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 March 31, 1996 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 March 31, 1996
Common Stock, No Par Value 7,898,569
Page 1
This filing contains 27 pages.
CBT CORPORATION
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1996,
December 31, 1995 and March 31, 1995 3
Consolidated Statements of Income for Three
Months Ended March 31, 1996 and March 31, 1995 4
Consolidated Statements of Changes in Shareholders'
Equity for Three Months Ended March 31, 1996 and
March 31, 1995 5
Consolidated Statements of Cash Flows for Three
Months Ended March 31, 1996 and March 31, 1995 6
Notes to Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of
Consolidated Financial Condition and Results
of Operations 13-22
PART II. OTHER INFORMATION
Item 1. through Item 6. 23
SIGNATURE PAGE 24
EXHIBIT INDEX 25
FINANCIAL DATA SCHEDULE 26-27
CBT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited) (audited) (unaudited)
($ in thousands) March 31 December 31 March 31
1996 1995 1995
ASSETS
Cash and due from banks $30,621 $33,662 $28,093
Federal funds sold - 1,000 -
Total cash and cash equivalents 30,621 34,662 28,093
Securities to be held to maturity 53,557 46,427 48,981
Securities available for sale
(at fair market value) 167,787 158,474 147,886
Loans, net of unearned interest 635,292 644,661 619,738
Allowance for loan losses (9,858) (11,004) (11,366)
Loans, net 625,434 633,657 609,372
Premises and equipment, net 18,797 18,872 16,535
Accrued interest receivable 6,455 6,752 5,937
Other 6,628 5,897 7,824
TOTAL ASSETS $909,279 $904,741 $863,628
LIABILITIES
Deposits:
Non-interest bearing $60,036 $69,628 $65,248
Interest bearing 599,929 604,106 599,696
Total deposits 659,965 673,734 664,944
Borrowings:
Federal funds purchased and securities
sold under agreements to repurchase 52,704 39,037 48,601
Notes payable - U.S. Treasury 2,072 459 556
Revolving lines of credit 5,000 4,000 6,500
Federal Home Loan Bank advances 61,879 61,893 31,918
Term debt 10,069 10,069 5,092
Total borrowings 131,724 115,458 92,667
Accrued interest payable 4,832 4,341 4,329
Other 7,273 6,837 6,008
TOTAL LIABILITIES 803,794 800,370 767,948
SHAREHOLDERS' EQUITY
Common stock, no par value, authorized
12,000,000 shares; issued and outstanding
7,898,569 shares at March 31, 1996;
7,907,435 shares at December 31, 1995;
and 7,952,108 shares at March 31, 1996 4,100 4,100 4,100
Capital surplus 18,783 19,003 18,985
Retained earnings 82,945 80,961 75,429
Unrealized gains (losses) on securities
available for sale, net of deferred
taxes (343) 307 (2,834)
TOTAL SHAREHOLDERS' EQUITY 105,485 104,371 95,680
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $909,279 $904,741 $863,628
CBT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME Three Months Ended
($ in thousands except per share data (unaudited) March 31
1996 1995
INTEREST INCOME
Loans, including fees:
Taxable $15,574 $14,593
Tax-exempt 40 48
Securities:
Taxable 2,506 2,515
Tax-exempt 868 903
Other 18 72
Total interest income 19,006 18,131
INTEREST EXPENSE
Deposits 7,170 6,947
Borrowings 1,617 1,415
Total interest expense 8,787 8,362
NET INTEREST INCOME 10,219 9,769
PROVISION FOR LOAN LOSSES 470 231
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,749 9,538
NON-INTEREST INCOME
Trust and investment advisory fees 465 311
Service charges on deposit accounts 760 865
Insurance commissions 312 309
Net gain (loss) on sale of securities 13 (2)
Other 420 360
Total non-interest income 1,970 1,843
NON-INTEREST EXPENSE
Salaries and employee benefits 3,962 4,454
Net occupancy 353 253
Depreciation and amortization 554 460
Supplies 244 186
Data processing 415 318
FDIC assessments 57 376
Tax on bank shares 303 295
Other 1,707 1,218
Total non-interest expense 7,595 7,560
INCOME BEFORE INCOME TAXES 4,124 3,821
INCOME TAXES 1,192 1,054
NET INCOME $2,932 $2,767
NET INCOME PER COMMON SHARE $0.37 $0.35
CBT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
($ in thousands)
Total
Shareholders'
Equity
Balance, December 31, 1995 $104,371
Net income 2,932
Dividends on common stock (948)
Stock options exercised -
Purchase of common stock (220)
Change in unrealized gains (losses) on
securities available for sale, net (650)
Balance, March 31, 1996 $105,485
Balance, December 31, 1994 $91,337
Net income 2,767
Dividends on common stock (876)
Stock options exercised 432
Purchase of common stock (532)
Change in unrealized gains (losses) on
securities available for sale, net 2,552
Balance, March 31, 1995 $95,680
CBT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Three Months Ended
($ in thousands) March 31
1996 1995
OPERATING ACTIVITIES
Net income $2,932 $2,767
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 470 231
Depreciation 498 403
Amortization 56 57
Amortization and accretion of securities 15 14
Loss (gain) on sale of securities (13) 2
Gain on sale of premises and equipment - (1)
Changes in assets and liabilities:
Accrued interest receivable 297 131
Other assets (436) (725)
Accrued interest payable 491 448
Other liabilities 436 940
Net cash provided by operating activities 4,746 4,267
INVESTING ACTIVITIES
