SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1995 Commission file number 0-16878
CBT CORPORATION
(Exact name of registrant as specified in its charter)
Kentucky 61-1030727
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Broadway, Paducah, Kentucky 42001
(Address of principal executive offices)
Registrant's telephone number, including area code (502) 575-5100
Indicate by check mark whether the registrant (a) 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.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 31, 1995
Common Stock, No Par Value 7,904,935
Page 1
This filing contains 40 pages.
CBT CORPORATION
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1995,
December 31, 1994 and September 30, 1994 3
Consolidated Statements of Income for Three
Months and Nine Months Ended September 30, 1995 and
September 30, 1994 4
Consolidated Statements of Changes in Shareholders'
Equity for Nine Months Ended September 30, 1995 and
September 30, 1994 5
Consolidated Statements of Cash Flows for Nine
Months Ended September 30, 1995 and September 30, 1994 6
Notes to Consolidated Financial Statements 7 - 11
Item 2. Management's Discussion and Analysis of
Consolidated Financial Condition and Results
of Operations 12 - 22
PART II. OTHER INFORMATION
Item 1. through Item 6. 23
SIGNATURE PAGE 24
EXHIBIT INDEX 25
FORM OF SEVERANCE PROTECTION AGREEMENT 26 - 38
FINANCIAL DATA SCHEDULE 39 - 40
CBT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited) (audited) (unaudited)
($ in thousands) September 30 December 31 September 30
1995 1994 1994
ASSETS
Cash and due from banks $31,595 $30,404 $26,574
Federal funds sold - - 3,800
Total cash and cash equivalents 31,595 30,404 30,374
Securities to be held to maturity 46,250 48,175 47,611
Securities available for sale
(at fair market value) 153,786 161,478 167,183
Loans, net of unearned interest 641,670 616,009 602,515
Allowance for loan losses (11,299) (11,533) (11,900)
Loans, net 630,371 604,476 590,615
Premises and equipment, net 18,248 15,910 15,502
Accrued interest receivable 6,286 6,068 5,654
Other 6,170 8,606 7,603
TOTAL ASSETS $892,706 $875,117 $864,542
LIABILITIES
Deposits:
Non-interest bearing $69,631 $70,962 $68,445
Interest bearing 600,242 598,615 596,424
Total deposits 669,873 669,577 664,869
Borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 39,210 56,976 27,926
Notes payable - U.S. Treasury 1,952 1,718 2,000
Revolving lines of credit 2,500 6,000 9,073
Federal Home Loan Bank advances 55,899 35,432 36,490
Term debt 10,069 5,092 22,966
Total borrowings 109,630 105,218 98,455
Accrued interest payable 5,131 3,881 4,035
Other 6,644 5,104 5,553
TOTAL LIABILITIES 791,278 783,780 772,912
SHAREHOLDERS' EQUITY
Common stock, no par value, authorized
12,000,000 shares; issued and
outstanding;7,904,935 shares at
September 30, 1995; 7,927,113
shares at December 31, 1994; and
7,926,158 shares at September 30, 1994; 4,100 4,100 4,100
Capital surplus 18,985 18,553 18,543
Retained earnings 78,488 74,070 72,120
Unrealized losses on securities available
for sale, net of deferred taxes (145) (5,386) (3,133)
TOTAL SHAREHOLDERS' EQUITY 101,428 91,337 91,630
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $892,706 $875,117 $864,542
CBT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
(unaudited) September 30 September 30
($ in thousands except per share data) 1995 1994 1995 1994
INTEREST INCOME
Loans, including fees:
Taxable $15,965 $13,484 $45,788 $37,261
Tax-exempt 34 50 128 213
Securities:
Taxable 2,388 2,739 7,290 7,704
Tax-exempt 852 910 2,635 2,835
Other 24 14 101 206
Total interest income 19,263 17,197 55,942 48,219
INTEREST EXPENSE
Deposits 7,580 5,877 21,839 16,995
Borrowings 1,466 965 4,277 2,264
Total interest expense 9,046 6,842 26,116 19,259
NET INTEREST INCOME 10,217 10,355 29,826 28,960
Provision for loan losses 338 359 828 1,054
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,879 9,996 28,998 27,906
NON-INTEREST INCOME
Trust and investment advisory fees 378 232 1,086 943
Service charges on deposit accounts 913 702 2,670 2,087
Insurance commissions 331 256 955 715
Net gain (loss) on sale of
securities 81 (271) 214 (160)
Other 299 286 1,005 998
Total non-interest income 2,002 1,205 5,930 4,583
NON-INTEREST EXPENSE
Salaries and employee benefits 3,763 3,456 12,023 10,314
Net occupancy 325 228 863 718
Depreciation and amortization 464 412 1,352 1,266
Supplies 210 171 606 543
Data processing 379 276 1,053 835
FDIC assessments 376 367 1,127 1,098
Tax on bank shares 247 273 838 817
Other 2,027 1,747 5,067 4,995
Total non-interest expense 7,791 6,930 22,929 20,586
INCOME BEFORE INCOME TAXES 4,090 4,271 11,999 11,903
INCOME TAXES 1,183 1,161 3,398 3,249
NET INCOME $2,907 $3,110 $8,601 $8,654
NET INCOME PER COMMON SHARE $0.37 $0.39 $1.08 $1.09
CBT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
($ in thousands)
Total
Shareholders'
Equity
Balance, December 31, 1994 $91,337
Net income 8,601
Dividends on common stock (2,692)
Stock options exercised 432
Purchase of common stock (1,491)
Net change in unrealized loss on
securities available for sale 5,241
Balance, September 30, 1995 $101,428
Balance, December 31, 1993 $88,712
Net income 8,654
Dividends on common stock (2,417)
Stock options exercised 171
Purchase of common stock (357)
Net change in unrealized loss on
securities available for sale (3,133)
