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 March 31, 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 May 14, 1997: 11,430,801 shares.
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
Consolidated Balance Sheets
(Unaudited)
In thousands, except share data
<CAPTION>
March 31 December 31 March 31
1997 1996 1996
Assets
<S> <C> <C> <C>
Cash and due from banks .................................... $ 60,746 $ 75,054 $ 61,128
Interest-bearing deposits with banks ....................... 98 98 98
Mortgage loans held for sale ............................... 70,215 67,999 59,225
Securities available for sale (amortized
cost of $256,732 as of March 31, 1997;
$285,264 as of December 31, 1996;
and $294,380 as of March 31, 1996) ..................... 254,718 285,155 292,762
Loans, net of unearned income .............................. 1,448,765 1,450,999 1,295,338
Less allowance for loan losses ............................. 19,010 18,065 16,051
----------- ----------- -----------
Net loans ............................................... 1,429,755 1,432,934 1,279,287
Premises and equipment, net ................................ 37,670 37,377 42,685
Mortgage servicing rights .................................. 43,466 41,866 41,004
Other assets ............................................... 41,274 63,469 39,876
=========== =========== ===========
Total assets ............................................ $ 1,937,942 $ 2,003,952 $ 1,816,065
=========== =========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest bearing .................................... $ 205,414 $ 231,717 $ 201,080
Interest bearing ........................................ 1,311,540 1,347,500 1,231,095
----------- ----------- -----------
Total deposits .......................................... 1,516,954 1,579,217 1,432,175
Federal funds purchased and
repurchase agreements ................................... 58,317 71,879 44,542
Other short-term borrowings ................................ 55,000 55,000 70,003
Long-term debt ............................................. 140,796 140,903 116,379
Other liabilities .......................................... 32,517 25,637 21,472
----------- ----------- -----------
Total liabilities ....................................... 1,803,584 1,872,636 1,684,571
Shareholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued and
outstanding 11,318,770; 11,293,291;
and 11,284,604 shares, respectively .................. 21,408 21,324 21,197
Additional paid-in capital .............................. 45,294 44,745 43,990
Retained earnings ....................................... 71,401 67,790 70,081
Unrealized net loss on
securities available for sale,
net of tax ........................................... (1,395) (92) (936)
Employee Stock Ownership Plan shares
purchased with debt .................................. (2,350) (2,451) (2,838)
----------- ----------- -----------
Total shareholders' equity .............................. 134,358 131,316 131,494
----------- ----------- -----------
Total liabilities
and shareholders' equity .............................. $ 1,937,942 $ 2,003,952 $ 1,816,065
=========== =========== ===========
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
Consolidated Statements of Income
(Unaudited)
In thousands, except per share data
For the three months ended March 31
1997 1996
Interest income
Loans, including fees .................................... $33,608 $30,001
Federal funds sold and resale
agreements ............................................. -- 2
Securities available for sale ............................ 3,820 4,041
Mortgage loans held for sale ............................. 1,229 781
Interest-bearing deposits with banks ..................... 2 4
------- -------
Total interest income .................................... 38,659 34,829
Interest expense
Deposits ................................................. 15,505 14,343
Federal funds purchased
and repurchase agreements .............................. 591 592
Long-term debt and other
borrowings ............................................. 3,263 2,350
------- -------
Total interest expense ................................... 19,359 17,285
------- -------
Net interest income ........................................ 19,300 17,544
Provision for loan losses ................................ 1,950 1,221
------- -------
Net interest income after
provision for loan losses ................................ 17,350 16,323
Non-interest income
Service charges on deposit accounts ...................... 2,495 2,236
Mortgage banking income .................................. 2,757 2,653
Gains (losses) on sales of securities
available for sale, net ................................ 221 15
Trust services ........................................... 561 461
Brokerage income ......................................... 710 661
Other .................................................... 1,175 1,209
------- -------
Total non-interest income ................................ 7,919 7,235
Non-interest expenses
Compensation and benefits ................................ 8,608 9,233
Net occupancy expense .................................... 1,150 1,204
Furniture and equipment expense .......................... 1,566 1,667
Deposit insurance ........................................ 103 244
Professional fees ........................................ 666 696
Postage, printing & supplies ............................. 980 977
Processing fees .......................................... 495 389
Communications ........................................... 658 569
Other .................................................... 2,813 3,140
------- -------
Total non-interest expenses .............................. 17,039 18,119
