FORM 10-Q
United States
Securities and Exchange Commission
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1998 Commission file number 0-16878
CBT CORPORATION
(Exact name of registrant as specified in its charter)
Kentucky 61-1030727
(State of incorporation) (I.R.S. Employer Identification No.)
333 Broadway Paducah, Kentucky 42001
(Address of principal executive offices) (Zip Code)
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, 1998
Common Stock, No Par Value 7,863,792
This filing contains 24 pages.
2
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1998,
December 31, 1997 and March 31, 1997 3
Consolidated Statements of Income for Three
Months Ended March 31, 1998 and March 31, 1997 4
Consolidated Statements of Changes in Shareholders'
Equity for Three Months Ended March 31, 1998 and
March 31, 1997 5
Consolidated Statements of Cash Flows for Three
Months Ended March 31, 1998 and March 31, 1997 6
Notes to Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of
Consolidated Financial Condition and Results
of Operations 11 - 19
PART II. OTHER INFORMATION
Item 1. through Item 6. 19 - 20
SIGNATURE PAGE 21
EXHIBIT INDEX 22
FINANCIAL DATA SCHEDULE 23 - 24
SPECIAL NOTE
This Quarterly Report on Form 10-Q contains statements relating
to future results of the Corporation that are considered "forward-
looking" within the meaning of the Private Securities Litigation
and Reform Act of 1995. Actual results may differ materially
from those expressed or implied as a result of certain risks and
uncertainties, including, but not limited to, changes in
political and economic conditions, interest rate fluctuations,
fixed income market fluctuations, personal and corporate
customers' bankruptcies, inflation, acquisitions and integrations
of acquired businesses, technological change, changes in law,
changes in fiscal, monetary, regulatory and tax policies,
monetary fluctuations, success in gaining regulatory approvals
when required as well as other risks and uncertainties detailed
from time to time in the filings of the Corporation with the
Securities and Exchange Commission.
3
CBT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited) (audited) (unaudited)
($ in thousands) March 31 December 31 March 31
1998 1997 1997
--------------------------------
ASSETS
Cash and due from banks $ 38,227 $ 52,870 $ 35,111
Federal funds sold 20,230 - -
- ----------------------------------------------------------------------------
Total cash and cash equivalents 58,457 52,870 35,111
Securities to be held to maturity 59,157 60,146 55,205
Securities available for sale (at fair
market value) 173,668 203,923 169,457
Loans, net of unearned interest 711,779 731,194 682,333
Allowance for loan losses (9,771) (9,243) (8,707)
- ----------------------------------------------------------------------------
Loans, net 702,008 721,951 673,626
Premises and equipment, net 17,766 18,179 17,828
Accrued interest receivable 6,788 7,902 6,409
Intangible Assets 5,677 5,802 6,155
Other 7,477 7,702 1,267
- ----------------------------------------------------------------------------
TOTAL ASSETS $1,030,998 $1,078,475 $ 965,058
============================================================================
LIABILITIES
Deposits:
Non-interest bearing $ 78,204 $ 79,540 $ 73,690
Interest bearing 636,482 666,980 629,363
- ----------------------------------------------------------------------------
Total deposits 714,686 746,520 703,053
Borrowings:
Federal funds purchased 80 14,140 1,930
Securities sold under agreements to
repurchase 63,753 63,844 42,291
Notes payable - US Treasury 2,034 2,000 2,009
Revolving lines of credit 7,500 7,023 6,500
Federal Home Loan Bank advances 99,365 99,490 75,803
Term Debt 10,023 10,000 10,046
- ----------------------------------------------------------------------------
Total borrowings 182,755 196,497 138,579
Accrued interest payable 5,059 4,923 5,344
Other 6,467 10,455 6,816
- ----------------------------------------------------------------------------
TOTAL LIABILITIES 908,967 958,395 853,792
STOCKHOLDERS' EQUITY
Common stock, no par value, authorized
12,000,000 shares; issued and
outstanding 7,863,792 shares at
March 31, 1998; 7,862,627 shares
at December 31 1997; and 7,862,627
shares at March 31, 1997 4,100 4,100 4,100
Capital surplus 16,070 16,043 16,042
Retained earnings 100,997 98,897 92,249
Unrealized gains (losses) on securities
available for sale, net of deferred taxes 864 1,040 (1,125)
- ----------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 122,031 120,080 111,266
- ----------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS'EQUITY $1,030,998 $1,078,475 $ 965,058
============================================================================
4
CBT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
(unaudited) (unaudited)
March 31 March 31
1998 1997
------------------------------
INTEREST INCOME
Loans, including fees:
Taxable $17,251 $16,334
Tax-exempt 19 34
Securities:
Taxable 2,686 2,511
Tax-exempt 1,231 926
Other 40 69
- -----------------------------------------------------------------------
Total interest income 21,227 19,874
- -----------------------------------------------------------------------
INTEREST EXPENSE
Deposits 7,656 7,814
Other borrowings 2,689 1,709
- -----------------------------------------------------------------------
Total interest expense 10,345 9,523
- -----------------------------------------------------------------------
