holding Company’s 1993 Stock Incentive Plan (attached to, and incorporated by reference from, Exhibit 4.2 to City Holding Company’s Registration Statement on Form S-8, Registration No. 333-87667, filed with the Securities and Exchange Commission on September 23, 1999). | |
| 10(g) | Amendment No. 2 to City Holding Company’s 1993 Stock Incentive Plan (attached to, and incorporated by reference from, City Holding Company’s Form 10-Q Quarterly Report for the quarter ended June 30, 2002, filed August 14, 2002 with the Securities and Exchange Commission). | |
| 10(h) | City Holding Company’s 2003 Incentive Plan (attached to, and incorporated by reference from, City Holding Company’s Definitive Proxy Statement, filed March 21, 2003 with the Securities and Exchange Commission). | |
| 10(i) | Form of Amended and Restated Employment Agreement, dated as of November 18, 2003, by and between City Holding Company and Gerald R. Francis (attached to and incorporated by reference from, City Holding Company’s Form 10-K Annual Report for the year ended December 31, 2003, filed March 11, 2004 with the Securities and Exchange Commission). | |
| 10(j) | Form of Amended and Restated Employment Agreement, dated as of November 18, 2003, by and between City Holding Company and William L. Butcher (attached to and incorporated by reference from, City Holding Company’s Form 10-K Annual Report for the year ended December 31, 2003, filed March 11, 2004 with the Securities and Exchange Commission). | |
21
| 10(k) | Form of Amended and Restated Employment Agreement, dated as of November 18, 2003, by and between City Holding Company and Charles R. Hageboeck (attached to and incorporated by reference from, City Holding Company’s Form 10-K Annual Report for the year ended December 31, 2003, filed March 11, 2004 with the Securities and Exchange Commission). | |
| 10(l) | Form of Amended and Restated Employment Agreement, dated as of November 18, 2003, by and between City Holding Company and Craig Stilwell (attached to and incorporated by reference from, City Holding Company’s Form 10-K Annual Report for the year ended December 31, 2003, filed March 11, 2004 with the Securities and Exchange Commission). | |
| 10(m) | Form of Amendment to Employment Agreement, dated as of February 1, 2005, by and between City Holding Company and Charles R. Hageboeck (attached to and incorporated by reference from, City Holding Company’s Form 10-K Annual Report for the year ended December 31, 2004, filed March 2, 2005 with the Securities and Exchange Commission). | |
| 10(n) | Form of Change of Control Agreement, dated February 1, 2005, by and between City Holding Company and David L. Bumgarner (attached to and incorporated by reference from, City Holding Company’s Form 10-K Annual Report for the year ended December 31, 2004, filed March 2, 2005 with the Securities and Exchange Commission). | |
| 10(o) | Form of Amendment to Employment Agreement, dated as of February 25, 2005, by and between City Holding Company and Craig Stilwell (attached to and incorporated by reference from, City Holding Company’s Form 10-K Annual Report for the year ended December 31, 2004, filed March 2, 2005 with the Securities and Exchange Commission). | |
| 10(p) | Form of Employment Agreement, dated March 14, 2002, by and between City Holding Company and John W. Alderman, III. | |
| 10(q) | Form of Change in Control and Termination Agreement, dated June 28, 2004, by and between City Holding Company and John A. DeRito. | |
| 10(r) | Description of Base Salaries of Named Executive Officers for 2006, (incorporated by reference from City Holding Company’s Current Report on Form 8-K filed February 23, 2006 with the Securities and Exchange Commission). | |
| 13 | Portions of City Holding Company Annual Report to Shareholders for Year Ended December 31, 2005. | |
| 21 | Subsidiaries of City Holding Company | |
| 23 | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm | |
| 24 | Power of Attorney (included on the signature page hereof) | |
| 31(a) | Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Charles R. Hageboeck | |
| 31(b) | Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by David L. Bumgarner | |
| 32(a) | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Charles R. Hageboeck | |
| 32(b) | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by David L. Bumgarner | |
22
Exhibit 3(j)
CITY HOLDING COMPANY
AMENDED AND RESTATED BYLAWS
ARTICLE I
SHAREHOLDERS
Section 1. Annual Meetings. The annual meeting of the shareholders shall be held at the principal office of the corporation at Charleston, Kanawha County, West Virginia, on the 30th of March of each year, or at such other place and on such other date as the Board of Directors may designate by resolution from time to time.
For the purpose of determining shareholders entitled to vote at the annual meeting of the shareholders or any adjournment thereof, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date to be not more than fifty days and not less than ten days prior to the date of the annual meeting.
Section 2. Special Meetings. Special meetings of the shareholders may be called at any time by the Board of Directors or by the President and Secretary, or by any three or more shareholders holding together not less than ten percentum (10%) of the capital stock of the corporation.
For the purpose of determining shareholders entitled to vote at the special meeting of the shareholders or any adjournment thereof, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date to be not more than fifty days and not less than ten days prior to the date of the special meeting.
Section 3. Notice of Meetings. Notice of either annual or special meetings of the shareholders shall be given by mailing to each shareholder of record at his last know post office address, postage prepaid, at least ten (10) days prior to the date of the meeting, a written notice thereof. Such notice shall state the time and place of the meeting. The call for the meeting, if made by shareholders, shall be signed by the shareholders making the call. If the call should be made by the Board of Directors, it shall be signed by the President, a Vice President or the Secretary of the corporation. If the call be made by the President and the Secretary, it shall be signed by both of them. The notice of special meetings of the shareholders shall state the business to be transacted, and no business other than that included in the notice or incidental thereto shall be transacted at any such meeting. If such notice is mailed, it shall be deemed to have been given to a shareholder when deposited in the United States mail, postage prepaid, directed to the shareholder at such shareholder’s address as it appears on the record of shareholders of the corporation. Such further notice shall be given as may be required by law. A written waiver of any notice of any annual or special meeting signed by the person entitled thereto, shall be deemed equivalent to notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the shareholders needs to be specified in a written waiver of notice. Attendance of a shareholder at a meeting of shareholders shall constitute a waiver of notice of such meeting, except when the shareholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not lawfully called or convened.
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Section 4. Notice of Shareholder Business and Nominations
(a) Annual Meetings of Shareholders .
| (i) | Nominations of persons for election to the Board of Directors and the proposal of business to be considered by shareholders at an annual meeting may be made only (A) by the Board of Directors or the Chief Executive Officer, or (B) by any shareholder entitled to vote at the meeting who complies with the requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) and rules and regulations promulgated thereunder and the notice procedures set forth in clause (ii) of this Section 4(a) and who was a shareholder of record at the time such notice is delivered to the Secretary of the corporation. |
| (ii) | For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to clause (B) of paragraph (a)(i) of this Section 4, the shareholder must have given timely notice thereof in writing to the Secretary and any such business must be a proper matter for shareholder action. To be timely, a shareholder’s notice shall be delivered to the Secretary at the principal executive offices of the corporation not less than 120 calendar days prior to the first anniversary of the previous year’s annual meeting. If no annual meeting was held in the previous year or the date of the annual meeting was changed by more than 30 days from the anniversary date of the previous year’s annual meeting, notice by the shareholder must be so received not later than 120 calendar days prior to such annual meeting or 10 calendar days following the date on which public announcement of the date of the meeting is first made. |
| (iii) |
In no event shall an adjournment or postponement of an annual meeting (or the public announcement thereof) commence a new time period (or extend any time period) for the giving of shareholders’ notice as described below. Such shareholder’s notice shall set forth (A) as to each person whom the shareholder proposes to nominate for election or reelection as a Director all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act, and Rule 14a-11 thereunder, including such person’s written consent to being named in the proxy statement as a nominee and to serving as a Director if elected; (B) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and, in the event that such business includes a proposal to amend either the Articles of Incorporation or the bylaws, the language of the proposed amendment; (C) any material interest in such business of such shareholder and of any beneficial owner on whose behalf the proposal is made and, in case of nominations, a description of all arrangements or understandings between the shareholder and each nominee and any other persons (naming them) pursuant to which the nominations are to be made by the shareholder; (D) a representation that the |
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|
shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by a qualified representative at the meeting to propose such business; (E) if the shareholder intends to solicit proxies in support of such shareholder’s proposals, a representation to that effect; and (F) as to the shareholder giving the notice and any beneficial owner on whose behalf the nomination or proposal is made, (1) the name and address of such shareholder, as it appears on the corporation’s books, and of such beneficial owner and (2) the class and number of shares of the corporation which are owned beneficially and of record by such shareholder and such beneficial owner. If such shareholder does not appear or send a qualified representative to present such proposal at such annual meeting, the corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the corporation. The presiding officer of any annual meeting of shareholders shall refuse to permit any business proposed by a shareholder to be brought before such annual meeting without compliance with the foregoing procedures or if the shareholder solicits proxies in support of such shareholder’s proposal without such shareholder having made the representation required by clause (E) above. |
(b) Special Meetings of Shareholders .
| (i) | Only such business as shall have been brought before the special meeting of the shareholders pursuant to the corporation’s notice of meeting pursuant to Article I, Section 3 of these bylaws shall be conducted at such meeting. |
| (ii) | In the event that Directors are to be elected at a special meeting of shareholders pursuant to the corporation’s notice of meeting, nominations of persons for election to the Board of Directors may be made at such special meeting of shareholders (1) by the Board of Directors or (2) by any shareholder entitled to vote at the meeting who complies with the notice procedures set forth in this Section 4 and who is a shareholder of record at the time such notice is delivered to the Secretary. Nominations by shareholders of persons for election to the Board of Directors may be made at such special meeting if the shareholder’s notice required by paragraph (a)(ii) of this Section 4 shall be delivered to the Secretary at the principal executive offices of the corporation not later than 150 calendar days prior to such special meeting or 10 calendar days following the date on which public announcement of the date of the special meeting and of the nominees to be elected at such meeting is first made. In no event shall the adjournment or postponement of a special meeting (or the public announcement thereof) commence a new time period (or extend any time period) for the giving of a shareholder’s notice as described above. |
(c) General . Only persons who are nominated in accordance with the procedures set forth in this Section 4 and in Article II, Section 15 herein shall be eligible to serve as Directors and only such business shall be conducted at a meeting of shareholders as shall have been
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brought before the meeting in accordance with the procedures set forth in this Section 4. Except as otherwise provided by law, the Articles of Incorporation or these bylaws, the presiding officer of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed in accordance with the procedures set forth in this Section 4 and, if any proposed nomination or business is not in compliance with this Section 4, to declare that such defective proposal or nomination shall be disregarded.
Section 5. Quorum. The holders of a majority of all the shares of the capital stock of the corporation entitled to vote shall constitute a quorum at any meeting for all purposes, including the election of Directors. Any number less than a quorum present may adjourn any shareholders’ meeting until a quorum is present.
Section 6. Conduct of Meetings . The Board of Directors may adopt rules for the conduct of meetings of shareholders. Unless inconsistent with any such rules, the presiding officer shall convene and adjourn the meeting and prescribe such appropriate procedures for the conduct of the meeting. Such procedures may include: (i) establishment of an agenda for the meeting; (ii) procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to shareholders of record of the corporation, their proxies or such other persons as the presiding officer shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Meetings of shareholders shall not be required to be held in accordance with the rules of parliamentary procedure.
Section 7. Voting. In all elections of Directors, each shareholder shall have the right to cast one (1) vote for each share of stock owned by him and entitled to a vote, and he may cast the same in person or by proxy, for as many persons as there are Directors to be elected, or he may cumulate such votes and give one candidate as many votes as the number of Directors to be elected multiplied by the number of his shares of stock shall equal; or he may distribute them on the same principle among as many candidates and in such manner as he shall desire, and the Directors shall not be elected in any other manner; and on any other question to be determined by a vote of shares at any meeting of shareholders, each shareholder shall be entitled to one (1) vote for each share of stock in person or by proxy. If a shareholder intends to cumulate his votes in an election of directors, he must provide the corporation with written notice of his intention to do so. Such notice must be received by the corporation at least 48 hours before the beginning of the meeting being held to consider the election of directors. Shares of another corporation, domestic or foreign, standing in the name of the corporation may be voted by the President, Senior Vice President or Corporate Secretary of the corporation.
Section 8. Inspectors . An appropriate number of inspectors for any meeting of shareholders may be appointed by the chairman of such meeting. Inspectors so appointed will open and close the polls, will receive and take charge of proxies and ballots, and will decide all questions as to the qualifications of voters, validly of proxies and ballots, and the number of votes properly cast.
Section 9. Annual Report. The President shall annually prepare a full and true statement of the affairs of the corporation, which shall be submitted at the annual meeting of the
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shareholders and filed within twenty (20) days thereafter in the principal office of the corporation at Charleston, West Virginia, where it shall, during the usual business hours of each secular day be open for inspection by any shareholder of the corporation.
ARTICLE II
DIRECTORS
Section 1. Number. The Board shall consist of not less than five nor more than twenty-five shareholders, the exact number within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board or by resolution of the shareholders at any meeting thereof; provided, however, that a majority of the full Board of Directors may not increase the number of directors to a number which: (i) exceeds by more than three the number of directors last elected by shareholders where such number was fifteen or less; and (ii) to a number which exceeds by more than four the number of directors last elected by shareholders where such number was sixteen or more except when directors are added as a result of a business combination accounted for as a pooling-of-interests, but in no event shall the number of directors exceed twenty-five, and provided, further, however, that no decrease shall have the effect of shortening the term of any incumbent director.
Section 2. Director Emeritus. From time to time, the Board of Directors may elect one or more persons to serve as a Director Emeritus. A Director Emeritus shall have the privilege of attending those meetings of the Board of Directors at which the Board has invited in writing all Directors Emeritus. He shall not have the right to vote on any matters or to receive attendance fees for the meetings he attends.
Section 3. Qualifications. The members of the Board of Directors need not be residents of the State of West Virginia. No Board member, duly qualified and elected by the shareholders to serve a term upon the Board of Directors will be required to retire from the Board upon reaching the age of 70. However, no nominee may stand for election to the Board of Directors if he or she shall attain age 70 prior to the date of the annual meeting. Beginning on January 1, 2005, each member of the Board of Directors shall complete a minimum of eight hours of continuing education annually, the sponsors and curriculum of which shall be approved by the Board of Directors. After December 31, 2005, any Director subject to this requirement who fails to complete the mandatory continuing education for the previous year shall have payment of their Board fees suspended until such continuing education is accomplished. For good cause shown, the Board of Directors may, in individual cases involving undue hardship or extenuating circumstances, grant conditional, partial, or complete exemptions of these minimum continuing education requirements. Any such exemption shall be reviewed by the Board of Directors at least once during each year, unless a lifetime conditional exemption has been granted. One hour of credit may be obtained for each period of fifty minutes of instruction attended in an approved course or by means of videocassette, videotape, audiocassette, or DVD instruction, provided that such instruction is approved by the Board of Directors. The Board of Directors may designate providers or courses which are presumptively approved.
Beginning on January 1, 2006, each member of the Board of Directors must attest that he or she is in compliance with the Company’s Ethics Policy. After January 1, 2006, any director
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subject to this requirement who fails to adhere to the Ethics Policy or attest to his or her adherence of the Ethics Policy shall have payment of Board fees suspended until he or she has made an attestation and is in compliance with the Ethics Policy.
Section 4. Time of Holding Office. Commencing with the 1986 annual meeting of shareholder, the Board of Directors shall be divided into three classes, Class I, Class II, and Class III, as nearly equal in number as possible. At the 1986 annual meeting of shareholders, directors of the first class (Class I) shall be elected to hold office for a term expiring at the 1987 annual meeting of shareholders; directors of the second class (Class II) shall be elected to hold office for a term expiring at the 1988 annual meeting of shareholders; and directors of the third class (Class III) shall be elected to hold office for a term expiring at the 1989 annual meeting of shareholders. At each annual meeting of shareholders after 1986, the successors to the class of directors whose term shall then expire shall be identified as being of the same class of directors they succeed and elected to hold office for a term expiring at the third succeeding annual meeting of shareholders. When the number of directors is changed, any newly-created directorships or any decrease in directorship shall be so apportioned among the classes by the Board of Directors as to make all classes as nearly equal as possible.
Section 5. Election of Officers. The Board of Directors shall elect from within their number a President. The Board shall also elect from within or without their number one or more Vice Presidents, a Secretary, a Treasurer, and all such other officers and agents as they may deem proper. The Board shall have the authority to fix the salaries of all officers and agents, whether such officers and agents be Directors or not. All officers and agents elected by the Board shall hold office during the pleasure of the Board.
Section 6. Quorum. A majority of the Board of Directors shall constitute a quorum for the transaction of business. Any number less than a quorum present may adjourn any Directors’ meeting until a quorum is present.
Section 7. Regular Meetings. Regular meetings of the Board of Directors shall be held as needed.
Section 8. Special Meetings. Special meetings of the Board of Directors may be called by the President, or any three Directors to be held at such time and place and for such purposes as shall be specified in the notice.
Section 9. Notice of Special Meetings. Telephonic or written notice of every special meeting of the Board of Directors shall be duly give to each Director not less than one (1) day before such meeting. Such notice shall state the time and place of the meeting and, if the meeting is being called for the purpose of amending the bylaws or for the purpose of authorizing the sale of all or substantially all of the assets of the corporation, such notice shall set forth the nature of the business intended to be transacted. Notice of any meeting of the Board may be dispensed with if every Director shall attend in person, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened, or if every absent Director shall in writing filed with the records of the meeting, either before or after the holding thereof, waive such notice. Any provision of these bylaws to the contrary notwithstanding a meeting of the Board of Directors may be held
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immediately following the adjournment of any meeting of the shareholders, and no notice need be given for any such meeting of the Board of Directors.
Section 10. Action by Telephonic Communications . Members of the Board of Directors may participate in any meeting of the Board of Directors by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in any meeting pursuant to this provision shall constitute presence in person at such meeting.
Section 11. Action Without a Meeting . Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all members of the Board of Directors consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors. Action taken under this section is effective when the last Director signs the consent unless the consent specifies a different effective date, in which event the action taken is effective as of the date specified therein provided the consent states the date of execution by each Director.
Section 12. Chairman of the Board. The Board of Directors shall elect from among its members a Chairman of the Board of Directors who shall preside at all meetings of the Board of Directors and perform such other duties as may be designated by the Board.
Section 13. Committees. The Board of Directors may, by resolution of resolutions passed by a majority of the whole Board, designate one or more committees, each to consist of two or more of the Directors, which, to the extent provided in such resolution or resolutions, shall have and may exercise the powers of the Board in the management of the business and affairs of the corporation, and may have power to authorize the seal of the corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board.
Section 14. Powers of Directors. The Board of Directors may exercise all of the powers of the corporation except such as are by law or by the charter or by the bylaws conferred upon or reserved to the shareholders. It shall also have the power to fix the compensation of the officers elected or appointed by it, and of all other officers and employees of the corporation; to purchase or otherwise acquire for the corporation any property rights or privileges which the corporation is authorized to acquire, at such price and on such terms and conditions as the Board may think proper; to sell or otherwise dispose of any property owned by the corporation and not necessary for carrying on the business of the corporation and upon such terms and conditions and for such consideration as the Board may deem proper. The Board may also confer on any officers of the corporation the right to choose, remove or suspend any subordinate officer, agent, or employee. The Directors shall further have the power to fix Directors’ fees form time to time in such amounts as the Directors shall deem proper.
Section 15. Newly-Created Directorships and Vacancies. Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors. A director elected or appointed, as the case may be, to fill a vacancy shall be elected or appointed for the unexpired term of his predecessor in office. Any directorship to be filled by reason of an increase in the number of directors may
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be filled by the board of directors for a term of office continuing only until the next election of directors. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.
Section 14. Voting. No member of the Board of Directors shall vote on a question in which he is interested otherwise than as a shareholder, except the election of a President or other officer or employee or be present at the Board while the same is being considered; but if his retirement from the Board in such case reduces the number present below a quorum, the question may nevertheless be decided by those who remain. On any question the names of those voting each way shall be entered on the record of their proceedings if any member at the time requires it.
Section 15. Depositories. The Board of Directors shall have the power to designate the bank in which corporate funds and securities shall be deposited.
Section 16. Bonds for Officers. The Board of Directors may require any officer of the corporation whose duties involve the handling of its funds, or a part thereof, to furnish proper bond, such bond to be in a penalty to be prescribed by the Board.
Section 17. Removal of Directors. Any director may be removed, with or without cause, only by the affirmative vote of the holders of a majority of the outstanding common stock.
Section 18. Tie Votes. In the event that a vote which is duly brought before the board of directors at a meeting at which a quorum is present results in a tie vote, the vote of the Chairman of the Company or his duly appointed delegate (who shall also be a director) shall be counted twice.
ARTICLE III
OFFICERS
Section 1. Officers. The officers of the corporation shall be a President, one or more Vice Presidents as the Board of Directors may fix from time to time by proper resolutions, a Secretary and a Treasurer, all of whom shall be chosen by the Board of Directors as provided for in Section 4 of Article II of these bylaws. Any two of the above-named offices, except those of President and Secretary, may be held by the same person, but no officer shall execute an acknowledgement or verify any instrument in more than one capacity, if such instrument is required by law or by these bylaws to be executed, acknowledged, verified or countersigned by two or more officers. The Board may, by resolution, provide for an Assistant Secretary and an Assistant Treasurer, and may also elect or appoint such other officers, agents and employees as the Board may deem proper.
Section 2. Powers and Duties. The officers of the corporation shall have such powers and duties as are usually incident to their respective offices, as well as such powers and duties as from time to time shall be assigned to them by the Board of Directors.
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Section 3. Checks, Notes, Etc. All checks and drafts of the corporation, bank accounts, and all bills of exchange, promissory notes, and all acceptances, obligations and other instruments for the payment of money shall be signed and/or countersigned by such officers as the Board of Directors may designate.
Section 4. Corporate Acknowledgments. The corporation may acknowledge any instrument required by law to be acknowledged by its attorney appointed to serve, and such appointment may be embodied in the deed or instrument to be acknowledged, or be made by a separate instrument, or such deed or other instrument may be acknowledged by the President or a Vice President of the corporation without such appointment, or in any manner provided by law.
ARTICLE IV
CAPITAL STOCK
Section 1. Stock Certificates. The certificates of stock of this corporation shall be in such form as shall be approved by the Board of Directors, and shall be signed by the President or a Vice President and countersigned by the Secretary or Assistant Secretary and evidenced by the seal of the corporation. Each certificate shall recite on its face that the stock represented thereby is transferable only upon the books of the corporation properly endorsed.
Section 2. Issuing Stock and Fixing Value. The Board of Directors of this corporation may issue the shares of its capital stock from time to time for such considerations as the Board may deem advisable.
Section 3. Title. Title to a certificate and to the shares represented thereby may be transferred only (a) by delivery of the certificate endorsed, either in blank or to a specific person, by the person appearing by the certificate to be the owner of the shares represented thereby; or (b) by the delivery of the certificate and a separate document containing a written assignment of the certificate or a power of attorney to sell, assign, or transfer the same or the shares represented thereby, to be signed by the person appearing by the certificate to be the owner of the shares represented thereby. Such assignment or power of attorney may be either in blank or to a specified person.
Section 4. Lost Certificate. A new certificate may be issued in lieu of one lost or destroyed without requiring publication of notice of loss and the cost of said publication applied on a bond of proportionately increased penalty in any case where such procedure is agreed to by said holder of record and deemed adequate by the Board of Directors. A new certificate may also be issued in the discretion of the Board without requiring either the publication of notice of loss or the giving of a bond; and upon such other conditions as may be agreed to by said holder of record and deemed adequate by the Board for the protection of the corporation and its shareholders.
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ARTICLE V
FISCAL YEAR AND CORPORATE SEAL
Section 1. Fiscal Year. The fiscal year of the corporation shall begin on the first day of January and shall end on the 31st day of December of each year.
Section 2. Corporate Seal. The Board of Directors shall provide a suitable seal containing the name of the corporation, which seal shall be in the charge and custody of the Secretary and Treasurer.
ARTICLE VI
DIVIDENDS
Section 1. Dividends. The Board of Directors may from time to time declare and pay dividends from the surplus or any profits of the corporation, whenever they shall deem it expedient in the exercise of discretion and in conformity with the provisions upon which the capital stock of the corporation has been issued. If any shareholder shall be indebted to the corporation, his dividend, or so much as is necessary thereof, may be applied to the payment of such indebtedness, if then due and payable.
Section 2. Working Capital. The Board of Directors may fix a sum which may be set aside or retained over and above the corporation’s capital stock paid in as working capital for the corporation, and from time to time as the Board may increase, diminish and vary the same in its absolute judgment and discretion.
ARTICLE VII
AMENDMENT OF BYLAWS
Section 1. Amendment. The Board of Directors shall have the power to make, amend and repeal the bylaws of the corporation at any regular or special meeting by a majority of the votes cast thereat.