Proceeds from maturities of securities to be held
to maturity 400 100
Proceeds from sales of securities available for sale - 24,165
Proceeds from maturities of securities available
for sale 7,360 1,400
Principal collected on mortgage-backed securities,
including those classified as available for sale 2,423 1,555
Payment for purchases of securities (27,628) (10,524)
Net increase in loans (7,753) (4,127)
Proceeds from sale of premises and equipment - 1
Payment for purchase of premises and equipment (424) (1,009)
Net cash (used in) provided by investing
activities (10,116) 11,561
FINANCING ACTIVITIES
Net decrease in deposits (13,769) (4,633)
Net increase (decrease) in short-term borrowings 15,280 (9,537)
Net decrease in FHLB advances (14) (3,514)
Net cash advanced on revolving lines of credit 1,000 500
Cash dividends paid (948) (876)
Stock options exercised - 432
Purchase of common stock (220) (532)
Net cash provided by (used in) financing
activities 1,329 (18,160)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 4,041 (2,332)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 34,662 30,404
CASH AND CASH EQUIVALENTS, END OF PERIOD $30,621 $28,072
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $8,296 $7,914
Federal income taxes $325 $0
CBT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Presentation Basis
The accompanying unaudited consolidated financial statements of CBT
Corporation 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. The financial statements include the accounts of CBT Corporation
(the Parent Company) and its wholly-owned subsidiaries: Citizens Bank &
Trust Company (Citizens), Pennyrile Citizens Bank & Trust Company, Bank of
Marshall County, Graves County Bank and United Commonwealth Bank FSB.
Collectively these entities constitute the "Corporation", which provides
financial services primarily in western Kentucky and surrounding
communities. Fidelity Credit Corporation is a wholly-owned subsidiary of
Citizens. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Operating results for the three month period ended March 31, 1996, are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1996. 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,
1995.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and federal funds sold.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered adequate
to provide for potential losses based on management's evaluation of the
loan portfolio, including the financial strength of guarantors, valuation
of collateral, and the likelihood of further collection based upon the
borrower's financial condition, as well as on prevailing and anticipated
economic conditions.
Although management believes it uses the best information available to make
determinations with respect to the Corporation's allowances, future
adjustments may be necessary if economic or other conditions differ
substantially from the economic and other conditions in the assumptions
used in making the initial determinations, and such adjustments could be
material.
Effective January 1, 1995, the Corporation adopted SFAS No. 114. Accounting
by Creditors for Impairment of a Loan" as amended by SFAS No. 118
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures." These pronouncements require that impaired loans be measured
based upon the present value of expected future cash flows, discounted at
the loans' effective interest rate or at the loans' market price or fair
value of collateral, if the loan is collateral dependent. When the measure
of the impaired loan is less than that recorded investment in the loan, the
impairment is recorded through a valuation allowance that is included in
the allowance for loan losses. The adoption of these pronouncements did
not have a material impact on the Corporation's consolidated financial
statements.
The Corporation's impaired loans are generally measured on a loan by loan
basis. Interest payments received on impaired loans are recorded as
interest income unless collection of the loan is doubtful, in which case
payments are recorded as a reduction of principal.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation of premises and equipment is computed using the straight-line
and accelerated methods over the estimated useful lives of the assets, as
follows:
Years
Buildings and improvements 15 - 35
Furniture and fixtures 7
Equipment 5
Repurchase Agreements
Certain securities are sold under agreements to repurchase and are treated
as financings. The obligation to repurchase such securities is reflected
as a liability on the consolidated balance sheets. The dollar amounts of
securities underlying the agreements are included in the respective asset
accounts.
Trust Fees and Assets
Revenues from trust services are reported on the cash basis in accordance
with customary banking practice. Reporting such revenues on the accrual
basis would not materially affect the accompanying consolidated financial
statements. Assets held in a fiduciary or agency capacity for customers
and beneficiaries are not included in the consolidated financial statements
as such items are not assets of the Corporation.