------- -------
Income before income taxes ................................. 8,230 5,439
Income tax expense ......................................... 2,682 1,703
======= =======
Net income ................................................. $ 5,548 $ 3,736
======= =======
Primary earnings per share ................................. $ 0.48 $ 0.33
Fully-diluted earnings per share ........................... $ 0.48 $ 0.33
======= =======
See accompanying notes to consolidated financial statements
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
In thousands
For the three months ended March 31 1997 1996
Balance January 1 ....................... $ 131,316 $ 129,767
Net income ............................ 5,548 3,736
Issuance of common stock .............. 633 140
Cash dividends declared on common stock (1,937) (1,807)
Change in net unrealized loss on
securities available for sale,
net of taxes ........................ (1,303) (533)
ESOP debt reduction ................... 101 191
========= =========
Balance March 31 ........................ $ 134,358 $ 131,494
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
(Unaudited)
In thousands
For the three months ended March 31
<CAPTION>
1997 1996
Cash flows from operating activities:
<S> <C> <C>
Net income/(loss) ................................................ $ 5,548 $ 3,736
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses .................................... 1,950 1,221
Deferred tax expense ......................................... (472) (281)
Gain on sale of securities available for sale ................ (221) (15)
Gain on sale of mortgage loans held for sale ................. (980) (1,888)
Gain on sale of premises and equipment ....................... (6) --
Depreciation and amortization of fixed assets ................ 1,215 1,516
Amortization of intangible assets ............................ 323 343
Amortization of premium on securities
and loans, net ............................................. 199 300
Amortization of mortgage servicing rights .................... 1,460 1,012
Decrease in accrued interest receivable .......................... 1,984 615
Decrease in other assets ........................................ 20,345 15,301
Increase (decrease) in accrued interest payable ................. 1,585 (410)
Increase (decrease) in other liabilities ......................... 5,897 (598)
Sale of mortgage loans held for sale ............................. 187,861 64,594
Originations of mortgage loans held for sale ..................... (189,097) (60,519)
--------- --------
Net cash provided by operating activities ...................... 37,591 24,927
Cash flows from investing activities:
Net decrease in interest-bearing deposits
with banks ..................................................... -- 99
Proceeds from sale of securities available for sale .............. 2,154 16
Proceeds from prepayment and call of securities available for sale 2,295 24,314
Proceeds from maturities of securities available for sale ........ 24,335 8,015
Purchase of securities available for sale ........................ (231) (28,128)
Net decrease (increase) in loans ................................ 838 (53,315)
Purchase and origination of mortgage servicing rights ............ (3,060) (5,013)
Proceeds from sale of foreclosed assets .......................... 407 1,326
Purchases of premises and equipment .............................. (1,713) (2,794)
Proceeds from disposal of premises and equipment ................. 211 51
--------- --------
Net cash provided in /(used in) investing activities .......... 25,236 (55,429)
Cash flows from financing activities:
Net decrease in deposits ......................................... (62,263) (12,308)
Net decrease in federal funds purchased
and repurchase agreements ...................................... (13,562) (31,052)
Net increase in other short-term borrowings ...................... -- 24,989
Proceeds from issuance of long-term debt ......................... -- 30,000
Repayment of long-term debt ...................................... (6) (35)
Proceeds from issuance of common stock ........................... 633 140
Dividends paid ................................................... (1,937) (1,807)
--------- --------
Net cash provided in /(used in) financing activities ............ (77,135) 9,927
--------- --------
Net decrease in cash and cash equivalents ........................ (14,308) (20,575)
Cash and cash equivalents at beginning of year ................... 75,054 81,703
--------- --------
Cash and cash equivalents at end of period ....................... $ 60,746 $ 61,128
========= ========
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 of only 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:
In thousands
For the three months ended March 31 1997 1996
Balance beginning of period ................ $ 18,065 $ 15,779
Provision for loan losses ................ 1,950 1,221
Loans charged off ........................ (1,132) (1,121)
Recoveries of loans previously charged off 127 172
-------- --------
Net charge-offs .......................... (1,005) (949)
-------- --------
Balance March 31 ........................... $ 19,010 $ 16,051
======== ========
(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 $4,258,000 at March 31,
1997. Of that amount, $1,715,000 represents loans for which an allowance for
loan losses, in the amount of $590,000, has been established under SFAS 114. The
average recorded investment of impaired loans was $4,436,000 and $12,599,000 for
the three months ended March 31, 1997 and 1996, respectively. Interest income
recognized on impaired loans totaled $22,000 for the three months ended March
31, 1997, and $14,000 for the first quarter of 1996.
