UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934
For the quarter ended June 30, 1997 Commission File Number
-------------
0-13030
TRANS FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-1048868
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
500 East Main Street, Bowling Green, Kentucky 42101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 781-5000
Indicate by check mark whether the registrant (1) 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 _
The number of shares outstanding of the issuer's class of common stock on August
12, 1997: 11,441,035 shares.
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
Consolidated Balance Sheets
(Unaudited)
In thousands, except share data
<CAPTION>
June 30 December 31 June 30
1997 1996 1996
Assets
<S> <C> <C> <C>
Cash and due from banks ................. $ 72,131 $ 75,054 $ 56,902
Interest-bearing deposits with banks .... 98 98 98
Mortgage loans held for sale ............ 80,489 67,999 56,232
Securities available for sale (amortized
cost of $252,082 as of June 30, 1997;
$285,264 as of December 31, 1996;
and $290,696 as of June 30, 1996) .... 251,829 285,155 287,481
Loans, net of unearned income ........... 1,473,337 1,450,999 1,348,906
Less allowance for loan losses .......... 21,016 18,065 16,344
----------- ----------- -----------
Net loans ............................ 1,452,321 1,432,934 1,332,562
Premises and equipment, net ............. 36,488 37,377 39,795
Mortgage servicing rights ............... 45,397 41,866 41,425
Other assets ............................ 41,937 63,469 52,201
=========== =========== ===========
Total assets ......................... $ 1,980,690 $ 2,003,952 $ 1,866,696
=========== =========== ===========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing ................. $ 226,140 $ 231,717 $ 226,807
Interest bearing ..................... 1,314,609 1,347,500 1,280,526
----------- ----------- -----------
Total deposits ....................... 1,540,749 1,579,217 1,507,333
Federal funds purchased and
repurchase agreements ................ 93,607 71,879 29,530
Other short-term borrowings ............. 45,000 55,000 45,000
Long-term debt .......................... 140,628 140,903 141,179
Other liabilities ....................... 20,812 25,637 19,971
----------- ----------- -----------
Total liabilities .................... 1,840,796 1,872,636 1,743,013
Shareholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued and
outstanding 11,437,962; 11,372,532;
and 11,312,500 shares, respectively 21,446 21,324 21,211
Additional paid-in capital ........... 45,570 44,745 44,108
Retained earnings .................... 75,317 67,790 63,089
Unrealized net loss on
securities available for sale,
net of tax ........................ (257) (92) (2,073)
Employee Stock Ownership Plan shares
purchased with debt ............... (2,182) (2,451) (2,652)
----------- ----------- -----------
Total shareholders' equity ........... 139,894 131,316 123,683
----------- ----------- -----------
Total liabilities
and shareholders' equity ........... $ 1,980,690 $ 2,003,952 $ 1,866,696
=========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Income
(Unaudited)
In thousands, except per share data
For the periods ended June 30
<CAPTION>
Three Months Six Months
1997 1996 1997 1996
Interest income
<S> <C> <C> <C> <C>
Loans, including fees ............... $ 34,337 $ 30,905 $67,945 $ 60,906
Federal funds sold and resale
agreements ........................ -- 48 -- 50
Securities available for sale ....... 3,597 4,129 7,417 8,170
Mortgage loans held for sale ........ 1,568 1,128 2,797 1,909
Interest-bearing deposits with banks 2 5 4 9
------- -------- ------- --------
Total interest income ............... 39,504 36,215 78,163 71,044
Interest expense
Deposits ............................ 16,035 14,668 31,540 29,011
Federal funds purchased
and repurchase agreements ......... 699 428 1,290 1,020
Long-term debt and other
borrowings ........................ 3,056 2,844 6,319 5,194
------- -------- ------- --------
Total interest expense .............. 19,790 17,940 39,149 35,225
------- --------
Net interest income ................... 19,714 18,275 39,014 35,819
Provision for loan losses ........... 2,900 8,421 4,850 9,642
------- -------- ------- --------
Net interest income after
provision for loan losses ........... 16,814 9,854 34,164 26,177
Non-interest income
Service charges on deposit accounts . 2,582 2,419 5,077 4,655
Mortgage banking income ............. 2,612 2,331 5,369 4,984
Gains (losses) on sales of securities
available for sale, net ........... (88) (21) 133 (6)
Trust services ...................... 677 441 1,238 902
Brokerage income .................... 708 667 1,418 1,328
Other ............................... 2,684 1,467 3,859 2,676
------- -------- ------- --------
Total non-interest income ........... 9,175 7,304 17,094 14,539
Non-interest expenses
Compensation and benefits ........... 8,577 10,910 17,185 20,143
Net occupancy expense ............... 1,156 1,734 2,306 2,938
Furniture and equipment expense ..... 1,615 2,172 3,181 3,839
Deposit insurance ................... 106 267 209 511
Professional fees ................... 712 1,219 1,378 1,915
Postage, printing & supplies ........ 867 1,153 1,847 2,130
Communications ...................... 712 615 1,370 1,184
Other ............................... 3,411 6,695 6,719 10,224
------- -------- ------- --------
Total non-interest expenses ......... 17,156 24,765 34,195 42,884
------- -------- ------- --------
Income (loss) before income taxes ..... 8,833 (7,607) 17,063 (2,168)
Income tax expense (credit) ........... 2,971 (2,424) 5,653 (721)
------- -------- ------- --------
Net income (loss) ..................... $ 5,862 $ (5,183) $11,410 $ (1,447)
Primary earnings (loss) per share ..... $ 0.50 $ (0.45) $ 0.98 $ (0.13)
======= ======== ======= ========
Fully-diluted earnings (loss) per share $ 0.50 $ (0.45) $ 0.97 $ (0.13)
======= ======== ======= ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
In thousands
For the six months ended June 30 1997 1996
Balance January 1 $131,316 $129,767
Net income 11,410 (1,447)
Issuance of common stock 946 272
Cash dividends declared:
Common stock (3,882) (3,616)
Change in unrealized loss on
securities available for sale,
net of taxes (165) (1,670)
ESOP debt reduction 269 377
============== =============
Balance at end of period $139,894 $123,683
============== =============
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
(Unaudited)
In thousands
For the six months ended June 30
<CAPTION>
1997 1996
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) ................................................ $ 11,410 $ (1,447)
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses .................................... 4,850 9,642
Deferred tax expense ......................................... (472) (281)
Loss (gain) on sale of securities available for sale ......... (133) 6
Gain on sale of mortgage loans held for sale ................. (1,910) (1,797)
Writedown of premises and equipment .......................... -- 593
Gain on sale of premises and equipment ....................... (3) (60)
Gain on sale of Tennessee offices ............................ (1,241) --
Depreciation and amortization of fixed assets ................ 2,549 3,447
Amortization of intangible assets ............................ 647 687
Amortization of premium on securities and loans, net ......... 418 586
Amortization of mortgage servicing rights .................... 2,957 2,407
Decrease (increase) in accrued interest receivable ............... 895 (844)
Decrease in other assets ......................................... 21,169 7,153
Increase (decrease) in accrued interest payable ................. (102) 326
Increase (decrease) in other liabilities ......................... (4,751) 3,777
Sale of mortgage loans held for sale ............................. 410,164 171,529
Originations of mortgage loans held for sale ..................... (420,744) (165,982)