Balance, September 30, 1994 $91,630
CBT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Nine Months Ended
($ in thousands) September 30
1995 1994
OPERATING ACTIVITIES:
Net income $8,601 $8,654
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 828 1,054
Depreciation 1,183 1,085
Amortization 169 181
Amortization and accretion of securities 9 537
Net (gain) loss on sale of securities (214) 160
Net (gain) loss on sale of premises and
equipment 17 (59)
Changes in assets and liabilities:
Accrued interest receivable (218) (165)
Other assets (555) 1,181
Accrued interest payable 1,250 1,481
Other liabilities 1,540 1,749
Net cash provided by operating activities 12,610 15,858
INVESTING ACTIVITIES:
Proceeds from maturities of securities to be held
to maturity 2,953 2,118
Proceeds from sales of securities available for
sale 32,172 42,073
Proceeds from maturities of securities available
for sale 6,382 9,764
Principal collected on mortgage-backed securities,
including those classified as available for sale 5,588 20,309
Payment for purchases of securities (29,220) (67,703)
Net increase in loans (26,723) (78,482)
Proceeds from sales of premises and equipment - 483
Payment for purchase of premises and equipment (3,538) (1,807)
Net cash used in investing activities (12,376) (73,245)
FINANCING ACTIVITIES:
Net increase in deposits 296 16,225
Net decrease in short term borrowings (12,555) (8,544)
Increase in FHLB advances 20,467 37,426
Cash advanced on revolving lines of credit 1,500 9,300
Principal payments on revolving lines of credit (5,000) (1,490)
Cash dividends paid (2,692) (2,417)
Stock options exercised 432 171
Purchase of common stock (1,491) (357)
Net cash provided by financing activities 957 50,314
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,191 (7,073)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 30,404 37,447
CASH AND CASH EQUIVALENTS, END OF PERIOD $31,595 $30,374
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $24,866 $17,778
Federal income taxes $3,013 $2,751
CBT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1995
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-1 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period and nine month period ended September
30, 1995, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1995. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Corporation's annual report on Form 10-K for the year ended
December 31, 1994.
Cash and Cash Equivalents
For purpose of reporting cash flows, cash and cash equivalents include cash
and due from banks, federal funds sold and money market investments.
Generally, federal funds are purchased and sold for one-day periods.
Income Taxes
The provision for income taxes in the interim periods has been calculated
using the anticipated effective tax rate for the respective calendar year,
taking into consideration certain tax exempt loan and investment income.
Per Common Share Data
Net income per common share is based on 7,935,760 average shares
outstanding during the nine months ended September 30, 1995, and 7,926,158
average shares outstanding during the nine months ended September 30, 1994.
Common stock options are not included in net income per common share data
since their effect is not significant. All share and per share information
reflects the Corporation's 2-for-1 stock split on common shares declared on
September 25, 1994, and paid October 25, 1994.
Reclassifications
Certain reclassifications have been made in the 1994 financial statements
to conform to the presentation of the 1995 financial statements.
NOTE 2: ACQUISITIONS
On May 31, 1994, CBT Corporation (CBT) of Paducah, Kentucky acquired 100
percent of the outstanding shares of common stock of BMC Bankcorp, Inc.
(BMC). In the transaction, accounted for as a pooling of interests, BMC
shareholders received two shares of CBT common stock for each one share of
BMC common stock held. As a result of the exchange, CBT issued an
additional 1,195,560 shares of common stock. Accordingly, the accompanying
financial statements have been restated to include the accounts and
operations of BMC for periods prior to the merger.
BMC's interest income and net income of $6,202,000 and $938,000,
respectively, for the five months ended May 31, 1994 (unaudited) are
included in the consolidated statement of income for the nine months ended
September 30, 1994.
NOTE 3: SECURITIES TO BE HELD TO MATURITY
($ in thousands) September 30, 1995
ESTIMATED
AMORTIZED FAIR GROSS UNREALIZED
COST VALUE GAIN LOSS
U.S. Treasury securities and
obligations
of other U.S. Government $2,438 $2,438 $20 $20
agencies
State and political subdivisions 43,612 45,635 2,354 331
Other 200 198 - 2
Total securities $46,250 $48,271 $2,374 $353
December 31, 1994
ESTIMATED
AMORTIZED FAIR GROSS UNREALIZED
COST VALUE GAIN LOSS
U.S. Treasury securities and
obligations
of other U.S. Government $3,850 $3,741 $15 $125
agencies
State and political subdivisions 44,125 42,473 539 2,191
Other 200 186 - 14
Total securities $48,175 $46,400 $554 $2,330
Certain securities to be held to maturity were pledged to secure public
deposits, securities sold under agreements to repurchase, and for other
purposes as required or permitted by law. These pledged securities had an
amortized cost and estimated fair value of approximately $11,387,000 and
$11,778,000, respectively, at September 30, 1995.