NET INTEREST INCOME 10,882 10,351
Provision for loan losses 1,169 930
- -----------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,713 9,421
NON-INTEREST INCOME
Trust fees 303 273
Investment advisory fees 425 265
Service charges on deposit accounts 832 836
Insurance commissions 361 364
Gain on sale of securities 119 -
Gain on sale of finance receivables 142 185
Other 607 549
- -----------------------------------------------------------------------
Total non-interest income 2,789 2,472
- -----------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 4,320 4,071
Net occupancy 373 359
Depreciation and amortization 628 546
Supplies 186 173
Data processing 453 442
FDIC assessments 36 (8)
Franchise tax 384 294
Other 1,725 1,585
- -----------------------------------------------------------------------
Total non-interest expense 8,105 7,462
- -----------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,397 4,431
Income taxes 1,196 1,300
- -----------------------------------------------------------------------
NET INCOME $ 3,201 $ 3,131
=======================================================================
PER COMMON SHARE
Basic earnings per common share $ 0.41 $ 0.40
Diluted earnings per common share $ 0.40 $ 0.40
========================================================================
5
CBT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)) Accumulated
other
Compre- Common Capital Retained comprehensive Total
hensive Stock Surplus Earnings income Stockholders'
income Equity
- -------------------------------------------------------------------------------
BALANCE, $4,100 $16,160 $ 90,143 $ (187) $110,216
DECEMBER 31, 1996
Comprehensive income
Net income for the
three months ended
March 31, 1997 $3,131 3,131 3,131
Other comprehensive
income, net of tax:
Unrealized holding
gains arising
during the period (938) (938) (938)
------
Comprehensive income $2,193
======
Dividends on common
stock (1,025) (1,025)
Stock options
exercised 103 103
Repurchase of
common stock (220) (220)
- -----------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 $4,100 $16,042 $ 92,249 $(1,125) $111,266
=============================================================================
BALANCE, DECEMBER 31, 1997 $4,100 $16,043 $ 98,897 $ 1,040 $120,080
Comprehensive income
Net income for the
three months ended
March 31, 1998 $3,201 3,201 3,201
Other comprehensive
income, net of tax:
Unrealized holding
gains arising
during the period (176) (176) (176)
------
Comprehensive income $3,025
======
Dividends on common
stock (1,101) (1,101)
Stock options
exercised 27 27
- -----------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 $4,100 $16,070 $100,997 $ 864 $122,031
=============================================================================
6
CBT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Three Months
($ in thousands) ended
March 31
1998 1997
----------------
OPERATING ACTIVITIES:
Net income $ 3,201 $ 3,131
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,169 464
Depreciation 504 502
Amortization 125 44
Amortization and accretion of securities 238 87
Net gain on sale of securities (119) -
Net loss on sale of premises and
equipment 1 1
Net gain on sale of finance receivables (142) (185)
Changes in assets and liabilities:
Accrued interest receivable 1,114 436
Other assets 320 257
Accrued interest payable 136 629
Other liabilities (3,988) (8)
- ------------------------------------------------------------------
Net cash provided by operating activities 2,559 5,358
- ------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities and sales of
securities to be held to maturity 980 1,025
Proceeds from maturities and sales of 20,738 35
securities available for sale
Principal collected on mortgage-backed
securities, including those classified
as available for sale 10,060 2,330
Payment for purchases of securities (924) (24,087)
Net increase in loans 18,166 4,031
Proceeds from sales of premises and equipment 13 2
Proceeds from sales of finance receivables 750 1,039
Payment for purchase of premises and
equipment (105) (135)
- ------------------------------------------------------------------
Net cash used in investing activities 49,678 (15,760)
- ------------------------------------------------------------------
FINANCING ACTIVITIES:
Net decrease in deposits (31,834) (7,078)
Net increase in short term borrowings (14,117) 3,228
Net increase (decrease) in FHLB advances (125) 6,685
Cash advanced on revolving lines of credit 500 -
Cash dividends paid (1,101) (1,025)
Stock options exercised 27 -
Purchase of common stock - (118)
- -------------------------------------------------------------------
Net cash used in financing activities (46,650) 1,692
- -------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS 5,587 (8,710)
- -------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 52,870 43,821
- -------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 58,457 $35,111
- -------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $10,345 $ 8,894
- -------------------------------------------------------------------
Income taxes 1,296 -
- -------------------------------------------------------------------
Exercise of stock options through exchange of
common stock - 103
===================================================================
7
CBT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1998
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.