(4) New Accounting Standard
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 establishes 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 cannot 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 per share would have been $0.49 and $0.33
for the quarters ended March 31, 1997 and 1996, respectively. Diluted earnings
per share would have been $0.48 and $0.33, respectively, for those same periods.
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, which has two commercial bank subsidiaries--Trans
Financial Bank, National Association ("TFB-KY") and Trans Financial Bank
Tennessee, National Association --and one thrift subsidiary--Trans Financial
Bank, F.S.B. 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."
Results of Operations
Overview
For the three months ended March 31, 1997, the company recorded net income
of $5.5 million, or $0.48 per common share, compared to net income of $3.7
million, or $.33 per common share, in the same period of 1996. This represents
an increase of 49% over first quarter 1996. Results for the first three months
of 1997 produced an annualized return on average assets of 1.16% and a return on
average common equity of 16.75%, compared with returns of 0.85% and 11.49%,
respectively, for the comparable period of 1996.
Net Interest Income
Net interest income on a tax-equivalent basis totaled $19.7 million in the
first three months of 1997, compared with $18.0 million in the comparable 1996
period - a 9.0% increase. For the first three months of 1997, the net interest
margin (net interest income as a percentage of average interest-earning assets)
on a tax-equivalent basis decreased 5 basis points, from 4.49% to 4.44%,
compared to the same period for 1996. The net interest margin decreased 11 basis
points in the first quarter of 1997 as compared to the quarter ended December
31, 1996, due to a seasonal decline in non-interest bearing deposits. Most of
this decline resulted from year-end payouts of escrow deposits associated
with mortgage loans serviced by Trans Financial Mortgage Company.
Approximately $628 million of the company's commercial and consumer 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 gross yield on interest-
earning assets and the 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 slowed during the first quarter of 1997, the net interest-rate spread
dropped ten basis points as compared to the first quarter of 1996, and the net
interest margin fell five basis points when comparing the first quarter of 1997
to the same period in 1996. The prime rate increased twenty-five basis points to
8.50% near the end of the first quarter of 1997, which is expected to have a
slight positive impact on net interest income in the second quarter of 1997.
The following tables show, for the three-month periods ended March 31, 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 loans,
certificates of deposit, and borrowed funds.
<PAGE>
<TABLE>
Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended March 31
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 .... $1,453,965 $ 33,689 * 9.40% $1,269,829 $ 30,115* 9.54%
Securities ....................... 271,685 4,100 * 6.12% 293,206 4,347* 5.96%
Mortgage loans held for sale ..... 68,545 1,229 7.27% 46,200 781 6.80%
Federal funds sold
and other interest income ...... 98 2 8.28% 283 6 8.53%
---------- ----------- ---------- -----------
Total interest-earning assets /
interest income .................. 1,794,293 39,020 8.82% 1,609,518 35,249 8.81%
----------- -----------
Non-interest-earning assets:
Cash and due from banks .......... 49,593 66,046
Premises and equipment ........... 37,608 42,169
Other assets ..................... 66,433 56,373
============= =============
Total assets ....................... $1,947,927 $1,774,106
============= =============
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand (NOW) .. $ 33,883 $ 255 3.05% $ 246,292 $ 1,713 2.80%
Savings deposits ............... 104,144 687 2.68% 120,550 791 2.64%
Money market accounts .......... 270,391 2,140 3.21% 40,853 315 3.10%
Certificates of deposit ........ 833,443 11,293 5.50% 737,470 10,299 5.62%
Other time deposits ............ 83,404 1,130 5.49% 87,349 1,225 5.64%
--------- ------------- ----------- ---------
Total interest-bearing deposits 1,325,265 15,505 4.74% 1,232,514 14,343 4.68%
Federal funds purchased
and repurchase agreements ........ 47,932 591 5.00% 49,886 592 4.77%
Long-term debt and
and other borrowings ............. 213,728 3,263 6.19% 153,004 2,350 6.18%
-------- ------------- ----------- ----------
Total borrowed funds ............. 261,660 3,854 5.97% 202,890 2,942 5.83%
-------- ------------ ----------- ----------
Total interest-bearing liabilities /
interest expense ................. 1,586,925 19,359 4.95% 1,435,404 17,285 4.84%
------------ -----------
Non-interest-bearing liabilities:
Non-interest-bearing deposits .... 201,759 190,993
Other liabilities ................ 24,921 16,902
----------- -----------
Total liabilities ................ 1,813,605 1,643,299
Shareholders' equity ............... 134,322 130,807
----------- -----------
Total liabilities
and shareholders' equity ......... $1,947,927 $1,774,106
============= ===========
Net interest-rate spread ........... 3.87% 3.97%
Impact of non-interest bearing
sources and other changes in
balance sheet composition ........ 0.57% 0.52%
--------- ---------
Net interest income /
margin on interest-earning assets $ 19,661 4.44% $ 17,964 4.49%
========== ========== ============= ==========
*Includes tax-equivalent adjustment
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 earnedon interest-earning assets and the average
rate of interest expensed on interest-bearing liabilities. Average balances
are based on daily balances.