NOTE 4: SECURITIES AVAILABLE FOR SALE
($ in thousands) September 30, 1995
ESTIMATED
AMORTIZED FAIR GROSS UNREALIZED
COST VALUE GAIN LOSS
U.S. Treasury securities
and obligations of other
U.S. Government agencies $37,544 $37,919 $499 $124
State and political 9,610 10,167 619 62
subdivisions
Mortgage-backed securities 86,768 85,842 489 1,415
Deravitive securities 12,229 11,999 2 232
Federal Home Loan Bank stock 7,737 7,737 - -
Other 122 122 - -
Total securities $154,010 $153,786 $1,609 $1,833
December 31, 1994
ESTIMATED
AMORTIZED FAIR GROSS UNREALIZED
COST VALUE GAIN LOSS
U.S. Treasury securities and
obligations of other
U.S. Government agencies $32,408 $31,469 $28 $967
State and political 13,945 14,417 646 174
subdivisions
Mortgage-backed securities 104,543 97,633 177 7,087
Deravitive securities 11,439 10,532 - 907
Federal Home Loan Bank stock 6,740 6,740 - -
Other 688 688 - -
Total securities $169,763 $161,478 $851 $9,136
Certain securities available for sale were pledged to secure public
deposits, securities sold under agreements to repurchase, and for other
purposes as required or permitted by law. These pledged securities had an
amortized cost and estimated fair value of approximately $88,540,000 and
$88,494,000, respectively, at September 30, 1995. Federal Home Loan Bank
stock, which is classified as available for sale, is carried at cost.
NOTE 5: LOANS
($ in thousands) September 30 December 31 September 30
1995 1994 1994
Commercial, industrial,
and agricultural loans $201,291 $191,243 $221,648
Residential real estate loans 258,590 268,538 249,563
Installment loans 191,864 166,871 141,409
Total loans 651,745 626,652 612,620
Less: Unearned interest 10,075 10,643 10,105
Total loans, net of unearned $641,670 $616,009 $602,515
interest
NOTE 6: PREMISES AND EQUIPMENT
($ in thousands) September 30 December 31 September 30
1995 1994 1994
Land $1,996 $1,996 $1,954
Buildings and improvements 16,569 15,071 15,038
Furniture and equipment 12,074 10,679 10,410
Construction in progress 1,692 1,145 618
Total premises and equipment 32,331 28,891 28,020
Less: Accumulated depreciation
and amortization 14,083 12,981 12,518
Net premises and equipment $18,248 $15,910 $15,502
NOTE 7: INTEREST BEARING DEPOSITS
($ in thousands) September 30 December 31 September 30
1995 1994 1994
NOW accounts $93,908 $103,631 $99,327
Money Manager accounts 44,804 47,306 56,285
Individual retirement accounts 49,635 45,432 44,773
Savings accounts 45,982 49,174 43,487
Certificates of deposit under $100,000 292,241 281,904 281,532
Certificates of deposit $100,000 and 73,672 71,168 71,020
above
Total interest bearing deposits $600,242 $598,615 $596,424
PART I - FINANCIAL INFORMATION
ITEM 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations
CBT Corporation ("CBT") is a multi-bank holding company that consists of
four state chartered commercial banks, one federal savings bank, and a
consumer finance company. CBT's banking subsidiaries have a total of 18
banking locations in Western Kentucky and its consumer finance subsidiary
has 24 offices located throughout the state. The following discussion and
analysis is presented on a consolidated basis.
The results of CBT's operations for the periods prior to May 31, 1994 have
been restated to include the results of BMC Bankcorp, Inc. which was
acquired by CBT effective May 31, 1994 and has been accounted for using the
pooling of interests method of accounting. The accompanying financial
statements have been restated to include the accounts and operations of BMC
Bankcorp, Inc. for periods prior to the acquisition.
For the first nine months of 1995, CBT reported net income of $8,601,000, a
slight decrease of 0.6 percent from the first nine months of 1994, which
was reported at $8,654,000. Net of non-recurring re-engineering costs,
CBT's net income for the period would have been $9,390,000 or 8.5 percent
higher than that of the same period last year. For the third quarter of
1995, net income was $2,907,000 which is $203,000 lower than the third
quarter of 1994. A major factor affecting third quarter net income was a
32 percent increase in interest expense over the third quarter of 1994.
This increase in interest expense is due to higher rates paid on deposits
and increased borrowings during the year. Net income per share for the
nine months ended September 30, 1995 remained fairly constant with net
income per share a year ago at $1.08 versus $1.09 for 1994. Per share
earnings for the third quarter 1995 were $0.37, while third quarter 1994
per share earnings were $0.39.
Return on average equity was 11.48 percent for the first nine months of
1995 compared with 12.55 percent for the first nine months of 1994. Return
on average assets, which is used as an indicator of earnings efficiency,
was 1.30 percent for the first nine months of 1995, compared with 1.45
percent for the first nine months of 1994.
CBT's subsidiaries, collectively and individually, well exceeded the
minimum regulatory capital ratios set for well-capitalized financial
institutions. At September 30, 1995, CBT's Tier 1 risk-based capital ratio
was 15.93 percent and its total risk-based capital ratio was 17.18 percent.
CBT's leverage ratio of average assets to average shareholders' equity was
11.22 percent compared to 10.35 percent for the same period ended in 1994.
The per common share amount for the first nine months of 1994 has been
restated to reflect a two-for-one split of the outstanding shares of common
stock of CBT which was declared on September 25, 1994 and paid on October
25, 1994.
Consolidated Income Statement Analysis
Net Interest Income
Net interest income on a tax-equivalent basis is the difference between
interest earned on assets and interest paid on liabilities, with
adjustments made to present yields on tax-exempt assets as if such income
was fully taxable. For the first nine months of 1995, tax-equivalent net
interest income provided 83.8 percent of CBT's net revenues, compared with
86.8 percent of net revenues in the first nine months of 1994.
