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| CHCO > SEC Filings for CHCO > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
Critical Accounting Policies
The accounting policies of the Company conform with U.S. generally accepted
accounting principles and require management to make estimates and develop
assumptions that affect the amounts reported in the financial statements and
related footnotes. These estimates and assumptions are based on information
available to management as of the date of the financial statements. Actual
results could differ significantly from management's estimates. As this
information changes, management's estimates and assumptions used to prepare the
Company's financial statements and related disclosures may also change. The most
significant accounting policies followed by the Company are presented in Note
One to the audited financial statements included in the Company's 2008 Annual
Report to Shareholders. The information included in this Quarterly Report on
Form 10-Q, including the Consolidated Financial Statements, Notes to
Consolidated Financial Statements, and Management's Discussion and Analysis of
Financial Condition and Results of Operations, should be read in conjunction
with the financial statements and notes thereto included in the 2008 Annual
Report of the Company. Based on the valuation techniques used and the
sensitivity of financial statement amounts to the methods, assumptions, and
estimates underlying those amounts, management has identified the determination
of the allowance for loan losses, income taxes, and previously securitized loans
to be the accounting areas that require the most subjective or complex judgments
and, as such, could be most subject to revision as new information becomes
available.
Pages 23 - 27 of this Quarterly Report on Form 10-Q provide management's
analysis of the Company's allowance for loan losses and related provision. The
allowance for loan losses is maintained at a level that represents management's
best estimate of probable losses in the loan portfolio. Management's
determination of the adequacy of the allowance for loan losses is based upon an
evaluation of individual credits in the loan portfolio, historical loan loss
experience, current economic conditions, and other relevant factors. This
determination is inherently subjective as it requires material estimates
including the amounts and timing of future cash flows expected to be received on
impaired loans that may be susceptible to significant change. The allowance for
loan losses related to loans considered to be impaired is generally evaluated
based on the discounted cash flows using the impaired loan's initial effective
interest rate or the fair value of the collateral for certain collateral
dependent loans.
The Company is subject to federal and state income taxes in the jurisdictions in
which it conducts business. In computing the provision for income taxes,
management must make judgments regarding interpretation of laws in those
jurisdictions. Because the application of tax laws and regulations for many
types of transactions is susceptible to varying interpretations, amounts
reported in the financial statements could be changed at a later date upon final
determinations by taxing authorities. On a quarterly basis, the Company
estimates its annual effective tax rate for the year and uses that rate to
provide for income taxes on a year-to-date basis.
The amount of unrecognized tax benefits could change over the next twelve
months as a result of various factors. However, management cannot currently
estimate the range of possible change.
The Company is currently open to audit under the statute of limitations by the
Internal Revenue Service for the years ended December 31, 2005 through 2007. The
Company and its subsidiaries state income tax returns are open to audit under
the statute of limitations for the year ended December 31, 2007.
Note B, beginning on page 8 of this Quarterly Report on Form 10-Q, and pages
27-28 provide management's analysis of the Company's previously securitized
loans. The carrying value of previously securitized loans is determined using
assumptions with regard to loan prepayment and default rates. Using cash flow
modeling techniques that incorporate these assumptions, the Company estimated
total future cash collections expected to be received from these loans and
determined the yield at which the resulting discount would be accreted into
income. If, upon periodic evaluation, the estimate of the total probable
collections is increased or decreased but is still greater than the sum of the
original carrying amount less subsequent collections plus the discount accreted
to date, and it is probable that collection will occur, the amount of the
discount to be accreted is adjusted accordingly and the amount of periodic
accretion is adjusted over the remaining lives of the loans. If, upon periodic
evaluation, the discounted present value of estimated future cash flows declines
below the recorded value of previously securitized loans, an impairment charge
would be provided through the Company's provision for loan losses. Please refer
to Note B of Notes to Consolidated Financial Statements, on pages 8 - 9 for
further discussion.