--------- ---------
Net cash provided by operating activities ...................... 25,703 29,742
Cash flows from investing activities:
Net decrease in interest-bearing deposits with banks ............. -- 99
Proceeds from sale of securities available for sale .............. 2,604 5,118
Proceeds from prepayment and call of securities available for sale 5,245 28,028
Proceeds from maturities of securities available for sale ........ 30,670 12,195
Purchase of securities available for sale ........................ (5,622) (37,747)
Net decrease in loans ............................................ (25,560) (114,009)
Net cash outflow from sale of Tennessee offices .................. (13,789) --
Purchase and origination of mortgage servicing rights ............ (6,488) (12,981)
Proceeds from sale of foreclosed assets .......................... 407 1,326
Purchases of premises and equipment .............................. (2,648) (5,296)
Proceeds from disposal of premises and equipment ................. 232 345
--------- ---------
Net cash used in investing activities .......................... (14,949) (122,922)
Cash flows from financing activities:
Net increase (decrease) in deposits .............................. (22,463) 62,850
Net increase (decrease) in federal funds purchased
and repurchase agreements ...................................... 21,728 (46,064)
Net decrease in other short-term borrowings ...................... (10,000) (14)
Proceeds from issuance of long-term debt ......................... -- 55,000
Repayment of long-term debt ...................................... (6) (49)
Proceeds from issuance of common stock ........................... 946 272
Dividends paid ................................................... (3,882) (3,616)
--------- ---------
Net cash provided by (used in) financing activities ............ (13,677) 68,379
--------- ---------
Net decrease in cash and cash equivalents ........................ (2,923) (24,801)
Cash and cash equivalents at beginning of year ................... 75,054 81,703
--------- ---------
Cash and cash equivalents at end of period ....................... $ 72,131 $ 56,902
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of Trans Financial, Inc. and its
subsidiaries (the "company") conform to generally accepted accounting principles
and general practices within the banking industry. The consolidated financial
statements include the accounts of Trans Financial, Inc. and its wholly-owned
subsidiaries. All significant inter-company accounts and transactions have been
eliminated in consolidation. A description of other significant accounting
policies is presented in the 1996 annual report on Form 10-K.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
reflected in the accompanying unaudited financial statements. Results of interim
periods are not necessarily indicative of results to be expected for the full
year.
(2) Allowance for Loan Losses
An analysis of the changes in the allowance for loan losses follows:
<TABLE>
In thousands
For the periods ended June 30
<CAPTION>
Three Months Six Months
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Balance beginning of period .................... $ 19,010 $ 16,051 $ 18,065 $ 15,779
Provision for loan losses .................... 2,900 8,421 4,850 9,642
Loans charged off ............................ (1,141) (8,398) (2,273) (9,519)
Recoveries of loans previously charged off ... 247 270 374 442
-------- -------- -------- --------
Net charge-offs .............................. (894) (8,128) (1,899) (9,077)
-------- -------- -------- --------
Balance at end of period ....................... $ 21,016 $ 16,344 $ 21,016 $ 16,344
======== ======== ======== ========
</TABLE>
(3) Impaired Loans
The company's recorded investment in loans considered impaired in
accordance with Statement of Financial Accounting Standards No. 114, Accounting
by Creditors for Impairment of a Loan ("SFAS 114"), was $4,694,000 at June 30,
1997. Of that amount, $2,356,000 represents loans for which an allowance for
loan losses, in the amount of $639,000, has been established under SFAS 114.
Impaired loans totaled $6,534,000 at June 30, 1996, including $2,101,000 of
loans for which an allowance was established totaling $759,000.
The average recorded investment of impaired loans was $4,476,000 and
$9,644,000 for the three months ended June 30, 1997 and 1996, respectively, and
$4,456,000 and $11,122,000 for the six months ended June 30, 1997 and 1996,
respectively. Interest income recognized on impaired loans totaled $23,000 for
the three months ended June 30, 1997, and $46,000 for the six-month period ended
June 30, 1997. For the comparable periods in 1996, interest income on impaired
loans totaled $1,000 and $15,000, respectively.
(4) New Accounting and Disclosure Standards
Earnings per Share
During the first quarter of 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, Earnings per Share
("SFAS 128"), which established new standards for the calculation and
presentation of earnings per share ("EPS") in financial statements. SFAS 128,
which will become effective in the fourth quarter of 1997 and may not be adopted
earlier, replaces primary EPS with basic EPS, and fully-diluted EPS with diluted
EPS. Basic EPS for the company will be slightly higher than primary EPS because
common stock equivalents will not be considered in basic EPS; diluted EPS for
the company will be essentially the same as fully-diluted EPS. When adopted in
the fourth quarter of 1997, all prior periods will be restated to conform to the
SFAS 128 presentation.
Under SFAS 128, basic earnings (loss) per share would have been $0.51 and
$(0.46) for the quarters ended June 30, 1997 and 1996, respectively. Diluted
earnings (loss) per share would have been $0.50 and $(0.45), respectively, for
those same periods. For the six months ended June 30, 1997 and 1996, basic
earnings (loss) per share would have been $1.00 and $(0.13), respectively, and
diluted earnings (loss) per share would have been $0.97 and $(0.13),
respectively.
Derivatives and Certain Other Financial Instruments
Also during the first quarter of 1997, the Securities and Exchange
Commission in Release #33-7386 clarified and expanded existing disclosure
requirements for derivatives and other financial instruments sensitive to market
risk. This release mandates additional detail regarding accounting policies
followed with respect to derivatives, and expanded qualitative and quantitative
information regarding the market risk inherent in derivatives and other
financial instruments.
The company will provide the market risk information in its Annual Report
on Form 10-K for the year ended December 31, 1997. Accounting policies with
respect to derivatives are as follows:
The company uses interest rate contracts (swaps and floors) to manage
its sensitivity to interest rate risk. These off-balance-sheet transactions
are employed to hedge the inherent interest rate risk of specific
on-balance-sheet assets or liabilities, rather than for speculative trading
activity. These instruments are designated as hedges on the trade date and
would not be entered into unless highly correlated with the financial
instruments being hedged. Generally, a high correlation exists when the
contract and the hedged instrument have the same maturity and similar rate
characteristics. Interest income and expense for each contract is accrued
over the term of the agreement as an adjustment to the yield of the related
asset or liability. Similarly, transaction fees are deferred and amortized
through interest income and expense over the lives of the agreements. The
fair market value of these instruments is not included in the financial
statements.
Interest rate floor contracts are currently being utilized by the
company to mitigate the market risk of the mortgage servicing rights
portfolio due to prepayments associated with a decline in interest rates.