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Exhibit 10(p)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (“Agreement”) dated March 14, 2002, by and between CITY HOLDING COMPANY, a West Virginia corporation (“Employer”), and JOHN W. ALDERMAN, III (“Employee”) recites and provides:
| A. | Employee has heretofore been employed and rendered services to Employer as Chief Legal Officer and Senior Vice President; |
| B. | Employer and Employee desire to replace the Executive Employment Agreement, dated April 23, 1997, with this Agreement; |
| C. | Employer considers the continued availability of Employee’s services to be important to the management and conduct of Employer’s business and desires to secure for itself the continued availability of Employee’s services; and |
| D. | Employee is willing to make his services available to Employer on the terms and subject to the conditions set forth herein. |
NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows:
| 1. | Employment . Employee is employed as Chief Legal Officer and Senior Vice President of Employer. Employee shall have such duties and responsibilities as are commensurate with such positions. Employee hereby accepts and agrees to such employment, subject to the general supervision and pursuant to the orders, advice, and direction of Employer and its Board of Directors. Employee shall report to and be under the supervision of the Chief Executive Officer. Employee shall perform such duties as are customarily performed by one holding such positions in other same or similar businesses or enterprises as that engaged in by Employer, and shall also additionally render such other services and duties as may be reasonably assigned to him from time to time by Employer, consistent with his positions. |
| 2. | Term of Employment . The term of this Agreement shall commence from and after the date hereof, and shall terminate on the day next preceding the second anniversary of the date hereof unless extended as provided herein. On each monthly anniversary date starting the first month after the date hereof, this Agreement will be automatically extended for an additional month; provided, however, that on any one month anniversary date either Employer or Employee may serve notice to the other party to fix the term to a definite two-year period from the date of such notice and no further automatic extensions will occur. Notwithstanding the foregoing, this Agreement will not be extended beyond the first day of the month coincident with or next following the date on which Employee attains age 65. The term of this Agreement as may be extended pursuant to this Section 2, or, as may be shortened in accordance with Section 5 or 6 hereof, is hereinafter referred to as the “Term.” |
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| 3. | Compensation . |
| a. | For all services rendered by Employee to Employer under this Agreement, Employer shall pay to Employee, for the one-year period beginning on the date hereof, a minimum annual salary at a rate not less that $164,000, payable in accordance with the payroll practices of Employer applicable to all officers. |
| b. | Employee shall participate in such incentive plans of Employer for which he may become eligible and designated a participant, as such plans may be modified from time to time. |
| c. | After the first year following the date hereof, any salary increase payable to Employee shall be determined in accordance with Employer’s annual salary plan, and be based on Employer’s performance and the performance of Employee. |
| d. | Except as otherwise specifically provided herein, for so long as Employee is employed by Employer, Employee also shall be paid, on the same basis as other officers of Employer, employee pension and welfare benefits and group employee benefits such as sick leave, vacation, group disability and health, life, and accident insurance and similar indirect compensation which Employer may from time to time extend to its officers; provided that Employee shall receive term life insurance coverage in an amount not less than Employee’s base salary times 2.5, but not to exceed $500,000. |
| e. | If during the Term of the Agreement Employee becomes eligible for retirement under Employer’s retirement plans and he retires, Employee may elect to continue receiving the health insurance coverage provided to Employee prior to retirement at a comparable rate available to other retired employees. |
| f. | For so long as Employee is employed by Employer, Employer shall pay Employee’s reasonable country club dues and expenses. |
| g. | For so long as Employee is employed by Employer, Employer shall pay Employee’s reasonable civic club dues. |
| h. | For so long as Employee is employed by Employer, Employer will pay reasonable legal bar dues, bar association dues and reasonable costs of continuing legal education programs for Employee, and provide necessary legal books and similar materials to enable Employee to carry out his duties as Chief Legal Officer. |
| 4. | Covenants of Employee . |
| a. | Subject to the limitations provided in Section 4(c), upon termination of Employee’s employment prior to the expiration of the Term, Employee will not directly or indirectly, either as a principal, agent, employee, employer, stockholder, co-partner or in any other individual or representative capacity whatsoever, be engaged as a legal officer in the |
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banking and financial services business, which includes consumer, savings, commercial banking and the insurance and trust businesses, or the savings and loan or mortgage banking business, or any other business in which the Employer or its Affiliates are engaged, anywhere in the state of West Virginia and in any county outside of West Virginia contiguous to West Virginia, nor will Employee solicit, or assist any other person in so soliciting, any depositors or customers of Employer or its Affiliates or induce any then or former employee of Employer or its Affiliates to terminate their employment with Employer or its Affiliates. The term “Affiliate” as used in this Agreement means a Person that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, another Person. The term “Person” as used in this Agreement means any person, partnership, corporation, group or other entity.
| b. | If Employee’s employment is terminated by Employer or its Affiliates for Just Cause (as defined in Section 6(b) herein), Employee will not be subject to the provisions of Section 4(a). |
| c. | If Employee’s employment is terminated by Employer or its Affiliates for reasons other than Just Cause (as defined in Section 6(b) herein) at any time, Employee will be subject to the provisions of Section 4(a) until the earlier of: (i) the first anniversary of Employee’s termination or (ii) the date as of which Employee elects to forego any further compensation under Section 6(c). |
| d. | Notwithstanding any other provision of this Agreement to the contrary, if Employee voluntarily terminates his employment with Employer or its Affiliates in accordance with Section 6(d), Employee will not be subject to the provisions of Section 4(a). |
| e. | During the Term of Employee’s employment hereunder and thereafter, and except as required by any court, supervisory authority or administrative agency or as may be otherwise required by applicable law, Employee shall not, without the written consent of the Board of Directors of Employer or a person authorized thereby, disclose to any person, other than an employee of Employer or an Affiliate thereof or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by Employee of his duties as an employee of Employer or an Affiliate, any confidential information obtained by him while in the employ of Employer, unless such information has become a matter of public knowledge at the time of such disclosure. |
| f. | The covenants contained in this Section 4 shall be construed and interpreted in any judicial proceeding to permit their enforcement to the maximum extent permitted by law. Employee agrees that the restraints imposed herein are necessary for the reasonable and proper protection of Employer and its Affiliates and that each and every one of the restraints is reasonable in respect to such matter, length of time and the area. Employee further acknowledges that damages at law would not be a measurable or adequate remedy for breach of the covenants contained in |
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this Section 4 and, accordingly, Employee agrees to submit to the equitable jurisdiction of any court of competent jurisdiction in connection with any action to enjoin Employee from violating any such covenants.
| 5. | Disability . If, any reason of physical or mental disability during the term hereof, Employee is unable to carry out the essential functions of his employment hereunder for 12 consecutive months, his services hereunder may be terminated by action of the Board of Directors of Employer determining so to do upon one month’s notice to be given to Employee at any time after the period of 12 continuous months of disability and while such disability continues. If, prior to the expiration of the one month period after the giving of such notice, Employee shall recover from such disability and return to the full-time active discharge of his duties, then such notice shall be of no further force and effect and Employee’s employment shall continue as if the same had been uninterrupted. If Employee shall not so recover from his disability and return to his duties, then his services shall terminate at the expiration date of such one month’s notice with the same force and effect as if that date had been the date of termination originally provided for hereunder. During the first 12 months of the period of Employee’s disability, Employee shall continue to earn all compensation (including bonuses and incentive compensation) to which Employee would have been entitled as if he had not been disabled, such compensation to be paid at the time, in the amounts, and in the manner provided in Section 3(a), inclusive of any compensation received pursuant to any applicable disability insurance plan of Employer. Thereafter Employee shall receive compensation to which he is entitled under any applicable disability insurance plan. In the event a dispute arises between Employee and Employer concerning Employee’s physical or mental ability to continue or return to the performance of his duties as aforesaid, Employee shall submit to examination by a competent physician mutually agreeable to the parties, and his opinion as to Employee’s capability to so perform will be final and binding. Upon termination of Employee’s services by reason of disability, the Term shall end. |
| 6. | Termination . |
| a. | If employee shall die during the Term, this Agreement and the employment relationship hereunder will automatically terminate on the date of death, which date shall be the last date of the Term. Notwithstanding this Subsection 6(a), if Employee dies while employed by Employer, Employee’s estate shall receive annually 40% of Employee’s Termination Compensation until the earlier to occur of (x) five years from the date of Employee’s death, or (y) the date on which Employee would have reached age 65. |
| b. | Employer shall have the right to terminate Employee’s employment under this Agreement at any time for Just Cause, which termination shall be effective immediately. Termination for “Just Cause” shall include termination for Employee’s personal dishonesty, gross incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, |
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intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or a final cease-and-desist order, conviction of a felony or of a misdemeanor involving moral turpitude, unethical business practices in connection with Employer’s business, misappropriation of Employer’s assets (determined on a reasonable basis) or those of its Affiliates, or material breach of any other provision of this Agreement, provided that Employee has received written notice from Employer of such material breach and such breach remains uncured 30 days after the delivery of such notice. In the event Employee’s employment under this Agreement is terminated for Just Cause, Employee shall have no right to receive compensation or other benefits under this Agreement for any period after such termination.
| c. | Employer may terminate Employee’s employment other than for “Just Cause”, as describe in Subparagraph (b) above, at any time upon written notice to Employee, which termination shall be effective immediately. In the event Employer terminates Employee pursuant to this Subparagraph (c), Employee will receive the highest amount of the annual cash compensation (including cash bonuses and other cash-based benefits and excluding amounts earned upon exercise of stock option, including for these purposes amounts earned or payable whether or not deferred) received during any of the preceding five calendar years (“Termination Compensation”) in each year until the end of the Term, so long as Employee complies with Section 4(a) of the Agreement until the first anniversary of Employee’s termination. Such amounts shall be payable at the times such amounts would have been paid in accordance with Section 3(a). In addition, Employee shall continue to receive health insurance coverage from Employer on the same terms as were in effect prior to Employee’ termination, either under Employer’s plans or comparable coverage, for all periods Employee receives Termination Compensation. Notwithstanding anything in this Agreement to the contrary, if Employee breaches Section 4(a) of this Agreement prior to the first anniversary of Employee’s termination pursuant to the Section 6(c), Employee will not be entitled to receive any further compensation or benefits pursuant to this Section 6(c). |
| d. | In the event of a Change in Control (as defined below) of Employer at any time after the date hereof, Employee may voluntarily terminate employment with Employer up until 24 months after the Change in Control for “Good Reason” and be entitled to receive in a lump sum (i) any compensation due by not yet paid through the date of termination and (ii) in lieu of any further salary payments from the date of termination to the end of the Term, an amount equal to the Termination Compensation times 2.0. |
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“Good Reason” shall mean the occurrence of any of the following events without Employee’s express written consent:
| (i) | the assignment to Employee of duties inconsistent with the position and status of the offices and positions of Employer held immediately prior to the Change in Control; |
| (ii) | a reduction by Employer in Employee’s pay grade or base salary as then in effect or the exclusion of Employee from participation in Employer’s benefit plans in which he previously participated as in effect at the date hereof or as the same may be increased from time to time during the term of this Agreement of Employer’s failure to increase (within 12 months of Employee’s last increase in base salary) Employer’s failure to increase (within 12 months of Employee’s last increase in base salary) Employee’s base salary in an amount which at least equals, on a percentage basis, the average percentage increase in base salary for all executive entitled to participate in Employer’s executive incentive plans for which Employee was eligible during the preceding 12 months; |
| (iii) | an involuntary relocation of Employee more than 50 miles from the location where Employee worked immediately prior to the Change in Control or breach by Employer of any other material provision of this Agreement; or |
| (iv) | any purported termination of the employment of Employer which is not affected in accordance with this Agreement. |
A “Change of Control” shall be deemed to have occurred if (i) any person or group of persons (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 together with its affiliates, excluding employee benefit plans of Employer, is or becomes, directly or indirectly, the “beneficial owner” (as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of securities of Employers representing 20% or more of the combined voting power of Employer’s than outstanding securities; or (ii) during the term of this Agreement as a result of a tender offer or exchange offer for the purchase of securities of Employer (other than such an offer by Employer for its own securities), or as a result of a proxy contest, merger, consolidation or sale of assets, or as a result of any combination of the foregoing, individuals who at the beginning of any two-year period during the term of this Agreement constitute Employer’s Board of Directors, plus new directors whose election or nomination for election by Employer’s shareholders is approved by a vote of at least two-thirds of the directors still in office who were directors at the beginning of such two-year period, cease for any reason during such two year period to constitute at least two-thirds of the members of such Board of Directors; or (iii) the shareholders of Employer approve a merger or consolidation of Employer with
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any other corporation or entity regardless of which entity is the survivor, other than a merger or consolidation which would result in the voting securities of Employer outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) at least 80% of the combined voting power of the voting securities of Employer or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the shareholders of Employer approve a plan of complete liquidation or winding-up of Employer or an agreement for the sale or disposition by Employer of all or substantially all of Employer’s assets; or (v) any event which Employer’s Board of Directors determines should constitute a Change of Control.
| e. | In receiving any payments pursuant to this Section 6, Employee shall not be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Employee hereunder and such amounts shall not be reduced or terminated whether or not Employee obtains other employment. |
| f. | Notwithstanding anything in this Agreement to the contrary, if any of the payments provided for under this Agreement (the “Agreement Payments”), together with any other payments that Employee has the right to receive (such other payments together with the Agreement Payments are referred to as the “Total Payments”), would constitute an “excess parachute payment,” as defined in Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the “Code”) (an “Excess Parachute Payment”), the Agreement Payments shall be reduced by the smallest amount necessary so that no portion of such Total Payments would constitute Excess Parachute Payments. In the event Employer shall make an Agreement Payment to Employee that would constitute an Excess Parachute Payment, Employee shall return such payment to Employee (together with interest at the rate set forth in Section 1274(b)(2)(B) of the Code). To the extent the application of this Section 6(f) is triggered, the provisions of Section 4(a) shall not apply. |
| 7. | Other Employment . Employee shall devote all of his business time, attention, knowledge and skills solely to the business and interest of Employer and its Affiliates, and Employer and its Affiliates shall be entitled to all of the benefits, profits and other emoluments arising from or incident to all work, services and advice of Employee, and Employee shall not, during the Term hereof, become interested directly or indirectly, in any manner, as partner, officer director, stockholder, advisor, employee or in any other capacity in any other business similar to Employer’s business; provided, however, that nothing herein contained shall be deemed to prevent or limit the right of Employee to invest in a business similar to Employer’s business if such investment is limited to less than one percent of the capital stock or other securities of any corporation or similar organization whose stock or securities are publicly owned or are regularly traded on any public exchange. |
7
| 8. | Miscellaneous . |
| a. | This Agreement shall be governed by and construed in accordance with the laws of the State of West Virginia without regard to conflicts of law principles thereof. |
| b. | This Agreement constitutes the entire Agreement between Employee and Employer, with respect to the subject matter hereof, and supersedes all prior agreements between Employee and Employer and/or any of its Affiliates with respect thereto. |
| c. | This Agreement may be executed in one or more counterparts, all of which, taken together, shall constitute one and the same instrument. |
| d. | Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and delivered in person or by reliable overnight courier service or deposited in the mails, postage prepaid, return receipt requested, addressed as follows: |
To Employer:
City Holding Company
25 Gatewater Road
Charleston, West Virginia 25313
(304) 769-1100
Attention: Victoria Evans, Corporate Secretary
To Employee:
John W. Alderman, III
80 Abney Circle Road, N.
Charleston, West Virginia 25314
Notices given in person or by overnight courier service shall be deemed given when delivered to the address required by this Section 8(d), and notices given by mail shall be deemed given three days after deposit in the mails. Any party hereto may designate by written notice to the other party in accordance herewith any other address to which notices addressed to him shall be sent.
| e. | The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. It is understood and agreed that no failure or delay by Employer or Employee in exercising any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. |
| f. | In the event any dispute shall arise between Employee and Employer as to the terms or interpretations of this Agreement, whether instituted by formal legal proceedings or otherwise, including any action taken by Employee to enforce the terms of this Agreement or in defending against |
8
any action taken by Employer, Employer shall reimburse Employee for all reasonable costs and expenses, including reasonable attorneys’ fees, arising from such dispute, proceeding or action, if Employee shall prevail in any action initiated by Employee or shall have acted reasonably and in good faith in defending against any action initiated by Employer. Such reimbursement shall be paid within 10 days of Employee furnishing to Employer written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by Employee. Any such request for reimbursement by Employee shall be made no more frequently than at 60 day intervals.
SIGNATURE PAGE FOLLOWS
9
IN WITNESS WEHREOF, the parties hereto have executed this Agreement as of the date and year first above written.
| CITY HOLDING COMPANY | ||
| By: |
/s/ Gerald R. Francis |
|
| Gerald R. Francis | ||
| President and Chief Executive Officer | ||
|
EMPLOYEE: |
||
|
/s/ John W. Alderman, III |
||
| John W. Alderman, III | ||
10
February 22, 2005
John W. Alderman, III
80 Abney Circle Road, N.
Charleston, West Virginia 25314
Re: Setting Term of Employment Agreement
Dear John:
Pursuant to Section 2 of your Employment Agreement with City Holding Company, the Board of Directors of City Holding Company has determined that the Company elects to fix the term of your Employment Agreement to a definite two-year period from and effective on the March anniversary date of your contract, or March 14, 2005. Please sign below to acknowledge your agreement to this term.
Thank you very much for your continued service to City Holding Company and City National Bank of West Virginia.
|
Sincerely, |
|
/s/ Charles R. Hageboeck |
|
Charles R. Hageboeck |
|
President and Chief Executive Officer |
Acknowledged and Agreed
This 22 nd day of February, 2005.
|
/s/ John W. Alderman, III |
|
John W. Alderman, III |
11
Exhibit 10(q)
CHANGE IN CONTROL AND TERMINATION AGREEMENT
THIS CHANGE IN CONTROL AND TERMINATION AGREEMENT (“Agreement”) made as of June, 28, 2004 among CITY HOLDING COMPANY, (“Employer”), and JOHN A. DERITO (“Employee”), recites and provides:
Recitals:
| A. | Employee is employed by Employer as an Executive Vice President, Division Head Commercial Banking. |
| B. | Employer considers the continued availability of Employee’s services to be important during any period Employer is offered for sale. |
| C. | Employee is willing to make his services available to Employer on the terms and subject to the conditions set forth herein. |
Agreement:
In Consideration of the mutual covenants contained herein, the parties agree as follows:
| 1. | Change in Control . In the event of a Change of Control (as defined below) of Employer, Employee may voluntarily terminate employment with Employer until the expiration of the 24 month period after the Change of Control for “Good Reason” and be entitled to receive in a lump sum (i) any compensation already due and earned but not yet paid through the date of termination and (ii) in lieu of any further salary payments from the date of termination, an amount equal to Termination Compensation times 2.00, or at his election, may receive this amount in installments paid out over 24 months according to the Employer’s payroll practices during which time the Employee shall also be eligible for health insurance coverage at the same rate as any employee. |
“Good Reason” shall mean the occurrence at any time within 24 months after a Change of Control of any of the following events without Employee’s express written consent:
| a. | the assignment to Employee of duties materially inconsistent with the position held by Employee immediately prior to the Change of Control; |
1
| b. | a reduction by Employer in Employee’s base salary as then in effect or the exclusion of Employee from participation in Employer’s benefit plans in which he previously participated as in effect at the date hereof or as the same may be increased from time to time during the term of this Agreement or Employer’s failure to increase (within 12 months of Employee’s last increase in base salary) Employee’s base salary in an amount which at least equals on a percentage basis, the average percentage increase in base salary for all executives entitled to participate in Employer’s executive incentive plans for which Employee was eligible during the preceding 12 months; |
| c. | an involuntary relocation of Employee more that 30 miles from the location where Employee worked immediately prior to the Change of Control or the breach by Employer of any other material provision of this Agreement; or |
| d. | any purported termination of the employment of Employee by Employer without “Just Cause.” |
A “Change of Control” shall be deemed to have occurred if (i) any person or group of persons (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934) together with its affiliates, excluding CHCO and employee benefit plans of Employer, is or becomes, directly or indirectly, the “beneficial owner” (as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of securities of Employer representing 20% or more of the combined voting power of Employer’s then outstanding securities; or (ii) during the term of this Agreement as a result of a tender offer or exchange offer for the purchase of securities of Employer (other than such an offer by Employer for its own securities), or as a result of a proxy contest, merger, consolidation or sale of assets, or as a result of any combination of the foregoing, individuals who at the beginning of any two-year period during the term of this Agreement constitute Employer’s Board of Directors, plus new directors whose election or nomination for election by Employer’s shareholders is approved by a vote of at least two-thirds of the directors still in office who were directors at the beginning of such two-year period, cease for any reason during such two-year period to constitute at least two-thirds of the members of such Board of Directors; or (iii) the shareholders of Employer approve a merger or consolidation of Employer with any other corporation or entity regardless of which entity is the survivor, other than a merger or consolidation which would result in the voting securities of Employer outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) at least 80% of the combined voting power of the voting securities of Employer or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the shareholders of Employer
2
approve a plan of complete liquidation or winding-up of Employer or an agreement for the sale or disposition by Employer of all substantially all of Employer’s assets; or (v) any event which Employer’s Board of Directors determines should constitute a Change of Control.
“Termination Compensation” shall mean the highest amount of annual cash compensation (including cash bonuses and other cash-based benefits, including for these purposes amounts earned or payable whether or not deferred, and excluding any signing bonus for employment, stock bonuses, stock options or stock acquired pursuant to stock options) and continuation of other benefits (i.e. health, dental, life, disability) or cash equivalent value received by Employee during any one of the three calendar years preceding the year of termination of employment or what the employee would earn at the employee’s current rate of pay during the then current calendar year. Notwithstanding the above, total termination compensation for 2004 is set at $300,000.
“Just Cause” shall mean termination, accomplished by vote of Employer’s Board of Directors, related to Employee’s personal dishonesty, gross incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation, gross negligence, malfeasance (other than traffic violations or similar offenses) or a final cease-and-desist order, conviction of a felony or of a misdemeanor involving moral turpitude, unethical business practices in connection with Employer’s business, or misappropriation of Employer’s assets or similarly serious violation of policy of City National Bank or City Holding Company.
| 2. | Termination . |
| a. | Employer shall have the right to terminate Employee’s employment under this Agreement at any time for Just Cause, which termination shall be Effective immediately. In the event of termination for “Just Cause”, Employee shall only be entitled to receive earned but unpaid salary. |
| b. | Employer may terminate Employee’s employment other than for “Just Cause”, at any time upon written notice to Employee, which termination shall be Effective immediately. In the event Employer terminates Employee for reasons other than just cause, Employee will nevertheless receive a lump sum payment of 60 weeks pay or at his election may receive this amount in installments paid out according to the Employer’s payroll practices during which time the Employee shall also be eligible for health insurance coverage at the same rate as any employee. |
3
| 3. | No Obligation to Seek Other Employment. While receiving payments pursuant to this Agreement, Employee shall not be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Employee hereunder, and such amounts shall not be reduced or terminated whether or not Employee obtains other employment. |
| 4. | Non-Competition. If Employee is terminated for “Just Cause” or receives any termination compensation as a result of a Change in Control as set forth in paragraph 1, then Employee agrees that for a period of two (2) years after separation from the company, he will not directly or indirectly, either as principal, agent, employee, employer, co-partner, or in any other individual or representative capacity whatsoever engage in the banking and financial services business which includes consumer, savings, commercial banking and the insurance and trust business, or the savings and loan or mortgage business, or any other businesses in which the Company or its affiliates are engaged in the counties of Kanawha, Putnam, Jackson, Cabell, Wayne, Mason, Lincoln, Doddridge, Marion, Raleigh, Summers, Fayette, Greenbrier, Nicholas, Braxton, Lewis, Monroe, Pocahontas, Mercer, Wood, Harrison, Jefferson, Berkeley, Morgan, Hampshire in West Virginia, nor will Employee solicit or assist any other person in so soliciting, any depositors or customers of the Company or its affiliates, or induce any of them or former employees of the Company or its affiliates to terminate their employment with the Company or its affiliates. In the event the non-competition provision is violated, then the Company has the right to terminate any payments owed to Employee and seek any other available remedy. |
| 5. | Miscellaneous. |
| a. | This Agreement shall be governed by and construed in accordance with the laws of the State of West Virginia without regard to conflicts of law principles thereof. |
| b. | This Agreement constitutes the entire Agreement between Employee and Employer, with respect to the subject matter hereof, and supersedes all prior agreements with respect thereto. |
| c. | All parties agree that any dispute related to this Agreement, employment of Employee, or termination of Employee shall be arbitrated in accordance with the Rules of the American Arbitration Association with each party to bear their own costs and attorneys’ fees. |
| d. | This Agreement may be executed in one or more counterparts, all of which, taken together, shall constitute one and the same instrument. |
4
| e. | The Employee acknowledges that he has read this Agreement and has been given an opportunity to have counsel of his choice review this Agreement. |
| f. | Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and delivered in person or by reliable overnight courier service or deposited in the mails, postage prepaid, return receipt requested, addressed as follows: |
To Employer:
City Holding Company
25 Gatewater Road
Cross Lanes, West Virginia 25313
(304) 769-1100
Attention: Corporate Secretary
To Employee:
John A. DeRito
6 Foxchase Road
Charleston, West Virginia 25304
304-925-2063
| 6. | The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. It is understood and agreed that no failure or delay by Employer or Employee in exercising any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. |
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written.
| CITY HOLDING COMPANY | ||
| By: |
/s/ Gerald R. Francis |
|
| Name: | Gerald R. Francis | |
| Title: | President & CEO | |
| EMPLOYEE | ||
|
/s/ John A. DeRito |
||
| John A. DeRito | ||
5
Exhibit 13
S ELECTED F INANCIAL D ATA
T ABLE O NE
F IVE -Y EAR F INANCIAL S UMMARY
(in thousands, except per share data)
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
|
Summary of Operations |
||||||||||||||||||||
|
Total interest income |
$ | 135,518 | $ | 118,881 | $ | 117,290 | $ | 128,965 | $ | 177,480 | ||||||||||
|
Total interest expense |
38,438 | 31,871 | 31,785 | 42,299 | 86,415 | |||||||||||||||
|
Net interest income |
97,080 | 87,010 | 85,505 | 86,666 | 91,065 | |||||||||||||||
|
Provision for (recovery of) loan losses |
1,400 | — | (6,200 | ) | 1,800 | 32,178 | ||||||||||||||
|
Total other income |
50,091 | 50,036 | 38,738 | 33,525 | 42,852 | |||||||||||||||
|
Total other expenses |
69,113 | 66,333 | 64,498 | 69,210 | 114,405 | |||||||||||||||
|
Income (loss) before income taxes |
76,658 | 70,713 | 65,945 | 49,181 | (12,666 | ) | ||||||||||||||
|
Income tax expense (benefit) |
26,370 | 24,369 | 22,251 | 16,722 | (4,651 | ) | ||||||||||||||
|
Cumulative effect of accounting change, net of tax |
— | — | — | — | (17,985 | ) | ||||||||||||||
|
Net income (loss) |
50,288 | 46,344 | 43,694 | 32,459 | (26,000 | ) | ||||||||||||||
|
Per Share Data |
||||||||||||||||||||
|
Net income (loss) basic |
$ | 2.87 | $ | 2.79 | $ | 2.63 | $ | 1.93 | $ | (1.54 | ) | |||||||||
|
Net income (loss) diluted |
2.84 | 2.75 | 2.58 | 1.90 | (1.54 | ) | ||||||||||||||
|
Cash dividends declared |
1.00 | 0.88 | 0.80 | 0.45 | — | |||||||||||||||
|
Book value per share |
16.14 | 13.03 | 11.46 | 9.93 | 8.67 | |||||||||||||||
|
Selected Average Balances |
||||||||||||||||||||
|
Total loans |
$ | 1,514,367 | $ | 1,337,172 | $ | 1,219,917 | $ | 1,255,890 | $ | 1,758,834 | ||||||||||
|
Securities |
666,922 | 705,032 | 561,437 | 515,700 | 370,434 | |||||||||||||||
|
Interest-earning assets |
2,186,003 | 2,051,044 | 1,862,200 | 1,884,667 | 2,253,604 | |||||||||||||||
|
Deposits |
1,814,474 | 1,659,143 | 1,593,521 | 1,617,782 | 1,944,244 | |||||||||||||||
|
Long-term debt |
137,340 | 201,218 | 109,947 | 124,874 | 119,354 | |||||||||||||||
|
Shareholders’ equity |
264,954 | 206,571 | 178,372 | 158,011 | 154,312 | |||||||||||||||
|
Total assets |
2,402,058 | 2,211,853 | 2,006,992 | 2,042,164 | 2,432,349 | |||||||||||||||
|
Selected Year-End Balances |
||||||||||||||||||||
|
Net loans |
$ | 1,596,037 | $ | 1,336,959 | $ | 1,270,765 | $ | 1,175,887 | $ | 1,341,620 | ||||||||||
|
Securities |
605,363 | 679,774 | 704,961 | 517,794 | 383,552 | |||||||||||||||
|
Interest-earning assets |
2,222,641 | 2,037,778 | 2,036,594 | 1,895,625 | 1,933,578 | |||||||||||||||
|
Deposits |
1,928,420 | 1,672,723 | 1,636,762 | 1,564,580 | 1,691,295 | |||||||||||||||
|
Long-term debt |
98,425 | 148,836 | 190,836 | 112,500 | 116,828 | |||||||||||||||
|
Shareholders’ equity |
292,141 | 216,080 | 190,690 | 165,393 | 146,349 | |||||||||||||||
|
Total assets |
2,502,597 | 2,213,230 | 2,214,430 | 2,047,911 | 2,116,295 | |||||||||||||||
|
Performance Ratios |
||||||||||||||||||||
|
Return on average assets |
2.09 | % | 2.10 | % | 2.18 | % | 1.59 | % | (1.07 | )% | ||||||||||
|
Return on average equity |
18.98 | 22.43 | 24.50 | 20.54 | (16.85 | ) | ||||||||||||||
|
Net interest margin |
4.49 | 4.29 | 4.65 | 4.68 | 4.12 | |||||||||||||||
|
Efficiency ratio |
46.66 | 48.67 | 51.63 | 58.24 | 86.98 | |||||||||||||||
|
Dividend payout ratio |
34.84 | 31.54 | 30.42 | 23.32 | N/A | |||||||||||||||
|
Asset Quality |
||||||||||||||||||||
|
Net charge-offs to average loans |
0.38 | % | 0.27 | % | 0.07 | % | 1.75 | % | 1.26 | % | ||||||||||
|
Provision for (recovery of) loan losses to average loans |
0.09 | — | (0.51 | ) | 0.14 | 1.83 | ||||||||||||||
|
Allowance for loan losses to nonperforming loans |
401.96 | 487.28 | 528.78 | 948.24 | 164.54 | |||||||||||||||
|
Allowance for loan losses to total loans |
1.04 | 1.31 | 1.66 | 2.37 | 3.50 | |||||||||||||||
|
Consolidated Capital Ratios |
||||||||||||||||||||
|
Total |
16.38 | % | 16.64 | % | 13.17 | % | 13.36 | % | 11.43 | % | ||||||||||
|
Tier I Risk-based |
15.41 | 15.47 | 11.93 | 9.87 | 7.65 | |||||||||||||||
|
Tier I Leverage |
10.97 | 10.47 | 10.04 | 8.49 | 5.84 | |||||||||||||||
|
Average equity to average assets |
11.03 | 9.34 | 8.89 | 7.74 | 6.34 | |||||||||||||||
|
Average tangible equity to average tangible assets |
9.53 | 9.08 | 8.59 | 7.43 | 6.04 | |||||||||||||||
|
Full-time equivalent employees |
770 | 691 | 701 | 737 | 802 | |||||||||||||||
1
T WO -Y EAR S UMMARY OF
C OMMON S TOCK P RICES AND D IVIDENDS
|
Cash
Dividends Per Share* |
Market Value | ||||||||
| Low | High | ||||||||
|
2005 |
|||||||||
|
Fourth Quarter |
$ | 0.25 | $ | 32.68 | $ | 37.62 | |||
|
Third Quarter |
0.25 | 34.69 | 39.21 | ||||||
|
Second Quarter |
0.25 | 27.57 | 37.00 | ||||||
|
First Quarter |
0.25 | 29.01 | 36.61 | ||||||
|
2004 |
|||||||||
|
Fourth Quarter |
$ | 0.22 | $ | 31.85 | $ | 37.58 | |||
|
Third Quarter |
0.22 | 28.69 | 33.05 | ||||||
|
Second Quarter |
0.22 | 27.30 | 35.71 | ||||||
|
First Quarter |
0.22 | 32.35 | 36.18 | ||||||
| * | As more fully discussed under the caption Liquidity in Management’s Discussion and Analysis and in Note Nineteen of Notes to Consolidated Financial Statements, the Company’s ability to pay dividends to its shareholders is dependent upon the ability of City National to pay dividends to City Holding (“Parent Company”). |
The Company’s common stock trades on the NASDAQ stock market under the symbol CHCO. This table sets forth the cash dividends paid per share and information regarding the market prices per share of the Company’s common stock for the periods indicated. The price ranges are based on transactions as reported on the NASDAQ stock market. At December 31, 2005, there were 3,293 shareholders of record.