Net Interest Income
Three Months Ended March 31, 2009 vs. 2008
The Company's tax equivalent net interest income increased $0.9 million, or
3.5%, from $24.1 million during the first three months of 2008 to $25.0 million
during the first three months of 2009, as interest expense on deposits and other
interest bearing liabilities decreased more quickly than interest income from
loans and investments. The Company's reported net interest margin increased from
4.40% for the quarter ended March 31, 2008 to 4.46% for the quarter ended March
31, 2009.
During the third and fourth quarters of 2008, the Company sold $450 million of
interest rate floors. The gain from sales of these interest rate floors of $16.7
million will be recognized over the remaining lives of the various hedged
loans. During the first quarter of 2009, the Company recognized $2.9 million of
interest income compared to $1.0 million of interest income recognized in the
first quarter of 2008 from the interest rate floors.
Table One
Average Balance Sheets and Net Interest Income
(in thousands)
Three months ended March 31,
2009 2008
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets
Loan portfolio (1):
Residential real
estate $ 603,767 $ 8,781 5.90 % $ 601,600 $ 9,886 6.61 %
Home equity 386,653 6,143 6.44 343,658 5,912 6.92
Commercial, financial,
and agriculture 756,201 10,875 5.83 700,155 12,235 7.03
Loans to depository
institutions - - - 4,670 35 3.01
Installment loans to
individuals 47,566 1,118 9.53 47,629 1,346 11.37
Previously securitized
loans 3,867 1,141 119.66 6,421 1,578 98.84
Total loans 1,798,054 28,058 6.33 1,704,133 30,992 7.31
Securities:
Taxable 430,734 6,062 5.71 455,663 6,064 5.35
Tax-exempt (2) 37,558 629 6.79 37,723 614 6.55
Total securities 468,292 6,691 5.79 493,386 6,678 5.44
Deposits in depository
institutions 4,826 5 0.42 8,697 65 3.01
Total interest-earning
assets 2,271,172 34,754 6.21 2,206,216 37,735 6.88
Cash and due from
banks 52,410 65,442
Bank premises and
equipment 60,813 54,709
Other assets 211,000 186,273
Less: allowance for
loan losses (22,564 ) (17,837 )
Total assets $ 2,572,831 $ 2,494,803
Liabilities
Interest-bearing
demand deposits $ 416,695 $ 463 0.45 % $ 409,745 $ 712 0.70 %
Savings deposits 360,740 507 0.57 360,587 1,104 1.23
Time deposits 982,947 8,403 3.47 933,502 10,199 4.39
Short-term borrowings 147,510 153 0.42 127,793 1,145 3.60
Long-term debt 19,032 254 5.41 22,505 441 7.88
Total interest-bearing
liabilities 1,926,924 9,780 2.06 1,854,132 13,601 2.95
Noninterest-bearing
demand deposits 324,333 311,885
Other liabilities 35,392 28,770
Stockholders' equity 286,182 300,016
Total liabilities and
stockholders' equity $ 2,572,831 $ 2,494,803
Net interest income $ 24,974 $ 24,134
Net yield on earning
assets 4.46 % 4.40 %
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(1) For purposes of this table, non-accruing loans have been included in average balances and loan fees, which are immaterial, have been included in interest income.
(2) Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 35%.
Table Two
Rate Volume Analysis of Changes in Interest Income and Interest Expense
(in thousands)
Three months ended March 31,
2009 vs. 2008
Increase (Decrease)
Due to Change In:
Volume Rate Net
Interest-earning assets:
Loan portfolio
Residential real estate $ 35 $ (1,140 ) $ (1,105 )
Home equity 734 (503 ) 231
Commercial, financial, and agriculture 971 (2,331 ) (1,360 )
Loans to depository institutions (35 ) - (35 )
Installment loans to individuals (2 ) (226 ) (228 )
Previously securitized loans (622 ) 185 (437 )
Total loans 1,081 (4,015 ) (2,934 )
Securities:
Taxable (321 ) 319 (2 )
Tax-exempt (1) (12 ) 27 15
Total securities (333 ) 346 13
Deposits in depository institutions (29 ) (31 ) (60 )
Total interest-earning assets $ 719 $ (3,700 ) $ (2,981 )
Interest-bearing liabilities:
Demand deposits $ 12 $ (261 ) $ (249 )
Savings deposits - (597 ) (597 )
Time deposits 536 (2,332 ) (1,796 )
Short-term borrowings 175 (1,167 ) (992 )
Long-term debt (67 ) (120 ) (187 )
Total interest-bearing liabilities $ 656 $ (4,477 ) $ (3,821 )
Net Interest Income $ 63 $ 777 $ 840
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(1) Fully federal taxable equivalent using a tax rate of 35%.