</TABLE>
<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 three-month period ended March 31, 1997, as compared to
the same period in 1996.
First Quarter 1997 vs. 1996 Increase (decrease)
in interest income and expense
In thousands due to changes in:
Volume Rate Total
Interest-earning assets:
Loans ............................ $ 4,280 $(706) $ 3,574
Securities ....................... (324) 77 (247)
Mortgage loans held for sale ..... 398 50 448
Federal funds sold
and other interest income ...... (4) 0 (4)
------- ----- -------
Total interest-earning assets .... 4,350 (579) 3,771
Interest-bearing liabilities:
Interest-bearing demand (NOW) .... (1,588) 130 (1,458)
Savings deposits ................. (108) 4 (104)
Money market accounts ............ 1,816 9 1,825
Certificates of deposit .......... 1,308 (314) 994
Other time deposits .............. (54) (41) (95)
------- ----- -------
Total interest-bearing deposits 1,374 (212) 1,162
Federal funds purchased
and repurchase agreements ...... (24) 23 (1)
Long-term debt and
and other borrowings ........... 927 (14) 913
------- ----- -------
Total borrowed funds ........... 903 9 912
------- ----- -------
Total interest-bearing liabilities 2,277 (203) 2,074
------- ----- -------
Increase (decrease)
in net interest income ......... $ 2,073 $(376) $ 1,697
======= ===== =======
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>
Provision for Loan Losses
The provision for loan losses was $2.0 million (0.54% of average loans, on
an annualized basis, excluding mortgage loans held for sale) for the first three
months of 1997, compared with $1.2 million (0.38% of average loans) for the
comparable period of 1996. Net loan charge-offs were $1,005 thousand (0.28% of
average loans) for the first three months of 1997, compared with $949 thousand
(0.30% of average loans) for the first three 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 first three months of 1997 increased $684
thousand over the first three months of 1996. This reflects an increase in
service charges on deposit accounts of $259 thousand, due in part to the
introduction of new transaction account products in April of 1996. The growth in
the mortgage servicing portfolio during the past year resulted in an increase of
$104 thousand of mortgage banking income. An increase in trust and investment
services income of $172 thousand reflects the company's expanding trust and
brokerage services. Non-interest income for the first quarter of 1997 includes a
pre-tax gain of $221 thousand recognized on the sale of securities. When
compared to fourth quarter 1996, non-interest income increased $163 thousand. An
improvement of $331 thousand from trust and investment services income was the
primary source of the increase. During the fourth quarter of 1996, the company
recognized a pre-tax gain of $400 thousand from the sale of its merchant
servicing business.
Non-Interest Expenses
Non-interest expenses decreased $1.1 million for the first three months
of 1997, compared to the first three months of 1996. This represents a 6%
decrease from first quarter 1996. This decrease is a result of an initiative
undertaken during the second quarter of 1996 to refocus the company's resources
on its core financial services, reduce operating expenses and exit from
less-profitable initiatives. As of March 31, 1997, the company has
accomplished the following goals of the initiative:
-exited the venture capital and human resources consulting initiatives,
-closed the Louisville, Kentucky office, closed mortgage loan
production offices in Chattanooga, Jackson and Knoxville, Tennessee,
-sold the corporate aircraft, sold the travel agency,
-sold a newly-constructed building intended to house the company's
corporate headquarters and consolidated office space in Bowling Green,
Kentucky, and
-realized additional cost savings in the company's retail delivery
system of approximately $2.5 million on an annualized pre-tax basis,
primarily through the reduction of administrative personnel.