M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS
C ITY H OLDING C OMPANY
City Holding Company (the “Company”), a West Virginia corporation headquartered in Charleston, West Virginia, is a bank holding company that provides diversified financial products and services to consumers and local businesses. Through its network of 67 banking offices in West Virginia (55), Kentucky (9), and Ohio (3), the Company provides credit, deposit, trust and investment management, and insurance products and services to its customers. In addition to its branch network, the Company’s delivery channels include ATMs, check cards, interactive voice response systems, and internet technology. The Company’s business activities are currently limited to one reportable business segment, which is community banking. The Company has approximately 7% of the deposit market in West Virginia and is the third largest bank headquartered in West Virginia based on deposit share. In the Company’s key markets, the Company’s primary subsidiary, City National Bank of West Virginia (“City National”), generally ranks in the top three relative to deposit market share.
C RITICAL A CCOUNTING P OLICIES
The accounting policies of the Company conform to 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 of Notes to Consolidated Financial Statements included herein. 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 15-18 of this Annual Report to Shareholders 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.
2
M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
Pages 9-10 of this Annual Report to Shareholders provide management’s analysis of the Company’s income taxes. The Company is subject to federal and state income taxes in the jurisdictions in which it conducts business. In computing the provision for income taxes, management must make judgments regarding interpretation of laws in those jurisdictions. Because the application of tax laws and regulations for many types of transactions is susceptible to varying interpretations, amounts reported in the financial statements could be changed at a later date upon final determinations by taxing authorities. On a quarterly basis, the Company estimates its annual effective tax rate for the year and uses that rate to provide for income taxes on a year-to-date basis.
Note Seven of Notes to Consolidated Financial Statements, beginning on pages 39-40 of this Annual Report to Shareholders, and pages 18-19 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 decline 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 One of Notes to Consolidated Financial Statements, on pages 31 and 34 for further discussion of SOP 03-3.
A CQUISITION OF C LASSIC B ANCSHARES , I NC .
On May 20, 2005, City completed the acquisition of Classic Bancshares (“Classic”) and the merger of Classic’s subsidiary, Classic Bank, into City National Bank. Classic operated 10 full-service branches located in Eastern Kentucky and Southeastern Ohio. The primary reason for the merger with Classic was for City National to expand its presence in the Huntington/Ashland WV-KY-OH Metropolitan Statistical Area (“MSA”). With the acquisition of Classic, the Company is now the largest commercial banking franchise in the Huntington/Ashland WV-KY-OH MSA. On May 20, 2005, Classic had total assets of $338 million, net loans of $254 million, deposits of $252 million, and $38 million of shareholders’ equity. The acquisition was accounted for using the purchase accounting method and the results of operations of Classic are included in the Company’s consolidated statement of income from the date of acquisition forward.
The aggregate purchase price for the acquisition was approximately $81 million and was consummated by the exchange of a combination of the Company’s common stock and cash for Classic’s common stock. The purchase was funded through the issuance of 1,580,034 shares of the Company’s common shares and cash consideration of $18.2 million from the Company’s available cash.
Additional information concerning the acquisition is contained in Note Two of Notes to Consolidated Financial Statements on page 35 of this Annual Report to Shareholders.
3
M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
F INANCIAL S UMMARY
The Company’s financial performance over the previous three years is summarized in the following table:
| 2005 | 2004 | 2003 | ||||||||||
|
Net income ( in thousands ) |
$ | 50,288 | $ | 46,344 | $ | 43,694 | ||||||
|
Earnings per share, basic |
$ | 2.87 | $ | 2.79 | $ | 2.63 | ||||||
|
Earnings per share, diluted |
$ | 2.84 | $ | 2.75 | $ | 2.58 | ||||||
|
ROA* |
2.09 | % | 2.10 | % | 2.18 | % | ||||||
|
ROE* |
18.98 | % | 22.43 | % | 24.50 | % | ||||||
| * | ROA (Return on Average Assets) is a measure of the effectiveness of asset utilization. ROE (Return on Average Equity) is a measure of the return on shareholders’ investment. |
As illustrated in the table above, the Company continued to experience favorable results in each of these measures of financial performance during 2005. The Company’s operating results in 2005 were positively affected by an increase of $10.1 million in net interest income due to the Classic acquisition, a rising interest rate environment, and growth in the Company’s traditional loan portfolio (see Net Interest Income). Additionally, net of investment securities gains and legal settlements, non-interest income increased $6.5 million, or 15.0%, over 2004 primarily as a result of higher service charge revenues, which grew 19.9% from the prior year. Non-interest income for 2004 included income of $5.5 million recognized in connection with the settlement of a derivative action brought against certain current and former directors and former executive officers of the Company and City National. Exclusive of the Classic acquisition, non-interest expenses decreased $0.6 million from 2004 as decreases in salaries and employee benefits and professional fees and litigation expenses were partially offset by increases in customer service expense, advertising expense, and a fair value adjustment associated with interest rate floors. These fluctuations are more fully discussed under the captions Non-Interest Income and Expense. The Company recorded a provision for loan losses of $1.4 million in 2005, its first since 2002. Despite the provision in 2005, the quality of its loan portfolio remains solid as evidenced by its ratio of non-performing assets to total loans and other real estate owned of 0.27% at December 31, 2005.
B ALANCE S HEET A NALYSIS
Total assets increased $289 million from December 31, 2004 to December 31, 2005 primarily as a result of the Classic acquisition. As a result of this acquisition, the Company experienced significant growth in the residential real estate, commercial and installment loan categories during 2005. Exclusive of the Classic acquisition, total loans at December 31, 2005 approximated total loans at December 31, 2004, as growth in commercial and residential real estate loans were essentially offset by declines in consumer loans and previously securitized loans. Commercial loan balances increased $55.2 million, or 11.7%, in 2005, as compared to 2004. The outstanding balance of residential real estate loans increased $7.5 million, or 1.6%, from December 31, 2004 to December 31, 2005. Consumer lending decreased $20.4 million due to normal repayments associated with these loans. In addition, home equity loan balances decreased $13.4 million from December 31, 2004 due to borrowers refinancing prime-based home equity lines of credit into fixed rate mortgages as a result of the flattening yield curve during 2005.
Between 1997 and 1999, the Company originated and securitized $760 million in 125% loan-to-value junior-lien underlying mortgages in six separate pools. The Company had a retained interest in the residual cash flows associated with these underlying mortgages after satisfying priority claims. Principal amounts owed to investors in the securitizations were evidenced by securities that were subject to redemption under certain circumstances. When the notes were redeemed during 2003 and 2004, the Company became the beneficial owner of the mortgage loans and recorded the loans as “Previously Securitized Loans” within the loan portfolio. At December 31, 2005, the Company reported “Previously Securitized Loans” of $30.3 million compared to $58.4 million at December 31, 2004, a decrease of 48.2%.
Total investment securities decreased $74.4 million, or 10.9%, from $679.8 million at December 31, 2004, to $605.4 million at December 31, 2005. The decrease in the securities portfolio in 2005 was related primarily to funding commercial loans, repaying long-term borrowings, and to the maturities of securities.
Total deposits increased $255.6 million from $1.67 billion at December 31, 2004 to $1.93 billion at December 31, 2005. This increase was primarily attributable to the acquisition of Classic during 2005.
Short-term debt balances increased $7.1 million, or 4.9%, from December 31, 2004 to December 31, 2005. This increase was primarily attributable to an increase of $6.3 million in security repurchase agreements. The Company does not depend on these types of funds, which are subject to significant fluctuations for funding or liquidity.
Long-term debt balances decreased $50.4 million, or 33.9%, from 2004 to 2005. This decrease was primarily due to the maturity of FHLB advances.
4
M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
T ABLE T WO
A VERAGE B ALANCE S HEETS AND N ET I NTEREST I NCOME
(in thousands)
| 2005 | 2004 | 2003 | ||||||||||||||||||||||||||||
|
Average
Balance |
Interest |
Yield/
Rate |
Average
Balance |
Interest |
Yield/
Rate |
Average
Balance |
Interest |
Yield/
Rate |
||||||||||||||||||||||
|
ASSETS |
||||||||||||||||||||||||||||||
|
Loan portfolio (1): |
||||||||||||||||||||||||||||||
|
Residential real estate |
$ | 545,280 | $ | 30,570 | 5.61 | % | $ | 454,890 | $ | 26,869 | 5.91 | % | $ | 455,971 | $ | 30,583 | 6.71 | % | ||||||||||||
|
Home equity |
305,525 | 19,088 | 6.25 | 298,703 | 14,004 | 4.69 | 251,135 | 11,165 | 4.45 | |||||||||||||||||||||
|
Commercial, financial, and agriculture |
564,612 | 36,287 | 6.43 | 443,484 | 24,632 | 5.55 | 390,890 | 23,514 | 6.02 | |||||||||||||||||||||
|
Installment loans to individuals |
56,091 | 6,368 | 11.35 | 59,944 | 6,882 | 11.48 | 101,495 | 11,485 | 11.32 | |||||||||||||||||||||
|
Previously securitized loans |
42,859 | 11,401 | 26.60 | 80,151 | 13,712 | 17.11 | 20,426 | 4,549 | 22.27 | |||||||||||||||||||||
|
Total loans |
1,514,367 | 103,714 | 6.85 | 1,337,172 | 86,099 | 6.44 | 1,219,917 | 81,296 | 6.66 | |||||||||||||||||||||
|
Securities: |
||||||||||||||||||||||||||||||
|
Taxable |
623,155 | 29,804 | 4.78 | 666,863 | 30,110 | 4.52 | 517,728 | 21,267 | 4.11 | |||||||||||||||||||||
|
Tax-exempt (2) |
43,767 | 2,904 | 6.64 | 38,169 | 2,784 | 7.29 | 43,709 | 3,248 | 7.43 | |||||||||||||||||||||
|
Total securities |
666,922 | 32,708 | 4.90 | 705,032 | 32,894 | 4.67 | 561,437 | 24,515 | 4.37 | |||||||||||||||||||||
|
Deposits in depository institutions |
4,609 | 109 | 2.36 | 5,347 | 52 | 0.97 | 10,778 | 114 | 1.06 | |||||||||||||||||||||
|
Federal funds sold |
105 | 4 | 3.81 | 193 | 3 | 1.55 | 3,406 | 36 | 1.06 | |||||||||||||||||||||
|
Retained interests |
— | — | — | 3,300 | 808 | 24.48 | 66,662 | 12,465 | 18.70 | |||||||||||||||||||||
|
Total interest-earning assets |
2,186,003 | 136,535 | 6.25 | 2,051,044 | 119,856 | 5.84 | 1,862,200 | 118,426 | 6.36 | |||||||||||||||||||||
|
Cash and due from banks |
48,562 | 43,616 | 45,831 | |||||||||||||||||||||||||||
|
Premises and equipment |
39,109 | 34,804 | 36,289 | |||||||||||||||||||||||||||
|
Other assets |
145,899 | 102,179 | 89,549 | |||||||||||||||||||||||||||
|
Less: allowance for loan losses |
(17,515 | ) | (19,790 | ) | (26,877 | ) | ||||||||||||||||||||||||
|
Total assets |
$ | 2,402,058 | $ | 2,211,853 | $ | 2,006,992 | ||||||||||||||||||||||||
|
LIABILITIES |
||||||||||||||||||||||||||||||
|
Interest-bearing demand deposits |
$ | 433,831 | $ | 3,866 | 0.89 | % | $ | 405,865 | $ | 2,599 | 0.64 | % | $ | 385,882 | $ | 2,174 | 0.56 | % | ||||||||||||
|
Savings deposits |
295,045 | 2,070 | 0.70 | 279,174 | 1,456 | 0.52 | 287,823 | 1,606 | 0.56 | |||||||||||||||||||||
|
Time deposits |
743,725 | 22,869 | 3.07 | 662,068 | 19,152 | 2.89 | 627,741 | 18,757 | 2.99 | |||||||||||||||||||||
|
Short-term borrowings |
157,264 | 3,369 | 2.14 | 120,849 | 1,082 | 0.90 | 99,567 | 792 | 0.80 | |||||||||||||||||||||
|
Long-term debt |
137,340 | 6,264 | 4.56 | 201,218 | 7,582 | 3.77 | 109,947 | 8,456 | 7.69 | |||||||||||||||||||||
|
Total interest-bearing liabilities |
1,767,205 | 38,438 | 2.18 | 1,669,174 | 31,871 | 1.91 | 1,510,960 | 31,785 | 2.10 | |||||||||||||||||||||
|
Noninterest-bearing demand deposits |
341,873 | 312,036 | 292,075 | |||||||||||||||||||||||||||
|
Other liabilities |
28,026 | 24,072 | 25,585 | |||||||||||||||||||||||||||
|
Shareholders’ equity |
264,954 | 206,571 | 178,372 | |||||||||||||||||||||||||||
|
Total liabilities and shareholders’ equity |
$ | 2,402,058 | $ | 2,211,853 | $ | 2,006,992 | ||||||||||||||||||||||||
|
Net interest income |
$ | 98,097 | $ | 87,985 | $ | 86,641 | ||||||||||||||||||||||||
|
Net yield on earning assets |
4.49 | % | 4.29 | % | 4.65 | % | ||||||||||||||||||||||||
| (1) | For purposes of this table, loans on nonaccrual status have been included in average balances. |
| (2) | Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 35%. |
5
M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
N ET I NTEREST I NCOME
2005 vs. 2004
On a tax-equivalent basis, the Company’s net interest income increased by $10.1 million, or 11.5%, from 2004 to 2005 (Table Three). This increase was primarily due to the Classic acquisition and from increased interest income from the Company’s traditional loan portfolio (excluding previously securitized loans). The Classic acquisition contributed $7.5 million of net interest income during 2005. Exclusive of the Classic acquisition and interest income from previously securitized loans and retained interests (see below), net interest income increased $5.8 million from 2004 to 2005. This increase was primarily attributable to an increase in the net interest spread, loan growth, and an increase in average demand deposits and shareholders’ equity. Due to increases in the Federal Funds rate, the positioning of the Company’s balance sheet, and its strong core-deposit base, the yield on the loan portfolio (exclusive of Classic and previously securitized loans) increased 49 basis points while the cost of deposits increased only 22 basis points. As a result, net interest income improved $3.4 million in 2005. Exclusive of previously securitized loans and Classic, average loans increased $66.7 million, or 5.3%, from 2004 to 2005 and average demand deposits and shareholders’ equity increased $49.2 million during the same period. These increases combined to increase net interest income $2.4 million during 2005.
These increases were partially offset by decreased interest income associated with previously securitized loans and retained interests. The average balances of previously securitized loans and retained interests decreased from $83.4 million for the year ended December 31, 2004, to $42.9 million for the year ended December 31, 2005. This decrease was partially mitigated as the yield on previously securitized loans rose from 17.11% for the year ended December 31, 2004, to 26.60% for the year ended December 31, 2005 (see Previously Securitized Loans ). The net result of the decreases in balances of 48.6% and the increased yield was a decrease in interest income from previously securitized loans and retained interests of $3.1 million from 2004 to 2005.
Average earning assets increased by $135 million in 2005 due to increases associated with the acquisition of Classic. Average loan balances (excluding previously securitized loans) increased by $214 million from 2004 to 2005. This increase was partially offset by decreases in average balances of previously securitized loans and retained interests of $41 million (see Previously Securitized Loans ) and in average balances of securities of $38 million. Excluding the acquisition of Classic and the impact of previously securitized loans and retained interests, average earning assets were flat from 2004 to 2005 as increases attributable to commercial loans and residential real estate loans were essentially offset by declines in investments and consumer loan balances. Exclusive of the Classic acquisition, the Company had increases in average commercial loans of $68 million and average residential real estate loans of $20 million. Average securities decreased due to maturities, repayment of long-term borrowings, and funding of commercial loans. In addition, average balances of installment loans fell by $22 million without the acquisition of Classic, as the Company continued its strategy of emphasizing real estate secured loans. The net increase in average earning assets was accompanied by an increase in average interest-bearing deposits of $125 million primarily as a result of the Classic acquisition. Average interest-bearing liabilities increased by $98 million while average non-interest bearing liabilities increased by $34 million and average equity grew by $58 million. Excluding the Classic acquisition, average deposits were flat while average total borrowings decreased $49 million.
The net interest margin for the year ended December 31, 2005, of 4.49% represented a 20 basis point increase from the year ended December 31, 2004’s net interest margin of 4.29%. To offset the effects of decreasing balances of high yielding previously securitized loans, the Company positioned its balance sheet to benefit from rising interest rates. Since December 2004, the Federal Funds rate increased 200 basis points from 2.25% to 4.25% in December 2005. These increases improved the Company’s yield on variable rate lending products, while the Company’s deposit rates increased at a slower pace due to its solid core-deposit base. As a result, the yield on interest-bearing assets excluding previously securitized loans and retained interests increased 49 basis points from 5.35% in 2004 to 5.84% in 2005, while the cost of interest bearing deposits increased only 24 basis points from 1.72% in 2004 to 1.96% in 2005.
2004 vs. 2003
The Company’s net interest income, on a tax-equivalent basis, increased by $1.3 million from 2003 to 2004 (Table Three). This increase was primarily attributable to a 10.1% increase in average earning assets, which was partially offset by a decrease in the net yield on earning assets of 52 basis points. The primary increase in average earning assets was in securities as the Company executed an interest rate risk management strategy put into place in the fourth quarter of 2003. This strategy was implemented to specifically offset anticipated reductions in net interest income from declining balances of retained interests and previously securitized loans. The increase in securities was funded primarily with fixed rate borrowings.
Average earning assets increased by $189 million in 2004 due to increases in average securities of $144 million and in average home equity and commercial loan categories of $100 million. These increases were partially offset by decreases in average consumer lending products of $42 million and a reduction of average Federal funds sold and deposits in depository intermediaries of $9 million. The changes in average loan balances are attributable to the Company’s
6
M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
aforementioned strategic lending policies with emphasis being placed on real estate secured lending. This net increase in average earning assets was accompanied by an increase in average interest-bearing liabilities of $158 million as average short-term and long-term debt increased by $112 million and average interest-bearing deposits increased by $46 million. Average equity increased by $28 million and average noninterest-bearing demand deposits increased by $20 million.
As a continued result of the historically low interest rate environment, the Company experienced a declining net interest margin from 4.65% in 2003 to 4.29% in 2004. This was primarily caused by loan balances continuing to reprice downward while the cost of deposits remained relatively unchanged. The decrease was primarily due to the decrease in the yield on average residential real estate loans, which fell by 80 basis points, and decreasing yields on retained interests and previously securitized loans which decreased by 214 basis points on a combined basis. Partially offsetting these decreases, which resulted in a net decrease in the yield on average earning assets from 6.36% in 2003 to 5.84% in 2004, was an increase in the yield on average securities of 30 basis points. Offsetting the overall decrease in average earning assets was the continued downward repricing trend of 19 basis points in 2004 in the Company’s interest-bearing liabilities. This decrease was primarily attributable to a 392 basis point decrease in the cost of long-term debt that was related to the Company’s early redemption of $57.5 million of 9.125% trust preferred securities.
T ABLE T HREE
R ATE /V OLUME A NALYSIS OF C HANGES IN I NTEREST I NCOME AND E XPENSE
(in thousands)
| 2005 vs. 2004 | 2004 vs. 2003 | |||||||||||||||||||||||
|
Increase (Decrease) Due to Change In: |
Increase (Decrease) Due to Change In: |
|||||||||||||||||||||||
| Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||||||
|
Interest-Earning Assets |
||||||||||||||||||||||||
|
Loan portfolio: |
||||||||||||||||||||||||
|
Residential real estate |
$ | 5,339 | $ | (1,638 | ) | $ | 3,701 | $ | (73 | ) | $ | (3,641 | ) | $ | (3,714 | ) | ||||||||
|
Home equity |
320 | 4,764 | 5,084 | 2,115 | 724 | 2,839 | ||||||||||||||||||
|
Commercial, financial, and agriculture |
6,723 | 4,932 | 11,655 | 3,166 | (2,048 | ) | 1,118 | |||||||||||||||||
|
Installment loans to individuals |
(442 | ) | (72 | ) | (514 | ) | (4,704 | ) | 101 | (4,603 | ) | |||||||||||||
|
Previously securitized loans |
(6,380 | ) | 4,069 | (2,311 | ) | 13,301 | (4,138 | ) | 9,163 | |||||||||||||||
|
Total loans |
5,560 | 12,055 | 17,615 | 13,805 | (9,002 | ) | 4,803 | |||||||||||||||||
|
Securities: |
||||||||||||||||||||||||
|
Taxable |
(1,973 | ) | 1,667 | (306 | ) | 6,126 | 2,717 | 8,843 | ||||||||||||||||
|
Tax-exempt (1) |
408 | (288 | ) | 120 | (412 | ) | (52 | ) | (464 | ) | ||||||||||||||
|
Total securities |
(1,565 | ) | 1,379 | (186 | ) | 5,714 | 2,665 | 8,379 | ||||||||||||||||
|
Deposits in depository institutions |
(7 | ) | 64 | 57 | (57 | ) | (5 | ) | (62 | ) | ||||||||||||||
|
Federal funds sold |
(1 | ) | 2 | 1 | (34 | ) | 1 | (33 | ) | |||||||||||||||
|
Retained interests |
(808 | ) | — | (808 | ) | (11,848 | ) | 191 | (11,657 | ) | ||||||||||||||
|
Total interest-earning assets |
$ | 3,179 | $ | 13,500 | $ | 16,679 | $ | 7,580 | $ | (6,150 | ) | $ | 1,430 | |||||||||||
|
Interest-Bearing Liabilities |
||||||||||||||||||||||||
|
Interest-bearing demand deposits |
$ | 179 | $ | 1,088 | $ | 1,267 | $ | 113 | $ | 312 | $ | 425 | ||||||||||||
|
Savings deposits |
83 | 531 | 614 | (48 | ) | (102 | ) | (150 | ) | |||||||||||||||
|
Time deposits |
2,362 | 1,355 | 3,717 | 1,026 | (630 | ) | 396 | |||||||||||||||||
|
Short-term borrowings |
326 | 1,961 | 2,287 | 169 | 121 | 290 | ||||||||||||||||||
|
Long-term debt |
(2,407 | ) | 1,089 | (1,318 | ) | 7,020 | (7,895 | ) | (875 | ) | ||||||||||||||
|
Total interest-bearing liabilities |
$ | 543 | $ | 6,024 | $ | 6,567 | $ | 8,280 | $ | (8,194 | ) | $ | 86 | |||||||||||
|
Net interest income |
$ | 2,636 | $ | 7,476 | $ | 10,112 | $ | (700 | ) | $ | 2,044 | $ | 1,344 | |||||||||||
| (1) | Fully federal taxable equivalent using a tax rate of approximately 35%. |
7
M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
N ONINTEREST I NCOME AND E XPENSE
2005 vs. 2004
The Company focuses much of its efforts on retail banking and enhancing its retail deposit franchise within its markets. The Company has approximately 169,000 households that maintain approximately 300,000 various accounts with the Company as of December 31, 2005. As a result of this strong retail banking operation, service charge revenues have provided significant revenue growth for the Company over the past three years. During 2005, noninterest income (excluding security transactions and legal settlements) increased approximately $6.5 million, or 15.0%, from 2004. This increase was primarily attributable to the Company’s continued increase in service charge revenues of $6.5 million, or 19.9%, from $32.6 million during 2004 to $39.1 million during 2005. The acquisition of Classic accounted for $2.0 million of this increase, while the remaining $4.5 million increase was due to increased services utilized by our customers.
In addition to the Company’s continued success in expanding services it provides to its customers, other income also increased from $3.1 million in 2004 to $3.7 million in 2005. This increase was primarily attributable to increased sales of fixed rate mortgage loans as a result of the flat yield curve.
2004’s non-interest income included $5.5 million recognized in connection with the settlement of a derivative action brought against certain current and former directors and former executive officers of the Company and City National seeking to recover alleged damages on behalf of the Company and City National.
Noninterest expenses increased $2.8 million, or 4.2%, from $66.3 million in 2004 to $69.1 million in 2005. Non-interest expenses increased $3.4 million due to the Classic acquisition, and $1.4 million from changes in market value of interest rate floors. During 2005, the Company entered into interest rate floor arrangements to protect the future income stream from certain variable rate loans should interest rates decline below certain specified levels. During the fourth quarter of 2005, management determined that the changes in the market value of the floors should be charged to operations. Partially offsetting these increases was a decrease in compensation expense of $2.4 million incurred in 2004 related to an obligation to five current and former executive officers for severance payments as provided under their respective employment agreements. Exclusive of the Classic acquisition, market adjustment on interest rate floors, and executive severance obligations, non-interest expenses increased by $0.4 million between 2004 and 2005.