The financial statements include the accounts of CBT Corporation
(the Parent Company) and its wholly-owned subsidiaries: Citizens
Bank and Trust Company of Paducah (Citizens), Pennyrile Citizens
Bank and Trust Company (PCB), Bank of Marshall County (BOMC),
Graves County Bank, Inc. (GCB), and United Commonwealth Bank, FSB
(UCB). Collectively, these entities constitute the
"Corporation", which provides financial services primarily in
western Kentucky and surrounding communities. Fidelity Credit
Corporation (FCC), a finance company that operates throughout
Kentucky, 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,
1998, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. 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, 1997.
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.
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 uses the best information available to make
determinations with respect to the Corporation's allowance,
future adjustments may be necessary if economic or other
conditions differ substantially from the economic and other
conditions considered in making the initial determinations, and
such adjustments could be material.
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
8
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
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, when 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
During 1997, the corporation adopted the provisions of Statement
of Financial Accounting Standards No. 128 "Earnings per Share."
Under the standards established by SFAS No. 128, per share
information is measured at two levels: basic and diluted.
Reclassifications
Certain reclassifications have been made in the 1997 financial
statements to conform to the presentation of the 1998 financial
statements.
Uses of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles 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.
9
<CAPTION)
NOTE 2: SECURITIES HELD TO MATURITY
($ in thousands) March 31, 1998
-------------------------------------
Amortized Estimated Gross Unrealized
Cost Fair Value Gain Loss
-------------------------------------
US Government agency $ 653 $ 661 $ 8 $ 0
State and political
subdivisions 58,504 61,573 3,075 6
- ---------------------------------------------------------------
Total securities $59,157 $62,234 $ 3,083 $ 6
===============================================================
($ in thousands) December 31, 1997
-------------------------------------
Amortized Estimated Gross Unrealized
Cost Fair Value Gain Loss
-------------------------------------
US Government Agency
obligations $ 653 662 9 -
State and political
subdivisions 59,493 62,561 3,075 7
- --------------------------------------------------------------
Total securities $ 60,146 $ 63,223 $3,084 $ 7
==============================================================
Certain securities 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 $16,409,000 and $17,240,000, respectively, at
March 31, 1998.
NOTE 3: SECURITIES AVAILABLE FOR SALE
($ in thousands) March 31, 1998
-------------------------------------
Amortized Estimated Gross Unrealized
Cost Fair Value Gain Loss
-------------------------------------
US Treasury securities $ 2,117 $ 2,129 $ 13 $ 1
US Government agency
obligations 42,167 42,237 91 21
State and political
subdivisions 29,056 29,473 468 51
Mortgage-backed
securities 88,053 88,883 955 125
Derivative Securities 200 200 0 0
Federal Home Loan Bank 10,646 10,646 0 0
Stock
Other 100 100 0 0
- --------------------------------------------------------------
Total Securities $172,339 $173,668 $ 1,527 $ 198
==============================================================
($ in thousands) December 31, 1997
------------------------------------
Amortized Estimated Gross Unrealized
Cost Fair Value Gain Loss
-------------------------------------
US Treasury securities $ 4,615 $ 4,624 $ 11 $ 2
US Government agency
obligations 53,787 53,911 138 14
State and political
subdivisions 28,327 28,811 524 40
Mortgage-backed securities 104,334 105,316 1,132 150
Derivative Securities 700 701 1 -
Federal Home Loan Bank 10,460 10,460 - -
Other 100 100 - -
- --------------------------------------------------------------
Total Securities $202,323 $203,923 $ 1,806 $ 206
==============================================================
10
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 $109,996,000 and $110,624,000 respectively, at
March 31, 1998. Federal Home Loan Bank stock, which is
classified as available for sale, is carried at cost.