Securities to be Held to Maturity and Securities Available for Sale
Effective January 1, 1994, the Corporation changed its method of accounting
for securities to conform with Statement of Financial Accounting Standards
(SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." Securities to be held to maturity are reported at cost,
adjusted for premiums and discounts and consist of securities for which the
Corporation has the positive intent and ability to hold to maturity.
Available for sale securities are reported at fair value and consist of
securities not classified as securities to be held to maturity. Unrealized
holding gains and losses, net of deferred taxes, on available for sale
securities are reported as a net amount in a separate component of
shareholders' equity until realized.
Federal Home Loan Bank stock is not considered to be a marketable equity
security under SFAS No. 115 and, therefore, is carried at cost. The stock
is included in securities available for sale.
Amortization of premiums and accretion of discounts are recorded primarily
on the interest method. Gains and losses on disposition of investment
securities and securities available for sale are computed by the specific
identification method.
Loans and Interest Income
Loans are stated at the principal balance outstanding, net of unearned
interest. Interest on loans is based upon the principal balance
outstanding, except interest on some consumer installment loans, which is
recognized on the sum-of-the-years-digits method, and does not differ
materially from the interest method.
The accrual of interest income is generally reviewed for discontinuance
when a loan becomes 90 days past due as to principal or interest. When
interest is discontinued, all unpaid accrued interest is reversed.
Management may elect to continue the accrual of interest when the estimated
net realizable value of collateral is sufficient to cover the principal
balance and accrued interest or, in the opinion of management, the interest
is collectible.
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 data is based upon 7,906,912 average shares
outstanding during the three months ended March 31, 1996, and 7,946,045
average shares outstanding during the three months ended March 31, 1995.
The delutive effect of common stock options are not included in net income
per common share data since their effect is not significant.
Reclassifications
Certain reclassifications have been made in the 1995 financial statements
to conform to the presentation of the 1996 financial statements.
Uses of Estimates in the Preparation of Financial Statements
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
NOTE 2: SECURITIES TO BE HELD TO MATURITY
($ in thousands) March 31, 1996
ESTIMATED
AMORTIZED FAIR GROSS UNREALIZED
COST VALUE GAIN LOSS
U.S. Treasury securities and
obligations of
U.S. Government agencies $2,329 $2,336 $18 $11
State and political subdivisions 51,129 52,825 2,110 414
Other 100 100 - -
Total $53,558 $55,261 $2,128 $425
December 31, 1995
ESTIMATED
AMORTIZED FAIR GROSS UNREALIZED
COST VALUE GAIN LOSS
U.S. Treasury securities and
obligations of
U.S. Government agencies $2,333 $2,352 $27 $8
State and political subdivisions 43,894 46,068 2,435 261
Other 200 199 - 1
Total $48,175 $46,400 $2,462 $270
Certain securities to be held to maturity were pledged to secure public
deposits, securities sold under agreements to repurchase, and other
purposes as required or permitted by law. These pledged securities had an
estimated amortized cost and estimated fair value of approximately
$11,706,000 and $12,050,000, respectively, at March 31, 1996.
NOTE 3: SECURITIES AVAILABLE FOR SALE
($ in thousands) March 31, 1996
ESTIMATED
AMORTIZED FAIR GROSS UNREALIZED
COST VALUE GAIN LOSS
U.S. Treasury securities
and obligations of
U.S. Government agencies $57,333 $57,445 $276 $124
State and political 9,587 10,119 593 62
subdivisions
Mortgage-backed securities 85,998 84,940 496 1,415
Derivative securities 7,265 7,151 7 232
Federal Home Loan Bank stock
(at cost) 8,010 8,010 - -
Other 122 122 - -
Total $168,315 $167,787 $1,372 $1,900
December 31, 1995
ESTIMATED
AMORTIZED FAIR GROSS UNREALIZED
COST VALUE GAIN LOSS
U.S. Treasury securities and
obligations of
U.S. Government agencies $44,821 $45,236 $479 $64
State and political 9,587 10,186 646 47
subdivisions
Mortgage-backed securities 83,952 83,557 576 971
Derivative securities 11,747 11,600 10 157
Federal Home Loan Bank Stock
(at cost) 7,873 7,873 - -
Other 22 22 - -
Total $158,002 $158,474 $1,711 $1,239
Certain securities available for sale were pledged to secure public
deposits, securities sold under agreements to repurchase, and other
purposes as required or permitted by law. These pledged securities had an
amortized cost and estimated fair value of approximately $93,114,000 and
$92,155,000, respectively, at March 31, 1996.