Advertising expenses increased $0.5 million, or 24.3%, from $2.4 million in 2004 to $2.9 million in 2005. The increase was primarily attributed to an expanded territory as a result of the Classic acquisition and the Company’s focused efforts to attract and grow customer relationships.
Bankcard expenses increased $0.6 million from 2004 to 2005 as a result of increased customer usage of electronic banking services and an increase in customers as a result of the Classic acquisition.
Excluding the Classic acquisition and market adjustment on interest rate floors, other expenses increased $0.4 million, or 4.6%, from 2004 to 2005 primarily as a result of increased business franchise taxes incurred by the Company.
Partially offsetting these increases in non-interest expenses was a decrease in professional fees and litigation expenses of $1.3 million from $3.3 million in 2004 to $2.0 million in 2005. The decrease was primarily related to legal expenses incurred during 2004 associated with the derivative action previously discussed.
2004 vs. 2003
The Company focuses much of its efforts on retail banking and enhancing its retail deposit franchise within its markets. The Company had approximately 150,000 households that maintain approximately 270,000 various accounts with the Company at December 31, 2004. As a result of this strong retail banking operation, service charge revenues have provided significant revenue growth for the Company over the past three years. During 2004, noninterest income (excluding security transactions) increased approximately $10.0 million, or 25.7%, from 2003. This was primarily attributable to the Company’s continued increase in service charge revenues of $4.2 million, or 14.7%, from $28.4 million during 2003 to $32.6 million during 2004. This reflects the Company’s emphasis on increasing its core deposit customer base by growing its retail banking franchise and the introduction of new products and services for depository customers.
During 2003, the Company made a strategic decision to increase its investment in Bank Owned Life Insurance (“BOLI”) to somewhat mitigate the rising costs of providing medical and retirement benefits for the Company’s employees. Primarily due to this increased investment, BOLI related revenues increased $1.6 million, or 122.0%, from 2003.
In addition to the Company’s continued success in expanding its depository relationships, the Company also continued to improve its income from trust and investment management fees and insurance commissions. Trust and investment management fee income increased $0.4 million, or 28.6%, from $1.6 million in 2003 to $2.0 million in 2004. Income generated from insurance commissions increased $0.3 million, or 10.8%, during 2004. These increases were attributable to the Company’s continued efforts to deliver its trust and investment management services and insurance products to new and existing bank customers.
8
M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
Also included in noninterest income is $5.5 million of income from the settlement of litigation brought in December 2001 against certain current and former directors and former executive officers of the Company and City National. During 2003, the Company benefited from a $1.6 million legal settlement associated with the resolution of its claim against the Federal Deposit Insurance Corporation (“FDIC”) in the FDIC’s capacity as receiver for The First National Bank of Keystone. Excluding the impact of litigation proceeds and security transactions, total noninterest income increased $6.1 million, or 16.4%, from $37.3 million in 2003 to $43.4 million in 2004.
Noninterest expenses increased $1.8 million, or 2.8%, from $64.5 million in 2003 to $66.3 million in 2004. This increase is primarily attributable to an increase in salaries and employee benefits of $3.2 million or 10.2%. Increases in healthcare costs and expenses associated with executive severances were primarily responsible for this increase. Due to continued increases in healthcare costs and increased claims, healthcare expenses for the Company’s employees increased $1.8 million. Also contributing to this increase was an increase of $1.6 million in severance costs to $3.3 million in 2004 from $1.7 million in 2003. Severance costs increased in connection with the Company’s obligation to five current and former executive officers for severance payments as provided in their respective employment agreements.
Other expenses increased $0.6 million, or 7.5%, from 2003 to 2004 primarily as a result of increased business franchise taxes incurred by the Company.
Repossessed asset gains and losses and expenses decreased $0.6 million as a result of net gains of $0.7 million in 2003 compared with net gains of $0.1 million in 2004 realized on the disposal of other real estate properties. There can be no assurance that the Company will be able to continue to achieve similar results in future periods in its efforts to resolve and dispose of repossessed assets.
Professional fees and litigation expenses increased $0.4 million from $2.9 million in 2003 to $3.3 million in 2004. The increase was primarily related to legal expenses associated with the derivative action previously discussed.
Partially offsetting these increases in noninterest expenses was a decrease in the loss on early extinguishments of debt. In 2003, the Company reported a charge of $2.4 million primarily associated with the early redemption of $57.5 million of 9.125% trust preferred securities. During 2004, the Company reported a charge of $0.3 million associated with the repurchase in the open market of $2.0 million of its outstanding 9.15% junior subordinated debentures.
Depreciation expense declined by $0.5 million, or 10.9%, from 2003 to 2004 as the Company continued to be selective in limiting its capital expenditures to items deemed necessary to optimize customer service, lower other expenses, or increase revenues.
Also offsetting other noninterest expense increases was a decline in office supplies of $0.4 million, or 26.6%, from $1.4 million in 2003 to $1.0 million in 2004. This decrease was primarily attributable to the Company’s focus on the management and reduction of operational costs.
I NCOME T AXES
The Company recorded income tax expense of $26.4 million, $24.4 million, and $22.3 million in 2005, 2004, and 2003, respectively. The Company’s effective tax rates for 2005, 2004, and 2003 were 34.4%, 34.5%, and 33.7%, respectively. A reconciliation of the effective tax rate to the statutory rate is included in Note Fourteen of Notes to Consolidated Financial Statements.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s net deferred tax assets increased from $27.0 million at December 31, 2004 to $27.9 million at December 31, 2005. The components of the Company’s net deferred tax assets are disclosed in Note Fourteen of Notes to Consolidated Financial Statements. Realization of the most significant net deferred tax assets is primarily dependent on future events taking place that will reverse the current deferred tax assets. For example, realization of the deferred tax asset attributable to the allowance for loan losses is expected to occur as additional loan charge-offs, which have already been provided for within the Company’s financial statements, are recognized for tax purposes. The deferred tax asset associated with the allowance for loan losses declined from $8.2 million at December 31, 2004 to $7.6 million at December 31, 2005. The deferred tax asset associated with the Company’s previously securitized loans is expected to be realized as the Company recognizes income for financial statement purposes from these loans in future periods. The deferred tax asset associated with these loans has increased from $9.7 million at December 31, 2004 to $10.2 million at December 31, 2005. As discussed in Note Seven of Notes to Consolidated Financial Statements, the Company had net recoveries on previously securitized loans of $3.2 million during 2005 that were taxable for income tax purposes but will be recognized in future periods for financial reporting purposes. The deferred tax asset/(liability) associated with unrealized securities losses/(gains) is the tax impact of the unrealized losses/(gains) on the Company’s available for sale security portfolio. At December 31, 2005, the Company had a deferred tax asset of $3.2 million associated with unrealized securities losses as compared to a deferred tax liability of $0.9 million associated with unrealized securities gains at December 31, 2004. The impact of the
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M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
Company’s unrealized losses/(gains) is noted in the Company’s Consolidated Statements of Changes in Shareholder Equity as an adjustment to Accumulated Other Comprehensive Income (Loss). The deferred tax asset at December 31, 2005, would be realized if the unrealized losses on the Company’s securities were realized from sales or maturities of the related securities. The Company believes that it is more likely than not that each of the net deferred tax assets will be realized and that no valuation allowance is necessary as of December 31, 2005 or 2004.
R ISK M ANAGEMENT
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, in turn, 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.
At December 31, 2004 the Company reported that it expected to benefit from rising interest rates. The Fed Funds rate was 2.25% on December 31, 2004, and rose 200 basis points by December 31, 2005, although long-term interest rates increased much more gradually. The Company’s interest rate risk model estimated that the results of a 200 basis point parallel increase in interest rates would be to increase net interest income by 5.0%, and an approximate increase of 6.7% in net income, as compared to what would have been expected if rates did not rise. The model also estimated that the net interest margin would increase by 10 basis points as a result of a 200 basis point parallel increase in interest rates. In fact, after adjusting for the loss of net interest income associated with the decline in the previously securitized loan portfolio as well as the acquisition of Classic Bancshares, the Company’s net interest income did in fact rise by 11.5% and its net interest margin rose by 9 basis points.
The Company’s policy objective is to avoid negative fluctuations in net income or the economic value of equity of more than 15% within a 12-month period, assuming an immediate parallel increase or decrease of 300 basis points. The Company measures the long-term risk associated with sustained increases and decreases in rates through analysis of the impact to changes in rates on the economic value of equity.
However, it is important to understand that a parallel downward shift of 300 basis points in interest rates from the current rate would result in both a 1.25% Fed Funds rate and long-term interest rates of approximately 2%. While it is true that short-term interest rates such as the Fed Funds rate have been at these low levels in the recent past, long-term interest rates have not reached levels as low as would be associated with this “worst-case” interest rate environment in well over 30 years. Based upon the Company’s belief that the likelihood of an immediate 300 basis point decline in both long-term and short-term interest rates from current levels is remote, the Company has chosen to reflect only its risk to a decrease of 200 basis points from current rates.
The Company has entered into interest rate floors with a total notional value of $400 million at December 31, 2005, with terms of 3, 4, and 5 years to facilitate the management of its short-term interest rate risk. These derivative instruments provide the Company protection against the impact declining interest rates on future income streams from certain variable rate loans. Please refer to Notes One and Thirteen of Notes to Consolidated Financial Statements 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:
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M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
|
Immediate
Basis Point
in Interest Rates |
Implied Federal
Funds Rate Associated with Change in Interest Rates |
Estimated Increase (Decrease) in
Net Income Over
|
Estimated
(Decrease) in
Economic Value
Equity |
||||||
|
2005 : |
|||||||||
|
+300 |
7.25 | % | +10.1 | % | +2.2 | % | |||
|
+200 |
6.25 | +8.1 | +2.1 | ||||||
|
+100 |
5.25 | +4.4 | +1.4 | ||||||
|
-100 |
3.25 | (6.7 | ) | (3.4 | ) | ||||
|
-200 |
2.25 | (10.0 | ) | (4.9 | ) | ||||
|
2004: |
|||||||||
|
+400 |
6.25 | % | +9.4 | % | +8.8 | % | |||
|
+300 |
5.25 | +9.1 | +9.5 | ||||||
|
+200 |
4.25 | +6.7 | +7.9 | ||||||
|
+100 |
3.25 | +3.9 | +4.9 | ||||||
|
-100 |
1.25 | (9.7 | ) | (10.8 | ) | ||||
These results are highly dependent upon assumptions made by management, including, but not limited to, assumptions regarding the manner in which interest-bearing demand deposit and saving deposit accounts reprice in different interest rate scenarios, pricing behavior of competitors, prepayments of loans and deposits under alternative rate environments, and new business volumes and pricing. As a result, there can be no assurance that the results above will be achieved in the event that interest rates increase or decrease during 2006 and beyond.
Based upon the results above, the Company believes that its net income is positively correlated with increasing rates as compared to the level of net income the Company would expect if interest rates remain flat. However, these results do not necessarily imply that the Company will experience increases in net income if market interest rates rise. In fact, the Company has significant exposure due to projected decreases in outstanding balances of previously securitized loans. Between January 2006 and December 2006, based upon the Company’s projected reductions in outstanding balances of previously securitized loans, assuming that market interest rates remain unchanged, and assuming that other loan and deposit balances remain unchanged, the Company anticipates a reduction in net interest income of approximately 2.2% and a corresponding reduction in net income of approximately 4.5%. The table above demonstrates that increases in the level of market interest rates could partially or fully offset this impact. For example, an immediate increase in interest rates of approximately 100 basis points would increase net income by approximately 4.4% over a 12-month horizon, assuming that the Company’s assumptions regarding such things as pricing behavior of competitors are fulfilled. Alternatively, the Company believes that loan growth of approximately 3% in 2006 could mitigate the anticipated reduction in net interest income associated with declining balances of previously securitized loans during 2006.
L IQUIDITY
The Company evaluates the adequacy of liquidity at both the Parent Company level and at City National. At the Parent Company level, the principal source of cash is dividends from City National. Dividends paid by City National to the Parent Company are subject to certain legal and regulatory limitations. Generally, any dividends in amounts that exceed the earnings retained by City National in the current year plus retained net profits for the preceding two years must be approved by regulatory authorities. Approval is also required if dividends declared would cause City National’s regulatory capital to fall below specified minimum levels. At December 31, 2005, City National may pay dividends in 2006 of $14.1 million, plus an amount equal to its net profits for 2006, as defined by statute, up to the date of declaration without prior regulatory approval.
During 2005, the Parent Company used cash obtained from the dividends received primarily to: (1) pay common dividends to shareholders, (2) fund the acquisition of Classic Bancshares, and (3) fund repurchases of the Company’s common shares. Additional information concerning sources and uses of cash by the Parent Company is reflected in Note Twenty-One of Notes to Consolidated Financial Statements, on page 51.
Over the next 12 months, the Parent Company has an obligation to remit interest payments approximating $2.6 million on the junior subordinated debentures held by City Holding Capital Trust. However, interest payments on the debentures can be deferred for up to five years under certain circumstances and dividends to shareholders can, if necessary, be suspended. Additionally, the Parent Company anticipates continuing the payment of dividends, which would have approximated $18.1 million on an annualized basis for 2005 based on common shareholders on record at December 31, 2005. In addition to these anticipated cash needs for 2006, the Parent Company has operating expenses and other contractual obligations, which are estimated to require $0.6 million of additional cash over the next 12 months. As of December 31, 2005, the Parent Company reported a cash balance of approximately $38.4 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 in 2006.
Excluding the interest and dividend payments discussed above, the Parent Company has no significant commitments or obligations in years after 2006 other than the repayment of its $28.8 million obligation under the debentures held by City Holding Capital Trust (subsequent to December 31, 2005, the Company repurchased $2.5 million of these debentures in the open market, thus reducing it obligation for these debentures to $26.3 million). However, this obligation does not mature until April 2028, or earlier at the option of the Parent Company. It is expected that the Parent Company will be able
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M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
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. Table Ten on page 20 of this Annual Report to Shareholders summarizes the contractual obligations of the Parent Company and City National, combined.
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 December 31, 2005, deposits and capital significantly fund City National’s assets. However, City National maintains borrowing facilities with the FHLB and other financial institutions that are accessed as necessary to fund operations and to provide contingency funding mechanisms. As of December 31, 2005, City National has the capacity to borrow an additional $483.8 million from the FHLB under existing borrowing facilities. City National maintains a contingency funding plan, incorporating these borrowing facilities, to address liquidity needs in the event of an institution-specific or systematic financial industry crisis. Additionally, City National maintains a significant percentage (90.8% or $550.0 million at December 31, 2005) of its investment securities portfolio in the highly liquid available-for-sale classification. As such, these securities could be liquidated, if necessary, to provide an additional funding source. City National also manages 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. As illustrated in the Consolidated Statements of Cash Flows, the Company generated $52.4 million of cash from operating activities during 2005, primarily from interest income received on loans and investments, net of interest expense paid on deposits and borrowings.
The Company’s net loan to asset ratio is 63.8% at December 31, 2005 as compared to its peers (defined as U.S. banks with total assets between $1 billion and $3 billion as published by the Federal Financial Institution Examination Council) of 69.1% as of September 30, 2005. 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 with carrying values that totaled $605.4 million at December 31, 2005, and that greatly exceeded the Company’s non-deposit sources of borrowing which totaled $282.0 million.
The Company primarily funds its assets with deposits, which fund 77.1% of total assets as compared to 62.3% for its peers. Further, the Company’s deposit mix has a very high proportion of transaction and savings accounts that fund 44.6% of the Company’s total assets. And, the Company uses fewer time deposits over $100,000 than its peers, funding just 7.3% of total assets as compared to peers, which fund 14.6% of total assets with such deposits. And, as described under the caption Certificates of Deposit , the Company’s large CDs are primarily small retail depositors rather than public and institutional deposits.
I NVESTMENTS
The Company’s investment portfolio decreased from $679.8 million at December 31, 2004 to $605.4 million at December 31, 2005. This decrease was primarily related to funding the increase in commercial loans, repayment of long-term borrowings, and maturities of investment securities.
The investment portfolio remains highly liquid at December 31, 2005, with 90.8% of the portfolio classified as available-for-sale, including $45.4 million invested in an open-end, short-term investment fund. The investment portfolio is structured to provide flexibility in managing liquidity needs and interest rate risk, while providing acceptable rates of return.
The majority of the Company’s investment securities continue to be mortgage-backed securities. The mortgage-backed securities in which the Company has invested are predominantly underwritten to the standards of, and guaranteed by, government-sponsored agencies such as FNMA and FHLMC.
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M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
T ABLE F OUR
I NVESTMENT P ORTFOLIO
| Carrying Values as of December 31 | |||||||||
|
(in thousands) |
2005 | 2004 | 2003 | ||||||
|
Securities Available-for-Sale : |
|||||||||
|
U.S. Treasury and other U.S. government corporations and agencies |
$ | 243 | $ | 23,695 | $ | 47,653 | |||
|
States and political subdivisions |
44,034 | 31,652 | 27,856 | ||||||
|
Mortgage-backed securities |
392,210 | 494,428 | 434,449 | ||||||
|
Other debt securities |
51,433 | 41,045 | 34,681 | ||||||
|
Total debt securities available-for-sale |
487,920 | 590,820 | 544,639 | ||||||
|
Equity securities and investment funds |
62,046 | 29,214 | 101,024 | ||||||
|
Total Securities Available-for-Sale |
549,966 | 620,034 | 645,663 | ||||||
|
Securities Held-to-Maturity : |
|||||||||
|
States and political subdivisions |
8,333 | 12,504 | 17,635 | ||||||
|
Other debt securities |
47,064 | 47,236 | 41,663 | ||||||
|
Total Securities Held-to-Maturity |
55,397 | 59,740 | 59,298 | ||||||
|
Total Securities |
$ | 605,363 | $ | 679,774 | $ | 704,961 | |||
Included in equity securities and investment funds in the table above at December 31, 2005 are $10.6 million of Federal Home Loan Bank stock, $4.6 million of Federal Reserve Bank stock, and $45.4 million the Company had invested in Federated Prime Obligations Fund (“the Fund”). The Fund is an open-end fund traded on the NASDAQ National Market, which invests primarily in high quality, short-term, fixed income securities issued by banks, corporations, and the U.S. government. At December 31, 2005, there were no securities of any non-governmental issuers whose aggregate carrying or market value exceeded 10% of shareholders’ equity.
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M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
Weighted-average yields on tax-exempt obligations of states and political subdivisions have been
computed on a fully federal tax-equivalent basis using a tax rate of 35%. Average yields on investments available-for-sale are computed based on amortized cost. Mortgage-backed securities have been allocated to their respective maturity groupings
L OANS
T ABLE F IVE
L OAN P ORTFOLIO
The composition of the Company’s loan portfolio at December 31 follows:
|
(in thousands) |
2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||
|
Residential real estate |
$ | 592,521 | $ | 469,458 | $ | 446,134 | $ | 471,806 | $ | 631,103 | |||||
|
Home equity |
301,728 | 308,173 | 282,481 | 210,753 | 98,100 | ||||||||||
|
Commercial, financial, and agriculture |
629,670 | 472,112 | 427,451 | 389,227 | 430,748 | ||||||||||
|
Installment loans to individuals |
58,652 | 46,595 | 77,337 | 132,605 | 230,304 | ||||||||||
|
Previously securitized loans |
30,256 | 58,436 | 58,788 | — | — | ||||||||||
|
Gross loans |
$ | 1,612,827 | $ | 1,354,774 | $ | 1,292,191 | $ | 1,204,391 | $ | 1,390,255 | |||||
During 2005, the Company continued its strategy of focusing on the growth of its real estate secured lending portfolio. During 2005, commercial loans increased $157.6 million, or 33.4%, from $472.1 million at December 31, 2004, to $629.7 million at December 31, 2005. While $80.5 million of this increase was attributable to the Classic acquisition, the Company’s ability to successfully attract new commercial relationships also contributed significantly to this increase. Residential real estate loans increased $123.0 million, or 26.2%, from $469.5 million at December 31, 2004, to $592.5 million at December 31, 2005. While the majority of this increase, $108.9 million, was attributable to the Classic acquisition, the Company was able to otherwise grow this portfolio by $14.1 million in 2005. Home equity loans decreased $6.5 million from $308.2 million at December 31, 2004, to $301.7 million at December 31, 2005, due to the flattened yield curve that resulted in borrowers refinancing into fixed rate mortgages.
Installment loans increased $12.1 million to $58.7 million at December 31, 2005, as a result of the Classic acquisition. Exclusive of the Classic acquisition, installment balances decreased $13.9 million from December 31, 2004. This decrease is primarily a result of tightened credit standards that were initiated during 2001. As a result of the revised credit standards for installment loans, loan repayments have exceeded new installment borrowings for existing City balances.
As of December 31, 2005, the Company reported $30.3 million of loans classified as “previously securitized loans.” These loans were recorded as a result of the Company’s early redemption of the outstanding notes attributable to the Company’s six loan securitization trusts (see Retained Interests and Previously Securitized Loans ). As the outstanding notes were redeemed during 2004 and 2003, the Company became the beneficial owner of the remaining mortgage loans and recorded the carrying amount of those loans within the loan portfolio, classified as “previously securitized loans.” These loans are junior lien mortgage loans on one- to four-family residential properties located throughout the United States. The loans generally have contractual terms of 25 or 30 years and have fixed interest rates. The Company expects this balance to continue to decline as borrowers remit principal payments on the loans. The following table shows the scheduled maturity of loans outstanding as of December 31, 2005:
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M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
A LLOWANCE AND P ROVISION FOR L OAN L OSSES
Management systematically monitors the loan portfolio and the adequacy of the allowance for loan losses on a quarterly basis to provide for probable losses inherent in the portfolio. Management assesses the risk in each loan type based on historical trends, the general economic environment of its local markets, individual loan performance, and other relevant factors. Individual credits are selected throughout the year for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the adequacy of the allowance. Due to the nature of commercial lending, evaluation of the adequacy of the allowance as it relates to these loan types is often based more upon specific credit review, with consideration given to the potential impairment of certain credits and historical charge-off percentages, adjusted for general economic conditions and other inherent risk factors. Conversely, due to the homogeneous nature of the real estate and installment portfolios, the portions of the allowance allocated to those portfolios are primarily based on prior 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.
During the past three years, management has implemented a number of strategic initiatives to strengthen its loan portfolio including tightening credit standards, changing the overall mix of the portfolio to include a higher proportion of real estate secured loans, and identifying and charging off or resolving problem loans. As a result of these initiatives, the quality of the Company’s loan portfolio has been solid over the past three years as evidenced by the stability of its ratio of non-performing assets to total loans and other real estate owned which was 0.27% on December 31, 2005. As the Company’s asset quality has consistently improved, the required level of the allowance has decreased. The provision for loan losses recorded during 2005 was the result of an increase in loss trends for overdraft deposit accounts and credit card loans, and growth in the outstanding balances of commercial loans during the year. The Company has continued to experience growth in commercial real estate loans, with average balances increasing by $158 million from 2004 to 2005. Increased losses in the overdraft deposit accounts and credit card loans categories are consistent with trends experienced by banks nationally during 2005 and appear to have been impacted by the new bankruptcy legislation that became effective on October 17, 2005. While these trends required the Company to record provision expense for the first time since 2002, the amount of provision recorded was favorably impacted by continued improvement in the quality of the loan portfolio. Specifically, three classified credits for which the Company had previously allocated $1.9 million in reserves were refinanced by other banks during 2005. As a result, the reserves allocated to these credits were no longer required, favorably impacting the provision required by $800,000 for the year.
The allowance as a percentage of loans outstanding is 1.04% at December 31, 2005, compared to the average of the Company’s peer group of 1.24% for the most recently reported quarter. The Company’s strong asset quality is the primary reason for this difference. At December 31, 2005, non-performing assets as a percentage of loans and other real estate owned were 0.27%. Average non-performing assets as a percentage of loans and other real estate owned for the Company’s peer group for the most recently reported quarter were 0.67%. Another contributing factor that has enabled the Company to maintain its allowance at lower levels than peers is the composition of the Company’s loan portfolio, which is weighted toward more residential mortgage loans and fewer non-real estate secured commercial loans than its peers. Additionally as a result of the Company’s acquisition of Classic, the Company’s allowance increased by $3.3 million in 2005. Based on management’s analysis of the adequacy of the allowance for loan losses during 2005, management determined it was appropriate to record a provision for loan losses of $1.4 million for 2005. The Company believes its methodology for determining the adequacy of its allowance adequately provides for probable losses inherent in the loan portfolio and produces a provision for loan losses that is directionally consistent with changes in asset quality and loss experience.
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M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
The allowance allocated to the commercial loan portfolio decreased $3.0 million, or 28.5%, from $10.7 million at December 31, 2004 to $7.6 million at December 31, 2005. This decline was due primarily to the Company’s improved commercial credit quality. The allowance allocated to problem credits has decreased $3.8 million, or 48%, from December 31, 2004, to December 31, 2005 as these credits have either been charged-off, refinanced by other banks, repaid, or shown improved creditworthiness during 2005. In addition, the Company’s improved commercial loan credit quality has resulted in decreased historical charge-off percentages applied to commercial credits not individually reviewed.
The allowance allocated to the residential real estate portfolio increased $0.8 million, or 26.2%, from $3.2 million at December 31, 2004, to $4.0 million at December 31, 2005. This is the result of increased amounts of residential real estate and home equity loans outstanding. As of December 31, 2005, residential real estate and home equity loans totaled $894.2 million, a $116.6 million (15.0%) increase from the December 31, 2004, amount of $777.6 million. As reflected in Table Six, the Company reported recoveries of $0.3 million during 2005 and charge-offs of $1.5 million during the year. The charge-offs experienced during 2005 primarily related to residential real estate loans originated prior to 2001.
The allowance allocated to the consumer loan portfolio increased $0.2 million, or 10.5%, from $2.6 million at December 31, 2004 to $2.8 million at December 31, 2005. This increase was primarily due to the growth of the consumer loan portfolio as a result of the Classic acquisition. The outstanding balances of installment loans to individuals, defined as installment, indirect, and credit card loans, increased $12.1 million, or 25.9%, from December 31, 2004, to December 31, 2005. This increase in balances was partially offset by lower historical loss percentages in the installment loan portfolio, which decreased 19% from December 31, 2004, to December 31, 2005.
With the introduction of new depository account products and services in 2002 and the growth experienced in this product line from 2002 to 2005, the Company began allocating a portion of the allowance for loan losses to overdraft deposit account borrowings in 2003. Certain products offered by the Company permit customers to overdraft their depository accounts. While the Company generates service charge revenues for providing this service to the customer, certain deposit account overdrafts are not fully repaid by the customer resulting in losses incurred. The Company has provided for probable losses resulting from overdraft deposit account borrowings through its allowance for loan losses. As reflected in Table Six, the Company reported net charge-offs on depository accounts of $2.4 and $1.5 million during 2005 and 2004, respectively. As of December 31, 2005, the balance of overdraft deposit accounts was $3.3 million and is included in installment loans to individuals in Note Five of Notes to Consolidated Financial Statements. The Company allocated $2.4 million (see Table Eight) of its allowance for loan losses as of December 31, 2005, to provide for probable losses resulting from overdraft deposit accounts.
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 and allowance 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 December 31, 2005, is adequate to provide for probable losses inherent in the Company’s loan portfolio. Future provisions for loan losses will be dependent upon trends in loan balances including the composition of the loan portfolio, changes in loan quality and loss experience trends, and potential recoveries of previously charged-off loans, among other factors. The Company believes that its methodology for determining its allowance for loan losses adequately provides for probable losses inherent in the loan portfolio at December 31, 2005.