Total tax-equivalent net interest income for the third quarter of 1995
decreased 1.7 percent or $181,000 from the third quarter a year ago, while
year-to-date tax-equivalent net interest income increased by 2.3 percent
from $30.1 million to $30.8 million over last year. Changes in the mix and
volume of earning assets and interest-bearing liabilities, their related
yields, and overall interest rates have a major impact on net income. Growth
in tax-equivalent net interest income for 1995 over 1994 was mainly due to
a moderate growth in interest earning assets of 5.7 percent, which was
partially offset by a 16 basis point decline in net interest margin. The
year-to-date increase in earning assets is primarily due to a 13.2 percent
growth in average loans outstanding.
The following schedule presents yields and rates on key components of
interest income and interest expense. Net interest margin, which is tax
equivalent interest income expressed as a percentage of total average
earning assets, is also presented below.
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
Yield on investments 7.07% 6.92% 6.56% 6.85%
Yield on loans (including fees) 9.99% 9.25% 9.80% 9.06%
Yield on federal funds sold and
other money market investments 6.33% 6.05% 6.03% 4.10%
Yield on earning assets 9.29% 8.59% 8.99% 8.38%
Rate on interest-bearing deposits 5.02% 3.97% 4.90% 3.93%
Rate on borrowings 5.52% 4.62% 5.49% 4.07%
Rate on interest bearing 5.09% 4.05% 4.98% 3.94%
liabilities
Net interest margin (including fees) 4.99% 5.24% 4.95% 5.11%
Net interest spread 4.20% 4.54% 4.01% 4.44%
For the period ended September 30, 1995, total loans, net of unearned
interest, were $641.7 million. This represents a 6.5 percent growth over
the same period last year at $602.5 million. Major growth has occurred
particularly in the installment loans at $191.9 million, up 35.7 percent
compared to September 30, 1994 installment loans of $141.4 million.
Supplementing the strong installment loan growth, CBT's consumer finance
company, Fidelity Credit Corporation ("FCC") has experienced continued
growth by opening six new offices since September 1994, for a total of 21
offices located throughout central and western Kentucky.
Net interest margin, the ratio of tax-equivalent net interest income
divided by average earning assets, was 4.99 percent in the third quarter of
1995, compared with 5.24 percent in the third quarter of 1994, a decrease
of 25 basis points. CBT continues to remain competitive in the marketplace
by paying increased rates on deposits which is reflected in the increase of
105 basis points from 3.97 percent for the third quarter of 1994 to 5.02
percent for the third quarter of 1995. This factor, along with higher
rates paid on other borrowings, caused the decrease in net interest margin.
Loans continue to produce higher yields, increasing 74 basis points from
the third quarter of 1994 at 9.25 percent to 9.99 percent for third quarter
1995. In addition, investment yields improved modestly to 7.07 percent, up
15 basis points.
Year-to-date September 30, 1995 net interest margin was 16 basis points
lower at 4.95 percent compared to 5.11 percent a year ago. The increase in
rates paid on deposits remained consistent, increasing 97 basis points from
3.93 percent for the nine months ended 1994 to 4.90 percent for the nine
months ended 1995. The increase in the yield on loans also remained
consistent, increasing 74 basis points from 9.06 percent to 9.80 percent
for the nine months ended 1995. The investment yields declined, however,
for the nine months ended 1995 by 24 basis points to 6.56 percent.
Net interest spread which is the net yield earned on earning assets less
the rate paid on interest bearing liabilities was 4.20 percent for the
quarter ended September 30, 1995, 34 basis points lower than the third
quarter net interest spread of last year which was 4.54 percent.
Provision for Loan Losses
The provision for loan losses reflects management's judgment of the cost
associated with the credit risk inherent in CBT's loan portfolio. The
consolidated provision for loan losses was $338,000 for the third quarter
of 1995, a decrease of $21,000 compared with $359,000 in the third quarter
of 1994. For the nine months ended 1995, the provision for loan loss was
$828,000, which is $226,000 or 21.4 percent lower than $1.1 million
provision expense a year ago. The ratio of the allowance for loan loss
to total loans has fallen from 1.98 percent at September 30, 1994 to 1.76
percent at September 30, 1995, chiefly as a result of increased loans and
two charge-offs of approximately $300,000 each during 1995. Management
believes the allowance for loan losses is adequate based on the current
level of non-performing assets and the expected level of future charge-
offs.
Net charge-offs for the third quarter of 1995 were $463,000 compared to
$108,000 for the third quarter of 1994, and for the nine months ended 1995,
net charge-offs were $1.1 million compared to $152,000 for the same period
a year ago. Two large charge-offs of approximately $300,000 each accounted
for approximately 56 percent of the increase during the first nine months
of 1995. Adjustments to the progression of the allowance for loan losses
include a $6,000 discount related to the purchase of finance receivables at
CBT's consumer finance affiliate.