NOTE 4: LOANS
($ in thousands) March 31 December 31 March 31
1996 1995 1995
Commercial, industrial,
and agricultural loans $204,900 $212,266 $191,513
Residential real estate loans 250,623 253,556 261,362
Installment loans 189,152 189,036 177,037
Total loans 644,675 654,858 629,912
Less: Unearned interest 9,383 10,197 10,174
Total loans, net of unearned $635,292 $644,661 $619,738
interest
NOTE 5: PREMISES AND EQUIPMENT
($ in thousands) March 31 December 31 March 31
1996 1995 1995
Land $1,971 $1,971 $1,996
Buildings and improvements 13,224 17,715 15,087
Furniture and equipment 18,357 13,537 10,799
Construction in progress 80 20 1,963
Total premises and equipment 33,632 33,243 29,845
Less: Accumulated depreciation
and amortization 14,835 14,371 13,310
Net premises and equipment $18,797 $18,872 $16,535
NOTE 6: INTEREST BEARING DEPOSITS
($ in thousands) March 31 December 31 March 31
1996 1995 1995
NOW accounts $97,958 $101,448 $93,934
Money Manager accounts 41,910 45,581 47,481
Individual Retirement accounts 48,753 50,601 46,176
Savings accounts 47,942 44,845 48,656
Certificates of deposit under $100,000 294,300 292,489 291,825
Certificates of deposit $100,000 and 69,066 69,142 71,623
above
Total interest bearing deposits $599,929 $604,106 $599,695
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. The banks' 17 locations provide financial
services primarily in western Kentucky, while the finance company has 25
locations throughout Kentucky. The following discussion and analysis is
presented on a consolidated basis, with all significant inter company
accounts and transactions eliminated.
For the first three months of 1996, CBT reported net income of $2,932,000,
an increase of 6.0 percent from the first three months of 1995, which
was reported at $2,767,000. Net income per share was $.37 for the three
months ended March 31, 1996 compared with $.35 for the three months ended
March 31, 1995, an increase of 5.7 percent.
Return on average equity was 11.21 percent for the first three months of
1996 compared with 11.48 percent for the first three months of 1995.
Return on average assets was 1.31 percent for the first three months of
1996, compared with 1.29 percent for the first three months of 1995.
Consolidated Income Statement Analysis
Net Interest Income
Net interest income is the difference between interest earned on assets and
interest incurred on liabilities. It is affected by changes in the mix and
volume of earning assets and interest-bearing liabilities, their related
yields, and overall interest rates. For discussion purposes herein, net
interest income is presented on a tax-equivalent basis with adjustments
made to present yields on tax-exempt assets as if such income was fully
taxable.
In the first quarter of 1996, tax-equivalent net interest income provided
84.2 percent of CBT's net revenue, compared with 84.7 percent in the first
quarter of 1995. Total tax-equivalent net interest income for the first
quarter of 1996 increased 1.0 percent from the first quarter a year ago.
Growth in tax-equivalent net interest income for 1996 over 1995 was mainly
due to a moderate growth in average earning assets of 2.4 percent. Total
average earning assets for the three months ended March 31, 1996 were
$851.9 million. This growth was partially offset by a 3.3 percent increase
in average interest bearing liabilities. Total average interest-bearing
liabilities for the three months ended March 31, 1996 were $720.8 million.
Net interest margin, the ratio of tax-equivalent net interest income
divided by average earning assets, was 4.97 percent and 4.92 percent for
the three months ended March 31, 1996 and March 31, 1995, respectively.
The following schedule presents yields and rates on key components of
interest income and interest expense.
Three Months Ended
March 31
1996 1995
Yield on investments 6.99% 7.22%
Yield on loans (including fees) 9.83% 9.63%
Yield on federal funds sold and other
money market investments 5.13% 5.53%
Yield on earning assets 9.12% 9.00%
Rate on interest-bearing deposits 4.82% 4.72%
Rate on borrowings 5.33% 5.48%
Rate on interest bearing 4.90% 4.83%
liabilities
Net interest spread 4.22% 4.17%
Net interest margin (including fees) 4.97% 4.92%
The increase in net interest margin between the first quarter of 1996
versus 1995 is due to higher yields on earning assets, specifically the
loan yields. There was a shift in asset mix towards loans, which generally
produce higher yields. Average loans comprised 75.1 percent of average
earning assets in the first quarter of 1996, compared to 74.2 percent in
the first quarter of 1995. This increase was partially offset by increased
costs of time deposits.
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 $470,000 for the first quarter
of 1996, a 103.5 percent increase from the $231,000 in the first quarter of
1995. The provision for loan losses was .30 percent of average loans at
March 1996, compared with .15 percent at March 31, 1995. The increase in
the amount of provision for loan losses in the first quarter of 1996
compared with the first quarter of 1995 reflects management's desire to
maintain a strong allowance for loan loss position.
Net loan losses were $1,616,000 for the first quarter of 1996 compared to
$398,000 for the first quarter of 1995. Net loan losses as a percent of
average loans were 1.02 percent at March 31, 1996, compared to .27 percent
at March 31, 1995. The increase in net loan losses in 1996 over 1995 is
attributable to a $1,350,000 charge-off taken on one commercial account.