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M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
T ABLE S IX
A NALYSIS OF THE A LLOWANCE FOR L OAN L OSSES
An analysis of changes in the allowance for loan losses follows:
The Company recognized approximately $0.1 million of interest income received in cash on non-accrual and restructured loans in both 2005 and 2003, with no such income recognized during 2004. Approximately $0.2 million, $0.1 million and $0.2 million of interest income would have been recognized during 2005, 2004 and 2003, respectively, if such loans had been current in accordance with their original terms. There were no commitments to provide additional funds on non-accrual, restructured, or other potential problem loans at December 31, 2005 and 2004.
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M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
Interest on loans is accrued and credited to operations based upon the principal amount outstanding.
The accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest unless the loan is well collateralized and in the process of collection. When interest accruals are discontinued, interest
credited to income in the current year that is unpaid and deemed uncollectible is charged to operations. Prior-year interest accruals that are unpaid and deemed uncollectible are charged to the allowance for loan losses, provided that such amounts
T ABLE E IGHT
A LLOCATION OF THE A LLOWANCE FOR L OAN L OSSES
A summary of the allocation of the allowance for loan losses by loan type at December 31 follows:
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||||||||
|
(dollars in thousands) |
Amount |
Percent
of Loans in Each Category to Total Loans |
Amount |
Percent
of Loans in Each Category to Total Loans |
Amount |
Percent
of Loans in Each Category to Total Loans |
Amount |
Percent
of Loans in Each Category to Total Loans |
Amount |
Percent
of Loans in Each Category to Total Loans |
||||||||||||||||||||
|
Commercial, financial and agricultural |
$ | 7,613 | 39 | % | $ | 10,655 | 35 | % | $ | 13,554 | 33 | % | $ | 17,039 | 32 | % | $ | 32,428 | 31 | % | ||||||||||
|
Real estate-mortgage |
3,977 | 57 | 3,151 | 62 | 2,874 | 61 | 7,363 | 57 | 9,493 | 52 | ||||||||||||||||||||
|
Installment loans to individuals |
2,819 | 4 | 2,552 | 3 | 3,558 | 6 | 4,102 | 11 | 6,714 | 17 | ||||||||||||||||||||
|
Overdraft deposit accounts |
2,381 | — | 1,457 | — | 1,440 | — | — | — | — | — | ||||||||||||||||||||
| $ | 16,790 | 100 | % | $ | 17,815 | 100 | % | $ | 21,426 | 100 | % | $ | 28,504 | 100 | % | $ | 48,635 | 100 | % | |||||||||||
R ETAINED I NTERESTS AND P REVIOUSLY S ECURITIZED L OANS
Overview: Between 1997 and 1999, the Company originated and securitized approximately $759.8 million in 125% loan to junior-lien underlying mortgages in six separate pools. The Company had a retained interest in the securitizations. Principal amounts owed to investors in the securitizations were evidenced by securities (“Notes”). The Notes were subject to redemption, in whole but not in part, at the option of the Company, as owner of the retained interests, or at the option of the Note insurer, on or after the date on which the related Note balance had declined to 5% or less of the original Note balance. Once the Notes were redeemed, the Company became the beneficial owner of the mortgage loans and recorded the loans as assets of the Company within the loan portfolio. During 2004 and 2003, the Notes outstanding on each of the Company’s six securitizations declined below the 5% threshold and the Company exercised its early redemption option on each of those securitizations.
Retained Interests: Interest income on retained interests was recognized over the life of the retained interest using the effective yield method. Using the effective yield approach, the Company recognized $0.8 million and $12.5 million of interest income in 2004 and 2003, respectively. Comparatively, the Company received cash from the retained interests of $6.1 million in 2003, with no cash received during 2004. The Company recognized no interest income and did not receive any cash from retained interests in 2005.
Previously Securitized Loans: As the Company redeemed the outstanding Notes, no gain or loss was recognized in the Company’s financial statements and the remaining mortgage loans were recorded in the Company’s loan portfolio as “previously securitized loans,” at the lower of carrying value or fair value. Because the carrying value of the mortgage loans incorporated assumptions for expected prepayment and default rates, the carrying value of the loans was generally less than the actual outstanding contractual balance of the loans. As of December 31, 2005 and 2004, the Company reported a carrying value of previously securitized loans of $30.3 million and $58.4 million, respectively, while the actual outstanding contractual balance of these loans was $48.1 million and $75.0 million, respectively. The Company accounts for the difference between the carrying value and the outstanding balance 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. Effective January 1, 2005, the Company adopted Statement of Position 03-3 to determine the collectibility of
18
M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
previously securitized loans (see Recent Accounting Pronouncements). If upon evaluation of estimated collections and collections to date, the estimated total amount of collections is reduced below the original value of the loans, the loans will be considered impaired and subject to further evaluation. For a further discussion of the accounting policies for previously securitized loans, please see Note One to the Consolidated Financial Statements, on page 31 of this Annual Report to Shareholders.
During 2005 and 2004, the Company recognized $11.4 million and $13.7 million, respectively, of interest income on its previously securitized loans. Cash receipts for 2005 and 2004 are summarized in the following table:
|
(in thousands) |
2005 | 2004 | ||||
|
Principal receipts |
$ | 30,201 | $ | 49,129 | ||
|
Interest receipts |
9,146 | 12,412 | ||||
|
Total cash receipts |
$ | 39,347 | $ | 61,541 | ||
Key assumptions used in estimating the fair value of the Company’s previously securitized loans as of December 31, 2005 and 2004, were as follows:
| December 31 | ||||||
| 2005 | 2004 | |||||
|
Prepayment speed (CPR): |
||||||
|
From January 2005 – May 2005 |
— | 40 | % | |||
|
From June 2005 – May 2006 |
30 | % | 30 | % | ||
|
From June 2006 – September 2006 |
30 | % | 20 | % | ||
|
After September 2006 |
20 | % | 20 | % | ||
|
Weighted-average cumulative defaults |
10.54 | % | 12.37 | % | ||
The projected cumulative default rate is computed using actual loan defaults experienced life-to-date plus forecasted loan defaults projected over the remaining expected life of the loans.
Summary: The following table summarizes the activity with the reported balance of retained interests and previously securitized loans during 2005 and 2004 and illustrates the impact on these balances of converting the retained interest asset to loans:
G OODWILL
The Company evaluates the recoverability of goodwill and indefinite lived intangible assets annually as of November 30, or more frequently if events or changes in circumstances warrant, such as a material adverse change in the business. Goodwill is considered to be impaired when the carrying value of a reporting unit exceeds its estimated fair value. Indefinite-lived intangible assets are considered impaired if their carrying value exceeds their estimated fair value. As described in Note One of the Company’s Consolidated Financial Statements, the Company conducts its business activities through one reportable business segment – community banking. Fair values are estimated by reviewing the Company’s stock price as it compares to book value and the Company’s reported earnings. In addition, the impact of future earnings and activities are considered in the Company’s analysis. The Company has $54.9 million of goodwill subject to impairment at December 31, 2005.
19
M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
C ERTIFICATES OF D EPOSIT
Scheduled maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 2005, are summarized in Table Nine. The Company
has time certificates of deposit of $100,000 or more totaling $182.5 million. These deposits are primarily small retail depositors of the bank as demonstrated by the average balance of time certificates of deposit of $100,000 or more being less than
T ABLE N INE
M ATURITY D ISTRIBUTION OF C ERTIFICATES OF D EPOSIT OF $100,000 OR MORE
|
(in thousands) |
Amounts | Percentage | ||||
|
Three months or less |
$ | 18,615 | 10 | % | ||
|
Over three months through six months |
21,298 | 12 | ||||
|
Over six months through twelve months |
38,531 | 21 | ||||
|
Over twelve months |
104,042 | 57 | ||||
|
Total |
$ | 182,486 | 100 | % | ||
C ONTRACTUAL O BLIGATIONS
The Company has various financial obligations that may require future cash payments according to the terms of the obligations. Demand, both noninterest-
and interest-bearing, and savings deposits are, generally, payable immediately upon demand at the request of the customer. Therefore, the contractual maturity of these obligations is presented in the following table as “less than one
year.” Time deposits, typically CDs, are customer deposits that are evidenced by an agreement between the Company and the customer that specify stated maturity dates and early withdrawals by the customer are subject to penalties assessed by the
Company. Short-term borrowings and long-term debt represent borrowings of the Company and have stated maturity dates. The Company is not a party to any material capital or operating leases as of December 31, 2005. The composition of the
T ABLE T EN
C ONTRACTUAL O BLIGATIONS
| Contractual Maturity in | |||||||||||||||
|
(in thousands) |
Less than One
Year |
Between One
and Three Years |
Between Three
and Five Years |
Greater than
Five Years |
Total | ||||||||||
|
Noninterest-bearing demand deposits |
$ | 376,076 | $ | — | $ | — | $ | — | $ | 376,076 | |||||
|
Interest-bearing demand deposits (1) |
442,492 | — | — | — | 442,492 | ||||||||||
|
Savings deposits (1) |
305,354 | — | — | — | 305,354 | ||||||||||
|
Time deposits (1) |
418,538 | 344,837 | 96,737 | 458 | 860,570 | ||||||||||
|
Short-term borrowings (1) |
156,586 | — | — | — | 156,586 | ||||||||||
|
Long-term debt (1) |
5,315 | 97,674 | 4,667 | 4,652 | 112,308 | ||||||||||
|
Total Contractual Obligations |
$ | 1,704,361 | $ | 442,511 | $ | 101,404 | $ | 5,110 | $ | 2,253,386 | |||||
| (1) | Includes interest on both fixed- and variable-rate obligations. The interest associated with variable-rate obligations is based upon interest rates in effect at December 31, 2005. The contractual amounts to be paid on variable-rate obligations are affected by market interest rates that could materially affect the contractual amounts to be paid. |
20
M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
O FF –B ALANCE S HEET A RRANGEMENTS
As disclosed in Note Seventeen of Notes to Consolidated Financial Statements, the Company has also entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit. While the outstanding commitment obligation is not recorded in the Company’s financial statements, the estimated fair value, which is not material to the Company’s financial statements, of the standby letters of credit is recorded in the Company’s Consolidated Balance Sheets as of December 31, 2005.
C APITAL R ESOURCES
During 2005, Shareholders’ Equity increased $76.0 million, or 35.2%, from $216.1 million at December 31, 2004, to $292.1 million at December 31, 2005. This increase was due to reported net income of $50.3 million for 2005 and the issuance of 1,580,034 common shares, net 108,373 common shares owned and transferred to treasury, for the acquisition of Classic Bancshares that increased equity by $54.3 million. These increases were partially offset by cash dividends declared during the year of $17.7 million, common stock purchases of $11.9 million, and a $6.8 million reduction in accumulated other comprehensive income.
During June 2005, the Board of Directors authorized the Company to buy back up to 1,000,000 shares of its common shares (approximately 5% of outstanding shares) in open market transactions at prices that are accretive to the earnings per share of continuing shareholders. No time limit was placed on the duration of the share repurchase program. As part of this authorization, the Company rescinded the previous share repurchase program plan approved in June 2002. The Company had repurchased 755,216 shares under the June 2002 Stock Repurchase Plan. During 2005, the Company acquired 342,576 shares of its common stock at an average price of $34.77 per share. The Company has purchased 205,100 shares of its common stock under the repurchase program adopted in June 2005. However, 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.
The $6.8 million reduction in accumulated other comprehensive income was primarily due to a $6.1 million, net of tax, unrealized loss on the Company’s available for sale investment securities (see Note Four of Notes to Consolidated Financial Statements) and a $0.7 million, net of tax, increase in underfunded pension obligations (see Note Fifteen of Notes to Consolidated Financial Statements).
During 2004, Shareholders’ Equity increased $25.4 million, or 13.3%, from $190.7 million at December 31, 2003, to $216.1 million at December 31, 2004. This increase was primarily due to reported net income of $46.3 million for 2004, which was partially offset by cash dividends declared during the year of $14.6 million, common stock purchases of $5.9 million, and a $2.5 million reduction in accumulated other comprehensive income.
Regulatory guidelines require the Company to maintain a minimum total capital to risk-adjusted assets ratio of 8.00%, with at least one-half of capital consisting of tangible common shareholders’ equity and a minimum Tier I leverage ratio of 4.00%. Similarly, City National is also required to maintain minimum capital levels as set forth by various regulatory agencies. Under capital adequacy guidelines, City National is required to maintain minimum total capital, Tier I capital, and leverage ratios of 8.00%, 4.00%, and 4.00%, respectively. To be classified as “well capitalized,” City National must maintain total capital, Tier I capital, and leverage ratios of 10.00%, 6.00%, and 5.00%, respectively.
The Capital Securities issued by City Holding Capital Trust (“Trust I”) qualify as regulatory capital for the Company under guidelines established by the Federal Reserve Board. The Company’s regulatory capital ratios remained strong for both City Holding and City National as of December 31, 2005, as illustrated in the following table:
| Actual | ||||||||||||
| December 31 | ||||||||||||
| Minimum |
Well- Capitalized |
2005 | 2004 | |||||||||
|
City Holding: |
||||||||||||
|
Total |
8.00 | % | 10.00 | % | 16.38 | % | 16.64 | % | ||||
|
Tier I Risk-based |
4.00 | 6.00 | 15.41 | 15.47 | ||||||||
|
Tier I Leverage |
4.00 | 5.00 | 10.97 | 10.74 | ||||||||
|
City National: |
||||||||||||
|
Total |
8.00 | % | 10.00 | % | 13.99 | % | 14.49 | % | ||||
|
Tier I Risk-based |
4.00 | 6.00 | 13.01 | 13.32 | ||||||||
|
Tier I Leverage |
4.00 | 5.00 | 9.24 | 9.25 | ||||||||
In March 2005, the Federal Reserve Board issued a final rule that retains the inclusion of trust preferred securities in Tier 1 of capital of bank holding companies. After a five year transition period ending March 31, 2009, the aggregate amount of trust preferred securities and certain other capital elements, will be limited to 25% of Tier 1 capital elements, net of goodwill less associated deferred tax liability. Amounts of restricted core capital elements in excess of this limit generally may be included in Tier 2 capital.
L EGAL I SSUES
The Company and City National are engaged in various legal actions in the ordinary course of business. As these legal actions are resolved, the Company or City National 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 will be presented in the future.
21
M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS ( CONTINUED )
R ECENT A CCOUNTING P RONOUNCEMENTS AND D EVELOPMENTS
Note One, “Recent Accounting Pronouncements,” of Notes to Consolidated Financial Statements discusses recently issued new accounting pronouncements and their expected impact on the Company’s consolidated financial statements.
F ORWARD -L OOKING S TATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements that are included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such information involves risks and uncertainties that could cause the Company’s actual results to differ from those projected in the forward-looking information. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include, but are not limited to, (1) the Company may incur additional provision for loan losses due to negative credit quality trends in the future that may lead to a deterioration of asset quality; (2) the Company may incur increased charge-offs in the future; (3) the Company may experience increases in the default rates on previously securitized loans that would result in impairment losses or lower the yield on such loans; (4) the Company may continue to benefit from strong recovery efforts on previously securitized loans resulting in improved yields on this asset; (5) the Company could have adverse legal actions of a material nature; (6) the Company may face competitive loss of customers; (7) the Company may be unable to manage its expense levels; (8) the Company may have difficulty retaining key employees; (9) changes in the interest rate environment may have results on the Company’s operations materially different from those anticipated by the Company’s market risk management functions; (10) changes in general economic conditions and increased competition could adversely affect the Company’s operating results; (11) changes in other regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact the Company’s operating results; and (12) the Company may experience difficulties growing loan and deposit balances. Forward-looking statements made herein reflect management’s expectations as of the date such statements are made. Such information is provided to assist stockholders and potential investors in understanding current and anticipated financial operations of the Company and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made.
22
R EPORT ON M ANAGEMENT ’ S A SSESSMENT OF I NTERNAL C ONTROL O VER F INANCIAL R EPORTING
The management of City Holding Company is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements of City Holding Company have been prepared in accordance with U.S. generally accepted accounting principles and, necessarily include some amounts that are based on the best estimates and judgments of management.
The management of City Holding Company is responsible for establishing and maintaining adequate internal control over financial reporting that is designed to produce reliable financial statements in conformity with U.S. generally accepted accounting principles. The system of internal control over financial reporting is evaluated for effectiveness by management and tested for reliability through a program of internal audits with actions taken to correct potential deficiencies as they are identified. Because of inherent limitations in any internal control system, no matter how well designed, misstatements due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control effectiveness may vary over time.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on our assessment, management believes that, as of December 31, 2005, the Company’s system of internal control over financial reporting is effective based on those criteria. Ernst & Young, LLP, the Company’s independent registered public accounting firm, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting. This report appears on page 24.
March 1, 2006
|
/s/ Charles R. Hageboeck |
/s/ David L. Bumgarner |
|||
| Charles R. Hageboeck | David L. Bumgarner | |||
| President and Chief Executive Officer | Chief Financial Officer |
23
R EPORT OF I NDEPENDENT R EGISTERED P UBLIC A CCOUNTING F IRM ON E FFECTIVENESS OF I NTERNAL C ONTROL O VER F INANCIAL R EPORTING
Audit Committee of the Board of Directors and the
Shareholders of City Holding Company
We have audited management’s assessment, included in the accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting, that City Holding Company maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). City Holding Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment about the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that City Holding Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, City Holding Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005 of City Holding Company and our report dated March 1, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Charleston, West Virginia
March 1, 2006
24
R EPORT OF I NDEPENDENT R EGISTERED P UBLIC A CCOUNTING F IRM ON C ONSOLIDATED F INANCIAL S TATEMENTS
Audit Committee of the Board of Directors and the
Shareholders of City Holding Company
We have audited the accompanying consolidated balance sheets of City Holding Company and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of City Holding Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of City Holding Company and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of City Holding Company’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Charleston, West Virginia
| March | 1, 2006 |
25
C ONSOLIDATED B ALANCE S HEETS
C ITY H OLDING C OMPANY AND S UBSIDIARIES
| December 31 | ||||||||
|
(in thousands) |
2005 | 2004 | ||||||
|
Assets |
||||||||
|
Cash and due from banks |
$ | 81,822 | $ | 52,854 | ||||
|
Interest-bearing deposits in depository institutions |
4,451 | 3,230 | ||||||
|
Cash and Cash Equivalents |
86,273 | 56,084 | ||||||
|
Investment securities available-for-sale, at fair value |
549,966 | 620,034 | ||||||
|
Investment securities held-to-maturity, at amortized cost (approximate fair value at December 31, 2005 and 2004 - $58,892 and $64,476, respectively) |
55,397 | 59,740 | ||||||
|
Total Investment Securities |
605,363 | 679,774 | ||||||
|
Gross Loans |
1,612,827 | 1,354,774 | ||||||
|
Allowance for loan losses |
(16,790 | ) | (17,815 | ) | ||||
|
Net Loans |
1,596,037 | 1,336,959 | ||||||
|
Bank-owned life insurance |
52,969 | 50,845 | ||||||
|
Premises and equipment |
42,542 | 34,607 | ||||||
|
Accrued interest receivable |
13,134 | 9,868 | ||||||
|
Net deferred tax assets |
27,929 | 27,025 | ||||||
|
Intangible assets |
59,559 | 6,255 | ||||||
|
Other assets |
18,791 | 11,813 | ||||||
|
Total Assets |
$ | 2,502,597 | $ | 2,213,230 | ||||
|
Liabilities |
||||||||
|
Deposits: |
||||||||
|
Noninterest-bearing |
$ | 376,076 | $ | 319,425 | ||||
|
Interest-bearing: |
||||||||
|
Demand deposits |
437,639 | 411,127 | ||||||
|
Savings deposits |
302,571 | 281,466 | ||||||
|
Time deposits |
812,134 | 660,705 | ||||||
|
Total Deposits |
1,928,420 | 1,672,723 | ||||||
|
Short-term borrowings |
152,255 | 145,183 | ||||||
|
Long-term debt |
98,425 | 148,836 | ||||||
|
Other liabilities |
31,356 | 30,408 | ||||||
|
Total Liabilities |
2,210,456 | 1,997,150 | ||||||
|
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 and 16,919,248 shares issued at December 31, 2005 and 2004, including 395,465 and 331,191 shares in treasury, respectively |
46,249 | 42,298 | ||||||
|
Capital surplus |
104,435 | 55,512 | ||||||
|
Retained earnings |
160,747 | 128,175 | ||||||
|
Cost of common stock in treasury |
(11,278 | ) | (8,761 | ) | ||||
|
Accumulated other comprehensive income: |
||||||||
|
Unrealized (loss) gain on securities available-for-sale |
(4,839 | ) | 1,281 | |||||
|
Underfunded pension liability |
(3,173 | ) | (2,425 | ) | ||||
|
Total Accumulated Other Comprehensive Income |
(8,012 | ) | (1,144 | ) | ||||
|
Total Shareholders’ Equity |
292,141 | 216,080 | ||||||
|
Total Liabilities and Shareholders’ Equity |
$ | 2,502,597 | $ | 2,213,230 | ||||
See notes to consolidated financial statements.
26
C ONSOLIDATED S TATEMENTS OF I NCOME
C ITY H OLDING C OMPANY AND S UBSIDIARIES
| Year Ended December 31 | ||||||||||||
|
(in thousands, except per share data) |
2005 | 2004 | 2003 | |||||||||
|
Interest Income |
||||||||||||
|
Interest and fees on loans |
$ | 103,714 | $ | 86,099 | $ | 81,296 | ||||||
|
Interest on investment securities: |
||||||||||||
|
Taxable |
29,804 | 30,110 | 21,267 | |||||||||
|
Tax-exempt |
1,887 | 1,809 | 2,112 | |||||||||
|
Interest on retained interests |
— | 808 | 12,465 | |||||||||
|
Interest on deposits in depository institutions |
109 | 52 | 114 | |||||||||
|
Interest on federal funds sold |
4 | 3 | 36 | |||||||||
|
Total Interest Income |
135,518 | 118,881 | 117,290 | |||||||||
|
Interest Expense |
||||||||||||
|
Interest on deposits |
28,805 | 23,207 | 22,537 | |||||||||
|
Interest on short-term borrowings |
3,369 | 1,082 | 792 | |||||||||
|
Interest on long-term debt |
6,264 | 7,582 | 8,456 | |||||||||
|
Total Interest Expense |
38,438 | 31,871 | 31,785 | |||||||||
|
Net Interest Income |
97,080 | 87,010 | 85,505 | |||||||||
|
Provision for (recovery of) loan losses |
1,400 | — | (6,200 | ) | ||||||||
|
Net Interest Income After Provision for (Recovery of) Loan Losses |
95,680 | 87,010 | 91,705 | |||||||||
|
Noninterest Income |
||||||||||||
|
Investment securities gains (losses) |
151 | 1,173 | (148 | ) | ||||||||
|
Service charges |
39,091 | 32,609 | 28,422 | |||||||||
|
Insurance commissions |
2,352 | 2,733 | 2,467 | |||||||||
|
Trust and investment management fee income |
2,025 | 2,026 | 1,575 | |||||||||
|
Bank-owned life insurance |
2,779 | 2,931 | 1,320 | |||||||||
|
Net proceeds from litigation settlements |
— | 5,453 | 1,600 | |||||||||
|
Other income |
3,693 | 3,111 | 3,502 | |||||||||
|
Total Noninterest Income |
50,091 | 50,036 | 38,738 | |||||||||
|
Noninterest Expense |
||||||||||||
|
Salaries and employee benefits |
33,479 | 34,245 | 31,070 | |||||||||
|
Occupancy and equipment |
6,295 | 5,984 | 6,015 | |||||||||
|
Depreciation |
4,096 | 3,932 | 4,411 | |||||||||
|
Professional fees and litigation expense |
2,021 | 3,265 | 2,879 | |||||||||
|
Postage, delivery, and statement mailings |
2,666 | 2,474 | 2,646 | |||||||||
|
Advertising |
2,941 | 2,366 | 2,340 | |||||||||
|
Telecommunications |
2,248 | 1,820 | 1,874 | |||||||||
|
Bankcard expenses |
2,137 | 1,501 | 1,255 | |||||||||
|
Insurance and regulatory |
1,496 | 1,323 | 1,266 | |||||||||
|
Office supplies |
1,193 | 1,048 | 1,428 | |||||||||
|
Repossessed asset gains |
(78 | ) | (77 | ) | (691 | ) | ||||||
|
Loss on early extinguishment of debt |
— | 263 | 2,388 | |||||||||
|
Other expenses |
10,619 | 8,189 | 7,617 | |||||||||
|
Total Noninterest Expense |
69,113 | 66,333 | 64,498 | |||||||||
|
Income Before Income Taxes |
76,658 | 70,713 | 65,945 | |||||||||
|
Income tax expense |
26,370 | 24,369 | 22,251 | |||||||||
|
Net Income |
$ | 50,288 | $ | 46,344 | $ | 43,694 | ||||||
|
Basic earnings per common share |
$ | 2.87 | $ | 2.79 | $ | 2.63 | ||||||
|
Diluted earnings per common share |
$ | 2.84 | $ | 2.75 | $ | 2.58 | ||||||
|
Dividends declared per common share |
$ | 1.00 | $ | 0.88 | $ | 0.80 | ||||||
|
Average common shares outstanding: |
||||||||||||
|
Basic |
17,519 | 16,632 | 16,634 | |||||||||
|
Diluted |
17,690 | 16,882 | 16,947 | |||||||||
See notes to consolidated financial statements.