NOTE 4: LOANS
($ in thousands) March 31 December 31 March 31
1998 1997 1997
-------------------------------
Commercial, industrial, and
agricultural loans $235,529 $243,801 $221,890
Residential real estate and
mobile home loans 289,951 294,270 280,054
Installment loans 195,302 202,609 189,106
- ----------------------------------------------------------------
Total loans 720,782 740,680 691,050
Less: Unearned interest 9,003 9,486 8,717
- ----------------------------------------------------------------
Total loans, net of unearned
interest $711,779 $731,194 $682,333
================================================================
NOTE 5: PREMISES AND EQUIPMENT
($ in thousands) March 31 December 31 March 31
1998 1997 1997
---------------------------------
Land $ 2,401 $ 2,401 $ 1,971
Buildings and improvements 19,328 19,285 18,588
Furniture and equipment 14,201 14,167 13,652
Construction in progress 5 24 11
- ----------------------------------------------------------------
Total premises and epquipment 35,935 35,877 34,222
Accumulated depreciation and
amortization (18,169) (17,698) (16,394)
- ----------------------------------------------------------------
Net premises and equipment $ 17,766 $ 18,179 $ 17,828
================================================================
NOTE 6: INTEREST-BEARING DEPOSITS
($ in thousands) March 31 December 31 March 31
1998 1997 1997
-------------------------------
NOW accounts $ 98,925 $109,699 $ 93,671
Money Manager accounts 72,770 67,590 54,098
Individual Retirement accounts 51,982 53,421 49,036
Savings accounts 46,930 46,352 53,132
Certificates of deposit
under $100,000 286,062 304,853 289,690
Certificates of deposit 74,166 76,844 78,154
$100,000 and above
Brokered certificates 5,647 8,221 11,582
- ---------------------------------------------------------------
Total interest-bearing
deposits $636,482 $666,980 $629,363
===============================================================
11
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
consisting of four state chartered commercial banks, one federal
savings bank, and a consumer finance company. The banks' 18
locations provide financial services primarily in western
Kentucky, while the finance company has 26 locations throughout
the Commonwealth. The following discussion and analysis is
presented on a consolidated basis, with all significant
intercompany accounts and transactions eliminated.
For the three month period ended March 30, 1998, CBT earned
$3,201,0000 compared to $3,131,000 earned during the first
quarter of 1997. Basic earnings per share was $0.41 for 1998 and
$0.40 per share for 1997. Fully diluted earnings per share was
$0.40 for 1998 and $0.40 for 1997.
Return on average equity was 10.76 percent and 11.38 percent for
the first quarter of 1998 and 1997, respectively. Return on
average assets for the three month period ended March 31, 1998
was 1.25 percent, compared with 1.33 percent for the same 1997
period.
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 1998, tax equivalent net interest income
provided 80.4 percent of CBT's net revenue, compared with 81.2
percent in the first quarter of 1997. The change was a result of
higher fee income in 1998 compared to 1997. Total tax-
equivalent net interest income for the first quarter of 1998
increased 7.47 percent from the first quarter a year ago. Growth
in tax-equivalent net interest income for the first quarter of
1998 over 1997 was due to growth in average earning assets of 8.4
percent partially offset by a 5 basis point decline in net
interest margin.
Net interest margin, the ratio of tax-equivalent net interest
income divided by average earning assets, was 4.76 percent and
4.81 percent for the three months ended March 31, 1998 and March
31, 1997, respectively. The decline was caused by lower loan
yields primarily as a result of non-accrual loans and increased
competitions. A mitigating factor was higher security yields.
Also affecting the net interest margin was the increase in 1997
of the security portfolio as a percent of total earning assets.
While security yields were improved, they still lagged behind
loan yields and as securities have assumed a more prominent
position in CBT's earning asset mix, net interest margin
declined. The following schedule presents yields and costs on
key components of interest income and interest expense for the
first three months of 1998 and 1997.
12
Three Months
Ended
March 31
1998 1997
---------------
Yield on securities 7.31% 7.13%
Yield on loans (including fees) 9.67% 9.74%
Yield on federal funds sold and other
money market investments 5.66% 5.25%
Yield on earning assets 9.06% 9.09%
Rate on interest-bearing deposits 4.82% 5.00%
Rate on borrowings 5.77% 5.56%
Rate on interest bearing 5.04% 5.09%
liabilities
Net interest spread 4.02% 4.00%
Net interest margin 4.76% 4.81%
========================================================
Provision for Loan Losses
The provision for loan losses reflects management's judgment of
the current period cost associated with maintaining adequate
reserves for the credit risk inherent in CBT's loan portfolio.
The consolidated provision for loan losses was $1,169,000 for the
first quarter of 1998, a 25.7 percent increase from the $930,000
provision recorded in the first quarter of 1997. The first
quarter 1998 provision for loan losses was 0.65 percent of
average loans on an annualized basis, compared with 0.55 percent
in the prior year
Net loan losses were $622,000 for the first quarter of 1998
compared to $438,000 for the first quarter of 1997. Net loan
losses as a percent of average loans on an annualized basis were
0.35 percent for the three months ended March 30, 1998, compared
to 0.26 percent for the three months ended March 31, 1997.