The following is a progression of the allowance for loan losses:
Three Months Nine Months
Ended Ended
($ in thousands) September 30 September 30
1995 1994 1995 1994
Balance, beginning of period $11,424 $11,649 $11,533 $10,998
Provision for loan losses 338 359 828 1,054
Adjustment related to purchase of
finance receivables - - 6 -
Loans charged off (513) (286) (1,359) (472)
Recoveries 50 178 291 320
Net charge-offs (463) (108) (1,068) (152)
Balance, end of period $11,299 $11,900 $11,299 $11,900
Allowance for loan losses to total
loans, net of unearned interest 1.76% 1.98% 1.76% 1.98%
Net charge-offs to average loans 0.29% 0.07% 0.23% 0.04%
Non-performing assets to period-end
loans and other real estate 0.70% 0.25% 0.70% 0.25%
Non-Interest Income
Non-interest income represented 16.0 percent of CBT's tax-equivalent
revenue in the third quarter of 1995, compared with 10.1 percent in the
third quarter of 1994. Non-interest income increased in the third quarter
of 1995 $797,000 or 66.1 percent over the third quarter of 1994. Non-
interest income increased in all major categories. Trust and investment
advisory fees increased 62.9 percent from $232,000 to $378,000 over the
third quarter of 1994. Service charges on deposit accounts and insurance
commissions increased 30.1 percent and 29.3 percent respectively over the
third quarter 1994. These increases reflect management's continued emphasis
on fee income opportunities. In addition, portfolio restructuring
opportunities during 1995 have resulted in gains on security sales. The net
gain on security sales for the third quarter of 1995 was $81,000 as compared
to a net loss of $271,000 for the third quarter of 1994.
The following table shows a breakdown of non-interest income:
Three Months Ended Nine Months Ended
($ in thousands) September 30 September 30
1995 1994 1995 1994
Trust and investment advisory $378 $232 $1,086 $943
fees
Service charges on deposit 913 702 2,670 2,087
accounts
Insurance commissions 331 256 955 715
Net gain (loss) on sale of securities 81 (271) 214 (160)
Other 299 286 1,005 998
Total non-interest income $2,002 $1,205 $5,930 $4,583
In 1994, CBT announced a strategic alliance with J.C. Bradford and Co.
("JCB"), a Nashville-based regional brokerage firm, involving the placement
of JCB brokers in CBT banking locations. Because of the transition from
another provider of brokerage services to JCB, revenues from this activity
declined during the first nine months of 1994. For the first nine months
of 1995, brokerage income increased 3.2 percent from the first nine months
of 1994 from $343,000 to $354,000. In a continued effort to provide a full
range of services at all banking locations, JCB has opened an office at all
of CBT's bank subsidiaries.
Non-Interest Expenses
Non-interest expense increased 12.4 percent from $6.9 million in the third
quarter of 1994 to $7.8 million for the third quarter of 1995. For the
first nine months of 1995, non-interest expense increased to $22.9 million,
up 11.4 percent from last year. Net occupancy expenses comprised a major
portion of the increase in non-interest expense, up 42.5 percent from
$228,000 for the third quarter of 1994 to $325,000 for the third quarter of
1995. Data processing increased 37.3 percent, from $276,000 to $379,000
for the third quarter 1994 to the third quarter 1995 respectively. The
increase in data processing expense is due in part to the increased
expenses associated with upgrades and advancements in technological
services.
The bank subsidiaries of CBT recognized a $360,000 reduction in FDIC premiums
during the third quarter of 1995 because of the recapitalized status of the
Bank Insurance Fund. This amount was offset by an estimate of the change
expected to be assessed on deposits insured by the Savings Association
Insurance Fund. Therefore, net income was unaffected for the third quarter of
1995.
The following table shows a breakdown of non-interest expense:
Three Months Ended Nine Months Ended
($ in thousands) September 30 September 30
1995 1994 1995 1994
Salaries and employee $3,763 $3,456 $12,023 $10,314
benefits
Net occupancy 325 228 863 718
Depreciation and 464 412 1,352 1,266
amortization
Supplies 210 171 606 543
Data processing 379 276 1,053 835
FDIC assessments 376 367 1,127 1,098
Tax on bank shares 247 273 838 817
Other 2,027 1,747 5,067 4,995
Total non-interest expense $7,791 $6,930 $22,929 $20,586
The efficiency ratio, defined as non-interest expense divided by tax-
equivalent net revenues, is a measure of how effective a financial services
company is in leveraging its resources to produce revenue. For the third
quarter of 1995, CBT's efficiency ratio was 62.25 percent compared with
58.25 percent for the third quarter of 1994. Included in the efficiency
ratio calculations are the non-recurring re-engineering expenses previously
mentioned. Net of non-recurring re-engineering expenses, the efficiency
ratio for the first nine months of 1995 would be 59.16 percent.
Income Taxes
CBT's income tax planning is based upon the goal of maximizing long-term,
after-tax profitability. Income tax expense is significantly affected by
the mix of taxable versus tax-exempt revenues.
The effective income tax rate for the third quarter of 1995 was 28.9
percent compared with 27.2 percent for the third quarter of 1994. The
slight increase is attributable to the decline of tax-exempt income as a
percentage of gross revenues.
Consolidated Balance Sheet Analysis
Earning Assets
Average earning assets for the third quarter of 1995 were $836.3 million
compared with $809.3 million for the year earlier period, an increase of
$27 million or 3.3 percent. The increase is attributable to the
continuation of strong loan demand in the markets CBT serves. Loan demand
was funded, in part, through sales of securities in the available for sale
portfolio; average security balances declined by $29.8 million or 13.1
percent from the third quarter of 1994 to the third quarter of 1995.
Securities available for sale declined 8.0 percent from September 1994 to
September 1995 as CBT sold securities to take advantage of loan demand.