27
C ONSOLIDATED S TATEMENTS OF C HANGES IN S HAREHOLDERS ’ E QUITY
C ITY H OLDING C OMPANY AND S UBSIDIARIES
|
(in thousands) |
Common
Stock
|
Capital
Surplus |
Retained
Earnings |
Accumulated
Other Comprehensive (Loss) Income |
Treasury
Stock |
Total
Shareholders’ Equity |
|||||||||||||||||
|
Balances at December 31, 2002 |
$ | 42,298 | $ | 59,029 | $ | 66,076 | $ | 4,416 | $ | (6,426 | ) | $ | 165,393 | ||||||||||
|
Comprehensive income: |
|||||||||||||||||||||||
|
Net income |
— | — | 43,694 | — | — | 43,694 | |||||||||||||||||
|
Other comprehensive loss, net of deferred income tax benefit of $2,030: |
|||||||||||||||||||||||
|
Unrealized loss on securities of $3,664, net of tax and reclassification adjustments for losses included in net income of $148 |
— | — | — | (2,198 | ) | — | (2,198 | ) | |||||||||||||||
|
Increase in underfunded pension liability of $1,411, net of tax |
— | — | — | (847 | ) | — | (847 | ) | |||||||||||||||
|
Total comprehensive income |
40,649 | ||||||||||||||||||||||
|
Cash dividends declared ($0.80 per share) |
— | — | (13,310 | ) | — | — | (13,310 | ) | |||||||||||||||
|
Exercise of 104,982 stock options, including tax benefit of $107 |
— | (1,665 | ) | — | — | 2,881 | 1,216 | ||||||||||||||||
|
Purchase of 118,300 common shares for treasury |
— | — | — | — | (3,258 | ) | (3,258 | ) | |||||||||||||||
|
Balances at December 31, 2003 |
42,298 | 57,364 | 96,460 | 1,371 | (6,803 | ) | 190,690 | ||||||||||||||||
|
Comprehensive income: |
|||||||||||||||||||||||
|
Net income |
— | — | 46,344 | — | — | 46,344 | |||||||||||||||||
|
Other comprehensive loss, net of deferred income tax benefit of $1,678: |
|||||||||||||||||||||||
|
Unrealized loss on securities of $4,136, net of tax and reclassification adjustments for gains included in net income of $1,173 |
— | — | — | (2,481 | ) | — | (2,481 | ) | |||||||||||||||
|
Increase in underfunded pension liability of $57, net of tax |
— | — | — | (34 | ) | — | (34 | ) | |||||||||||||||
|
Total comprehensive income |
43,829 | ||||||||||||||||||||||
|
Cash dividends declared ($0.88 per share) |
— | — | (14,629 | ) | — | — | (14,629 | ) | |||||||||||||||
|
Exercise of 140,730 stock options, including tax benefit of $252 |
— | (1,852 | ) | — | — | 3,900 | 2,048 | ||||||||||||||||
|
Purchase of 197,040 common shares for treasury |
— | — | — | — | (5,858 | ) | (5,858 | ) | |||||||||||||||
|
Balances at December 31, 2004 |
42,298 | 55,512 | 128,175 | (1,144 | ) | (8,761 | ) | 216,080 | |||||||||||||||
|
Comprehensive income: |
|||||||||||||||||||||||
|
Net income |
— | — | 50,288 | — | — | 50,288 | |||||||||||||||||
|
Other comprehensive loss, net of deferred income tax benefit of $4,579: |
|||||||||||||||||||||||
|
Unrealized loss on securities of $10,200, net of tax and reclassification adjustments for losses included in net income of $151 |
— | — | — | (6,120 | ) | — | (6,120 | ) | |||||||||||||||
|
Increase in underfunded pension liability of $1,247, net of tax |
— | — | — | (748 | ) | — | (748 | ) | |||||||||||||||
|
Total comprehensive income |
43,420 | ||||||||||||||||||||||
|
Cash dividends declared ($1.00 per share) |
— | — | (17,716 | ) | — | — | (17,716 | ) | |||||||||||||||
|
Issuance of 1,580,034 shares for acquisition of Classic Bancshares, net 108,173 shares owned and transferred to treasury |
3,951 | 53,739 | — | — | (3,351 | ) | 54,339 | ||||||||||||||||
|
Issuance of 18,800 stock award shares |
— | (422 | ) | — | — | 569 | 147 | ||||||||||||||||
|
Exercise of 367,675 stock options, including tax benefit of $4,124 |
— | (4,394 | ) | — | — | 12,177 | 7,783 | ||||||||||||||||
|
Purchase of 342,576 common shares for treasury |
— | — | — | — | (11,912 | ) | (11,912 | ) | |||||||||||||||
|
Balances at December 31, 2005 |
$ | 46,249 | $ | 104,435 | $ | 160,747 | $ | (8,012 | ) | $ | (11,278 | ) | $ | 292,141 | |||||||||
See notes to consolidated financial statements.
28
C ONSOLIDATED S TATEMENTS OF C ASH F LOWS
C ITY H OLDING C OMPANY AND S UBSIDIARIES
| Year Ended December 31 | ||||||||||||
|
(in thousands) |
2005 | 2004 | 2003 | |||||||||
|
Operating Activities |
||||||||||||
|
Net income |
$ | 50,288 | $ | 46,344 | $ | 43,694 | ||||||
|
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
|
Amortization and accretion |
1,740 | 1,572 | 2,053 | |||||||||
|
Depreciation of premises and equipment |
4,096 | 3,932 | 4,411 | |||||||||
|
Provision for (recovery of) loan losses |
1,400 | — | (6,200 | ) | ||||||||
|
Loss on early extinguishments of debt |
— | 263 | 2,246 | |||||||||
|
Deferred income tax expense |
3,435 | 3,990 | 8,591 | |||||||||
|
Net periodic pension cost (benefit) |
49 | — | (156 | ) | ||||||||
|
Increase in retained interests |
— | (802 | ) | (6,368 | ) | |||||||
|
Increase in value of bank-owned life insurance |
(2,779 | ) | (2,931 | ) | (1,320 | ) | ||||||
|
Proceeds from bank-owned life insurance |
1,109 | 846 | — | |||||||||
|
(Gain) loss on sale of premises and equipment |
(74 | ) | 89 | 13 | ||||||||
|
Realized investment securities (gains) losses |
(151 | ) | (1,173 | ) | 148 | |||||||
|
(Increase) decrease in accrued interest receivable |
(1,720 | ) | 348 | 954 | ||||||||
|
Increase in other assets |
(1,661 | ) | (792 | ) | (575 | ) | ||||||
|
(Decrease) increase in other liabilities |
(3,359 | ) | 2,545 | (5,159 | ) | |||||||
|
Net Cash Provided by Operating Activities |
52,373 | 54,231 | 42,332 | |||||||||
|
Investing Activities |
||||||||||||
|
Proceeds from maturities and calls of securities held to maturity |
4,068 | 4,963 | 13,714 | |||||||||
|
Purchases of securities held-to-maturity |
— | (5,701 | ) | (1,072 | ) | |||||||
|
Proceeds from sale of money market and mutual fund available-for-sale securities |
1,262,300 | 819,800 | 801,500 | |||||||||
|
Purchases of money market and mutual fund available-for-sale securities |
(1,296,750 | ) | (747,500 | ) | (771,200 | ) | ||||||
|
Proceeds from sales of securities available-for-sale |
9,187 | 11,034 | 32,137 | |||||||||
|
Proceeds from maturities and calls of securities available-for-sale |
137,650 | 152,114 | 215,734 | |||||||||
|
Purchases of securities available-for-sale |
(12,329 | ) | (215,098 | ) | (485,219 | ) | ||||||
|
Net increase in loans |
(27,855 | ) | (17,417 | ) | (16,647 | ) | ||||||
|
Redemption of asset-backed notes |
— | (12,560 | ) | (17,654 | ) | |||||||
|
Investment in bank-owned life insurance |
— | — | (35,000 | ) | ||||||||
|
Sales of premises and equipment |
202 | 791 | 25 | |||||||||
|
Purchases of premises and equipment |
(4,501 | ) | (4,081 | ) | (1,985 | ) | ||||||
|
Acquisition, net of cash received |
(7,121 | ) | — | — | ||||||||
|
Net Cash Provided by (Used in) Investing Activities |
64,851 | (13,655 | ) | (265,667 | ) | |||||||
|
Financing Activities |
||||||||||||
|
Net increase in noninterest-bearing deposits |
21,601 | 9,719 | 28,416 | |||||||||
|
Net (decrease) increase in interest-bearing deposits |
(18,038 | ) | 26,242 | 43,766 | ||||||||
|
Net (decrease) increase in short-term borrowings |
(53,416 | ) | (78,220 | ) | 21,466 | |||||||
|
Proceeds from long-term debt |
— | 35,000 | 145,836 | |||||||||
|
Repayment of long-term debt |
(12,090 | ) | (22,200 | ) | (10,000 | ) | ||||||
|
Redemption of trust preferred securities |
— | — | (57,500 | ) | ||||||||
|
Purchases of treasury stock |
(11,912 | ) | (5,858 | ) | (3,258 | ) | ||||||
|
Exercise of stock options |
3,659 | 1,796 | 1,109 | |||||||||
|
Dividends paid |
(16,839 | ) | (14,309 | ) | (12,480 | ) | ||||||
|
Net Cash (Used in) Provided by Financing Activities |
(87,035 | ) | (47,830 | ) | 157,355 | |||||||
|
Increase (Decrease) in Cash and Cash Equivalents |
30,189 | (7,254 | ) | (65,980 | ) | |||||||
|
Cash and cash equivalents at beginning of year |
56,084 | 63,338 | 129,318 | |||||||||
|
Cash and Cash Equivalents at End of Year |
$ | 86,273 | $ | 56,084 | $ | 63,338 | ||||||
See notes to consolidated financial statements.
29
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
N OTE O NE
S UMMARY OF S IGNIFICANT A CCOUNTING AND R EPORTING P OLICIES
Summary of Significant Accounting and Reporting Policies: The accounting and reporting policies of City Holding Company and its subsidiaries (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. Actual results could differ from management’s estimates. The following is a summary of the more significant policies.
Principles of Consolidation: The consolidated financial statements include the accounts of City Holding Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity in conformity with U. S. generally accepted accounting principles. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (VIEs) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in an entity is present when an enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The Company’s wholly owned subsidiaries, City Holding Capital Trust I and City Holding Capital Trust II, are VIEs for which the Company is not the primary beneficiary. Accordingly, the accounts of these entities are not included in the Company’s consolidated financial statements.
Description of Principal Markets and Services: The Company is a bank holding company headquartered in Charleston, West Virginia, and conducts its principal activities through its wholly-owned subsidiary, City National Bank of West Virginia (“City National”). City National is a retail and consumer-oriented community bank with 67 offices in West Virginia, Kentucky, and Ohio. Principal activities include providing deposit, credit, trust and investment management, and insurance related products and services. The Company conducts its business activities through one reportable business segment - community banking.
Cash and Due from Banks: The Company considers cash, due from banks, and interest-bearing federal deposits in depository institutions as cash and cash equivalents.
Securities: Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold debt securities to maturity, they are classified as investment securities held-to-maturity and are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as investment securities available-for-sale along with the Company’s investment in equity securities. Securities available-for-sale are carried at fair value, with the unrealized gains and losses, net of tax, reported in comprehensive income. Securities classified as available-for-sale include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk, and other factors.
The specific identification method is used to determine the cost basis of securities sold.
Loans: Loans, excluding previously securitized loans, which are discussed separately below, are reported at the principal amount outstanding, net of unearned income.
Interest income on loans is accrued and credited to operations based upon the principal amount outstanding, using methods that generally result in level rates of return. Loan origination fees, and certain direct costs, are deferred and amortized as an adjustment to the yield over the term of the loan. The accrual of interest income generally is discontinued when a loan becomes 90 days past due as to principal or interest. Other indicators considered for placing a loan on non-accrual status include the borrower’s involvement in bankruptcies, foreclosures, repossessions, litigation and any other situation resulting in doubt as to whether full collection of contractual principal and interest is attainable. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and interest accrued in prior years is charged to the allowance for loan losses. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and related accrued interest, and the loan is in process of collection.
30
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
Interest income during the period the loan is non-performing is recorded on a cash basis after recovery of principal is reasonably assured. Cash payments received on nonperforming loans are typically applied directly against the outstanding principal balance until the loan is fully repaid. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.
Residential and home equity loans are generally subject to charge-off when the loan becomes 120 days past due, depending on the estimated fair value of the collateral less cost to dispose, versus the outstanding loan balance. Unsecured commercial loans are generally charged off when the loan becomes 120 days past due. Secured commercial loans are generally evaluated for charge-off when the loan becomes 180 days past due. Closed-end consumer loans are generally charged off when the loan becomes 120 days past due and open-end consumer loans are generally charged off when the loan becomes 180 days past due.
Retained Interests: When the Company sold certain receivables in securitizations of high loan-to-value loans, it retained a financial interest in the securitizations. Because quoted market prices were not readily available for retained interests, the Company estimated their fair values using cash flow modeling techniques that incorporated management’s best estimates of key assumptions—loan default rates, loan prepayment rates, and discount rates commensurate with the risks involved.
The Company recognized the excess cash flows attributable to the retained interests over the carrying value of the retained interests as interest income over the life of the retained interests using the effective yield method. The Company updated the estimate of future cash flows on a quarterly basis. If upon evaluation there was a favorable change in estimated cash flows from the cash flows previously projected, the Company recalculated the amount of accretable yield and accounted for the change prospectively with the amount of accretion adjusted over the remaining life of the retained interests. Conversely, if upon evaluation there was an adverse change in either the amount or timing of the estimated future cash flows, an other-than-temporary impairment loss was recorded in the Company’s Consolidated Statements of Income.
Previously Securitized Loans: Amounts reported in Note Five of Notes to Consolidated Financial Statements as “previously securitized loans” represent the carrying value of loans beneficially owned by the Company as a result of having fully redeemed the obligations owed to investors (“notes”) in certain of the Company’s securitization transactions. The loans were recorded at their carrying values, which were comprised of the carrying value of the related retained interest asset underlying the securitization plus amounts remitted by the Company to the noteholders to redeem the notes. Because the carrying value of the retained interests incorporated assumptions with regard to expected prepayment and default rates on the loans and also considered the expected timing and amount of cash flows to be received by the Company, the carrying value of the retained interests and the carrying value of the loans was less than the actual outstanding balance of the loans. No gain or loss was recognized in the Company’s financial statements upon recording the loans into the Company’s loan portfolio and, as a result, the loans are recorded at a discount to their actual outstanding balances.
The Company is accounting for the difference between the carrying value and the outstanding balance of these loans as an adjustment of the yield earned on these loans over their remaining lives. The discount is accreted to income over the period during which payments are probable of collection and are reasonably estimable.
Effective January 1, 2005, the Company adopted Statement of Position (“SOP”) 03-3, issued by the Accounting Standards Executive Committee, to determine the collectibility of previously securitized loans (see Recent Accounting Pronouncements). SOP 03-3 requires that the excess of expected cash flows over contractual cash flows generally be recognized prospectively through an adjustment to the yield over the remaining lives of the loans. If upon evaluation of estimated collections and collections to date, the estimated total amount of collections is reduced below the original value of the loans, SOP 03-3 requires that the loans be considered impaired for further evaluation.
Allowance for Loan Losses: 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. These evaluations are conducted at least quarterly and more frequently if deemed necessary. 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. Loan losses are charged against the allowance and recoveries of amounts previously charged are credited to the allowance. A provision for loan
31
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
losses is charged to operations based on management’s periodic evaluation of the adequacy of the allowance after considering factors noted above, among others.
In evaluating the adequacy of its allowance for loan losses, the Company stratifies the loan portfolio into seven major groupings, including commercial real estate, other commercial, residential real estate, home equity, and others. Historical loss experience, as adjusted, is applied to the then outstanding balance of loans in each classification to estimate probable losses inherent in each segment of the portfolio. Historical loss experience is adjusted using a systematic, weighted probability of potential risk factors that could result in actual losses deviating from prior loss experience. Risk factors considered by the Company in completing this analysis include: (1) unemployment and economic trends in the Company’s markets, (2) concentrations of credit, if any, among any industries, (3) trends in loan growth, loan mix, delinquencies, losses or credit impairment, (4) adherence to lending policies and others. Each risk factor is designated as low, moderate/increasing, or high based on the Company’s assessment of the risk to loss associated with each factor. Each risk factor is then weighted to consider probability of occurrence.
Additionally, all loans within the portfolio are subject to internal risk grading. Risk grades are generally assigned by the primary lending officer and are periodically evaluated by the Company’s internal loan review process. Based on an individual loan’s risk grade, estimated loss percentages are applied to the outstanding balance of the loan to determine the amount of probable loss.
Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets. Depreciation of leasehold improvements is computed using the straight-line method over the lesser of the term of the respective lease or the estimated useful life of the respective asset. Maintenance and repairs are charged to expense as incurred, while improvements that extend the useful life of premises and equipment are capitalized and depreciated over the estimated remaining life of the asset.
Goodwill and Other Intangible Assets: Goodwill is the excess of the cost of an acquisition over the fair value of tangible and intangible assets acquired. Goodwill is not amortized. Intangible assets represent purchased assets that also lack physical substance, but can be separately distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. Intangible assets with determinable useful lives, such as core deposits, are amortized over their estimated useful lives.
The Company performs an annual review for impairment in the recorded value of goodwill and indefinite lived intangible assets. Goodwill is tested for impairment between the annual tests if an event occurs or circumstances change that more than likely reduce the fair value of a reporting unit below its carrying value. An indefinite-lived intangible asset is tested for impairment between the annual tests if an event occurs or circumstances change indicating that the asset might be impaired.
Derivative Financial Instruments: The Company enters into derivative transactions principally to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. Under the guidelines of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, all derivative instruments are required to be carried at fair value on the balance sheet. SFAS No. 133 provides special hedge accounting provisions, which permit the change in the fair value of the hedged item related to the risk being hedged to be recognized in earnings in the same period and in the same income statement line as the change in the fair value of the derivative. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking each hedge transaction.
Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges under SFAS No. 133. The Company has not entered into any fair value hedges as of December 31, 2005. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either a freestanding asset or liability, with a corresponding offset recorded in other comprehensive income within shareholders’ equity, net of tax. Amounts are reclassified from other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings.
For the Company’s cash flow hedges, derivative gains and losses not effective in hedging the change in fair value or expected cash flows of the hedged item are recognized
32
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
immediately in the income statement. At the hedge’s inception and at least quarterly thereafter, a formal assessment is performed to determine whether changes in the fair values or cash flows of the derivative instruments have been highly effective in offsetting changes in the fair values or cash flows of the hedged items and whether they are expected to be highly effective in the future. If it is determined a derivative instrument has not been or will not continue to be highly effective as a hedge, hedge accounting is discontinued.
Income Taxes: The consolidated provision for income taxes is based upon reported income and expense. Deferred income taxes are provided for temporary differences between financial reporting and tax bases of assets and liabilities, computed using enacted tax rates. The Company files a consolidated income tax return. The respective subsidiaries generally provide for income taxes on a separate return basis and remit amounts determined to be currently payable to the Parent Company.
Advertising Costs: Advertising costs are expensed as incurred.
Stock-Based Compensation: The Company has elected to account for its employee stock options using the intrinsic value method. Because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
The alternative fair value method of accounting for stock-based compensation (see Recent Accounting Pronouncements) requires the use of option valuation models, such as the Black-Scholes model, for use in valuing employee stock options.
Pro forma information regarding net income and earnings per share has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value for the options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:
| 2005 | 2004 | 2003 | |||||||
|
Risk-free interest rate |
3.93 | % | 3.16 | % | 2.90 | % | |||
|
Expected dividend yield |
2.98 | % | 2.95 | % | 2.86 | % | |||
|
Volatility factor |
0.384 | 0.406 | 0.430 | ||||||
|
Expected life of option |
5 years | 5 years | 5 years |
For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the options’ vesting period. Pro forma net income, basic earnings per share, and diluted earnings per share for the years ended December 31, 2005, 2004, and 2003 were:
Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options at the time of grant.
Basic and Diluted Earnings per Common Share: Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares outstanding increased by the number of shares of common stock which would be issued assuming the exercise of stock options and other common stock equivalents. The incremental shares related to stock options were 171,000, 250,000, and 313,000 in 2005, 2004, and 2003, respectively.
Recent Accounting Pronouncements: In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock Issued for Employees.” SFAS 123R establishes accounting requirements for share-based compensation to employees and carries forward prior guidance on accounting for awards to non-employees. SFAS 123R eliminates the ability to account for stock-based compensation using the intrinsic value method and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the measurement date, which is generally the date of the grant, and be expensed over the applicable vesting period. On April 15, 2005, the Securities and Exchange Commission (“SEC”) announced that it would permit companies to implement SFAS No. 123R at the beginning of their next fiscal year (January 1, 2006
33
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
for the Company) instead of their next reporting period beginning after June 15, 2005, as required by SFAS No. 123R. The Company expects to transition to SFAS No. 123R using the “modified prospective application.” Under the “modified prospective application,” compensation costs will be recognized in the financial statements for all new share-based payments granted after January 1, 2006. Additionally, the Company will recognize compensation costs for the portion of previously granted awards that are outstanding as of January 1, 2006 for which the requisite service has not been rendered (“nonvested awards”) over the remaining requisite service period of the awards. The compensation expense to be recognized for the nonvested awards will be based on the fair value of the awards at their grant date. The Company does not expect that the recognition of compensation costs for unvested options upon the date of adoption will be materially different from the pro forma information previously disclosed under “stock based compensation.” Compensation expense for share-based awards granted after the date of adoption will depend on the number of awards issued and the fair value of that award on the grant date. The Company estimates that the cost of grants outstanding as of December 31, 2005 will approximate $0.2 million for the twelve months ending December 31, 2006. However, future levels of compensation costs recognized related to stock-based compensation awards may be impacted by new awards and/or modifications, repurchases and cancellations of existing awards before and after the adoption SFAS 123R.
In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1, “The Meaning of Other Than Temporary Impairment and Its Application to Certain Investments”, which clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. FSP FAS 115-1 is effective for other-than-temporary impairment analysis conducted in periods beginning after December 15, 2005. FAS 115-1 also requires certain disclosures about unrealized losses that have not been recognized as other that temporary impairments. The Company has evaluated its unrealized losses as of December 31, 2005 noting that all losses are properly classified as temporary as the Company has the intent and ability to hold investments with unrealized losses until maturity, or recovery of the unrealized loss.
In December 2003, the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, which addresses the accounting for differences between the contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 requires that the excess of expected cash flows over contractual cash flows generally to recognized prospectively through adjustment to the yield over the remaining lives of the loans. SOP 03-3 requires that decreases in cash flows expected to be collected be recognized as an impairment loss in the period the impairment is determined. Effective January 1, 2005, the Company adopted the provisions of SOP 03-3 as required. The adoption of this standard did not have a material impact on the Company’s financial statements.
In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” The new standard changes the requirements for the accounting for and reporting of a change in accounting principle. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements be termed a “restatement.” The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not anticipate that the adoption of this standard will have a material effect on its financial statements.
Statements of Cash Flows: Cash paid for interest, including interest paid for long-term debt and trust preferred securities, was $37.9 million, $31.8 million, and $34.0 million in 2005, 2004, and 2003, respectively. During 2005, 2004 and 2003, the Company paid $20.6 million, $19.5 million, and $14.6 million, respectively, for income taxes.
Reclassifications: Certain amounts in the 2004 and 2003 financial statements have been reclassified to conform to the 2005 presentation. Such reclassifications had no impact on net income or shareholders’ equity.
34
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
N OTE T WO
A CQUISITIONS
On May 20, 2005, the Company completed the acquisition of Classic Bancshares (“Classic”) and the merger of Classic’s subsidiary, Classic Bank, into City National. Classic operated 10 full-service branches located in Eastern Kentucky and Southeastern Ohio. The primary reason for the merger with Classic was for the Company to expand its presence in the Huntington/Ashland WV-KY-OH Metropolitan Statistical Area (“MSA”). With the acquisition of Classic, City National is now the largest commercial banking franchise in the Huntington/Ashland WV-KY-OH MSA. On May 20, 2005, Classic had total assets of $338 million, net loans of $254 million, deposits of $252 million, and $38 million of shareholders’ equity. The acquisition was accounted for using the purchase accounting method and the results of operations of Classic are included in the Company’s consolidated statement of income from the date of acquisition forward.
The aggregate purchase price for the acquisition was $81 million and was consummated by the exchange of a combination of the Company’s common stock and cash for Classic’s common stock. The purchase was funded through the issuance of 1,580,034 shares of the Company newly issued common shares and cash consideration of $18.2 million from the Company’s available cash.
The Company also paid $3.3 million for Classic’s outstanding stock options and incurred $1.9 million in direct costs associated with the merger. Included in the direct merger costs were $0.9 million of involuntary employee termination costs, $0.9 million of legal, accounting advisory and conversion costs, and $0.1 million of other direct merger related costs.
The cost to acquire Classic has been allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based upon preliminary estimated fair values. The allocation of the purchase price is subject to changes in the estimated fair values of assets acquired and liabilities assumed. The excess of the purchase price over the estimated fair values of assets acquired and liabilities assumed ($49.4 million) was assigned to goodwill. In connection with the preliminary purchase price allocation, the Company also assigned approximately $4.9 million to intangible assets including $4.4 million to deposit base intangibles. Deposit base intangibles are being amortized over their estimated remaining life of 10 years on an accelerated basis. Goodwill arising from the transaction is not subject to amortization and is not deductible for tax purposes, but will be evaluated annually for possible impairment.
Pro forma information regarding the acquisition has not been presented as the acquisition is not deemed to be significant, and pro forma results assuming that the acquisition had occurred at the beginning of 2005, 2004, and 2003 would not be materially different than the results reported herein.
N OTE T HREE
R ESTRICTIONS ON C ASH AND D UE F ROM B ANKS
City National is required to maintain an average reserve balance with the Federal Reserve Bank of Richmond to compensate for services provided by the Federal Reserve and to meet statutory required reserves for demand deposits. The average amount of the reserve balance for the year ended December 31, 2005, was approximately $13.0 million.
35
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
N OTE F OUR
I NVESTMENTS
The aggregate carrying and approximate market values of securities follow. Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable financial instruments.
| December 31, 2005 | |||||||||||||
|
(in thousands) |
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Estimated
Value |
|||||||||
|
Securities available-for-sale: |
|||||||||||||
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies |
$ | 246 | $ | — | $ | (3 | ) | $ | 243 | ||||
|
Obligations of states and political subdivisions |
44,180 | 275 | (421 | ) | 44,034 | ||||||||
|
Mortgage-backed securities |
400,443 | 226 | (8,459 | ) | 392,210 | ||||||||
|
Other debt securities |
51,088 | 535 | (190 | ) | 51,433 | ||||||||
|
Total Debt Securities |
495,957 | 1,036 | (9,073 | ) | 487,920 | ||||||||
|
Equity securities and investment funds |
62,085 | — | (39 | ) | 62,046 | ||||||||
|
Total Securities Available-for-Sale |
$ | 558,042 | $ | 1,036 | $ | (9,112 | ) | $ | 549,966 | ||||
|
Securities held-to-maturity: |
|||||||||||||
|
Obligations of states and political subdivisions |
$ | 8,333 | $ | 98 | $ | — | $ | 8,431 | |||||
|
Other debt securities |
47,064 | 3,455 | (58 | ) | 50,461 | ||||||||
|
Total Securities Held-to-Maturity |
$ | 55,397 | $ | 3,553 | $ | (58 | ) | $ | 58,892 | ||||
| December 31, 2004 | |||||||||||||
|
(in thousands) |
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Estimated
Value |
|||||||||
|
Securities available-for-sale: |
|||||||||||||
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies |
$ | 23,210 | $ | 495 | $ | (10 | ) | $ | 23,695 | ||||
|
Obligations of states and political subdivisions |
31,162 | 554 | (64 | ) | 31,652 | ||||||||
|
Mortgage-backed securities |
493,967 | 1,959 | (1,498 | ) | 494,428 | ||||||||
|
Other debt securities |
40,441 | 747 | (143 | ) | 41,045 | ||||||||
|
Total Debt Securitie s |
588,780 | 3,755 | (1,715 | ) | 590,820 | ||||||||
|
Equity securities and investment funds |
29,228 | — | (14 | ) | 29,214 | ||||||||
|
Total Securities Available-for-Sale |
$ | 618,008 | $ | 3,755 | $ | (1,729 | ) | $ | 620,034 | ||||
|
Securities held-to-maturity: |
|||||||||||||
|
Obligations of states and political subdivisions |
$ | 12,504 | $ | 358 | $ | — | $ | 12,862 | |||||
|
Other debt securities |
47,236 | 4,441 | (63 | ) | 51,614 | ||||||||
|
Total Securities Held-to-Maturity |
$ | 59,740 | $ | 4,799 | $ | (63 | ) | $ | 64,476 | ||||
Certain investment securities owned by the Company were in an unrealized loss position (i.e., amortized cost basis exceeded the estimated fair value of the securities) as of December 31, 2005. The following table shows the gross unrealized losses and fair value of the Company’s investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2005 and 2004.