Under these contracts the company would receive interest on the notional
amount to the extent that a specified market rate for U.S. Treasury
securities falls below the designated "floor" rate. The cost of these
contracts is included in other assets in the consolidated balance sheet and
is amortized against mortgage banking income on a straight-line basis over
the lives of the contracts.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Trans Financial, Inc. ("the company") is a bank and savings and loan
holding company registered under the Bank Holding Company Act of 1956 and the
Home Owners' Loan Act. As of June 30, 1997, the company had two commercial bank
subsidiaries--Trans Financial Bank, National Association ("TFB-KY") and Trans
Financial Bank Tennessee, National Association ("TFB-TN")--and one thrift
subsidiary--Trans Financial Bank, F.S.B.("TFB-FSB"). In addition, the company
operates as subsidiaries of TFB-KY a full-service securities
broker/dealer--Trans Financial Investment Services, Inc. ("TFIS")--and a
mortgage banking company--Trans Financial Mortgage Company ("TFMC").
Collectively, the thrift and the two bank subsidiaries are referred to in this
report as "the banks."
During April 1997, the company sold substantially all of the deposits,
premises and equipment, and certain other assets of its Lebanon and Sparta,
Tennessee offices. These two offices represented $17 million of the company's
total deposits as of March 31, 1997.
On July 26, 1997, TFB-FSB was merged into TFB-KY, and its Tennessee
operations were sold to TFB-TN. These transactions consolidated the company's
banking operations into two national bank charters--one consisting of all of the
company's banking activities in Kentucky and the other of all of the Tennessee
banking activity.
On June 26, 1997, the company announced an agreement for the proposed
transfer of the Trans Adviser family of mutual funds ("the Funds") to the
Countrywide Family of Funds, subject to approval by the shareholders of the
Funds. TFB-KY currently acts as investment adviser to the Funds, which had total
assets of $159 million as of June 30, 1997. The proposed transfer will not
have a significant impact on the company's financial condition or results
of operations.
The discussion that follows is intended to provide additional insight into
the company's financial condition and results of operations. This discussion
should be read in conjunction with the consolidated financial statements and
accompanying notes presented in Item 1 of Part I of this report.
Results of Operations
Overview
For the three months ended June 30, 1997, the company earned $5.9 million,
or $0.50 per share, compared to a net loss of $5.2 million, or $0.45 per share,
for the second quarter of 1996. The loss in the second quarter of 1996 reflects
pre-tax charges totaling $5.8 million related to an initiative to refocus the
company's resources on its core financial services, reduce operating expenses
and exit from less-profitable initiatives. The company also recorded an $8.4
million provision for loan losses in the second quarter of 1996, after taking
partial charge-offs totaling $7.0 million on three non-performing loans. Results
for the second quarter of 1997 produced an annualized return on average assets
of 1.21% and a return on average shareholders' equity of 17.15%, compared with
(1.13)% and (15.78)%, respectively, for the second quarter of 1996.
For the first half of 1997, the company recorded net income of $11.4
million, or $0.98 per share, compared to a net loss of $1.4 million, or $0.13
per share, in the same period of 1996, which includes the impact of the
previously-mentioned charges and the increase in the provision for loan losses.
Return on average assets for the first six months of 1997 was 1.18% and the
return on average equity was 16.95%, compared with (0.16)% and (2.21)%,
respectively, for the first half of 1996.
Net Interest Income
Net interest income on a tax-equivalent basis totaled $20.1 million in the
second quarter of 1997, compared with $18.7 million in the comparable 1996
period--a 7% increase. For the second quarter of 1997, the net interest margin
(net interest income as a percentage of average interest-earning assets) on a
tax-equivalent basis increased three basis points, from 4.47% to 4.50%, compared
to the same period in 1996. For the first six months of 1997, the net interest
margin decreased three basis points, from 4.50% to 4.47%, as compared to first
half 1996.
Approximately $640 million of the company's loans are tied to the prime
rate. The prime rate increased to 8.25% in February 1996, and remained constant
through the remainder of 1996 and through most of the first quarter of 1997.
During this time, the company's funding costs continued to rise, as the company
placed greater reliance on wholesale funding sources, such as brokered deposits
and other borrowed funds. As a result, the company's net interest-rate spread
(the difference between the average yield on interest-earning assets and the
average rate paid on interest-bearing liabilities) decreased, negatively
impacting the net interest margin. This negative impact was partially offset
during 1996 by increased interest income due to loan growth. As loan growth has
slowed during the first half of 1997, the net interest-rate spread dropped nine
basis points as compared to the first six months of 1996. The prime rate
increased twenty-five basis points to 8.50% near the end of the first quarter of
1997, which has had a slight positive impact on net interest income in the
second quarter of 1997.
The following tables show, for the six- and three-month periods ended June
30, 1997 and 1996, the relationship between interest income and expense and the
levels of average interest-earning assets and average interest-bearing
liabilities. The tables also reflect the general increase in interest rates on
total interest-bearing liabilities over the past year, and increased volumes of
commercial loans, certificates of deposit (primarily brokered certificates of
deposit), and borrowed funds. During 1996 the company implemented a program
that sweeps excess funds from targeted interest-bearing demand accounts
into money market accounts. This program has significantly reduced the Federal
Reserve Bank reserve requirements for the company, and is the primary reason for
the change in average balances shown in the tables for these two types of
interest-bearing accounts.