The following is a progression of the allowance for loan losses:
Three Months
Ended
($ in thousands) March 31
1996 1995
Balance, beginning of period $11,004 $11,533
Provision for loan losses 470 231
Loans charged off (1,719) (553)
Recoveries 103 155
Net charge-offs (1,616) (398)
Balance, end of period $9,858 $11,366
Allowance for loan losses to total loans,
net of unearned interest 1.55% 1.83%
Net charge-offs to average loans 1.02% 0.27%
Non-performing assets to period-end
loans and other real estate 1.39% 0.46%
Non-Interest Income
Non-interest income represented 15.8 percent of CBT's tax-equivalent
revenue in the first quarter of 1996, compared with 15.3 percent in the
first quarter of 1995. Consolidated non-interest income increased 6.9
percent in the first quarter of 1996 to $1,970,000. Trust and investment
advisory fees increased 49.5 percent from $311,000 to $465,000 over the
first quarter of 1995. This increase reflects the higher brokerage volumes
being generated through CBT's strategic alliance with J.C. Bradford & Co.
("JCB"), a Nashville-based regional brokerage firm. JCB brokers are
located in each CBT banking location in an effort to provide a full range
of brokerage services to customers. Other non-interest income increased
16.7 percent over the first quarter of 1995. These increases reflect
management's continued emphasis on fee income opportunities. The growth in
these two areas was partially offset by a 12.1 percent decrease in service
charges on deposit accounts.
The following table shows a breakdown of non-interest income:
Three Months Ended
($ in thousands) March 31
1996 1995
Trust and investment advisory fees $465 $311
Service charges on deposit accounts 760 865
Insurance commissions 312 309
Gain (loss) on sale of securities 13 (2)
Other 420 360
Total non-interest income $1,970 $1,843
Non-Interest Expenses
Total non-interest expense increased less than one percent in the first
quarter of 1996 over the first quarter of 1995. Salaries and employee
benefits decreased $492,000 between quarters, as the first quarter 1995
amount included $865,000 of non-recurring charges associated with an
extensive re-engineering effort. Exclusive of the non-recurring charges,
salaries and employee benefits increased $373,000. Net occupancy expense
increased $100,000 between quarters. This is principally due to growth in
the number of FCC offices and the opening of the new United Commonwealth
Bank facility in the third quarter of 1995. Depreciation and amortization
increased 20.4 percent, or $94,000, which reflects the significant
investment CBT has made in technology, facilities and equipment over the
last year. The $97,000 increase in data processing expense relates to
charges for additional services as well as costs associated with upgrading
technology at banking affiliates. Supplies increased $58,000, due
primarily to costs associated with standardizing bank product offerings at
all bank affiliates. The $318,000 decline in FDIC assessments was a result
of a reduction in the assessment rate which occurred in the third quarter
of 1995. Other expenses increased as a result of expanded marketing and
advertising, additional telephone costs, increased courier and postage
expenses, growth in audit and exam fees and charges associated with
operational consolidations.
The following table shows a breakdown of non-interest expense:
Three Months Ended
($ in thousands) March 31
1996 1995
Salaries and employee benefits $3,962 $4,454
Net occupancy 353 253
Depreciation and amortization 554 460
Supplies 244 186
Data processing 415 318
FDIC assessments 57 376
Tax on bank shares 303 295
Other 1,707 1,218
Total non-interest expense $7,595 $7,560
The efficiency ratio, defined as non-interest expense divided by tax-
equivalent revenue, is a measure of how effective a financial services
company is in leveraging its resources to produce revenue. A lower ratio
indicates better performance for the first quarter of 1996, CBT's
efficiency ratio was 60.8 percent compared with 63.39 percent for the first
quarter of 1995.
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 first quarter of 1996 was 28.9
percent compared with 27.6 percent for the first quarter of 1995. The
slight increase in the effective tax rate is attributable to the decline of
tax-exempt income as a percentage of gross revenues.
Consolidated Balance Sheet Analysis
Earning Assets
At March 31, 1996, earning assets were $856.6 million, compared with $850.6
million and $816.6 million at December 31, 1995 and March 31, 1995. The
increase between the three months ended March 31, 1996 and March 31, 1995
is due to a $15.6 million increase in loans combined with a $24.5 million
increase in securities. From December 31, 1995, there was some decrease in
loan outstandings, while strong a security continued. Total earning assets
at March 31, 1996 consisted of loans, representing 74.2 percent, and
securities, representing 25.8 percent. Average earning assets for the
first quarter of 1996 were $851.9 million, an increase of 2.4 percent over
the first quarter of 1995.