Based on a comparison of non-interest expenses for the first quarter of 1997 to
the second quarter of 1996 (excluding the $5.8 million of charges to implement
the plan), total operating expenses have been reduced by more than $6 million
on an annualized pre-tax basis. As a result of higher revenues and lower
operating expenses, the efficiency ratio (non-interest expenses as a
percentage of net interest income plus non-interest income) decreased to 62.6%,
a substantial improvement over the 73.1% efficiency ratio in first quarter 1996.
With the major components of the refocus initiative in place by
year-end 1996, management believes the non-interest expenses incurred in the
fourth quarter of 1996 and the first quarter of 1997 are representative of the
company's ongoing non-interest expenses.
Income Taxes
Income tax expense totaled $2.7 million for the first three months of 1997,
compared with $1.7 million in the comparable 1996 period. These represent
effective tax rates of 32.6% and 31.3%, respectively.
<PAGE>
Balance Sheet Review
Overview
Assets at March 31, 1997 totaled $1.938 billion, compared with $2.004
billion at December 31, 1996, and $1.816 billion a year ago. Average total
assets for the first quarter increased $174 million (10%) over the past year to
$1.948 billion. Average interest-earning assets increased $185 million to $1.794
billion.
Loans
The company experienced moderate loan growth during the first quarter of
1997. Total loans, net of unearned income, averaged $1.454 billion in the first
quarter of 1997, excluding mortgage loans held for sale of $68.5 million. For
the comparable period in 1996, loans averaged $1.270 billion, excluding the
$46.2 million of mortgage loans held for sale.
At March 31, 1997, loans net of unearned income (excluding mortgage loans
held for sale) totaled $1.449 billion, compared with $1.451 billion at December
31, 1996, and $1.295 billion a year ago. The slower loan growth during the first
quarter of 1997 is primarily due to the payoff of the company's largest
commercial relationship which followed the customer's sale to a publicly
held company. Excluding the payoff, which had been expected, annualized loan
growth for the quarter was 5%. The company currently anticipates mid-single-
digit loan growth to continue through the remainder of 1997.
As of March 31, 1997, the company's 47 largest credit relationships
consisted of loans and loan commitments ranging from $5 million to $16.8
million, none of which was classified as non-performing. The aggregate amount of
these credit relationships was $460 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 March 31,
1997, down $1.0 million from December 31, 1996, and down $6.4 million from the
end of the first quarter of 1996. The ratio of non-performing loans to total
loans (net of unearned income) was 0.66% at March 31, 1997, compared with 0.73%
at the end of 1996 and 1.23% a year ago. Non-performing assets, which include
non-performing loans, foreclosed real estate and other foreclosed property,
totaled $11.1 million as of March 31,1997, as compared to $20.1 million at March
31, 1996. The ratio of non-performing assets to total assets decreased to 0.57%
at March 31, 1997, from 1.11% 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.
<PAGE>
<TABLE>
Non-performing Assets
Dollars in thousands
<CAPTION>
March 31 December 31 March 31
1997 1996 1996
<S> <C> <C> <C>
Non-accrual loans .................................... $ 5,528 $ 4,717 $12,394
Accruing loans which are contractually
past due 90 days or more ........................... 3,388 5,863 3,548
Restructured loans ................................... 633 4 10
------- ------- -------
Total non-performing and restructured loans ........ 9,549 10,584 15,952
Foreclosed real estate ............................... 1,328 1,608 3,328
Other foreclosed property ............................ 175 184 847
------- ------- -------
Total non-performing and restructured loans and
foreclosed property ................................ $11,052 $12,376 $20,127
======= ======= =======
Non-performing and restructured loans
as a percentage of net loans, net of unearned income 0.66% 0.73% 1.23%
Total non-performing and restructured loans and
foreclosed property as a percentage of total assets . 0.57% 0.62% 1.11%
</TABLE>
Three commercial credit relationships account for $2.6 million, or 47%,
of the company's non-accrual loans at March 31, 1997. An allowance for
loan losses in the amount of $200 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. The remaining non-
accrual balance consists of various commercial and consumer loans, with no
single loan exceeding $500,000.