<TABLE>
Average Consolidated Balance Sheets and Net Interest Analysis
For the six months ended June 30
Dollars in thousands
<CAPTION>
1997 1996
Average Average Average Average
Balance Interest Rate Balance Interest Rate
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned income * ..................... $1,453,064 $ 68,101 9.45 $1,292,141 $61,114 9.54%
Securities * ........................................ 262,601 7,961 6.11 293,940 8,788 6.03%
Mortgage loans held for sale ........................ 74,245 2,797 7.60 54,285 1,909 7.09%
Federal funds sold
and other interest income ......................... 131 4 6.16 1,867 59 6.37%
---------- ------- ---------- -------
Total interest-earning assets /
interest income ..................................... 1,790,041 78,863 8.88 1,642,233 71,870 8.83%
------- -------
Non-interest-earning assets:
Cash and due from banks ............................. 51,013 62,392
Premises and equipment .............................. 37,307 42,692
Other assets ........................................ 66,129 60,240
======= =======
Total assets .......................................... $1,944,490 $1,807,557
========== ==========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand (NOW) ..................... 34,474 541 3.16 $ 185,411 $ 2,635 2.87%
Savings deposits .................................. 103,205 1,409 2.75 117,692 1,552 2.66%
Money market accounts ............................. 270,557 4,376 3.26 98,893 1,481 3.02%
Certificates of deposit ........................... 832,577 22,913 5.55 756,147 20,909 5.58%
Other time deposits ............................... 82,822 2,301 5.60 86,925 2,434 5.65%
--------- ------- ---------- -------
Total interest-bearing deposits ................... 1,323,635 31,540 4.81 1,245,068 29,011 4.70%
Federal funds purchased
and repurchase agreements ........................... 50,722 1,290 5.13 43,485 1,020 4.73%
Long-term debt and
and other borrowings ................................ 201,669 6,319 6.32 170,262 5,194 6.15%
--------- ------- ---------- -------
Total borrowed funds ................................ 252,391 7,609 6.08 213,747 6,214 5.86%
--------- ------- ---------- -------
Total interest-bearing liabilities /
interest expense .................................... 1,576,026 39,149 5.01 1,458,815 35,225 4.87%
------- -------
Non-interest-bearing liabilities:
Non-interest-bearing deposits ....................... 208,855 198,338
Other liabilities ................................... 23,894 18,969
--------- ---------
Total liabilities ................................... 1,808,775 1,676,122
Shareholders' equity .................................. 135,715 131,435
--------- ---------
Total liabilities
and shareholders' equity ............................ $1,944,490 $1,807,557
========= =========
Net interest-rate spread .............................. 3.87% 3.96%
Impact of non-interest bearing
sources and other changes in
balance sheet composition ........................... 0.60% 0.54%
------ ------
Net interest income /
margin on interest-earning assets ................... $39,714 4.47% $36,645 4.50%
======= ====== ========= ======
*Includes tax-equivalent adjustment
</TABLE>
<PAGE>
<TABLE>
Average Consolidated Balance Sheets and Net Interest Analysis
For the three months ended June 30
Dollars in thousands
<CAPTION>
1997 1996
Average Average Average Average
Balance Interest Rate Balance Interest Rate
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned income * .. $1,452,174 $ 34,412 9.50 $1,314,453 $30,999 9.46%
Securities * ..................... 253,617 3,863 6.11 294,674 4,441 6.04%
Mortgage loans held for sale ..... 79,882 1,568 7.87 62,370 1,128 7.25%
Federal funds sold
and other interest income ...... 164 2 4.89 3,451 53 6.16%
--------- --------- --------- ------
Total interest-earning assets /
interest income .................. 1,785,837 39,845 8.95 1,674,948 36,621 8.77%
--------- ------
Non-interest-earning assets:
Cash and due from banks .......... 52,417 58,738
Premises and equipment ........... 37,009 43,215
Other assets ..................... 65,828 64,107
========= =========
Total assets ....................... $1,941,091 $1,841,008
========= =========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand (NOW) .. $ 35,059 $ 286 3.27$ 124,530 $ 922 2.97%
Savings deposits ............... 102,276 722 2.83 114,834 761 2.66%
Money market accounts .......... 270,721 2,236 3.31 156,933 1,166 2.98%
Certificates of deposit ........ 831,721 11,620 5.60 774,824 10,610 5.49%
Other time deposits ............ 82,246 1,171 5.71 86,501 1,209 5.61%
--------- --------- --------- ------
Total interest-bearing deposits 1,322,023 16,035 4.86 1,257,622 14,668 4.68%
Federal funds purchased
and repurchase agreements ........ 53,481 699 5.24 37,084 428 4.63%
Long-term debt and
and other borrowings ............. 189,743 3,056 6.46 187,520 2,844 6.08%
--------- --------- --------- ------
Total borrowed funds ............. 243,224 3,755 6.19 224,604 3,272 5.84%
--------- --------- --------- ------
Total interest-bearing liabilities /
interest expense ................. 1,565,247 19,790 5.07 1,482,226 17,940 4.85%
--------- ------
Non-interest-bearing liabilities:
Non-interest-bearing deposits .... 215,873 205,683
Other liabilities ................ 22,879 21,038
--------- ---------
Total liabilities ................ 1,803,999 1,708,947
Shareholders' equity ............... 137,092 132,061
--------- ---------
Total liabilities
and shareholders' equity ......... $1,941,091 $1,841,008
========= =========
Net interest-rate spread ........... 3.88% 3.92%
Impact of non-interest bearing
sources and other changes in
balance sheet composition ........ 0.62% 0.55%
---- ----
Net interest income /
margin on interest-earning assets $20,055 4.50% $18,681 4.47%
======= ==== ====== ====
*Includes tax-equivalent adjustment
</TABLE>
Net interest margin is net interest income divided by average interest-earning
assets. For computational purposes, non-accrual loans are included in
interest-earning assets. Net interest rate spread is the difference between the
average rate of interest earned on interest-earning assets and the average rate
of interest expensed on interest-bearing liabilities. Average balances are based
on daily balances and average rates are based on a 365-day year.
<PAGE>
Analysis of Changes in Net Interest Income
Shown in the following tables are changes in interest income and interest
expense resulting from changes in volumes (average balances) and changes in
interest rates for the six- and three-month periods ended June 30, 1997, as
compared to the same periods in 1996.
Six Months 1997 vs. 1996
In thousands
Increase (decrease)
in interest income and expense
due to changes in:
Volume Rate Total
Interest-earning assets:
Loans ............................ $ 7,547 $(560) $ 6,987
Securities ....................... (949) 122 (827)
Mortgage loans held for sale ..... 744 144 888
Federal funds sold
and other interest income ...... (53) (2) (55)
------- ----- -------
Total interest-earning assets .... 7,289 (296) 6,993
Interest-bearing liabilities:
Interest-bearing demand (NOW) .... (2,343) 249 (2,094)
Savings deposits ................. (196) 53 (143)
Money market accounts ............ 2,767 128 2,895
Certificates of deposit .......... 2,104 (100) 2,004
Other time deposits .............. (114) (19) (133)
------- ----- -------
Total interest-bearing deposits 2,218 311 2,529
Federal funds purchased
and repurchase agreements ...... 179 91 270
Long-term debt and
and other borrowings ........... 981 144 1,125
------- ----- -------
Total borrowed funds ........... 1,160 235 1,395
------- ----- -------
Total interest-bearing liabilities 3,378 546 3,924
------- ----- -------
Increase (decrease)
in net interest income ......... $ 3,911 $(842) $ 3,069
======= ===== =======
The change in interest due to both rate and volume has been allocated to
changes in average volume and changes in average rates in proportion to the
absolute dollar amounts of the change in each.
<PAGE>
Second Quarter 1997 vs. 1996
In thousands
Increase (decrease)
in interest income and expense
due to changes in:
Volume Rate Total
Interest-earning assets:
Loans ............................ $ 3,263 $ 150 $ 3,413
Securities ....................... (625) 47 (578)
Mortgage loans held for sale ..... 337 103 440
Federal funds sold
and other interest income ...... (42) (9) (51)
------- ----- -------
Total interest-earning assets .... 2,933 291 3,224
Interest-bearing liabilities:
Interest-bearing demand (NOW) .... (722) 86 (636)
Savings deposits ................. (87) 48 (39)
Money market accounts ............ 927 143 1,070
Certificates of deposit .......... 791 219 1,010
Other time deposits .............. (60) 22 (38)
------- ----- -------
Total interest-bearing deposits 849 518 1,367
Federal funds purchased
and repurchase agreements ...... 209 62 271
Long-term debt and
and other borrowings ........... 34 178 212
------- ----- -------
Total borrowed funds ........... 243 240 483
------- ----- -------
Total interest-bearing liabilities 1,092 758 1,850
------- ----- -------
Increase (decrease)
in net interest income ......... $ 1,841 $(467) $ 1,374
======= ===== =======
The change in interest due to both rate and volume has been allocated to
changes in average volume and changes in average rates in proportion to the
absolute dollar amounts of the change in each.