The shift to loans in the earning mix allowed the Corporation to enjoy
higher yields than would have been achieved by leaving these funds invested
in securities. In 1994, when accounting rules were established governing
the classification of securities between securities available for sale and
investment securities, CBT classified a relatively large portion of its
total securities as available for sale. These securities are available for
sale when market conditions are favorable or there are funding needs. The
strategy of maximizing securities available for sale enabled CBT to sell
securities to fund loan growth.
CBT has certain securities in its held to maturity and available for sale
portfolios that are classified as derivative securities by banking
regulators. Regulators stress that the appropriateness of these
investments for a bank depends on management's ability to understand,
measure and monitor the risk related to such investments. At September 30,
1995, CBT had $200,000 book value of federal agency derivatives in its held
to maturity portfolio. The market value of these securities on September
30, 1995 was $198,000. At December 31, 1994, book value of these
securities was $200,000 and market value was $186,000.
In its available for sale portfolio, CBT had $12,229,000 and $11,439,000
book value at September 30, 1995 and December 31, 1994, respectively, in
derivative securities as defined by regulators. These amounts represent
7.9 percent and 6.7 percent of the total book value of securities available
for sale at September 30, 1995 and December 31, 1994, respectively. These
securities were purchased by banks that were subsequently acquired by CBT.
Market value for these securities was $11,999,000 at September 30, 1995 and
$10,532,000 at the end of 1994. At September 30, 1995, derivative
securities available for sale consisted of $7,924,000 in step-up bonds,
$3,805,000 of deleveraged bonds, and $500,000 of index amortizing notes.
The step-up bonds have an increasing interest rate during the life of the
bonds and are callable by the issuer at specific intervals. The
deleveraged bonds pay an adjustable rate of interest based on movement of
an index; the index amortizing notes have a fixed interest rate, with
maturities potentially fluctuating based on a mortgage index. All of these
securities are guaranteed by a government agency and have maturities of
seven years or less.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," which was adopted by CBT in the first quarter of
1994. The Statement requires that investment securities classified as
available for sale be reported at fair value with unrealized gains and
losses reported, net of tax, as a separate component of shareholders'
equity. As of September 30, 1995, net unrealized losses related to
investment securities available for sale were $145,000, net of deferred
taxes. This net unrealized loss is a $5.2 million reduction from year end
1994 of $5.4 million. At September 30, 1994 net unrealized losses were
$3.1 million.
Credit Risk Management
CBT manages exposure to credit risk though loan portfolio diversification
by customer, industry, and loan type. As a result, there is no undue
concentration in any single sector.
Loans by type appear below:
($ in thousands) September 30 December 31 September 30
1995 1994 1994
Commercial, industrial, and
agricultural loans $201,291 $191,243 $221,648
Residential real estate loans 258,590 268,538 249,563
Installment loans 191,864 166,871 141,409
Total loans 651,745 626,652 612,620
Unearned interest 10,075 10,643 10,105
Total loans, net of unearned interest $641,670 $616,009 $602,515
As stated earlier, total loans, net of unearned interest, were $641.7
million at the end of the third quarter of 1995, a 6.5% increase over the
same period last year at $602.5 million. Installment loans at $191.9
million, are up by 35.7 percent from September 30, 1994 at $141.4 million.
CBT controls a strong market share of indirect dealer lending of
automobiles and manufactured housing. This factor, coupled with increase
sales efforts, helped to achieve such a high growth rate.
Residential real estate loans experienced moderate growth over last year,
increasing 3.6 percent from $249.6 million to $258.6 million. Commercial
loans decreased 9.2 percent from September 30 1994 at $221.6 million to
$201.3 million at September 30, 1995.
CBT is not aware of any loans classified for regulatory purposes at
September 30, 1995, that are expected to have a material impact on CBT's
future operating results, liquidity, or capital resources. There are no
material commitments to lend additional funds to customers whose loans were
classified as non-accrual at September 30, 1995.
Allowance for Loan Losses
At September 30, 1995, the allowance for loan losses was $11.3 million, or
1.76 percent of net loans outstanding, compared with $11.9 million, or 1.97
percent at September 30, 1994. The ratio of the allowance for loan losses
to non-performing assets was 251 percent at September 30, 1995, compared
with 799 percent at September 30, 1994. Non-performing assets consist of
non-accrual loans, loans past-due ninety days or more that are still
accruing interest, and other real estate owned. While the ratio of the
allowance for loan losses to non-performing assets has significantly
declined from September 1994 to September 1995, the ratio continues to
compare favorably to industry averages. The decline is chiefly a result of
higher non-accrual loans, particularly the $1.8 million credit previously
mentioned.
Although it is impossible for any lender to predict future loan losses with
complete accuracy, management monitors the allowance for loan losses with
the intent to provide for all losses that can reasonably be anticipated
based on current conditions. CBT maintains the allowance available to
cover future loan losses within the entire loan portfolio.
Non-Performing Assets
The following table presents data on CBT's non-performing assets. At
September 30, 1995, non-performing assets totaled $4.5 million, or 0.70
percent of net loans and other real estate owned, compared with $1.5
million, or 0.25 percent of net loans and other real estate owned, at
September 30, 1994.