Allowance and Provision for Loan Losses
Management systematically monitors the loan portfolio and the adequacy of the
allowance for loan losses ("ALLL") on a quarterly basis to provide for probable
losses inherent in the portfolio. Management assesses the risk in each loan type
based on historical trends, the general economic environment of its local
markets, individual loan performance, and other relevant factors. Individual
credits are selected throughout the year for detailed loan reviews, which are
utilized by management to assess the risk in the portfolio and the adequacy of
the allowance. Due to the nature of commercial lending, evaluation of the
adequacy of the allowance as it relates to these loan types is often based more
upon specific credit review, with consideration given to the potential
impairment of certain credits and historical loss rates, 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 rates are adjusted to reflect current inherent
risk factors, such as unemployment, overall economic conditions, concentrations
of credit, loan growth, classified and impaired loan trends, staffing, adherence
to lending policies, and loss trends.
Determination of the allowance for loan losses is subjective in nature and
requires management to periodically reassess the validity of its assumptions.
Differences between actual losses and estimated losses are assessed such that
management can timely modify its evaluation model to ensure that adequate
provision has been made for risk in the total loan portfolio.
As a result of the Company's quarterly analysis of the adequacy of the ALLL, the
Company recorded a provision for loan losses of $1.7 million in the first three
months of 2009 and $1.9 million in the first three months of 2008. The provision
for loan losses recorded during the first three months of 2009 reflects the
difficulties of certain commercial borrowers of the Company during the quarter,
the downgrade of their related credits, and management's assessment of the
impact of these difficulties on the ultimate collectability of the
loans. Changes in the amount of the provision and related allowance are based on
the Company's detailed methodology and are directionally consistent with changes
in the growth, composition, and quality of the Company's loan portfolio. The
Company believes its methodology for determining its ALLL adequately provides
for probable losses inherent in the loan portfolio at March 31, 2009.
The Company had net charge-offs of $1.9 million for the first three months of
2009. Net charge-offs on commercial and residential loans were $1.5 and $0.3
million, respectively, for the three months ended March 31, 2009. Charge-offs
for commercial loans were primarily related to three specific credits that had
been appropriately considered in establishing the allowance for loan losses in
prior periods. In addition, depository accounts net charge-offs were $0.1
million for the first three months of 2009. While charge-offs on depository
accounts are appropriately taken against the ALLL, the revenue associated with
depository accounts is reflected in service charges.
The Company's ratio of non-performing assets to total loans and other real
estate owned improved from 1.64% at December 31, 2008 to 1.53% at March 31,
2009. Based on our analysis, the Company believes that the allowance allocated
to impaired loans, after considering the value of the collateral securing such
loans, is adequate to cover losses that may result from these loans at March 31,
2009. The Company's ratio of non-performing assets to total loans and other real
estate owned is 138 basis points lower than that of our peer group (bank holding
companies with total assets between $1 and $5 billion), which reported average
non-performing assets as a percentage of loans and other real estate owned of
2.91% for the most recently reported quarter ended December 31, 2008.