Provision for Loan Losses
The provision for loan losses was $2.9 million (1.34% of average loans, on
an annualized basis, excluding mortgage loans held for sale) for the second
quarter of 1997, compared with $8.4 million (2.58% of average loans) for the
comparable period of 1996. Net loan charge-offs were $894 thousand (0.25% of
average loans) for the second quarter of 1997, compared with $8.1 million (2.49%
of average loans) for the second quarter of 1996.
The $8.4 million loan loss provision in the second quarter of 1996 was due
to several factors:
1) The charge-off of $7.0 million on three problem loans. Prior to the
second quarter of 1996, management expected two of these three borrowers to
be sold as going concerns and the loans to be repaid from the sales
proceeds. As a result, the company had previously allocated $4.2 million in
the allowance for loan losses for these three loans. Due to the rapid
deterioration in the financial condition of those borrowers in the second
quarter of 1996 and the resulting loss of interest by several potential
buyers, sale prospects became unlikely. As the possibility of sales as
going concerns grew less likely, management concluded that the collateral
securing the loans would probably have to be liquidated, resulting in
larger than anticipated losses on the loans. 2) Recent adverse loss trends
for consumer loans resulting from unprecedented levels of bankruptcies,
particularly personal bankruptcies in Kentucky and Tennessee. 3) Three
additional loans over $1 million (totaling $6.6 million) for which
information became known to the company during the quarter which caused
management to have serious doubts as to the ability of the borrowers to
comply with the loan repayment terms, but which were not included in
non-performing loans at June 30, 1996. 4) Continued strong growth in the
loan portfolio, particularly in large commercial relationships (over $5
million).
For the first six months of 1997, the provision for loan losses was $4.9
million (0.67% of average loans), compared with $9.6 million (1.50% of average
loans) for the comparable period of 1996. Net loan charge-offs were $1.9
million (0.26% of average loans) for the first half of 1997, compared with
$9.1 million (1.41% of average loans) for the first six months of 1996.
The provision for loan losses and the level of the allowance for loan
losses reflect the quality of the loan portfolio and result from management's
evaluation of the risks in the loan portfolio. The increased provision also
provides for overall growth in the loan portfolio. Further discussion on loan
quality and the allowance for loan losses is included in the Asset Quality
discussion later in this report.
Non-Interest Income
Non-interest income for the second quarter of 1997 increased $1.9 million
over the second quarter of 1996. This increase reflects a $1.2 million gain on
the sales of the two Tennessee offices which were sold during the quarter. The
growth in the mortgage servicing portfolio during the past year resulted in a
$281 thousand increase in mortgage banking income, while trust and brokerage
income increased $287 thousand, reflecting the company's expanding trust and
investment services business.
For the six-month periods (excluding the $1.2 million gain), non-interest
income increased $1.3 million from 1996 to 1997. The improvement was provided in
approximately equal amounts from service charges on deposit accounts, from the
mortgage banking business and from the trust and investment services business.
Non-Interest Expenses
Non-interest expenses decreased $1.8 million for the second quarter of
1997, compared to the second quarter of 1996 (excluding the $5.8 million of
charges related to the refocus initiative). This represents a 10% decrease from
second quarter 1996 and is a result of the refocus initiative.
For the six-month periods, non-interest expenses decreased $2.9 million, or
8%, in 1997 as compared to the first half of 1996 (excluding the $5.8 million of
charges related to the refocus initiative).
Based on a comparison of non-interest expenses for the second quarter of
1997 to the second quarter of 1996 (excluding the $5.8 million of charges
related to the refocus initiative), total operating expenses have been reduced
by approximately $7 million on an annualized pre-tax basis. With the major
components of the refocus initiative in place by year-end 1996, management
believes the non-interest expenses incurred in the first half of 1997 are
representative of the company's operating expense for the remainder of 1997.
As a result of higher revenues and lower operating expenses, the efficiency
ratio (a measure of operating expenses per dollar of income) decreased to 62.1%
in the second quarter of 1997 (excluding the $1.2 million gain)--a substantial
improvement over the 74.2% efficiency ratio in second quarter 1996 (excluding
the $5.8 million of charges related to the refocus initiative).
Income Taxes
Income tax expense totaled $3.0 million for the second quarter of 1997,
compared with a tax credit of $2.4 million in the comparable 1996 period. These
represent effective tax rates of 33.6% and 31.9%, respectively. For the six
months ended June 30, 1997, the company's effective tax rate was 33.1%, compared
to 33.3% in the first half of 1996.
Balance Sheet Review
Overview
Assets at June 30, 1997 totaled $1.981 billion, compared with $2.004
billion at December 31, 1996, and $1.867 billion a year ago. Average total
assets for the second quarter increased $100 million (5%) over the past year to
$1.941 billion. Average interest-earning assets increased $111 million to $1.786
billion.
Loans
The company experienced annualized loan growth of 7% during the second
quarter of 1997. Total loans, net of unearned income, averaged $1.452 billion in
the second quarter of 1997, excluding mortgage loans held for sale of $79.9
million. For the comparable period in 1996, loans averaged $1.314 billion,
excluding the $62.4 million of mortgage loans held for sale.
At June 30, 1997, loans net of unearned income (excluding mortgage loans
held for sale) totaled $1.473 billion, compared with $1.451 billion at December
31, 1996, and $1.349 billion a year ago. The company experienced slower loan
growth during the first half of 1997 than in the past several quarters, due to
the payoff of several of the company's larger commercial relationships. These
payoffs were the result of permanent refinancings of real estate loans and the
sale of one borrower to a publicly-held company. The company currently
anticipates mid- to upper-single-digit loan growth to continue through the
remainder of 1997.
As of June 30, 1997, the company's 47 largest credit relationships
consisted of loans and loan commitments ranging from $5 million to $16.5
million, none of which was classified as non-performing. The aggregate amount of
these credit relationships was $453 million. These large credit relationships
have been underwritten and structured to minimize the company's exposure to
loss. However, a significant deterioration in the financial condition of one or
more of these borrowers could result in an increase in the company's loan
charge-offs. In addition, the prepayment of one or more of these credits or
their refinancing at another financial institution may have a negative impact on
the company's future loan growth.
Asset Quality
Non-performing loans, which include non-accrual loans, accruing loans past
due 90 days or more and restructured loans, totaled $9.5 million as of June 30,
1997, down $1.1 million from December 31, 1996, and down $1.6 million from the
end of the second quarter of 1996. The ratio of non-performing loans to total
loans (net of unearned income) was 0.64% at June 30, 1997, compared with 0.73%
at the end of 1996 and 0.82% a year ago. Non-performing assets, which include
non-performing loans, foreclosed real estate and other foreclosed property,
totaled $10.7 million as of June 30, 1997, as compared to $14.7 million at June
30, 1996. The ratio of non-performing assets to total assets decreased to 0.54%
at June 30, 1997, from 0.79% a year ago.