36
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
| December 31, 2005 | ||||||||||||||||||
| Less Than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||
|
(in thousands) |
Estimated Fair
Value |
Unrealized
Loss |
Estimated Fair
Value |
Unrealized
Loss |
Estimated Fair
Value |
Unrealized
Loss |
||||||||||||
|
Securities available-for-sale: |
||||||||||||||||||
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies |
$ | 243 | $ | 3 | $ | — | $ | — | $ | 243 | $ | 3 | ||||||
|
Obligations of states and political subdivisions |
20,195 | 323 | 3,822 | 98 | 24,017 | 421 | ||||||||||||
|
Mortgage-backed securities |
184,448 | 3,167 | 185,791 | 5,292 | 370,239 | 8,459 | ||||||||||||
|
Other debt securities |
13,624 | 86 | 3,480 | 104 | 17,104 | 190 | ||||||||||||
|
Equity securities and investment funds |
— | — | 1,461 | 39 | 1,461 | 39 | ||||||||||||
|
Total |
$ | 218,510 | $ | 3,579 | $ | 194,554 | $ | 5,533 | $ | 413,064 | $ | 9,112 | ||||||
| Securities held-to-maturity: | ||||||||||||||||||
|
Other debt securities |
$ | 2,344 | $ | 5 | $ | 1,085 | $ | 53 | $ | 3,429 | $ | 58 | ||||||
| December 31, 2004 | ||||||||||||||||||
| Less Than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||
|
(in thousands) |
Estimated Fair
Value |
Unrealized
Loss |
Estimated Fair
Value |
Unrealized
Loss |
Estimated Fair
Value |
Unrealized
Loss |
||||||||||||
|
Securities available-for-sale: |
||||||||||||||||||
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies |
$ | 991 | $ | 10 | $ | — | $ | — | $ | 991 | $ | 10 | ||||||
|
Obligations of states and political subdivisions |
5,514 | 64 | — | — | 5,514 | 64 | ||||||||||||
|
Mortgage-backed securities |
224,387 | 1,183 | 16,468 | 315 | 240,855 | 1,498 | ||||||||||||
|
Other debt securities |
12,511 | 132 | 1,509 | 11 | 14,020 | 143 | ||||||||||||
|
Equity securities and investment funds |
1,486 | 14 | — | — | 1,486 | 14 | ||||||||||||
|
Total |
$ | 244,889 | $ | 1,403 | $ | 17,977 | $ | 326 | $ | 262,866 | $ | 1,729 | ||||||
|
Securities held-to-maturity: |
||||||||||||||||||
|
Other debt securities |
$ | 2,255 | $ | 63 | $ | — | $ | — | $ | 2,255 | $ | 63 | ||||||
Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary would be reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Management has the ability and intent to hold the securities classified as held to maturity until they mature, at which time the Company will receive full value for the securities. Furthermore, as of December 31, 2005, management also had the ability and intent to hold the securities classified as available for sale for a period of time sufficient for a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2005, management believes the unrealized losses detailed in the table above are temporary and no impairment loss has been recognized in the Company’s consolidated income statement.
The amortized cost and estimated fair value of debt securities at December 31, 2005, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Mortgage-backed securities have been allocated to their respective maturity groupings based on their contractual maturity.
37
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
|
(in thousands) |
Cost |
Estimated
Value |
||||
|
Securities Available-for-Sale |
||||||
|
Due in one year or less |
$ | 4,280 | $ | 4,281 | ||
|
Due after one year through five years |
12,294 | 12,227 | ||||
|
Due after five years through ten years |
23,565 | 23,649 | ||||
|
Due after ten years |
455,818 | 447,763 | ||||
| $ | 495,957 | $ | 487,920 | |||
|
Securities Held-to-Maturity |
||||||
|
Due in one year or less |
$ | 2,254 | $ | 2,276 | ||
|
Due after one year through five years |
4,349 | 4,397 | ||||
|
Due after five years through ten years |
1,731 | 1,758 | ||||
|
Due after ten years |
47,063 | 50,461 | ||||
| $ | 55,397 | $ | 58,892 | |||
Gross gains and gross losses realized by the Company from investment security transactions are summarized in the table below:
|
(in thousands) |
2005 | 2004 | 2003 | ||||||||
|
Gross realized gains |
$ | 154 | $ | 1,173 | $ | 696 | |||||
|
Gross realized losses |
(3 | ) | — | (894 | ) | ||||||
|
Investment security gains (losses) |
$ | 151 | $ | 1,173 | $ | (148 | ) | ||||
The carrying value of securities pledged to secure public deposits and for other purposes as
N OTE F IVE
L OANS
The following summarizes the Company’s major classifications for loans:
|
(in thousands) |
2005 | 2004 | ||||||
|
Residential real estate |
$ | 592,521 | $ | 469,458 | ||||
|
Home equity |
301,728 | 308,173 | ||||||
|
Commercial, financial, and agriculture |
629,670 | 472,112 | ||||||
|
Installment loans to individuals |
58,652 | 46,595 | ||||||
|
Previously securitized loans |
30,256 | 58,436 | ||||||
|
Gross Loans |
1,612,827 | 1,354,774 | ||||||
|
Allowance for loan losses |
(16,790 | ) | (17,815 | ) | ||||
|
Net Loans |
$ | 1,596,037 | $ | 1,336,959 | ||||
The Company has $86.0 million and $38.4 million of commercial and residential real estate construction loans as of December 31, 2005 and 2004, respectively. These loans are primarily secured by real estate within the Company’s principal markets. These loans were originated under the Company’s loan policy, which is focused on the risk characteristics of the loan portfolio, including construction loans. Adequate consideration has been given to these loans in establishing the Company’s allowance for loan losses.
38
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
N OTE S IX
A LLOWANCE FOR L OAN L OSSES
A summary of changes in the allowance for loan losses follows:
|
(in thousands) |
2005 | 2004 | 2003 | |||||||||
|
Balance at January 1 |
$ | 17,815 | $ | 21,426 | $ | 28,504 | ||||||
|
Allowance from acquisition |
3,265 | — | — | |||||||||
|
Provision for (recovery of) possible loan losses |
1,400 | — | (6,200 | ) | ||||||||
|
Charge-offs |
(8,459 | ) | (7,889 | ) | (7,823 | ) | ||||||
|
Recoveries |
2,769 | 4,278 | 6,945 | |||||||||
|
Balance at December 31 |
$ | 16,790 | $ | 17,815 | $ | 21,426 | ||||||
The recorded investment in loans on nonaccrual status and loans past due 90 days or more and still accruing interest is included in the following table:
|
(in thousands) |
2005 | 2004 | ||||
|
Nonaccrual loans |
$ | 2,785 | $ | 2,147 | ||
|
Accruing loans past due 90 days or more |
1,124 | 677 | ||||
|
Previously securitized loans past due 90 days or more |
268 | 832 | ||||
|
Total |
$ | 4,177 | $ | 3,656 | ||
Information pertaining to impaired loans is included in the following table:
The average recorded investment in impaired loans during 2005, 2004, and 2003 was $3.6 million, $4.2 million, and $3.3 million, respectively.
During 2003 and 2004, the Company experienced lower than anticipated losses and, generally, improving credit quality within certain segments of its loan portfolio. The Company also experienced greater than expected success in pursuing recoveries of previously charged-off loans. The Company’s analysis of the allowance for loan losses as of December 31, 2005, 2004, and 2003 has produced an allowance and provision this is directionally consistent with the above noted changes in asset quality.
N OTE S EVEN
R ETAINED I NTERESTS AND P REVIOUSLY S ECURITIZED L OANS
Between 1997 and 1999, the Company completed six securitization transactions involving approximately $759.8 million of fixed rate, junior lien mortgage loans. As described in Note One, the Company retained a financial interest in each of the securitizations. Principal amounts owed to investors are evidenced by securities (“Notes”). The Notes were subject to redemption, in whole but not in part, at the option of the Company, as owner of the retained interests in the securitization transactions, or at the option of the Note insurer, on or after the date on which the related Note balance declined to 5% or less of the original Note balance. Once the Notes were redeemed, the Company became the beneficial owner of the mortgage loans and recorded the loans as assets of the Company within the loan portfolio. During 2003 and 2004, the outstanding Note balances of the six securitizations declined below this 5% threshold and the Company had exercised its early redemption options on each of those securitizations. The table below summarizes information regarding delinquencies, net credit losses, and outstanding collateral balances of securitized loans and previously securitized loans for the dates presented:
| December 31 | ||||||||||||
|
(in thousands) |
2005 | 2004 | 2003 | |||||||||
|
Loans Underlying Retained Interests (a): |
|
|||||||||||
|
Total principal amount of loans outstanding |
$ | — | $ | — | $ | 59,822 | ||||||
|
Principal amount of loans between 30 and 89 days past due |
— | — | 2,664 | |||||||||
|
Principal amount of loans between 90 and 119 days past due |
— | — | 2,648 | |||||||||
|
Net credit losses during the year |
— | — | 5,116 | |||||||||
|
Previously Securitized Loans: |
||||||||||||
|
Total principal amount of loans outstanding |
$ | 48,061 | $ | 75,038 | $ | 70,087 | ||||||
|
Discount |
(17,805 | ) | (16,602 | ) | (11,299 | ) | ||||||
|
Net book value |
$ | 30,256 | $ | 58,436 | $ | 58,788 | ||||||
|
Principal amount of loans between 30 and 89 days past due |
$ | 1,848 | $ | 5,091 | $ | 5,055 | ||||||
|
Principal amount of loans between 90 and 119 days past due |
268 | 832 | 717 | |||||||||
|
Net credit (recoveries) losses during the year |
(3,225 | ) | 2,680 | 1,206 | ||||||||
| (a) | The outstanding balance of mortgage loans underlying retained interests and the related Note balances were not included in the consolidated balance sheets of the Company. |
39
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
As the Company redeemed the outstanding Notes from its securitizations, no gain or loss was recognized in the Company’s financial statements and the remaining mortgage loans were recorded in the Company’s loan portfolio at carrying value. Because the book value of the mortgage loans incorporates assumptions for expected prepayment and default rates, the carrying value of the loans is generally less than the actual contractual outstanding balance of the mortgage loans. As of December 31, 2005 and 2004, the Company reported a book value of previously securitized loans of $30.3 million and $58.4 million, respectively, while the actual outstanding balance of previously securitized loans at December 31, 2005 and 2004, was $48.1 million and $75.0 million, respectively. The difference (“the discount”) between the book value and actual outstanding balance of previously securitized loans is accreted into interest income over the life of the loans. Through December 31, 2004, net credit losses on previously securitized loans were first recorded against this discount and, therefore, impacted the yield earned on these assets. Effective January 1, 2005, the Company adopted the provisions of SOP 03-3 as required. In accordance with SOP 03-3, if 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 and allowance for loan losses. No such impairment charges were recorded for the year ending December 31, 2005.
The value of the previously securitized loans is determined using cash flow modeling techniques that incorporate key assumptions related to default, prepayment, and discount rates. Key assumptions used in estimating the fair value of the Company’s previously securitized loans as of December 31, 2005 and 2004, were as follows:
| December 31 | ||||||
| 2005 | 2004 | |||||
|
Prepayment speed (CPR): |
||||||
|
From January 2005 thru May 2005 |
— | 40 | % | |||
|
From June 2005 – May 2006 |
30 | % | 30 | % | ||
|
From June 2006 – September 2006 |
30 | % | 20 | % | ||
|
After September 2006 |
20 | % | 20 | % | ||
|
Weighted-average cumulative defaults |
10.54 | % | 12.37 | % | ||
Prepayment speed, or constant prepayment rate (CPR), represents the annualized monthly prepayment amount as a percentage of the previous month’s outstanding loan balance minus the scheduled principal payment. Weighted-average cumulative defaults represent actual loan defaults experienced life-to-date plus forecasted loan defaults projected over the remaining life of the collateral loans, divided by the original collateral balance. The weighted-average discount rate represents the interest rate used to compute the present value of the undiscounted future cash flows expected to be received by the Company.
Interest income on retained interests was recognized over the life of the retained interest using the effective yield method. Using the effective yield approach, the Company recognized $0.8 million and $12.5 million of interest income from the retained interests in 2004 and 2003, respectively. Comparatively, the Company received $6.1 million of cash from the retained interests during 2003, with no cash received on this asset during 2004. During 2005, 2004, and 2003 the Company recognized $11.4 million, $13.7 million, and $4.5 million, respectively, of interest income on the previously securitized loans and received cash of $39.3 million, $61.5 million, and $16.4 million, respectively, comprised of principal and interest payments received from borrowers.
N OTE E IGHT
P REMISES AND E QUIPMENT
A summary of premises and equipment and related accumulated depreciation as of December 31 is summarized as follows:
|
(in thousands) |
Estimated Useful Life |
2005 | 2004 | |||||||
|
Land |
$ | 11,015 | $ | 8,385 | ||||||
|
Buildings and improvements |
10 to 30 yrs. | 55,581 | 48,585 | |||||||
|
Equipment |
3 to 7 yrs. | 39,707 | 37,916 | |||||||
| 106,303 | 94,886 | |||||||||
|
Less accumulated depreciation |
(63,761 | ) | (60,279 | ) | ||||||
|
Net premises and equipment |
$ | 42,542 | $ | 34,607 | ||||||
40
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
N OTE N INE
G OODWILL AND I NTANGIBLE A SSETS
At December 31, 2005 and 2004, the carrying amount of goodwill approximated $54.9 million and $5.5 million, respectively. During the second quarter of 2005, the Company recorded goodwill totaling $49.4 million in connection with the acquisition of Classic Bancshares (see Note 2). The Company completed its annual assessment of the carrying value of goodwill during 2005 and concluded that its carrying value was not impaired.
During the second quarter of 2005, the Company recorded core deposit intangibles totaling $4.4 million in connection with the acquisition of Classic Bancshares (see Note 2). The following table summarizes core deposit intangibles as of December 31, 2005 and 2004, which are subject to amortization:
|
(in thousands) |
2005 | 2004 | ||||||
|
Gross carrying amount |
$ | 6,580 | $ | 2,176 | ||||
|
Accumulated amortization |
(1,923 | ) | (1,411 | ) | ||||
|
Net core deposit intangible |
$ | 4,657 | $ | 765 | ||||
During 2005, 2004, and 2003, the Company recognized pre-tax amortization expense of $512,000, $204,000, and $270,000, respectively, associated with its core deposit intangible assets. The estimated amortization expense for core deposit intangible assets for each of the next five years is as follows:
|
(in thousands) |
Projected
Amortization Expense |
||
|
2006 |
$ | 723 | |
|
2007 |
706 | ||
|
2008 |
637 | ||
|
2009 |
469 | ||
|
2010 |
437 | ||
| $ | 2,972 | ||
N OTE T EN
S CHEDULED M ATURITIES OF T IME C ERTIFICATES OF D EPOSITS OF $100,000 OR M ORE
Scheduled maturities of time certificates of deposits of $100,000 or more outstanding at December 31, 2005 and 2004, are summarized as follows:
|
(in thousands) |
2005 | 2004 | ||||
|
Within one year |
$ | 78,445 | $ | 49,054 | ||
|
Over one through two years |
43,427 | 16,436 | ||||
|
Over two through three years |
34,658 | 26,213 | ||||
|
Over three through four years |
16,149 | 22,257 | ||||
|
Over four through five years |
9,478 | 14,931 | ||||
|
Over five years |
329 | — | ||||
|
Total |
$ | 182,486 | $ | 128,891 | ||
N OTE E LEVEN
S HORT -T ERM B ORROWINGS
The components of short-term borrowings are summarized as follows:
|
(in thousands) |
2005 | 2004 | ||||
|
Security repurchase agreements |
$ | 76,443 | $ | 70,183 | ||
|
Federal funds borrowed |
75,812 | 75,000 | ||||
|
Total |
$ | 152,255 | $ | 145,183 | ||
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.
41
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
Average and maximum amounts outstanding and weighted-average interest rate information is summarized as follows:
|
(dollars in thousands) |
2005 | 2004 | 2003 | |||||||||
|
Avg. outstanding during the year: |
||||||||||||
|
Securities repurchase agreements |
$ | 81,638 | $ | 79,385 | $ | 93,393 | ||||||
|
FHLB advances and Federal funds borrowed |
75,626 | 41,464 | 6,174 | |||||||||
|
Max. outstanding at any month end: |
||||||||||||
|
Securities repurchase agreements |
105,303 | 106,171 | 103,609 | |||||||||
|
FHLB advances and Federal funds borrowed |
84,763 | 75,000 | 80,000 | |||||||||
|
Weighted-average interest rate: |
||||||||||||
|
During the year: |
||||||||||||
|
Securities repurchase agreements |
1.98 | % | 0.42 | % | 0.48 | % | ||||||
|
FHLB advances and Federal funds borrowed |
2.32 | % | 1.81 | % | 5.49 | % | ||||||
|
End of the year: |
||||||||||||
|
Securities repurchase agreements |
2.89 | % | 0.79 | % | 0.32 | % | ||||||
|
FHLB advances and Federal funds borrowed |
2.83 | % | 2.09 | % | 1.29 | % | ||||||
N OTE T WELVE
L ONG -T ERM D EBT
The components of long-term debt are summarized as follows:
|
(in thousands) |
Maturity |
Weighted-
Rate |
2005 | 2004 | |||||||
|
FHLB Advances |
2006 | 2.60 | % | $ | — | $ | 65,000 | ||||
|
FHLB Advances |
2007 | 3.38 | % | 23,710 | 20,000 | ||||||
|
FHLB Advances |
2008 | 4.02 | % | 38,178 | 35,000 | ||||||
|
FHLB Advances |
2009 | 5.75 | % | 2,003 | — | ||||||
|
FHLB Advances |
2010 | 6.30 | % | 2,000 | — | ||||||
|
FHLB Advances |
>5 years | 4.90 | % | 3,698 | — | ||||||
|
Junior subordinated debentures owed to City Holding Capital Trust |
2028 | 9.15 | % | 28,836 | 28,836 | ||||||
|
Total Long-term deb t |
$ | 98,425 | $ | 148,836 | |||||||
Through City National, the Company has purchased 106,069 shares of Federal Home Loan Bank (“FHLB”) stock at par value as of December 31, 2005. Such purchases entitle the Company to dividends declared by the FHLB and provide an additional source of short-term and long-term funding, in the form of collateralized advances. Financing obtained from the FHLB is based, in part, on the amount of qualifying collateral available, specifically U.S. Treasury and agency securities, mortgage-backed securities, and residential real estate loans. At December 31, 2005 and 2004, collateral pledged to the FHLB included approximately $629.0 million and $789.3 million, respectively, in investment securities and one-to-four-family residential property loans. Therefore, in addition to the short-term (see Note Eleven) and long-term financing discussed above, at December 31, 2005 and 2004, City National had an additional $483.8 million and $594.3 million, respectively, available from unused portions of lines of credit with the FHLB.
The Company formed two statutory business trusts, City Holding Capital Trust and City Holding Capital Trust II, under the laws of the state of Delaware (“the Capital Trusts”). The Capital Trusts were 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 trusts, (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 trusts are considered variable interest entities 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 (see Note 1).
During the fourth quarter of 2003, the Company fully repaid all of its 9.125% Junior Subordinated Debentures held by City Holding Capital Trust II. In turn, City Holding Capital Trust II retired its $57.5 million of Capital Securities. In completing the redemption of these Securities, the Company recorded a $2.3 million charge related to unamortized issuance costs. The issuance costs were being amortized over the life of the securities through interest expense using the effective yield method.
Distributions on the Debentures are cumulative. The Company has the option to defer payment of the distributions for an extended period up to five years, so long as the Company is not in default as to the terms of the Debentures. The Debentures, which have a stated interest rate of 9.15% and require semi-annual interest payments, mature in April 2028. The Debentures are redeemable prior to maturity at the option of the Company (i) on or after April 1, 2008, in whole at any time or in part from time-to-time, at declining redemption prices ranging from 104.58% to 100.00% on April 1, 2018, and thereafter, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of certain pre-defined events.
Payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities are guaranteed by the Company. The Company also entered into an agreement as to expenses and liabilities with the trust pursuant to which it agreed, on a subordinated basis, to pay any costs, expenses or liabilities of the trust other than those arising under the trust preferred securities. The obligations of the Company under the junior subordinated debentures, the related indentures, the trust agreement establishing the trust, the guarantees and the agreements as to expenses and
42
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
liabilities, in the aggregate, constitute a full and unconditional guarantee by the Company of the trust’s obligations under the trust preferred securities.
The Capital Securities issued by the statutory business trusts qualify as Tier 1 capital for the Company under the Federal Reserve Board guidelines. In March 2005, the Federal Reserve Board issued a final rule that allows the inclusion of trust preferred securities issued by unconsolidated subsidiary trusts in Tier 1 capital, but with stricter limits. Under ruling, after a five-year transition period, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25% of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 capital, subject to restrictions. The Company expects to include all of its $28.0 million in trust preferred securities in Tier 1 capital. The trust preferred securities could be redeemed without penalty if they were no longer permitted to be included in Tier 1 capital.
N OTE T HIRTEEN
D ERIVATIVE I NSTRUMENTS
The Company utilizes interest rate floors to mitigate exposure to interest rate risk. During 2005, the Company purchased five interest rate floor contracts with a total notional amount of $400 million for $2.8 million. The interest rate floor contracts were designated as cash flow hedges with the objective of protecting the overall cash flows from the Company’s monthly interest receipts on a rolling portfolio of $400 million of variable-rate loans outstanding from the risk of a decrease in those cash flows to a level such that the yield on the underlying loans would be less than a range of 6.00% to 6.75%. Prior to December 30, 2005, these instruments were accounted for as freestanding derivatives and changes in the market value of $1.4 million on these purchased floor options was charged to expense. On December 30, 2005, the Company re-designated each of the five respective interest rate floors to qualify as cash flow hedges.
The notional amounts and estimated fair values of interest rate floor derivative positions outstanding at year-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.
| 2005 | 2004 | |||||||||||
|
(in thousands) |
Notional
Value |
Estimated Fair
Value |
Notional
Value |
Estimated Fair
Value |
||||||||
|
Interest rate floors on variable-rate loans |
$ | 400,000 | $ | 1,270 | $ | — | $ | — | ||||
The weighted-average strike rates for interest rate floors outstanding at December 31, 2005 were between 6.00% and 6.75%.
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/Liability Management 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 amount of the market value adjustment reported in earnings and recorded in other expenses in the Consolidated Statement of Income for the year ended December 31, 2005 and in amortization and accretion in the Consolidated Statement of Cash Flows was $1.4 million.
43
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
N OTE F OURTEEN
I NCOME T AXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
| December 31 | ||||||
|
(in thousands) |
2005 | 2004 | ||||
|
Deferred tax assets: |
||||||
|
Previously securitized loans |
$ | 10,214 | $ | 9,690 | ||
|
Allowance for loan losses |
7,585 | 8,164 | ||||
|
Deferred compensation payable |
3,591 | 2,243 | ||||
|
Unrealized securities losses |
3,226 | — | ||||
|
Underfunded pension liability |
2,115 | 1,616 | ||||
|
Net operating loss carryforward |
1,926 | 3,420 | ||||
|
Accrued expenses |
1,828 | 3,209 | ||||
|
Impaired investments |
816 | 962 | ||||
|
Other |
1,058 | 594 | ||||
|
Total Deferred Tax Assets |
32,359 | 29,898 | ||||
|
Deferred tax liabilities: |
||||||
|
Intangible assets |
1,778 | 174 | ||||
|
Deferred loan fees |
823 | 846 | ||||
|
Unrealized securities gains |
— | 854 | ||||
|
Other |
1,829 | 999 | ||||
|
Total Deferred Tax Liabilities |
4,430 | 2,873 | ||||
|
Net Deferred Tax Assets |
$ | 27,929 | $ | 27,025 | ||
Significant components of the provision for income taxes are as follows:
As of December 31, 2005, the Company has approximately $137,000 of federal net operating loss carryforwards, obtained via a previous acquisition, that expire in 2006. As of December 31, 2005, the Company has approximately $21.4 million of state net operating loss carryforwards that expire in 2022. The Company expects to realize the deferred tax asset associated with the net operating loss carryforwards through future operations.
A reconciliation of the significant differences between the federal statutory income tax rate and the Company’s effective income tax rate is as follows:
N OTE F IFTEEN
E MPLOYEE B ENEFIT P LANS
During 2003, shareholders approved the City Holding Company 2003 Incentive Plan (“the Plan”), replacing the Company’s 1993 Stock Incentive Plan that expired on March 8, 2003. Employees, directors, and individuals who provide service to the Company (collectively “Plan Participants”) are eligible to participate in the Plan. Pursuant to the terms of the Plan, the Compensation Committee of the Board of Directors, or its delegate, may, from time-to-time, grant stock options, stock appreciation rights (“SARs”), or stock awards to Plan Participants. A maximum of 1,000,000 shares of the Company’s common stock may be issued upon the exercise of stock options and SARs and stock awards, but no more than 350,000 shares of common stock may be issued as stock awards. These limitations may be adjusted in the event of a change in the number of outstanding shares of common stock by reason of a stock dividend, stock split, or other similar event. Specific terms of options and SARs awarded, including vesting periods, exercise prices (stock price date of grant), and expiration dates are determined at the date of grant and are evidenced by agreements between the Company and the awardee. All incentive stock options and SARs will be exercisable ten years from the date granted and all options and SARs are exercisable for the period specified in the individual agreement. As of December 31, 2005, 251,750 stock options had been awarded pursuant to the terms of the Plan and 14,000 SARs or stock awards had been granted. The 90,000 stock options granted in 2003 (see table, below) were granted under the Company’s 1993 Stock Incentive Plan, prior to its expiration. The Company recognized $0.2 million of compensation expense for the twelve months ended December 31, 2005 within salaries and employee benefits in the Company’s Consolidated Statements of Income associated with the restricted stock awards issued.
44
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
In response to SFAS 123R, the Compensation Committee of the Board of Directors of the Company authorized the acceleration of the vesting of 20,002 value-vested options. The Company recognized $10,000 of expense for the twelve months ending December 31, 2005, in salaries and employee benefits for the modification of these stock options.
The exercise price of the option grants equals the market price of the Company’s stock on the date of grant. A summary of the Company’s stock option activity and related information is presented below for the years ended December 31:
| 2005 | 2004 | 2003 | |||||||||||||||||||
| Options |
Weighted-
Average Exercise Price |
Options |
Weighted-
Average Exercise Price |
Options |
Weighted-
Average Exercise Price |
||||||||||||||||
|
Outstanding at January 1 |
602,307 | $ | 16.51 | 650,671 | $ | 13.19 | 732,412 | $ | 13.55 | ||||||||||||
|
Granted |
144,250 | 33.70 | 107,500 | 33.62 | 90,000 | 28.00 | |||||||||||||||
|
Exercised |
(367,675 | ) | 9.95 | (140,730 | ) | 12.77 | (104,982 | ) | 10.55 | ||||||||||||
|
Forfeited |
(60,750 | ) | 33.90 | (15,134 | ) | 30.38 | (66,759 | ) | 41.19 | ||||||||||||
|
Outstanding at December 31 |
318,132 | $ | 28.56 | 602,307 | $ | 16.51 | 650,671 | $ | 13.19 | ||||||||||||
|
Exercisable at end of year |
232,007 | $ | 27.16 | 512,306 | $ | 13.48 | 620,667 | $ | 12.48 | ||||||||||||
|
Weighted-average fair value of options granted during the year |
$ | 10.09 | $ | 10.24 | $ | 8.93 | |||||||||||||||
Additional information regarding stock options outstanding and exercisable at December 31, 2005, is provided in the following table:
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 generated by such contributions. As of December 31, 2005, there were 15 investment options, including City Holding Company common stock, available under the 401(k) Plan.
The Company’s total expense associated with the retirement benefit plan approximated $542,000, $494,000, and $477,000, in 2005, 2004, and 2003, respectively. The total number of shares of the Company’s common stock held by the 401(k) Plan as of December 31, 2005 and 2004 is 431,561 and 483,826, respectively. Other than the 401(k) Plan, the Company offers no postretirement benefits.
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.