The following is a progression of the allowance for loan losses:
Three Months Ended
($ in thousands) March 31
1998 1997
------------------
Balance, beginning of period $ 9,243 $ 8,243
Adjustment for sale of finance (19) (28)
receivables
Provision for loan losses 1,169 930
Charge-offs (742) (571)
Recoveries 120 133
- ----------------------------------------------------------
Net charge-offs (622) (438)
- ----------------------------------------------------------
Balance, end of period $ 9,771 $ 8,707
==========================================================
Non-Interest Income
Non-interest income represented 19.6 percent of CBT's tax-
equivalent revenue in the first quarter of 1998, compared with
18.8 percent in the same quarter of 1997. Consolidated non-
interest income increased 12.8 percent or $317,000 in the first
quarter of 1998 to $2,789,000 compared to $2,472,000 in the same
period of 1997. Trust fees increased 11.0 percent during the
first quarter of 1998. Investment advisory fees increased 60.4%
in part because of the strength of the stock market during the
first quarter of 1998 over 1997. Improvement was also noted in
car club revenue by FCC (25.8 percent). Official check
commissions decreased 56.3 percent over the first quarter of 1997
as a result of a dispute with the service provider over fee
computations. Other non-interest income increased 43.5 percent
from the first quarter of 1997 primarily as a result of increases
in secondary market fees (17.7 percent) and $50,000 in
nonrecurring check printing fees (144.5 percent).
13
The following table shows a breakdown of non-interest income:
--------------
Three Months
Ended
($ in thousands) March 31
1998 1997
---------------
Trust fees $ 303 $ 273
Investment advisory fees 425 265
Service charges on deposit accounts 832 836
Credit life insurance commissions 361 364
Car club revenue 151 120
Official check commissions 70 160
Net gain on sale of securities 119 -
Net gain on sale of finance 142 185
receivables
Other 386 269
- --------------------------------------------------------
Total non-interest income $2,789 $2,472
========================================================
Non-Interest Expenses
Total non-interest expense increased $643,000, or 8.6 percent,
for the first quarter of 1998 compared to the first quarter of
1997. Salaries and benefits increased $249,000 (6.1 percent)
primarily as a result of annual merit increases and additional
accruals for sales incentives and other bonuses. Depreciation
and amortization grew $82,000 (15.1 percent) because of the
acquisition of the Fifth Third branch by GCB in May and of the
Republic branch by UCB in August and the resultant amortization
of premiums associated with the acquired deposits. Data
processing costs increased $11,000 or 2.5 percent reflecting
higher fees charged by our service provider implemented in the
third quarter of 1997. Increases in franchise taxes reflect the
settlement of a 1995 tax dispute along with an accrual
adjustment. Fluctuations in advertising, telephone, special
services, and community development reflect timing differences of
expense payments and accruals compared with 1997. Other expenses
increased $141,000 primarily from increases in collection costs
($41,000), brokerage expenses ($22,000), and net change in
miscellaneous charge-offs and recoveries ($93,000) primarily
caused by recoveries in 1997.
The following table shows a breakdown of non-interest expense:
--------------
Three Months
Ended
($ in thousands) March 31
1998 1997
--------------
Salaries and employee benefits $4,320 $4,071
Net occupancy 373 359
Depreciation and amortization 628 546
Supplies 186 173
Data processing 453 442
FDIC assessments 36 (8)
Franchise tax 384 294
Advertising 169 209
Phone 151 134
Postage 169 147
Audit and exam fees 67 115
Special services 94 89
Travel and entertainment 52 49
Community Development 122 82
Other 901 760
- --------------------------------------------------------
Total Non-interest expense $8,105 $7,462
========================================================
14
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. CBT's
efficiency ratio was 56.50 percent for the first quarter of 1998
compared to 56.75 percent for the same period in 1997.
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 three months ended March
31, 1998 and 1997 was 27.2 percent and 29.3 percent,
respectively. The change is attributable to the increase of tax-
exempt revenue (municipal bonds) as a percent of total revenue.
Consolidated Balance Sheet Analysis
Earning Assets
At March 31, 1998, average earning assets were $976.4 million,
compared with $901.0 million at March 31, 1997. This increase is
due to a $42.3 million increase in loans, a $35.6 million
increase in securities, and a $2.5 million decrease in Federal
funds and other earning assets. Total earning assets at March
31, 1998 consisted of 74.2 percent loans, 25.5 percent
securities, and 0.3 percent Federal funds and other earning
assets, while the March 31, 1997 earning asset mix consisted of
75.7 percent loans, 23.7 percent securities, and 0.6 percent
Federal funds and other earning assets. The change in mix was
caused by two branch acquisitions that involved the purchase of
virtually no loans and the security leverage strategy implemented
in the third quarter of 1997.