The following table presents information concerning non-performing assets,
including non-accrual and restructured loans. Management classifies commercial
and commercial real estate loans as non-accrual when principal or interest is
past due 90 days or more and the loan is not adequately collateralized and in
the process of collection, or when, in the opinion of management, principal or
interest is not likely to be paid in accordance with the terms of the
obligation. Consumer loans are charged off after 120 days of delinquency unless
adequately secured and in the process of collection. Non-accrual loans are not
reclassified as accruing until principal and interest payments are brought
current and future payments appear reasonably certain. Loans are categorized as
restructured if the original interest rate, repayment terms, or both were
restructured due to a deterioration in the financial condition of the borrower.
- -------------------------------------------------------------------------------
<TABLE>
Non-performing Assets
Dollars in thousands
<CAPTION>
June 30 March 31 December 31 June 30
1997 1997 1996 1996
<S> <C> <C> <C> <C>
Non-accrual loans .................................. $ 6,186 $ 5,528 $ 4,717 $ 5,570
Accruing loans which are contractually
past due 90 days or more ......................... 2,611 3,388 5,863 5,517
Restructured loans ................................. 679 633 4 6
------- ------- ------- -------
Total non-performing and restructured loans ...... 9,476 9,549 10,584 11,093
Foreclosed real estate ............................. 871 1,328 1,608 3,342
Other foreclosed property .......................... 354 175 184 303
------- ------- ------- -------
Total non-performing and restructured loans and
foreclosed property ............................. $10,701 $11,052 $12,376 $14,738
======== ======= ======= =======
Non-performing and restructured loans
as a percentage of loans, net of unearned income . 0.64% 0.66% 0.73% 0.82%
Total non-performing and restructured loans and
foreclosed property as a percentage of total assets 0.54% 0.57% 0.62% 0.79%
</TABLE>
Three commercial credit relationships account for $3.1 million, or 51%, of
the company's non-accrual loans at June 30, 1997. An allowance for loan losses
in the amount of $95 thousand has been established for these credits in
accordance with Statement of Financial Accounting Standards No. 114, Accounting
by Creditors for the Impairment of a Loan. Management believes the remaining
balance of these three credits is adequately secured. The other 49% of the
non-accrual loan balance consists of various commercial and consumer loans, with
no single borrower representing more than $500,000.
Foreclosed real estate consists of several properties, the largest of which
is recorded at $350,000. Based upon appraisals of the properties and previous
sales experience, management does not anticipate any significant loss to be
incurred on disposition of these properties.
As of June 30, 1997, the company had loans to eight borrowers totaling
$24.1 million which were not included in the past due, non-accrual or
restructured categories, but for which known information about possible credit
problems caused management to have serious doubts as to the ability of the
borrowers to comply with the present loan repayment terms. Of the $17.1 million
increase in these potential problem loans from March 31, 1997, $15.0 million is
due to a downturn in the coal industry, including $12.7 million of loans to one
borrower. Based on management's evaluation, including current market conditions,
cash flow generated and recent appraisals, no significant losses are anticipated
at this time in connection with these loans. These loans are subject to
continuing management attention and are considered in determining the level of
the allowance for loan losses.
The allowance represents an amount which, in management's judgment, will be
adequate to absorb probable losses on existing loans. The adequacy of the
allowance for loan losses is determined on an ongoing basis through analysis of
the overall size and quality of the loan portfolio, historical loan loss
experience, loan delinquency trends and current and projected economic
conditions. Additional allocations of the allowance are based on specifically
identified potential loss situations. The potential loss situations are
identified by account officers' evaluations of their own portfolios as well as
by an independent loan review function.
The allowance for loan losses is established through a provision for loan
losses charged to expense. At June 30,1997, the allowance was $21.0 million, up
from $18.1 million at December 31, 1996, and $16.3 million at June 30, 1996. The
ratio of the allowance for loan losses to total loans (excluding mortgage loans
held for sale) at June 30, 1997, was 1.43%, compared with 1.25% at December 31,
1996, and 1.21% at June 30, 1996. These increases from June 30, 1996 reflect in
part management's review of the growth in the loan portfolio, the continuing
concentrations of credit among the company's largest credit relationships, and
anticipated general economic conditions in the company's markets. The allowance
as a percentage of non-performing loans increased to 222% at June 30, 1997, from
171% at year-end 1996 and 147% at June 30, 1996, as a result of provisions for
loan losses of $9.1 million since June 30, 1996, and net loan charge-offs of
$4.4 million during that period.
Management believes that the allowance for loan losses at June 30, 1997, is
adequate to absorb losses inherent in the loan portfolio as of that date. That
determination is based on the best information available to management, but
necessarily involves uncertainties and matters of judgment and, therefore,
cannot be determined with precision and could be susceptible to significant
change in the future.
Securities Available for Sale
Securities (all classified as available for sale) decreased from $287
million at June 30, 1996 to $285 million at year-end 1996, and then
decreased to $252 million at June 30, 1997. Funds provided by the reduction
in securities were utilized to fund growth in the loan portfolio.
Deposits and Borrowed Funds
Total deposits averaged $1.538 billion in the second quarter of 1997, an
increase of $75 million, or 5%, from the comparable 1996 period. Average
interest-bearing accounts increased $64.4 million in the second quarter of 1997,
compared to the same period in 1996, while average non-interest-bearing accounts
increased $10.2 million. Of the $64.4 million increase in interest-bearing
accounts, 94% represents brokered certificates of deposit issued to fund loan
growth. As of June 30, 1997 and 1996, brokered certificates of deposit comprised
$130 million and $85 million, respectively, of the company's deposits. These
brokered deposits have various maturities ranging from three months to five
years.
For the six month periods, average total deposits increased $89 million,
or 6%, from $1.443 billion in 1996 to $1.532 billion in 1997.
Long-term debt totaled $141 million at June 30, 1997 and 1996. In order to
support growth in the loan portfolio, TFB-KY issued in the second quarter of
1996 $25 million of four-year notes, under a $250 million senior bank note
program. Bank notes issued to date bear interest at fixed rates of 6.32%, 6.48%,
and 7.13%, respectively. Certain of these notes have been effectively converted
to floating rate instruments through the use of interest rate swap transactions.
Under these swap agreements, TFB-KY pays interest at the prime rate, and
receives a fixed rate of 8.60%. An additional $175 million of bank notes may be
issued from time to time under this book-entry program in maturities varying
from 30 days to 30 years.
Capital Resources and Liquidity
The company's capital ratios at June 30, 1997, December 31, 1996, and
June 30, 1996 (calculated in accordance with regulatory guidelines) were as
follows:
June 30, December 31, June 30,
1997 1996 1996
Tier 1 risk based 8.36% 7.68% 7.71%
Regulatory minimum 4.00 4.00 4.00
Total risk based 11.69 10.87 10.99
Regulatory minimum 8.00 8.00 8.00
Leverage 6.69 6.12 6.24
Regulatory minimum 3.00 3.00 3.00
The decrease in these capital ratios from June 30, 1996 to December 31,
1996 was primarily due to a $2.7 million charge taken during the third quarter
of 1996 which was associated with the recapitalization of the Savings
Association Insurance Fund. These ratios improved in 1997 due to the company's
increased earnings combined with a decline in total assets from December 31,
1996. Capital ratios of all of the company's subsidiaries are in excess of
applicable minimum regulatory capital ratio requirements at June 30, 1997.
