| CITY HOLDING CO Item 1A Risk Factors 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 |
| 9 ______________________________________________________________________ [36]Table of Contents 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 15prca 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 10 ______________________________________________________________________ [37]Table of Contents 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 |
| 11 ______________________________________________________________________ [38]Table of Contents 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 |
| 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 dlra59dtta6 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 ______________________________________________________________________ [39]Table of Contents 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 |