45
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
Primarily as a result of the interest rate environment over the past two years, the benefit obligation exceeded the estimated fair value of plan assets as of October 31, 2005 and 2004. In accordance with FASB Statement No. 87, Employers’ Accounting for Pension Plans , the Company has recorded a minimum pension liability of $3.3 million and $2.1 million as of December 31, 2005 and 2004, respectively, included in Other Liabilities within the Consolidated Balance Sheets, and a $3.2 million and $2.4 million, net of tax, underfunded pension liability in Accumulated Other Comprehensive Income within Shareholders’ Equity at December 31, 2005 and 2004, respectively. The following table summarizes activity within the Defined Benefit Plan in 2005 and 2004:
| Pension Benefits | ||||||||
|
(in thousands) |
2005 | 2004 | ||||||
|
Change in fair value of plan assets: |
||||||||
|
Fair value at beginning of measurement period |
$ | 8,044 | $ | 7,715 | ||||
|
Actual gain on plan assets |
698 | 582 | ||||||
|
Contributions |
76 | 259 | ||||||
|
Benefits paid |
(626 | ) | (512 | ) | ||||
|
Fair value at end of measurement period |
8,192 | 8,044 | ||||||
|
Change in benefit obligation: |
||||||||
|
Benefit obligation at beginning of measurement period |
(10,133 | ) | (10,006 | ) | ||||
|
Interest cost |
(662 | ) | (642 | ) | ||||
|
Actuarial (loss) gain |
(1,332 | ) | 3 | |||||
|
Benefits paid |
626 | 512 | ||||||
|
Change in estimates |
— | — | ||||||
|
Benefit obligation at end of measurement period |
(11,501 | ) | (10,133 | ) | ||||
|
Funded status |
(3,309 | ) | (2,089 | ) | ||||
|
Unrecognized net actuarial gain |
5,366 | 4,148 | ||||||
|
Unrecognized net obligation |
(77 | ) | (107 | ) | ||||
|
Other comprehensive loss |
(5,289 | ) | (4,041 | ) | ||||
|
Accrued Benefit Cost |
$ | (3,309 | ) | $ | (2,089 | ) | ||
|
Weighted-average assumptions as of October 31: |
||||||||
|
Discount rate |
5.75 | % | 6.50 | % | ||||
|
Expected return on plan assets |
8.50 | % | 8.50 | % | ||||
The following table presents the components of the net defined benefit pension benefit:
The Defined Benefit Plan is administered by the West Virginia Bankers Association (“WVBA”) and all investment policies and strategies are established by the WVBA Pension Committee. The policy established by the Pension Committee is to invest assets per target allocations, as detailed in the table below. The assets are reallocated periodically to meet these target allocations. The investment policy is reviewed periodically, under the advisement of a certified investment advisor, to determine if the policy should be revised.
The overall investment return goal is to achieve a return greater than a blended mix of stated indices tailored to the same asset mix of the plan assets by 0.5%, after fees, over a rolling five-year moving average basis. Allowable assets include cash equivalents, fixed income securities, equity securities, exchange-traded index funds and guaranteed investment contracts. Prohibited investments include, but are not limited to, commodities and futures contracts, private placements, options, limited partnerships, venture capital investments, real estate and interest-only, principal-only, and residual tranche collateralized mortgage obligations. Unless a specific derivative security is allowed per the plan document, permission must be sought from the WVBA Pension Committee to include such investments.
In order to achieve a prudent level of portfolio diversification, the securities of any one company should not exceed more than 10% of the total plan assets, and no more than 25% of total plan assets should be invested in any one industry (other than securities of the U.S. government or U.S. government agencies). Additionally, no more than 20% of plan assets shall be invested in foreign securities (both equity and fixed).
The expected long-term rate of return for the plan’s assets is based on the expected return of each of the categories, weighted-based on the median of the target allocation for each class, noted in the table below. The allowable, target, and current allocation percentages of plan assets are as follows:
46
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
The Company anticipates making a contribution to the plan of $0.1 million for the year ending December 31, 2006. The following table summarizes the expected benefits to be paid in each of the next five years and in the aggregate for the five years thereafter:
|
Plan Year Ending October 31 |
Expected Benefits to be Paid | ||
| (in thousands) | |||
|
2006 |
$ | 577 | |
|
2007 |
598 | ||
|
2008 |
613 | ||
|
2009 |
623 | ||
|
2010 |
681 | ||
|
2011 through 2015 |
3,707 | ||
In addition, the Company and its subsidiary participate in the Pentegra multi-employer pension plan (the “multi-employer plan”). This non-contributory defined benefit plan covers current and former employees of Classic Bancshares that was acquired by the Company during 2005, see Note 2. The multi-employer plan has a June 30 year-end, and it is the policy of the Company to fund the normal cost of the multiemployer plan. No contributions were required for the year ended December 31, 2005. The benefits of the multi-employer plan were frozen prior to the acquisition of Classic Bancshares, and it is the intention of the Company to fund benefit amounts when assets of the plan are sufficient.
The Company has entered into employment contracts with certain of its current and former executive officers. The employment contracts provide for, among other things, the payment of severance compensation in the event an executive officer either voluntarily or involuntarily terminates his employment with the Company for other than “Just Cause.” The cost of these benefits was accrued over the five-year service period for each executive and is included in Other Liabilities within the Consolidated Balance Sheets. As of December 31, 2005 and 2004, the liability was $1.8 million and $5.1 million, respectively. For the years ended December 31, 2005, 2004, and 2003, $0.5 million, $3.3 million, and $1.7 million, respectively, was charged to operations in connection with these contracts. As of December 31, 2005, three officers had left the Company and are receiving severance compensation in accordance with the terms of each of their respective agreements.
Certain entities previously acquired by the Company had entered into individual deferred compensation and supplemental retirement agreements with certain current and former directors and officers. The Company has assumed the liabilities associated with these agreements, the cost of which is being accrued over the period of active service from the date of the respective agreement. The cost of such agreements approximated $262,000, $256,000, and $253,000, during 2005, 2004, and 2003, respectively. The liability for such agreements approximated $4.7 million and $4.6 million at December 31, 2005 and 2004, respectively, and is included in Other Liabilities in the accompanying Consolidated Balance Sheets.
To assist in funding the above liabilities, the acquired entities had insured the lives of certain current and former directors and officers. The Company is the current owner and beneficiary of insurance policies with a cash surrender value approximating $6.4 million and $5.3 million at December 31, 2005 and 2004, respectively, which is included in Other Assets in the accompanying Consolidated Balance Sheets.
N OTE S IXTEEN
R ELATED P ARTY T RANSACTIONS
City National has granted loans to certain non-executive officers and directors of the Company and its subsidiaries, and to their associates. The loans were made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with third-party lending arrangements. The Company has no material related party transactions that would require disclosure.
47
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
N OTE S EVENTEEN
C OMMITMENTS AND CONTINGENT LIABILITIES
The Company has entered into agreements with certain of its customers to extend credit or provide a conditional commitment to provide payment on drafts presented in accordance with the terms of the underlying credit documents. Conditional commitments generally include standby and commercial letters of credit. Standby letters of credit represent an obligation of the Company to a designated third party contingent upon the failure of a customer of the Company to perform under the terms of the underlying contract between the customer and the third party. Commercial letters of credit are issued specifically to facilitate trade or commerce. Under the terms of a commercial letter of credit, drafts will be drawn when the underlying transaction is consummated, as intended, between the customer and a third party. The table below presents a summary of the contractual obligations of the Company resulting from significant commitments:
|
(in thousands) |
2005 | 2004 | ||||
|
Commitments to extend credit: |
||||||
|
Home equity lines |
$ | 148,259 | $ | 137,582 | ||
|
Credit card lines |
39,646 | 46,284 | ||||
|
Commercial real estate |
65,966 | 41,691 | ||||
|
Other commitments |
145,535 | 120,288 | ||||
|
Standby letters of credit |
7,250 | 4,737 | ||||
|
Commercial letters of credit |
312 | 1,329 | ||||
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.
On December 31, 2001, the Company, its previous management team, and members of the Boards of Directors of both the Company and City National (the “defendants”) were named in a derivative action filed by a shareholder seeking to recover damages on behalf of the Company. In January 2004, the Company announced that a tentative settlement had been reached in this litigation. Subsequently, the Circuit Court of Kanawha County, West Virginia, approved the settlement and the Company received insurance proceeds of approximately $5.5 million or $0.19 diluted earnings per share, net of taxes, in April 2004.
During 2003, the Company received a net settlement of $1.6 million in resolution of its claim against the Federal Deposit Insurance Corporation (“FDIC”) in the FDIC’s capacity as receiver of the First National Bank of Keystone (“Keystone”). The settlement resolved federal court litigation the Company brought against the FDIC. With this settlement, the Company’s claims arising out of its business relationship with the failed Keystone bank were resolved.
The Company and City National are involved in various legal actions arising in the ordinary course of business. As these legal actions are resolved, the Company or City National 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 will be presented in the future.
N OTE E IGHTEEN
P REFERRED S TOCK AND S HAREHOLDER R IGHTS P LAN
The Company’s Board of Directors has the authority to issue preferred stock, and to fix the designation, preferences, rights, dividends, and all other attributes of such preferred stock, without any vote or action by the shareholders. As of December 31, 2005, no such shares are outstanding, nor are any expected to be issued, except as might occur pursuant to the Stock Rights Plan discussed below.
The Company’s Stock Rights Plan provides that each share of common stock carries with it one right. The rights would be exercisable only if a person or group, as defined, acquired 15% or more of the Company’s common stock, or announces a tender offer for such stock. Under conditions described in the Stock Rights Plan, holders of rights could acquire shares of preferred stock or additional shares of the Company’s common stock—or in the event of a 50% or more change in control, shares of common stock of the acquirer. The value of shares acquired under the plan would equal twice the exercise price.
48
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
N OTE N INETEEN
R EGULATORY R EQUIREMENTS AND C APITAL R ATIOS
The principal source of income and cash for City Holding (the “Parent Company”) is dividends from City National. Dividends paid by City National to the Parent Company are subject to certain legal and regulatory limitations. Generally, any dividends in amounts that exceed the earnings retained by City National in the current year plus retained net profits for the preceding two years must be approved by regulatory authorities. Approval is also required if dividends declared would cause City National’s regulatory capital to fall below specified minimum levels. At December 31, 2005, City National could pay dividends up to $14.1 million plus net profits for 2006, as defined by statute, up to the dividend declaration date without prior regulatory approval.
During 2005, the Parent Company used cash obtained from the dividends received primarily to: (1) pay common dividends to shareholders, (2) fund the acquisition of Classic Bancshares, Inc., and (3) fund repurchases of the Company’s common shares. As of December 31, 2005, the Parent Company reported a cash balance of approximately $38.4 million. Management believes that the Parent Company’s available cash balance, together with cash dividends from City National is adequate to satisfy its funding and cash needs in 2006.
The Company, including City National, is subject to various regulatory capital requirements administered by the various banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, action by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and City National must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The Company’s and City National’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and City National to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined). Management believes, as of December 31, 2005, that the Company and City National met all capital adequacy requirements to which they were subject.
As of December 31, 2005, the most recent notifications from banking regulatory agencies categorized the Company and City National as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since these notifications that management believes have changed the institutions’ categories. The Company’s and City National’s actual capital amounts and ratios are presented in the following table.
|
(dollars in thousands) |
2005 |
2004 |
Well Capitalized Ratio |
Minimum Ratio |
||||||||||||||
| Amount | Ratio | Amount | Ratio | |||||||||||||||
|
Total Capital (to Risk-Weighted Assets): |
||||||||||||||||||
|
Consolidated |
$ | 284,313 | 16.4 | % | $ | 253,655 | 16.6 | % | 10.0 | % | 8.0 | % | ||||||
|
City National |
241,294 | 14.0 | 220,021 | 14.5 | 10.0 | 8.0 | ||||||||||||
|
Tier I Capital (to Risk-Weighted Assets): |
||||||||||||||||||
|
Consolidated |
267,523 | 15.4 | 235,840 | 15.5 | 6.0 | 4.0 | ||||||||||||
|
City National |
224,504 | 13.0 | 202,207 | 13.3 | 6.0 | 4.0 | ||||||||||||
|
Tier I Capital (to Average Assets): |
||||||||||||||||||
|
Consolidated |
267,523 | 11.0 | 235,840 | 10.7 | 5.0 | 4.0 | ||||||||||||
|
City National |
224,504 | 9.2 | 202,207 | 9.3 | 5.0 | 4.0 | ||||||||||||
N OTE T WENTY
F AIR V ALUES OF F INANCIAL I NSTRUMENTS
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments , requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
49
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
The following table represents the estimates of fair value of financial instruments:
| Fair Value of Financial Instruments | ||||||||||||
| 2005 | 2004 | |||||||||||
|
(in thousands) |
Carrying
Amount |
Fair Value |
Carrying
Amount |
Fair Value |
||||||||
|
Assets: |
||||||||||||
|
Cash and cash equivalents |
$ | 86,273 | $ | 86,273 | $ | 56,084 | $ | 56,084 | ||||
|
Securities available-for-sale |
549,966 | 549,966 | 620,034 | 620,034 | ||||||||
|
Securities held-to-maturity |
55,397 | 58,892 | 59,740 | 64,476 | ||||||||
|
Net loans |
1,596,037 | 1,626,684 | 1,336,959 | 1,380,425 | ||||||||
|
Liabilities: |
||||||||||||
|
Deposits |
1,928,420 | 1,918,853 | 1,672,723 | 1,692,410 | ||||||||
|
Short-term borrowings |
152,255 | 150,256 | 145,183 | 143,646 | ||||||||
|
Long-term debt |
98,425 | 98,985 | 148,836 | 155,012 | ||||||||
The following methods and assumptions were used in estimating fair value amounts for financial instruments:
Cash and cash equivalents : Due to their short-term nature, the carrying amounts reported in the Consolidated Balance Sheets approximate fair value.
Securities : The fair value of securities, both available-for-sale and held-to-maturity, are generally based on quoted market prices.
Net loans : The fair value of the loan portfolio is estimated using discounted cash flow analyses at interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying value of accrued interest approximates its fair value.
Deposits : The fair values of demand deposits (e.g., interest and noninterest-bearing checking, regular savings, and other money market demand accounts) are, by definition, equal to their carrying values. Fair values for certificates of deposit are estimated using a discounted cash flow calculation, one that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities of time deposits.
Short-term borrowings : Securities sold under agreements to repurchase represent borrowings with original maturities of less than 90 days. The carrying amount of advances from the FHLB and borrowings under repurchase agreements approximate their fair values.
Long-term debt : The fair value of long-term borrowings is estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements and market conditions of similar debt instruments.
Commitments and letters of credit : The fair values of commitments are estimated based on fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties’ credit standing. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The amounts of fees currently charged on commitments and letters of credit are deemed insignificant, and therefore, the estimated fair values and carrying values have not been reflected in the table above.
N OTE T WENTY -O NE
C ITY H OLDING C OMPANY (P ARENT C OMPANY O NLY ) F INANCIAL I NFORMATION
Condensed Balance Sheets
| December 31 | ||||||
|
(in thousands) |
2005 | 2004 | ||||
|
Assets |
||||||
|
Cash |
$ | 38,420 | $ | 32,971 | ||
|
Securities available-for-sale |
3,135 | 1,042 | ||||
|
Investment in subsidiaries |
278,967 | 212,407 | ||||
|
Deferred tax asset |
2,232 | 1,208 | ||||
|
Fixed assets |
118 | 124 | ||||
|
Other assets |
4,103 | 1,873 | ||||
|
Total Assets |
$ | 326,975 | $ | 249,625 | ||
|
Liabilities |
||||||
|
Junior subordinated debentures |
$ | 28,836 | $ | 28,836 | ||
|
Dividends payable |
4,526 | 3,649 | ||||
|
Accrued interest payable |
641 | 641 | ||||
|
Other liabilities |
831 | 418 | ||||
|
Total Liabilities |
34,834 | 33,544 | ||||
|
Shareholders’ Equity |
292,141 | 216,081 | ||||
|
Total Liabilities and Shareholders’ Equity |
$ | 326,975 | $ | 249,625 | ||
Junior subordinated debentures represent the Parent Company’s amounts owed to City Holding Capital Trust at December 31, 2005 and 2004.
During the fourth quarter of 2003, the Parent Company fully repaid all of its 9.125% junior subordinated debentures held by City Holding Capital Trust II. In turn, City Holding Capital Trust II retired its $57.5 million of trust preferred securities. In completing the redemption of the Junior Subordinated Debentures, the Parent Company recorded a $2.3 million charge related to the unamortized balance of issuance costs. The charge is reported as “loss on early extinguishment of debt” below.
50
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
Condensed Statements of Income
| Year Ended December 31 | ||||||||||||
|
(in thousands) |
2005 | 2004 | 2003 | |||||||||
|
Income |
||||||||||||
|
Dividends from bank subsidiaries |
$ | 49,600 | $ | 38,350 | $ | 87,500 | ||||||
|
Other income |
339 | 132 | 368 | |||||||||
| 49,939 | 38,482 | 87,868 | ||||||||||
|
Expenses |
||||||||||||
|
Interest expense |
2,574 | 2,627 | 7,540 | |||||||||
|
Loss on early extinguishment of debt |
— | 263 | 2,246 | |||||||||
|
Other expenses |
354 | 388 | 359 | |||||||||
| 2,928 | 3,278 | 10,145 | ||||||||||
|
Income Before Income Tax Benefit and Equity in Undistributed Net Income (Excess Dividends) of Subsidiaries |
47,011 | 35,204 | 77,723 | |||||||||
|
Income tax benefit |
(1,183 | ) | (1,395 | ) | (4,057 | ) | ||||||
|
Income Before Equity in Undistributed Net Income (Excess Dividends) of Subsidiaries |
48,194 | 36,599 | 81,780 | |||||||||
|
Equity in undistributed net income (excess dividends) of subsidiaries |
2,094 | 9,745 | (38,086 | ) | ||||||||
|
Net Income |
$ | 50,288 | $ | 46,344 | $ | 43,694 | ||||||
Condensed Statements of Cash Flows
| Year Ended December 31 | ||||||||||||
|
(in thousands) |
2005 | 2004 | 2003 | |||||||||
|
Operating Activities |
||||||||||||
|
Net income |
$ | 50,288 | $ | 46,344 | $ | 43,694 | ||||||
|
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
|
Loss on early extinguishment of debentures |
— | 263 | 2,246 | |||||||||
|
Realized investment securities gains |
— | (116 | ) | (278 | ) | |||||||
|
Realized gain on sale of fixed assets |
(8 | ) | — | — | ||||||||
|
Amortization and accretion |
14 | — | — | |||||||||
|
Provision for depreciation |
48 | 60 | 76 | |||||||||
|
Decrease (increase) in other assets |
3,336 | (146 | ) | (726 | ) | |||||||
|
Increase (decrease) in other liabilities |
297 | (1,682 | ) | (5,431 | ) | |||||||
|
(Equity in undistributed net income) excess dividends of subsidiaries |
(2,094 | ) | (9,745 | ) | 38,086 | |||||||
|
Net Cash Provided by Operating Activities |
51,881 | 34,978 | 77,667 | |||||||||
|
Investing Activities |
||||||||||||
|
Purchases of available for sale securities |
(6,479 | ) | (1,042 | ) | — | |||||||
|
Proceeds from sales of available for sale securities |
369 | 217 | — | |||||||||
|
Acquisition, net cash received |
(15,385 | ) | — | — | ||||||||
|
Proceeds from sale of fixed assets |
8 | — | — | |||||||||
|
Net Cash Used in Investing Activities |
(21,487 | ) | (825 | ) | — | |||||||
|
Financing Activities |
||||||||||||
|
Repayment of long-term debt |
— | (2,200 | ) | — | ||||||||
|
Redemption of junior subordinated debentures |
— | — | (59,278 | ) | ||||||||
|
Cash dividends paid |
(16,839 | ) | (14,309 | ) | (12,480 | ) | ||||||
|
Purchases of treasury stock |
(11,912 | ) | (5,858 | ) | (3,258 | ) | ||||||
|
Issuance of stock awards |
147 | — | — | |||||||||
|
Exercise of stock options |
3,659 | 2,048 | 1,216 | |||||||||
|
Net Cash Used in Financing Activities |
(24,945 | ) | (20,319 | ) | (73,800 | ) | ||||||
|
Increase in Cash and Cash Equivalents |
5,449 | 13,834 | 3,867 | |||||||||
|
Cash and cash equivalents at beginning of year |
32,971 | 19,137 | 15,270 | |||||||||
|
Cash and Cash Equivalents at End of Year |
$ | 38,420 | $ | 32,971 | $ | 19,137 | ||||||
N OTE T WENTY -T WO
S UMMARIZED Q UARTERLY F INANCIAL I NFORMATION (U NAUDITED )
A summary of selected quarterly financial information for 2005 and 2004 follows:
|
(in thousands, except per share data) |
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
||||||||
|
2005 |
||||||||||||
|
Interest income |
$ | 30,293 | $ | 32,676 | $ | 35,910 | $ | 36,639 | ||||
|
Taxable equivalent adjustment |
233 | 241 | 273 | 269 | ||||||||
|
Interest income (FTE) |
30,526 | 32,917 | 36,183 | 36,908 | ||||||||
|
Interest expense |
8,030 | 9,054 | 10,290 | 11,064 | ||||||||
|
Net interest income |
22,496 | 23,863 | 25,893 | 25,844 | ||||||||
|
Provision for loan losses |
— | — | 600 | 800 | ||||||||
|
Investment securities gains (losses) |
3 | 18 | 5 | 125 | ||||||||
|
Noninterest income |
11,441 | 12,080 | 13,007 | 13,412 | ||||||||
|
Noninterest expense |
16,013 | 16,839 | 17,922 | 18,339 | ||||||||
|
Income before income tax expense |
17,927 | 19,122 | 20,383 | 20,242 | ||||||||
|
Income tax expense |
6,016 | 6,532 | 6,938 | 6,884 | ||||||||
|
Taxable equivalent adjustment |
233 | 241 | 273 | 269 | ||||||||
|
Net income |
$ | 11,678 | $ | 12,349 | $ | 13,172 | $ | 13,089 | ||||
|
Basic earnings per common share |
$ | 0.70 | $ | 0.72 | $ | 0.73 | $ | 0.72 | ||||
|
Diluted earnings per common share |
0.69 | 0.71 | 0.72 | 0.72 | ||||||||
|
Average common shares outstanding: |
||||||||||||
|
Basic |
16,605 | 17,268 | 18,052 | 18,127 | ||||||||
|
Diluted |
16,812 | 17,477 | 18,238 | 18,211 | ||||||||
|
2004 |
||||||||||||
|
Interest income |
$ | 30,175 | $ | 29,293 | $ | 29,667 | $ | 29,746 | ||||
|
Taxable equivalent adjustment |
257 | 246 | 236 | 236 | ||||||||
|
Interest income (FTE) |
30,432 | 29,539 | 29,903 | 29,982 | ||||||||
|
Interest expense |
7,863 | 7,860 | 8,035 | 8,113 | ||||||||
|
Net interest income |
22,569 | 21,679 | 21,868 | 21,869 | ||||||||
|
Provision for loan losses |
— | — | — | — | ||||||||
|
Investment securities gains (losses) |
1,012 | 124 | 4 | 33 | ||||||||
|
Noninterest income |
9,908 | 16,265 | 10,852 | 11,838 | ||||||||
|
Noninterest expense |
16,433 | 16,985 | 15,783 | 17,132 | ||||||||
|
Income before income tax expense |
17,056 | 21,083 | 16,941 | 16,608 | ||||||||
|
Income tax expense |
5,796 | 7,539 | 5,749 | 5,285 | ||||||||
|
Taxable equivalent adjustment |
257 | 246 | 236 | 236 | ||||||||
|
Net income |
$ | 11,003 | $ | 13,298 | $ | 10,956 | $ | 11,087 | ||||
|
Basic earnings per common share |
$ | 0.66 | $ | 0.80 | $ | 0.66 | $ | 0.67 | ||||
|
Diluted earnings per common share |
0.65 | 0.79 | 0.65 | 0.66 | ||||||||
|
Average common shares outstanding: |
||||||||||||
|
Basic |
16,681 | 16,694 | 16,584 | 16,572 | ||||||||
|
Diluted |
16,972 | 16,935 | 16,812 | 16,810 | ||||||||
51
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS ( CONTINUED )
C ITY H OLDING C OMPANY AND S UBSIDIARIES
N OTE T WENTY -T HREE
E ARNINGS PER S HARE
The following table sets forth the computation of basic and diluted earnings per share:
|
(in thousands, except per share data) |
2005 | 2004 | 2003 | ||||||
|
Net income |
$ | 50,288 | $ | 46,344 | $ | 43,694 | |||
|
Average shares outstanding |
17,519 | 16,632 | 16,634 | ||||||
|
Effect of dilutive securities: |
|||||||||
|
Employee stock options |
171 | 250 | 313 | ||||||
|
Shares for diluted earnings per share |
17,690 | 16,882 | 16,947 | ||||||
|
Basic earnings per share |
$ | 2.87 | $ | 2.79 | $ | 2.63 | |||
|
Diluted earnings per share |
$ | 2.84 | $ | 2.75 | $ | 2.58 | |||
Options to purchase 43,750 shares of common stock at exercise prices between $36.25 and $36.90 per share were outstanding during 2005 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 be antidilutive.
52
Exhibit 21
Subsidiaries of City Holding Company
As of December 31, 2005, the subsidiaries, each wholly-owned, of City Holding Company included:
|
City National Bank of West Virginia 3601 MacCorkle Avenue S.E. Charleston, West Virginia |
National Banking Association | Insured Depository Institution | ||
|
City Financial Corporation 3601 MacCorkle Avenue S.E. Charleston, West Virginia |
West Virginia Corporation |
Inactive Securities Brokerage and Investment Advisory Company |
||
|
City Mortgage Corporation Pittsburgh, Pennsylvania |
Pennsylvania Corporation |
Inactive Mortgage Banking Company |
||
|
City Holding Capital Trust 25 Gatewater Road Charleston, West Virginia |
Delaware Business Trust |
Special-purpose Statutory Trust |
||
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in this Annual Report (Form 10-K) of City Holding Company of our reports dated March 1, 2006, with respect to the consolidated financial statements of City Holding Company, City Holding Company management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of City Holding Company, included in the 2005 Annual Report to Shareholders for the year ended December 31, 2005.
We also consent to the incorporation by reference in the Registration Statement (Forms S-8, Nos. 333-115282 and 333-87667) pertaining to the 2003 Incentive Plan and the 1993 Stock Incentive Plan, respectively, of City Holding Company of our reports dated March 1, 2006, with respect to the consolidated financial statements of City Holding Company, City Holding Company management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of City Holding Company, incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 2005.
/s/ Ernst & Young LLP
Charleston, West Virginia
March 1, 2006
Exhibit 31(a)
CERTIFICATION
I, Charles R. Hageboeck certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of City Holding Company; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 1, 2006
|
/s/ Charles R. Hageboeck |
|
Charles R. Hageboeck |
|
President and Chief Executive Officer |
23
Exhibit 31(b)
CERTIFICATION
I, David L. Bumgarner certify that:
| 1. | I have reviewed this annual report on Form 10-K of City Holding Company; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 1, 2006
|
/s/ David L. Bumgarner |
|
David L. Bumgarner |
|
Senior Vice President and Chief Financial Officer |
24
Exhibit 32(a)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of City Holding Company (the “Company”) for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Charles R. Hageboeck, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: March 1, 2006
|
/s/ Charles R. Hageboeck |
|
Charles R. Hageboeck |
|
President and Chief Executive Officer |
25
Exhibit 32(b)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of City Holding Company (the “Company”) for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David L. Bumgarner, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: March 1, 2006
|
/s/ David L. Bumgarner |
|
David L. Bumgarner |
|
Senior Vice President and Chief Financial Officer |
26