Investment Risk Management
CBT has certain securities in its held to maturity and available for sale
portfolios that are classified as derivative securities by banking
regulators. These securities were purchased by banks that were subsequently
acquired by CBT. At March 31, 1996, CBT had $100,000 book value of Federal
agency derivatives in its held to maturity portfolio, representing less
than one percent of total investment securities held to maturity. The
market value of these securities on March 31, 1996 was $100,000. At
December 31, 1995, book value of these securities was $200,000 and market
value was $199,000.
In its available for sale portfolio, CBT had $7,265,000 and $11,747,000
book value at March 31, 1996 and December 31, 1995, respectively, in
derivative securities as defined by regulators. These amounts represent
4.3 percent and 7.4 percent of the total securities available for sale at
March 31, 1996 and December 31, 1995, respectively. Market value for these
securities was $7,151,000 at March 31, 1996 and $11,600,000 at December 31,
1995. The decrease in derivative securities available for sale reflects
security calls by issues due to the interest rate environment during the
first quarter of 1996. All are guaranteed by government agencies and none
have a maturity of over 6 years. At March 31, 1996, all derivative
securities met the Federal Financial Institutions Examinations Council
stress test guidelines which are measures of the suitability of various
investment securities for bank portfolios. The amount and nature of these
securities pose no undue risk to CBT's financial position and there are no
plans to acquire additional derivative securities.
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 deferred taxes, as a separate component of
shareholders' equity. As of March 31, 1996, net unrealized losses related
to investment securities available for sale were $343,000, net of deferred
taxes. This net unrealized loss is a $2.5 million reduction from the first
quarter of 1995 of $2.8 million. At December 31, 1995, the fair value of
securities available for sale reflected an unrealized gain of $307,000.
Credit Risk Management
CBT manages exposure to credit risk though loan portfolio diversification
by customer, industry, and loan type. As a result, there is no undue
concentration in any single sector. CBT annually evaluates economic
conditions affecting its lending markets. Economic indicators such as
unemployment levels, construction activity, and bankruptcy filings are
evaluated. During the first quarter of 1996, CBT's primary market areas
continued to experience an unemployment level below the national average,
strong real estate values and commercial development, and declining
bankruptcy filings. Based on this information, management believes that
generally favorable economic conditions are present in CBT's market areas.
CBT's credit risk is diversified by loan type. At March 31, 1996, 39
percent of the portfolio consisted of residential real estate, 32 percent
of commercial and 29 percent of consumer loans.
Credit risk management also includes monitoring the performance of existing
portfolios. CBT has in place a comprehensive internal credit review
program to assess the current financial condition and operating performance
of significant commercial borrowers.
Loans by type appear below:
($ in thousands) March 31 December 31 March 31
1996 1995 1995
Commercial, industrial, and
agricultural $204,900 $212,266 $191,513
loans
Residential real estate loans 250,623 253,556 261,362
Installment loans 189,152 189,036 177,037
Total loans 644,675 654,858 629,912
Unearned interest 9,383 10,197 10,174
Total loans, net of unearned $635,292 $644,661 $619,738
interest
CBT is not aware of any loans classified for regulatory purposes at March
31, 1996, that are expected to have a material impact on CBT's future
operating results, liquidity, or capital resources. CBT continues to
classify its loans consistent with current regulatory review results.
There are no material commitments to lend additional funds to customers
whose loans were classified as non-accrual at March 31, 1996.
Allowance for Loan Losses
At March 31, 1996, the allowance for loan losses was $9.9 million, or 1.55
percent of net loans outstanding, compared with $11.0 million, or 1.71
percent at December 31, 1995. The ratio of the allowance for loan losses
to non-performing assets was 93.2 percent at March 31, 1996, compared with
225.8 percent at December 31, 1995. Non-performing assets consist of non-
accrual loans, loans past-due ninety days or more that are still accruing
interest, restructured loans and other real estate owned. The ratio of the
allowance for loan losses to non-performing assets has significantly
declined from March 1995 to March 1996. The decline primarily reflects the
impact of a group of related commercial credits at a subsidiary bank, which
were classified as non-performing assets effective January 1996. The
amount of these credits is approximately $5.5 million at March 31, 1996,
following an approximate $1.3 million charge-off against this credit during
the first quarter of 1996. As of March 31, 1996, $3.7 million remained on
non-accrual with $1.8 million restructured.
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 has a comprehensive credit grading system
and other internal loan monitoring systems. Such systems fully comply with
the loan review guidelines set forth in the December 31, 1993 Interagency
Policy Statement on the Allowance for Loan and Lease Losses. CBT
management maintains the allowance available to cover future loan losses
within the entire loan portfolio and believes the allowance for loan losses
is adequate at March 31, 1996 based on the current level of non-performing
assets and the expected level of future charge-offs.