($ in thousands) September 30 December 31 September 30
1995 1994 1994
Non-accrual loans $3,873 $1,806 $865
Accruing loans which are
contractually past due 90 days or more 637 494 618
Total non-performing loans 4,510 2,300 1,483
Other real estate owned - 7 7
Total non-performing assets $4,510 $2,307 $1,490
The increase in the ratio reflects a rise in the amount of non-accrual
loans along with a slight increase in the amount of accruing loans which
are contractually 90 days or more past due. The bulk of this increase in
non-accrual loans is attributable to one credit at a subsidiary bank in the
amount of approximately $1.8 million at September 30, 1995, about which
there is serious doubt regarding the ability of the borrowers to comply
with the loan repayment terms. At March 31, 1995, the credit was placed on
non-accrual status. During the second and third quarters of 1995, the
obligor made principal payments of $183,000. Subsequent to September 30,
1995 the obligor has made additional principal payments of $30,000. The value
of the collateral supporting the indebtedness has been conservatively
estimated at approximately $500,000. Principals obligated on the credit
have personally guaranteed its repayment. There are no plans to advance
additional funds related to this credit.
CBT has a comprehensive credit grading system and internal loan review
process. That process fully complies with the loan review guidelines set
forth in the December 21, 1993 Interagency Policy Statement on the
Allowance for Loan and Lease Losses. CBT, at September 30, 1995 has rated
$4.5 million of credits as potential problems. These credits are not
included in the schedule of non-performing assets above because the
borrowers are servicing their loans in accordance with established
repayment terms.
Funding Sources
Interest-Bearing Liabilities
At September 30, 1995, interest-bearing liabilities totaled $709.9 million,
an increase of $15.0 million or 2.2 percent from $694.9 million reported at
September 30, 1994. The increase is due to increased borrowings to
supplement the sales of securities to fund loan growth.
Core Deposits
In CBT's banking subsidiaries, demand deposits, NOW, Money Manager,
Individual Retirement and savings accounts, and certificates of deposit
under $100,000 provide a stable source of funding. At September 30, 1995
these deposits represented 70.7 percent of earning assets compared with a
similar calculation as of September 30, 1994 of 72.7 percent. This level
of core deposits is considered appropriate by management given CBT's asset
mix. Management continues to develop new marketing campaigns designed to
expand the core customer base.
Non-Interest Bearing Deposits
Non-interest bearing deposits of $69.6 million have risen $1.2 million from
September 30, 1994 levels of $68.4 million, while the September 30, 1995
balances are a slight decrease over the December 31, 1994 levels of $71.0
million.
Purchased Deposits
Purchased deposits, which the Corporation defines as certificates of
deposit with denominations of $100,000 or more, increased $2.7 million or
3.7 percent to $73.7 million up from $71.0 million at September 30, 1994.
At December 31, 1994, certificates of deposits of $100,000 and above were
$71.2 million which represents a 3.5 percent increase for September 30,
1995. These purchased deposits represent 8.8 percent of total earning
assets at September 30, 1995.
Borrowings
CBT's borrowings increased 11.4 percent from $98.5 million a year ago to
$109.6 million at September 30, 1995. Federal Home Loan Bank advances rose
$19.4 million while term debt and revolving lines of credit decreased $19.5
million from last year.
Asset and Liability Management
The goal of the asset and liability management process is to manage the
structure of the balance sheet to provide the maximum level of net interest
income while maintaining acceptable levels of interest rate risk (as
defined below) and liquidity. The focal point of this process for all of
1995 has been the Asset and Liability Management Committee (ALCO) of CBT.
The corporate ALCO meets monthly to consider CBT's consolidated interest
rate risk and liquidity posture. The committee takes an active role in
maintaining and hedging CBT's profitability under a variety of interest
rate scenarios.
Interest Rate Risk and Its Measurement
Interest rate risk is the risk that future changes in interest rates will
reduce net interest income or the market value of CBT's balance sheet.
Management uses various measurement tools to monitor and adjust CBT's
interest rate risk position. One measurement tool is the GAP report, which
classifies assets and liabilities and their respective yields and costs in
terms of maturity or repricing date. While considerable judgment is
necessary to appropriately classify certain balance sheet items that do not
have contractual maturity or repricing dates, the GAP report provides
management a basic measure of interest rate risk. CBT monitors the GAP
position of each subsidiary individually, with Fidelity Credit Corporation
included as part of Citizens Bank & Trust Company of Paducah ("Citizens").
The GAP is also monitored on a consolidated basis.
Because of the limitations of GAP reports, CBT also uses a computer model
to estimate the impact of various parallel shifts in the yield curve on net
interest income and market value. This model is run monthly for each
subsidiary, as well as on a consolidated basis.
At Citizens, management has developed a model that identifies the portion
of year-to-date net interest income derived from interest rate mismatches
("mismatch profits"). Identifying mismatch profits assists management in
understanding the relative importance of such profits, which by their
nature are largely beyond management's control, to overall net interest
income. For the third quarter of 1995, mismatch profits represent less
than 2.96 percent of Citizens' tax-equivalent net interest income. CBT
believes that these results are indicative of the Corporation as a whole.
Management of Interest Rate Risk
The management of interest rate risk is governed by an asset and liability
management policy in place at each subsidiary. The policy specifies
targets based primarily on the one year GAP position in conjunction with a
market volatility risk analysis. At September 30, 1995, CBT was within
policy guidelines regarding the one year GAP position.
Changes in Interest Rate Risk
In 1995, CBT supplemented its use of the GAP model, with a computer
modeling approach that measures effects on net interest income and the fair
value of equity under a variety of interest rate scenarios. CBT's
management believes the two approaches complement each other in
understanding the impact of changes in interest rates. Based on modeling
using September 1995 data, CBT would expect its net interest income to
decline no more than one percent under a 200 basis point parallel shift
upward or downward of the yield curve. The GAP approach of measuring
interest rate risk produced a one year cumulative interest rate GAP of .93
on September 30, 1995 compared with a GAP of .97 on December 31, 1994.