Approximately 43% of the Company's non-performing loans at March 31, 2009, or
approximately $9 million, were associated with a $13 million portfolio of loans
to builders of speculative homes at the Greenbrier Resort in White Sulphur
Springs, West Virginia. These loans are considered to be commercial loans due to
the dollar amount of the borrowings, although the loans were used to purchase
lots and to construct upper-scale single-family residences at the Greenbrier
Resort. Construction loan terms were originally interest only for 12 months. All
loans are collateralized by completed homes and eight residential lots. Through
March 31, 2009, the Company has specifically reserved $4.0 million of the ALLL
associated with this portfolio of speculative properties. During the second
quarter of 2009, two of the completed residences and two residential lots were
foreclosed and taken into the Company's Other Real Estate Owned. The loans
associated with these properties were included in non-performing assets at March
31, 2009. The Greenbrier Resort has a long history and storied tradition as a
top resort destination. However, the current economic scenario has been
challenging for the Greenbrier, which lost $35 million in 2008 according to its
owner, CSX Corporation. During March 2009, the Greenbrier filed for Chapter 11
bankruptcy reorganization and CSX Corporation announced that Marriott
International was willing to buy the Greenbrier for up to $130 million, pending
court approval and a new labor deal with Greenbrier workers. While this
announcement sheds some light on the future of the Greenbrier, the Company has
considered the uncertainty of the situation at the Greenbrier and believes that
based on our analysis, the specific allowance allocated to the non-performing
and substandard loans, after considering the value of the collateral securing
such loans, is adequate to cover losses that may result from these loans as of
March 31, 2009.
In addition to the 43% of the Company's non-performing loans associated with
speculative builders at the Greenbrier, slightly more than 25% of the Company's
non-performing assets are associated with real estate in what is known as the
"Eastern Panhandle" of West Virginia - the counties of Jefferson, Berkeley, and
Morgan. These three counties are distant suburbs of the Washington D.C. MSA and
have experienced explosive growth in the last 10 years. While this is a
relatively small part of the Company's entire franchise, the downturn that has
gripped the nation's mortgage and construction industry has had
disproportionately more impact upon the Company's asset quality and provision in
this region than in the remainder of the Company. Exclusive of loans to
speculative builders at the Greenbrier or loans in the Eastern Panhandle, other
loans throughout the Company account for only 32% of the Company's
non-performing loans.
The allowance allocated to the commercial loan portfolio (see Table Five)
increased $0.3 million, or 1.8% from $15.1 million at December 31, 2008 to $15.4
at March 31, 2009. This increase was attributable to recent trends in the
quality of the Company's commercial portfolio.
The allowance allocated to the residential real estate portfolio (see Table
Five) decreased $0.2 million, or 4.1% from $4.6 million at December 31, 2008 to
$4.4 million at March 31, 2009. This decrease was primarily due to improvement
in non-performing real estate loans during the three months ended March 31,
2009.
The allowance allocated to the consumer loan portfolio (see Table Five) remained
consistent at $0.2 million at December 31, 2008 and March 31, 2009.
The allowance allocated to overdraft deposit accounts (see Table Five) decreased
$0.4 million, or 15.2% from $2.4 million at December 31, 2008 to $2.0 million at
March 31, 2009. This decrease was attributable to declines in losses experienced
during the three months ended March 31, 2009.
As previously discussed, the carrying value of the previously securitized loans
incorporates an assumption for expected cash flows to be received over the life
of these loans. To the extent that the present value of expected cash flows is
less than the carrying value of these loans, the Company would provide for such
losses through the provision for loan losses.
Based on the Company's analysis of the adequacy of the allowance for loan losses
and in consideration of the known factors utilized in computing the allowance,
management believes that the allowance for loan losses as of March 31, 2009, is
adequate to provide for probable losses inherent in the Company's loan
portfolio. Future provisions for loan losses will be dependent upon trends in
loan balances including the composition of the loan portfolio, changes in loan
quality and loss experience trends, and recoveries of previously charged-off
loans, among other factors.
Table three
Analysis of the Allowance for Loan Losses
Year ended
Three months ended March 31, December 31,
(in thousands) 2009 2008 2008
Balance at beginning of period $ 22,254 $ 17,581 $ 17,581
Charge-offs:
Commercial, financial, and agricultural (1,479 ) (406 ) (3,064 )
Real estate-mortgage (394 ) (274 ) (1,590 )
Installment loans to individuals (69 ) (75 ) (243 )
Overdraft deposit accounts (664 ) (984 ) (3,151 )
Total charge-offs (2,606 ) (1,739 ) (8,048 )
Recoveries:
Commercial, financial, and agricultural 29 13 38
Real estate-mortgage 81 27 223
Installment loans to individuals 55 108 296
Overdraft deposit accounts 517 694 1,741
Total recoveries 682 842 2,298
. . .
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