Non-Performing Assets
The following table presents data on CBT's non-performing assets. As
previously defined, non-performing assets consist of non-accrual loans,
loans past due ninety days or more that are still accruing interest,
restructured loans and other real estate owned. At March 31, 1996, non-
performing assets totaled $10.6 million, or 1.39 percent of net loans and
other real estate owned, compared with $4.9 million, or 0.77 percent of net
loans and other real estate owned, at December 31, 1995. As discussed
previously, this increase reflects a group of related commercial credits
totaling approximately $5.5 million. Of this amount, $1.8 million has been
restructured. The remaining portion totaling $3.7 million consists of two
notes to a single borrower. A $1.2 million note is secured by collateral
valued at $800,000 to $1,000,000. A $2.5 million note has nominal
collateral support. Personal guarantees exist on the obligation. There
are no plans to advance additional funds related to this credit.
($ in thousands) March 31 December 31 March 31
1996 1995 1995
Non-accrual loans $7,264 $4,059 $2,003
Restructured loans 1,805
Accruing loans which are contractually
past due 90 days or more 1,475 785 832
Total non-performing loans 10,544 4,844 2,835
Other real estate owned 30 30 -
Total non-performing assets $10,574 $4,874 $2,835
In 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan", (FAS 114). It was subsequently amended in 1994 with
the issue of FAS 118, "Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosure". FAS 114, as amended, requires that
impaired loans be measured based on the present value of expected future
cash flow discounted at the loan's effective rate, at the loan's market
price, or the fair value of the collateral is the loan is collateral
dependent. CBT adopted FAS 114 in 1995. The adoption of FAS 114 did not
have a material effect on CBT's consolidated financial statements.
Funding Sources
Non-Interest Bearing Deposits
Non-interest bearing deposits, which represent a portion of CBT's core
deposits, were $60.0 million at March 31, 1996, a $9.6 million decrease
from December 31, 1995. Average non-interest bearing deposits were $64.4
for the first quarter of 1996 compared with $67.0 million for fourth
quarter of 1995. Non-interest bearing deposits represented 7.6 percent of
CBT's total funding sources at March 31, 1996, compared with 8.8 percent at
December 31, 1995.
Interest-Bearing Liabilities
Interest-bearing liabilities for CBT consist of certain core deposits,
purchased deposits, short-term and long-term borrowings. At March 31,
1996, interest-bearing liabilities totaled $731.7 million, an increase of
$12.1 million over December 31, 1995. The increase is due to a $16.3
million increase in short-term borrowings (primarily Federal funds
purchased) offset by a $4.2 million decrease in interest-bearing deposits.
Interest-bearing Core Deposits - In CBT's banking subsidiaries, NOW, Money
Manager, Individual Retirement and savings accounts, and certificates of
deposit under $100,000 provide a stable source of funding. At March 31,
1996 these deposits accounted for 467.1 million of CBT's total funding
sources, compared with $67.8 million at December 31, 1995. This level of
core deposits is considered appropriate by management given CBT's asset
mix.
Purchased Deposits - Purchased deposits, which CBT defines as certificates
of deposit with denominations of $100,000 or more, decreased $4.9 million
or 7.1 percent to $64.3 million at March 31, 1996. Purchased deposits
represented 8.1 percent at March 31, 1996, compared with 8.8 percent at
December 31, 1995.
Borrowings - CBT's borrowing include both short-term and long-term
borrowings. Short-term borrowings include Federal funds purchased,
securities sold under agreements to repurchase, U.S. Treasury notes
payable, revolving lines of credit, and short-term Federal Home Loan Bank
advances. Management views short-term borrowings as a cost-effective
alternative to purchased deposits and actively manages CBT's short-term
borrowing position to maintain acceptable net interest margins and
liquidity. At March 31, 1996, short-term borrowings accounted for 13.2
percent of CBT's total funding sources, compared with 11.3 percent at
December 31, 1995. The increase primarily reflects Federal funds
purchased. Long-term borrowings, which totaled $61.9 million at March 31,
1996 and December 31, 1995 respectively, include Federal Home Loan bank
advances with maturities in excess of one year and term debt used to fund
FCC. At March 31, 1996, long-term borrowings represented 3.5 percent of
CBT's total funding sources compared with 3.3 percent at December 31, 1995.
Asset and Liability Management
Banking institutions manage the inherently different maturity and repricing
characteristics of earning assets and interest-bearing funding to achieve a
desired interest rate sensitivity position and to limit their exposure to
interest rate risk. 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 is the Asset and Liability Management Committee (ALCO) of CBT,
an executive level management committee. 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. The actual management of interest rate
risk is governed by an asset and liability management policy.