Foreclosed real estate consists of several properties, with no single
property exceeding $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 the properties.
As of March 31, 1997, the company had $7.0 million of loans 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. Based on management's evaluation, including current market
conditions, cash flow generated and recent appraisals, no significant losses are
anticipated 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 March 31,1997, the allowance was $19.0 million,
up from $18.1 million at December 31, 1996, and $16.1 million at March 31, 1996.
The ratio of the allowance for loan losses to total loans (excluding mortgage
loans held for sale) at March 31,1997, was 1.31%, compared with 1.25% at
December 31, 1996, and 1.24% at March 31, 1996. These increaes from March 31,
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 econcomic conditions in the company's
markets. The allowance as a percentage of non-performing loans increased to 199%
at March 31, 1997, from 171% at year-end 1996 and 101% at March 31, 1996. The
increase in the allowance as a percentage of non-performing loans from March 31,
1996, to March 31, 1997, is in part the result of the company's placement of one
significant loan into non-performing loans at year-end 1995, thus reducing the
ratio of the allowance to non-performing loans. That borrower's financial
condition, along with the financial condition of two other significant credits,
deteriorated in the second quarter of 1996, resulting in partial charge-offs
totalling $7.0 million of these loans in the second quarter of 1996. As a
result of net loan charge-offs of $11.7 million since March 31, 1996, and
provisions for loan losses of $14.6 million during that period (including the
$8.4 million provision in the second quarter of 1996), the ratio of the
allowance for loan losses to non-performing loans has increased to 199% at
March 31, 1997.
Securities Available for Sale
Securities, including those classified as held to maturity and available
for sale, decreased from $293 million at March 31, 1996 to $285 million at
year-end 1996, and then decreased to $255 million at March 31, 1997. Funds
provided by the reduction in securities from March 31, 1997 to December 31, 1996
were utilized to fund growth in the loan portfolio. The decrease in securities
from December 31, 1996 to March 31, 1997 partially funded the seasonal decrease
in deposits during that quarter. The seasonal decline in deposits resulted from
the year-end payouts of escrow deposits associated with the mortgage loans
serviced by Trans Financial Mortgage Company.
Deposits and Borrowed Funds
Total deposits averaged $1.527 billion in the first quarter of 1997, an
increase of $104 million, or 7%, from the comparable 1996 period. Average
interest-bearing accounts increased $92.8 million in the first quarter of 1997,
compared to the same period in 1996, while average non-interest-bearing accounts
increased $10.8 million. Of the $92.8 million increase in interest-bearing
accounts, 87% represents brokered certificates of deposit issued to fund loan
growth. As of March 31, 1997 and 1996, brokered certificates of deposit
comprised $105 million and $30 million, respectively, of the company's deposits.
The increase in brokered deposits results from the company's use of this source
of funds to provide for the loan growth experienced from the first quarter of
1996 through the first quarter of 1997. These brokered deposits have various
maturities ranging from three months to five years.
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.
Long-term debt totaled $141 million at March 31, 1997, an increase of $24
million from March 31, 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 the 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 March 31, 1997, December 31, 1996, and
March 31, 1996 (calculated in accordance with regulatory guidelines) were as
follows:
March 31, December 31, March 31,
1997 1996 1996
Tier 1 risk based ..... 8.08% 7.68% 8.51%
Regulatory minimum 4.00 4.00 4.00
Total risk based ...... 11.41 10.87 11.93
Regulatory minimum 8.00 8.00 8.00
Leverage .............. 6.52 6.12 6.72
Regulatory minimum 3.00 3.00 3.00
The decrease in these capital ratios during 1996 was primarily associated
with the $5.8 million in charges and an increased loan loss provision, both
taken during the second quarter of 1996, and a $2.7 million charge associated
with the SAIF recapitalization, taken during the third quarter of 1996. The
improvement in these ratios in 1997 is 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 March 31, 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
volatility in the capital markets and are more likely to be compared by the
investor to competing investments. 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, 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 rate-of-change
differentials, such as federal funds rates versus savings account rates;
maturity effects, such as calls on securities; and rate barrier effects, such as
caps or floors on loans. It also captures changing balance sheet levels and
floating-rate loans 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. In addition, it captures leads and lags that occur as rates move away
from current levels, and 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. As of March 31, 1997, the
company's most likely rate environment assumed the federal funds rate and prime
lending rate at 5.50% and 8.50%, respectively, rising to 5.75% and 8.75%,
respectively, by March of 1998. The following illustrates the effects on net
interest income of an immediate shift in market interest rates compared to the
most likely rate assumptions used in the company's model:
Basis-point change .................. +200 bp +100 bp -100 bp -200 bp
Increase (decrease) in net interest income 5.03% 2.48% (1.60)% (2.33)%
As of March 31, 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.