Investment Risk Management
CBT has certain securities in its available for sale portfolio
that are classified as derivative securities by banking
regulators. At March 31, 1998 and December 31, 1997,
respectively, CBT had $200,000 and $701,000 in derivative
securities. These amounts represent 0.1 percent and 0.3 percent
of the total securities available for sale at March 31, 1998 and
December 31, 1997, respectively. All are guaranteed by
government agencies and none have a maturity of over 1 year. 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.
CBT Corporation's board approved the implementation of a security
leverage strategy totaling $25 million in July 1997. The Company
believes that the current favorable inflation outlook and
expected moderate economic growth will result in stable to lower
interest rates over the next 3 to 5 years. Given the
Corporation's exceptionally strong capital position, the $25
million position was deemed conservative. With the favorable
spread between borrowing costs and the tax-equivalent yield
available during the first quarter, CBT Corporation borrowed $25
million of FHLB advances at 5.96 percent (original maturity of
approximately 1.5 years in duration) which it used to purchase
tax-exempt municipal securities bearing a tax-equivalent yield of
7.37 percent. Securities purchased mature in approximately
fifteen years, are primarily AAA rated, and generally were either
par bonds or carried premium coupons. The strategy was fully
implemented by September 30, 1997.
Credit Risk Management
CBT manages exposure to credit risk though loan portfolio
diversification by customer, industry, and loan type. As a
result, there is no undue concentration in any single sector.
CBT regularly evaluates economic conditions affecting its lending
markets. Economic indicators such as unemployment levels, real
estate activity, and bankruptcy filings are evaluated. During
the first quarter of 1998, CBT's primary market areas continued
15
to experience favorable unemployment levels while real estate
values softened somewhat. Bankruptcy filings in CBT's markets
have continued to increase during 1998, extending the trend
started in 1997. Management has considered expected economic
trends in assessing the adequacy of the allowance for loan losses
and believes that the allowance for loan losses is adequate in
light of these trends, among other factors. CBT's credit risk is
also diversified by loan type. At March 31, 1998, 40.2 percent
of the portfolio consisted of residential real estate and mobile
home loans, 32.7 percent of commercial and agricultural loans and
27.1 percent of consumer loans.
Credit risk management also includes monitoring the performance
of existing portfolios. CBT has in place a comprehensive
internal credit review program to assess the current financial
condition and operating performance of significant commercial
borrowers.
Loans by type appear below:
($ in thousands) March 30 December 31 March 30
1998 1997 1997
-------------------------------
Commercial, industrial, and
agricultural loans $235,529 $243,801 $221,890
Residential real estate and
mobile home loans 289,951 294,270 280,054
Consumer loans 195,302 202,609 189,106
-------------------------------
Total loans 720,782 740,680 691,050
Less: Unearned interest 9,003 9,486 8,717
-------------------------------
Total loans, net of
unearned interest $711,779 $731,194 $682,333
===============================
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, 1998.
Allowance for Loan Losses
At March 31, 1998, the allowance for loan losses was $9.8
million, or 1.37 percent of net loans outstanding, compared with
$9.2 million, or 1.28 percent at December 31, 1997. The ratio of
the allowance for loan losses to non-performing assets was 124.6
percent at March 31, 1998, compared with 127.3 percent at
December 31, 1997. Non-performing assets consist of non-accrual
loans, loans past-due thirty days or more that are still accruing
interest and other real estate owned.
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 to support this assessment. 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, 1998 based on the current
level of non-performing assets and the expected level of future
charge-offs.
Non-Performing Assets
The table below presents data on CBT's non-performing assets. As
previously defined, non-performing assets consist of non-accrual
loans, loans past due threety days or more that are still
accruing interest and other real estate owned. At March 31,
1998, non-performing assets totaled $7.8 million, or 1.1 percent
of net loans and other real estate owned, compared with $7.5
million, or 1.0 percent of net loans and other real estate owned,
at December 31, 1997.
16
($ in thousands) March 31 December 31 March 31
1998 1997 1997
------------------------------
Non-accrual loans $5,887 $5,533 $5,832
Accruing loans which are
contractually past due
90 days or more 1,665 1,643 1,684
- ----------------------------------------------------------------
Total non-performing loans 7,552 7,176 7,516
Other real estate owned 287 275 117
- ----------------------------------------------------------------
Total non-performing assets $7,839 $7,451 $7,633
================================================================
Non-performing assets ("NPA's") were higher at March 31, 1998
than one year earlier and remain higher than recent historic
levels. Management expects NPA's to remain at this or modestly
higher levels for the next several quarters until the workout
strategies now underway have a positive impact and reduce the
level of NPA's.