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. Management uses
various measurement tools to monitor 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 dates. 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 (FCC is included with Citizens), as well as on a consolidated
basis. The asset and liability management policy at each subsidiary
specifies targets based primarily on the one year cumulative GAP position
in conjunction with a market volatility risk analysis At March 31, 1996
the one year cumulative interest rate GAP was .94. At December 31, 1995
the one year cumulative interest rate GAP was .91. The above levels were
within stated corporate guidelines. A GAP of less than one indicates that,
over the time horizon measured, more liabilities will reprice than assets.
Generally, such a position is favorable in a falling interest rate
environment.
GAP as an interest rate risk measurement tool has some limitations, in that
it is a static measurement and does not capture basis risk or risk that
varies non-proportionally with rate movements. Because of such
limitations, CBT supplements its use of GAP with a computer model to
estimate the impact of various parallel shifts in the yield curve on net
interest income and fair value of equity under a variety of interest rate
scenarios. CBT's management believes the two approaches compliment each
other in understanding the impact of changes in interest rates. Based on
modeling using March 1996 data, CBT would expect its net interest income to
change no more than 5.0 percent under a 200 basis point parallel shift up
or down of the yield curve.
Finally, 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 first quarter of 1996, mismatch profits represent
less than 5.0 percent of Citizens' tax-equivalent net interest income.
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
March 31, 1996
Leverage Ratio (Equity to 5.00% 11.49% 6.49%
Assets)
Tier 1 Risk-Based 6.00% 16.34% 10.34%
Total Risk-Based 10.00% 17.59% 7.59%
December 31, 1995
Leverage Ratio (Equity to 5.00% 11.35% 6.35%
Assets)
Tier 1 Risk-Based 6.00% 16.12% 10.12%
Total Risk-Based 10.00% 17.37% 7.37%
Because of solid performance and conservative capital management, CBT has
consistently maintained a strong capital position. These ratios compare
favorably with industry standards and CBT's peers.
At March 31, 1996, CBT's shareholders' equity, exclusive of the unrealized
loss on securities available for sale, net of deferred tax, grew $7.6
million from December 1995 levels. CBT's internal capital growth rate
(ICGR) for the three months ended March 31, 1996 was 6.5 percent. The ICGR
represents the rate at which CBT's average shareholders' equity grew as a
result of earnings retained (net income less dividends paid).
CBT declared a $0.12 per share dividend in the first quarter of 1996. The
dividend payout ratio for the first quarter of 1996 was 27.8 percent which
falls within management's payout range of 25 to 35 percent.
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. Management is
also not aware of any events or uncertainties that will have or that are
reasonably likely to have a material impact on CBT's liquidity, capital
resources or operations.
Market Data
At March 31, 1996, CBT had issued and outstanding 7,898,519 shares of
common stock which was held by approximately 1,488 shareholders.
Shareholders have received cash dividends per share of common stock on a
quarterly basis in 1995 and thus far in 1996.
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 1996 and 1995. 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
March 31, 1996 $24.50 $21.50 $0.12
December 31, 1995 23.00 20.00 0.12
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
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) No Form 8-K has been filed during the first quarter of 1996.
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: May 15, 1996 SIGNED:/s/Jeffrey R. Nieder
Jeffrey R. Nieder
Senior Vice President
and Chief Financial Officer
EXHIBIT INDEX
NUMBER DESCRIPTION PAGE
3(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.
3(b) Articles of Amendment to the Articles of Incorporation
of CBT Corporation are incorporated by reference to
Exhibit 4(b) of Form 10-Q of CBT Corporation
dated June 30, 1995.
3(c) By-Laws of CBT Corporation are incorporated
by reference to Exhibit 3, to the Registration
Statement of Form S-14 of CBT Corporation
(Registration No. 2-83583).
10(a) **Form of Severance Protection Agreement
between CBT Corporation and certain executive
officers is incorporated by reference to Exhibit 10 of
Form 10-Q of CBT Corporation dated September 30, 1995.
10(b) **CBT Corporation 1986 Stock Option Plan is
incorporated by reference to Exhibit 4 of
Registration Statement on Form S-8 of CBT
Corporation (Registration No. 33-28512).
10(c) **CBT Corporation 1993 Stock Option Plan
is incorporated by reference to Form 10-Q
of CBT Corporation dated March 31, 1993.
10(d) **Salary Continuance Agreement is incorporated
by reference to Exhibit 10(c) of the Form 10-K
of CBT Corporation for the year ended December
31, 1990.
10(e) **Description of Incentive Compensation Plan is
incorporated by reference to Exhibit 10(d) of the
Form 10-K of CBT Corporation for the year ended
December 31, 1990.
27 Financial Data Schedule 26-27
** Denotes management contracts or compensatory plans or arrangements
required to be filed as exhibits to this Form 10-Q.
EXHIBIT 27
FINANCIAL DATA SCHEDULE
OF
CBT CORPORATION
FOR THE PERIOD ENDED
MARCH 31, 1996