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 valued based on numerous interest
rate path valuations using statistical rate simulation techniques.
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 March 31, 1997, are as follows:
<PAGE>
Interest Rate Swaps
As of March 31, 1997
Dollars in thousands
Notional Fixed Rate Floating
Rate
Amount (Receiving) (Paying) Maturity
--------- --------- --------- ---------
$ 50,000 8.33% 8.50%(Prime) June, 1997
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
--------- ------
Total / weighted average $275,000 8.48% 8.50% March, 1998
======== ============
As shown in the table, $150 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.
Subsequent Transactions
During the first quarter of 1997, the company entered into contracts to
sell its Lebanon and Sparta, Tennessee offices. These transactions were
consummated during April 1997.
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; delays in,
customer reactions to, and other unforeseen complications with respect to, the
implementation of the cost containment measures; 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 revised 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 claim wrongful termination, sex
discrimination, age discrimination, breach of contract and libel in connection
with the termination of their employment in June 1996. The plaintiffs seek,
among other things, compensatory damages in an unspecified amount, to include
the value of back pay and benefits; the value of certain stock options;
reinstatement as employees or alternatively the value of future earnings and
benefits; and punitive damages. Management is currently negotiating with the
parties to settle this mattter and believes that the litigation will not result
in a material adverse change in the consolidated financial condition or
results of operations of the company.
Item 4. Submission of Matters to a Vote of Security Holders
The registrant's 1997 Annual Meeting of Shareholders was held April 28,
1997. Proxies were solicited by the registrant's board of directors pursuant to
Regulation 14 under the Securities Exchange Act of 1934. There was no
solicitation in opposition to the board's nominees as listed in the proxy
statement, and all of the nominees were elected by vote of the
shareholders. Voting results for each nominee were as follows:
Votes For Votes Withheld
Vince A. Berta .... 8,949,940 67,812
C. C. Howard Gray . 8,952,485 65,267
Carroll F. Knicely 8,952,485 65,267
C. Cecil Martin ... 8,937,006 80,745
A proposal (Proposal II) to approve the Trans Financial, Inc. Consolidated
Stock Option Plan was approved by a majority of the outstanding shares of the
registrant's common stock. A total of 7,874,226 shares were voted in favor of
the proposal; 751,117 shares were voted against; and 392,398 shares abstained
(including broker non-votes). The total number of shares of common stock
outstanding as of February 21,1997, the record date of the Annual Meeting of
Shareholders, was 11,399,494.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index on page 18 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.
<PAGE>
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: ______________ /s/ Vince A. Berta
Vince A. Berta
President and
Chief Executive Officer
Principal Financial Officer:
Date: _____________________ /s/ Edward R. Matthews
Edward R. Matthews
Chief Financial Officer
<PAGE>
Exhibits
Sequentially
Numbered Pages
10 1996 Consolidated Stock Option Plan is incorporated by reference to
the registrant's Proxy Statement dated February 28, 1997, for the
April 28, 1997 Annual Meeting of Shareholders.*
11 Statement of Computation of Per Share Earnings....................19
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 11.
Statement Regarding Computation of Per Share Earnings
In thousands, except per share amounts
For the periods ended March 31 1997 1996
Primary earnings per common share:
Average common shares outstanding .... 11,400 11,295
Common stock equivalents ............. 258 129
------- -------
Average shares and share equivalents 11,658 11,424
Net income ............................. $ 5,548 $ 3,736
Primary net income per share ........... $ 0.48 $ 0.33
Fully-diluted earnings per common share:
Average common shares outstanding .... 11,400 11,295
Common stock equivalents ............. 258 129
------- -------
Average shares and share equivalents 11,658 11,424
Net income ............................. $ 5,548 $ 3,736
Fully-diluted net income per share ..... $ 0.48 $ 0.33
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000704469
<NAME> Trans Financial, Inc.
<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Mar-31-1997
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