Funding Sources
Non-Interest Bearing Deposits
Non-interest bearing deposits, which represent a portion of CBT's
core deposits, were $78.2 million at March 31, 1998, a $1.3
million decline from December 31, 1997. Average non-interest
bearing deposits were $73.1 million for the first three months of
1998 compared with $68.1 million for first three months of 1997.
Non-interest bearing deposits represented 8.7 percent of CBT's
total funding sources at March 31, 1998, compared with 8.4
percent at December 31, 1997. A portion of these deposits was
purchased as a part of two branch deposit acquisitions
consummated in 1997.
Interest-Bearing Liabilities
Interest-bearing liabilities for CBT consist of certain core
deposits, purchased deposits, and other borrowings. At March 31,
1998, interest-bearing liabilities totaled $819.2 million, a
decrease of $44.3 million over December 31, 1997. The decrease
is due primarily to a $30.5 million decrease in interest-bearing
deposits and a $14.2 million increase in Federal funds purchased
and securities sold under agreements to repurchase.
Interest-bearing Core Deposits - In CBT's banking subsidiaries,
NOW, Money Manager, Individual Retirement and savings accounts,
and certificates of deposit under $100,000 are considered core
interest-bearing deposits. At March 31, 1998 these deposits
accounted for 62.0 percent of CBT's total funding sources
compared with 61.7 percent at December 31, 1997.
Purchased Deposits - Purchased deposits, which CBT defines as
certificates of deposit with denominations of $100,000 or more
and brokered certificates of deposit, decreased $5.3 million or
6.2 percent to $79.8 million from $85.1 million at December 31,
1997. Purchased deposits represented 8.9 percent of CBT's total
funding sources at March 31, 1998, compared with 9.0 percent at
December 31, 1997. At March 31, 1998, CBT held $5.6 million of
brokered certificates of deposit. Management does not plan to
add any additional brokered certificates or to offer to renew the
existing brokered certificates of deposits at maturity.
Short-term Borrowings - Short-term borrowings include Federal
funds purchased, securities sold under agreements to repurchase,
US Treasury notes payable, revolving lines of credit, and short-
term Federal Home Loan Bank advances. Management views
borrowings as a cost-effective alternative to purchased deposits
and interest-bearing core deposits and actively manages CBT's
borrowing position to maintain acceptable net interest margins
and liquidity. At March 31, 1998, short-term borrowings
accounted for 15.5 percent of CBT's total funding sources,
compared with 15.6 percent at December 31, 1997. A portion of
this position was established to fund the $25 million security
leverage strategy noted earlier.
17
In July 1998, CBT Corporation implemented an arbitrage strategy
of $25 million. Funding for this strategy was received through
additional FHLB borrowings at a weighted average cost of 5.96%
Asset and Liability Management
Financial 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 optimal 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 a
financial institution. 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 have no
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, 1998 the one year cumulative interest rate GAP, defined as
the ratio of rate sensitive assets to rate sensitive liabilities,
was .88, while at December 31, 1997, the one year cumulative
interest rate GAP was .87. A GAP of less than one indicates
that, over the time horizon measured, more liabilities will
reprice than assets.
GAP as an interest rate risk measurement tool has several
limitations: it is a static measurement; it requires the
establishment of an subjective time horizon; and it 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 the 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 on the financial performance and condition of CBT.
Based on modeling using March 31, 1998 data, CBT would expect its
net interest income to change no more than 4.0 percent under a
200 basis point parallel shift up or down of the yield curve, a
level of risk management deems appropriate. Management expects
the GAP as currently measured to generally fall between .80 and
.90 and thinks this level of interest rate risk exposure is
warranted given its current balance sheet mix, capital position
and interest rate outlook.
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 a certain level of stability with
respect to liquidity. In addition, membership in the Federal
Home Loan Bank of Cincinnati provides a cost-effective alternate
source of funding, as does access to brokered certificates of
deposit. CBT's available for sale investment portfolio also
provides an additional source of liquidity.
18
Capital Management
CBT management believes that a strong capital position is vital
to continued profitability and promotes depositor and investor
confidence. CBT bank subsidiaries are required to maintain
capital levels sufficient to qualify for "well capitalized"
status with banking regulators and to meet anticipated growth
needs. Retained earnings and capital infusions from the parent
are the primary sources 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 and to infuse other subsidiaries with
capital, as required.
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, 1998
Leverage Ratio (Equity 5.00% 11.27% 6.27%
to Assets)
Tier 1 Risk-Based 6.00% 16.07% 10.07%
Total Risk-Based 10.00% 17.32% 7.32%
December 31, 1997
Leverage Ratio (Equity 5.00% 11.32% 6.32%
to Assets)
Tier 1 Risk-Based 6.00% 15.35% 9.35%
Total Risk-Based 10.00% 16.60% 6.60%
================================================================
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.