Liquidity Management
Liquidity management involves planning to meet funding needs at a
reasonable cost, as well as developing contingency plans to meet
unanticipated funding needs or a loss of funding sources. Liquidity
management for CBT is monitored by ALCO, which takes into account the
marketability of assets, the sources and stability of funding, and the
level of unfunded loan commitments.
CBT's consumer deposits provide stability with respect to liquidity. In
addition, membership in the Federal Home Loan Bank of Cincinnati provides a
cost-effective alternate source of funding.
Capital Management
CBT believes that a strong capital position is vital to continued
profitability and to promote depositor and investor confidence. Bank
subsidiaries are required to maintain capital levels sufficient to qualify
for "well capitalized" status with banking regulators and to meet
anticipated growth needs. Net income is the primary source of new capital
for subsidiaries. Net income of subsidiaries in excess of capital
requirements is available to CBT in the form of dividends and is used
primarily to pay corporate dividends.
The following analysis shows comparisons between the regulatory
requirements for "well capitalized" institutions and the actual capital
position of CBT:
Well
Capitalized Actual Excess
September 30, 1995
Leverage Ratio (Equity to Assets) 5.00% 11.22% 6.22%
Tier 1 Risk-Based 6.00% 15.93% 9.93%
Total Risk-Based 10.00% 17.18% 7.18%
December 31, 1994
Leverage Ratio (Equity to Assets) 5.00% 10.81% 5.81%
Tier 1 Risk-Based 6.00% 15.64% 9.64%
Total Risk-Based 10.00% 16.89% 6.89%
Because of solid performance and conservative capital management, CBT has a
strong capital position. CBT's Tier 1 capital ratio at September 30, 1995,
was 15.93 percent and its total capital to risk-based assets ratio was
17.18 percent, compared with 15.64 percent and 16.89 percent at December
31, 1994, respectively. CBT's leverage ratio was 11.22 percent at
September 30, 1995, compared with 10.81 percent at December 31, 1994. The
slight increase in the ratio from December to September is primarily
attributable to internal equity growth. These ratios compare favorably to
the regulatory "well capitalized" minimums of 6.0 percent for Tier 1, 10.0
percent for total capital to risk-based assets, and 5.0 percent for
leverage ratio.
At September 30, 1995, CBT's shareholders' equity, exclusive of the
unrealized loss on securities available for sale, net of deferred tax, grew
$4.9 million or 5.0 percent from December 1994 levels. This increase
equates to an annualized internal capital growth rate (ICGR) for 1995 of
8.9 percent as a result of earnings retained (net income less dividends
paid).
CBT declared a $0.12 per share dividend in the third quarter of 1995. The
dividend payout ratio for the third quarter of 1995 was 31.3 percent which
falls within management's range for maintaining a dividend payout ratio of
28 to 32 percent. In the third quarter of 1994, CBT declared a two-for-one
stock split payable on October 25, 1994.
Management is currently not aware of any recommendation by regulatory
authorities which, if implemented, would have a material effect on the
Corporation's liquidity, capital resources, or operations.
Market Data
At October 31, 1995, the Corporation had issued and outstanding 7,904,935
shares of common stock which was held by approximately 1,470 shareholders.
Shareholders have received cash dividends per share of common stock on a
quarterly basis in 1994 and thus far in 1995.
CBT Corporation common stock is traded on the NASDAQ Stock Market under the
symbol CBTC.
The following table summarizes transactions in common stock and cash
dividends declared in 1995 and 1994. The trading price information
reflects the range of actual reported sales prices for CBT Corporation
common stock as reported by NASDAQ.
Price
Quarter High Low Dividends
September 30, 1995 $24.25 $19.25 $0.12
June 30, 1995 24.00 19.75 0.11
March 31, 1995 24.75 21.00 0.11
December 31, 1994 23.00 20.63 0.11
September 30, 1994 22.75 20.75 0.11
June 30, 1994 21.50 19.50 0.11
March 31, 1994 23.38 18.50 0.10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits set out on the Exhibit Index included as page
25 of this report are furnished as a part of this report.
(b) On July 5, 1995 a Form 8-K was filed notifying the SEC of
a change in independent accountants. This change was
effective June 28, 1995.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBT CORPORATION
DATE: November 14, 1995 SIGNED:/s/ Jeffrey R. Nieder
Jeffrey R. Nieder
Senior Vice President
and Chief Financial Officer
EXHIBIT INDEX
NUMBER DESCRIPTION PAGE
4(a) Articles of Incorporation of CBT Corporation,
as amended are incorporated by reference to
Exhibit 4(a) of Amended Form 10-Q of CBT
Corporation dated September 6, 1994.
4(b) Articles of Amendment to the Articles of
Incorporation of CBT Corporation are
incorporated by reference to Exhibit 4(b) on
Form 10-Q of CBT Corporation dated June 30, 1995.
4(c) By-Laws of CBT Corporation are incorporated
by reference to Exhibit 3 to the Registration
Statement on Form S-14 of CBT Corporation
(Registration No. 2-83583).
10 Form of Severance Protection Agreement
entered into by CBT Corporation and
certain executive officers. 26 - 38
27 Financial Data Schedule 39 - 40
EXHIBIT 10
FORM OF
SEVERANCE PROTECTION AGREEMENT
entered into by
CBT CORPORATION
and
Certain Executive Officers