To maintain a desired level of liquidity, the company has several sources
of funds available. The company's primary investing activities include purchases
of securities and loan originations, offset by maturities, prepayments and sales
of securities, and loan payments. The company primarily relies upon net inflows
of cash from financing activities, supplemented by net inflows of cash from
operating activities, to provide cash used in these investing activities. As is
typical of most banking companies, significant financing activities include
issuance of common stock and long-term debt, deposit gathering, and the use of
short-term borrowing facilities, such as federal funds purchased, repurchase
agreements, FHLB advances and lines of credit. When compared to retail deposits
attracted through a branch network, wholesale funding sources are generally more
sensitive to changes in interest rates and the inherent volatility of the
capital markets. In addition, brokered deposits may be more sensitive to
significant changes in the financial condition of the company. As a result of
the company's use of wholesale funding sources, significant changes in the
prevailing interest rate environment, or in the availability of alternative
investments for individual and institutional investors, or in the company's
financial condition, among other factors, could affect the company's liquidity
and results of operations.
Asset/Liability Management
Managing interest rate risk is fundamental to the financial services
industry. The company's policies are designed to manage the inherently different
maturity and repricing characteristics of the lending and deposit-acquisition
lines of business to achieve a desired interest-sensitivity position and to
limit exposure to interest rate risk. The maturity and repricing characteristics
of the company's lending and deposit activities create a naturally
asset-sensitive structure. By using a combination of on- and off-balance-sheet
financial instruments, the company manages interest rate sensitivity while
optimizing net interest income within the constraints of prudent capital
adequacy, liquidity needs, the interest rate and economic outlook, market
opportunities and customer requirements.
The company uses an earnings simulation model to monitor and evaluate the
impact of changing interest rates on earnings. The simulation model used by the
company is designed to reflect the dynamics of all interest-earning assets,
interest-bearing liabilities and off-balance-sheet financial instruments,
combining the various factors affecting rate sensitivity into a two-year
earnings outlook. Among the factors the model utilizes are 1) rate-of-change
differentials, such as federal funds rates versus savings account rates; 2)
maturity effects, such as calls on securities; 3) rate barrier effects, such as
caps or floors on loans; 4) changes in balance sheet levels; 5) floating-rate
financial instruments that may be tied or related to prime, Treasury Notes, CD
rates or other rate indices, which do not necessarily move identically as rates
change; 6) leads and lags that occur as rates move away from current levels; and
7) the effects of prepayments on various assets, such as residential mortgages,
mortgage-backed securities and consumer loans.
The model is updated monthly for multiple interest rate scenarios,
projected changes in balance sheet categories and other relevant assumptions. In
developing multiple rate scenarios, an econometric model is employed to forecast
key rates, based on the cyclical nature and historic volatility of those rates.
A stochastic view of net interest income is derived once probabilities have been
assigned to those key rates. By forecasting a most likely rate environment, the
effects on net interest income of adjusting those rates up or down can reveal
the company's approximate interest rate risk exposure level. Several rate index
and yield curve assumptions are used in the model. As an example, the company's
most likely rate environment as of June 30, 1997, assumed the 3-month Treasury
rate at 5.25%, rising to 5.76% by year's end, then falling back to 5.63% in May
of 1998.
A second interest rate sensitivity tool utilized by the company is the
quantification of market value changes for all assets and liabilities, given an
increase or decrease in interest rates. This approach provides a longer-term
view of interest rate risk, capturing all expected future cash flows. Assets and
liabilities with option characteristics are measured based on numerous interest
rate path valuations using statistical rate simulation techniques.
The following illustrates the effects of an immediate shift in market
interest rates on net interest income and fair values of assets and liabilities
as compared to the most likely rate assumptions used in the company's model:
<TABLE>
<CAPTION>
Basis-point change +200 bp +100 bp -100 bp -200 bp
Income statement effects:
<S> <C> <C> <C> <C>
Increase (decrease) in net interest income ..... 4.34% 2.02% (1.45)% (2.42)%
Balance sheet effects:
Increase (decrease) in fair value of assets .... (2.81)% (1.44)% 1.55% 3.20%
Increase (decrease) in fair value of liabilities 1.82% 0.93% (0.96)% (1.97)%
</TABLE>
As of June 30, 1997, management believes the company's balance sheet was in
an asset-sensitive position, as the repricing characteristics of the balance
sheet were such that an increase in interest rates would have a positive effect
on earnings and a decrease in interest rates would have a negative effect on
earnings. It should be noted that some of the assumptions made in the use of the
simulation model will inevitably not materialize and unanticipated events and
circumstances will occur; in addition, the simulation model does not take into
account any future actions which could be undertaken to reduce an adverse impact
if there were a change in interest rate expectations or in the actual level of
interest rates.
To assist in achieving a desired level of interest rate sensitivity the
company has entered into off-balance-sheet interest rate swap transactions which
partially neutralize the asset sensitive position which is inherent in the
balance sheet. The company pays a variable interest rate on each swap and
receives a fixed rate. In a higher interest-rate environment, the increased
contribution to net interest income from on-balance-sheet assets will
substantially offset any negative impact on net interest income from interest
rate swap transactions. Conversely, if interest rates decline, the swaps will
mitigate the company's exposure to reduced net interest income. Interest rate
swap transactions as of June 30, 1997, are as follows:
<TABLE>
Interest Rate Swaps
As of June 30, 1997
Dollars in thousands
<CAPTION>
Notional Fixed Rate Floating Rate
Amount (Receiving) (Paying) Maturity
-------- ---------- ------------- ---------------
<S> <C> <C> <C> <C>
$50,000 8.50% 8.50% (Prime) July, 1997
20,000 8.60% 8.50% (Prime) October, 1997
30,000 8.23% 8.50% (Prime) March, 1998
70,000 8.50% 8.50% (Prime) June, 1998
30,000 8.60% 8.50% (Prime) October, 1998
25,000 8.74% 8.50% (Prime) December, 1999
50,000 9.52% 8.50% (Prime) April, 2000
--------
Total / weighted average $275,000 8.70% 8.50% September, 1998
========
</TABLE>
As shown in the table, $170 million of these interest rate swaps will
mature within twelve months. As these interest rate swaps mature, management
will evaluate whether new interest rate swap transactions are appropriate, given
the company's interest rate sensitivity position at that time. The company
requires all off-balance-sheet transactions be employed solely with respect to
asset/liability management or for hedging specific transactions or positions,
rather than for speculative trading activity.