For the three month period ended March 31, 1998, CBT's
shareholders' equity, exclusive of the unrealized loss on
securities available for sale (net of deferred tax) and stock
repurchases, grew $2.1 million. CBT's internal capital growth
rate (ICGR) for the three months ended March 31, 1998 was 1.76
percent. The ICGR represents the rate at which CBT's
shareholders' equity grew as a result of earnings retained (net
income less dividends paid).
CBT declared a $0.14 per share dividend in the first quarter of
1998, $0.01 per share greater than the amount declared one year
ago. The dividend payout ratio for the first three months of 1998
was 31.9 percent of net income, which was within management's
general payout guideline 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, 1998, CBT had issued and outstanding 7,863,792
shares of common stock held by approximately 1,410 shareholders
of record. Shareholders received cash dividends for each share
of common stock on a quarterly basis in 1997 and 1998.
CBT Corporation common stock is traded on the NASDAQ National
Stock Market under the symbol CBTC.
The following table summarizes common stock prices and cash
dividends declared in 1998 and 1997. The price information
reflects the range of prices for CBT Corporation common stock as
reported by NASDAQ.
19
--------------------------------
Price
Quarter High Low Dividends
--------------------------------
1st Quarter 1998 36.88 31.38 0.14
4th Quarter 1997 23.50 32.75 0.13
3rd Quarter 1997 21.00 25.63 0.13
2nd Quarter 1997 20.25 24.50 0.13
1st Quarter 1997 20.50 26.50 0.13
4th Quarter 1996 20.00 28.00 0.12
3rd Quarter 1996 20.00 23.50 0.12
2nd Quarter 1996 21.50 24.25 0.12
==================================================================
Recently Issued Accounting Standards
Effective January 1, 1998, the Corporation adopted SFAS no. 130 "
Reporting Comprehensive Income". This pronouncement establishes
standards for the reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a
full set of general-purpose financial statements. The adoption of
this pronouncement did not have a material impact on the
Corporation's consolidated financial statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information" (FAS 131. FAS 131 requires disclosure
of selected information about operating segments including
segment income, revenues and asset data. Operating segments, as
defined in FAS 131, would include those components for which
financial information is available and evaluated regularly by the
chief operating decision makers in assessing performance and
making resource allocation determinations for operating
components such as those which exceed 10 percent or more of
combined revenue, income or assets. The Corporation will be
required to adopt the provisions of FAS 131 in 1998. The
standards are not expected to have a material impact on the
Corporation's consolidated financial statements.
Merger
On January 10, 1998, CBT and Mercantile Bancorporation, Inc.
(Mercantile), a Missouri corporation, entered into an Agreement
and Plan of Merger, pursuant to which CBT will be merged with and
into Ameribanc, Inc., a wholly-owned subsidiary of Mercantile.
Ameribanc, Inc. will be the surviving entity resulting from the
merger.
SPECIAL NOTE
This Quarterly Report on Form 10-Q contains statements relating
to future results of the Corporation that are considered "forward-
looking" within the meaning of the Private Securities Litigation
and Reform Act of 1995. Actual results may differ materially
from those expressed or implied as a result of certain risks and
uncertainties, including, but not limited to, changes in
political and economic conditions, interest rate fluctuations,
fixed income market fluctuations, personal and corporate
customers' bankruptcies, inflation, acquisitions and integrations
of acquired businesses, technological change, changes in law,
changes in fiscal, monetary, regulatory and tax policies,
monetary fluctuations, success in gaining regulatory approvals
when required as well as other risks and uncertainties detailed
form time to time in the filings of the Corporation with the
Securities and Exchange Commission.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
20
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) No matters were submitted to a vote by Security
Holders during the three months ended March 31, 1998.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K:
During the quarter ended March 31, 1998, Registrant filed one (1)
Current Reports on Form 8-K as follows:
(1) In its Current Report on Form 8-K, dated January 10,
1998 and filed on January 15, 1998, under Item 5, Registrant
disclosed that it had entered into an Agreement and Plan of
Merger pursuant to which CBT will be merged with and into
Ameribanc, Inc., a Missouri corporation and a wholly-owned
subsidiary of Mercantile Bancorporation, Inc.
21
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 13, 1998 SIGNED:
__________________________
Paula J. Laird
Vice President and Controller
22
EXHIBIT INDEX
NUMBER DESCRIPTION PAGE
27 Financial Data Schedule 23 - 24
23
EXHIBIT 27
FINANCIAL DATA SCHEDULE
(filed in electronic format)
FOR
CBT CORPORATION
For the Period Ended
March 30, 1998