- --------------------------------------------------------------------------------
This report contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties. Although
the company believes that the forward-looking statements are based upon
reasonable assumptions, there can be no assurance that the forward-looking
statements will prove to be accurate. Factors that could cause actual results
to differ from the results anticipated in the forward-looking statements
include, but are not limited to: economic conditions (both generally and
more specifically in the markets in which the company and its banks
operate); competition for the company's customers from other providers of
financial services; government legislation and regulation (which changes from
time to time and over which the company has no control); changes in interest
rates; material unforeseen changes in the liquidity, results of operations,
or financial condition of the company's customers; and other risks
detailed in the company's filings with the securities and Exchange
Commission, all of which are difficult to predict and many of which are beyond
the control of the company. The company undertakes no obligation to republish
forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
- -------------------------------------------------------------------------------
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
In the ordinary course of operations, the company and the banks are
defendants in various legal proceedings. In the opinion of management, there is
no proceeding pending or, to the knowledge of management, threatened, in which
an adverse decision could result in a material adverse change in the
consolidated financial condition or results of operations of the company.
On August 22, 1996, two former employees of the company and three former
employees of TFB-KY filed suit in Jefferson Circuit Court, Louisville, Kentucky,
against the company. The five plaintiffs claimed wrongful termination, sex
discrimination, age discrimination, breach of contract and libel in connection
with the termination of their employment in June 1996. During the second
quarter of 1997, this matter was settled, and on May 19, 1997, the Jefferson
Circuit Court issued an order dismissing this litigation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index on page 20 of this Form 10-Q are
filed as a part of this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter.
SIGNATURES
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.
Trans Financial, Inc.
(Registrant)
Principal Executive Officer:
Date: August 14, 1997 /s/ Vince A. Berta
------------------
Vince A. Berta
President and
Chief Executive Officer
Principal Financial Officer:
Date: August 14, 1997 /s/ Edward R. Matthews
----------------------
Edward R. Matthews
Chief Financial Officer
<PAGE>
Exhibits
Sequentially
Numbered Pages
10 Summary of 1997 Trans Financial Leadership Incentive Plan*........... 20
11 Statement of Computation of Per Share Earnings....................... 21
27 Financial Data Schedule (for SEC use only)
* Denotes a management contract or compensatory plan or arrangement of the
registrant required to be filed as an exhibit pursuant to Item
601(10)(iii) of Regulation S-K.
Exhibit 10.
1997 Trans Financial Leadership Incentive Plan
Summary
Purpose
The Executive Incentive Plan rewards the Trans Financial executives for leading
the company to the desired levels of success. Success is demonstrated through
achievement of individual and/or corporate goals. The corporate goal is made up
of two measures: operating efficiency and earnings per share. The individual
measures are based on net income or other bottom line contributions depending on
the executive's area of control. The rationale for the individual measures is
that executives should be concerned with their individual area of responsibility
while continuing to contribute and focus on overall corporate goals.
Eligibility
Twenty-one executives have currently been designated as eligible to participate
in this plan for 1997. New hires will receive a prorated incentive based on the
month of hire. Eligibility is contingent on a minimum performance rating of
excellent, and on active employment on the last day of the year.
Payment of Awards
Award amounts will be announced within 45 days after year end. Awards will be
paid in cash through the payroll system.
Payout Potential
There are three award levels based on performance achieved. The awards are
listed on an attachment to each executive's copy of this plan along with the
goals and measures to be met at each level. The three award levels are
threshold, target, and maximum. Threshold is the lowest level of achievement at
which an incentive award will be paid. Achievement between threshold and target
will result in a payout at the threshold level. Target is the level of
achievement required for 100% payout of the incentive. Target is the true goal
of this plan and is the budget. If performance is between target and the maximum
award level, a dollar value may will be extrapolated based on the level of
individual and company performance. Maximum is the award that will be paid if
all measures are achieved at exceptional levels.
Corporate and Individual Measures
Each executive will have a set of measures inclusive of two corporate measures.
The corporate measures of earnings per share and average operating efficiency
for 1997 are set forth on the individual executive's copy of the plan. Each
corporate measure will be considered separately and equally. If an executive has
individual measures, they are listed on an attachment to the individual
executive's copy of the plan.
Disclaimer
The Compensation Committee of the Board of Directors must approve all awards
under this plan. This plan is not a contract and may be modified or terminated
at the Committee's discretion.
Exhibit 11.
<TABLE>
Statement Regarding Computation of Per Share Earnings
In thousands, except per share amounts
For the periods ended June 30
<CAPTION>
Three Months Six Months
1997 1996 1997 1996
Primary earnings per common share:
<S> <C> <C> <C> <C>
Average common shares outstanding ..... 11,430 11,306 11,415 11,301
Common stock equivalents .............. 267 125 258 120
------- --------
Average shares and share equivalents 11,697 11,431 11,673 11,421
Net income (loss) ....................... $ 5,862 $ (5,183) $11,410 $ (1,447)
Primary net income (loss) per share ..... $ 0.50 $ (0.45) $ 0.98 $ (0.13)
Fully-diluted earnings per common share:
Average common shares outstanding ..... 11,430 11,306 11,415 11,301
Common stock equivalents .............. 335 146 335 146
------- --------
Average shares and share equivalents 11,765 11,452 11,750 11,447
Net income (loss) ....................... $ 5,862 $ (5,183) $11,410 $ (1,447)
Fully-diluted net income (loss) per share $ 0.50 $ (0.45) $ 0.97 $ (0.13)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> Dec-31-1997 Dec-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 Jun-30-1997
<CASH> 72,131 72,131
<INT-BEARING-DEPOSITS> 98 98
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 251,829 251,829
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 1,553,826 1,553,826
<ALLOWANCE> 21,016 21,016
<TOTAL-ASSETS> 1,980,690 1,980,690
<DEPOSITS> 1,540,749 1,540,749
<SHORT-TERM> 138,607 138,607
<LIABILITIES-OTHER> 20,812 20,812
<LONG-TERM> 140,628 140,628
0 0
0 0
<COMMON> 21,446 21,446
<OTHER-SE> 118,448 118,488
<TOTAL-LIABILITIES-AND-EQUITY> 1,980,690 1,980,690
<INTEREST-LOAN> 35,905 70,742
<INTEREST-INVEST> 3,597 7,417
<INTEREST-OTHER> 2 4
<INTEREST-TOTAL> 39,504 78,163
<INTEREST-DEPOSIT> 16,035 31,540
<INTEREST-EXPENSE> 19,790 39,149
<INTEREST-INCOME-NET> 19,714 39,014
<LOAN-LOSSES> 2,900 4,850
<SECURITIES-GAINS> (88) 133
<EXPENSE-OTHER> 17,156 34,195
<INCOME-PRETAX> 8,833 17,063
<INCOME-PRE-EXTRAORDINARY> 5,862 11,410
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,862 11,410
<EPS-PRIMARY> .50 .98
<EPS-DILUTED> .50 .97
<YIELD-ACTUAL> 4.50 4.47
<LOANS-NON> 6,186 6,186
<LOANS-PAST> 2,611 2,611
<LOANS-TROUBLED> 679 679
<LOANS-PROBLEM> 24,089 24,089
<ALLOWANCE-OPEN> 19,010 18,065
<CHARGE-OFFS> 1,141 2,273
<RECOVERIES> 247 374
<ALLOWANCE-CLOSE> 21,016 21,016
<ALLOWANCE-DOMESTIC> 21,016 21,016
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
