A rural Kentucky bank company said last week that it would take a $7.25 million charge in the third quarter to cover troubled indirect loans.
Community Trust Bancorp in tiny Pikeville also said it would write off $750,000 for corporate restructuring.
It plans to lay off 78 employees-9% of its work force-and close nine branches, which would save $2.5 million in 1999. That would leave the $2.2 billion-asset company with 62 branches in Kentucky and West Virginia.
The problems at Community Trust stem from loans it bought from local automobile dealers.
Chairman Burlin Coleman blamed the economy. Consumer debt overload caused much of his company's problem, he said. "I think it is happening everywhere," but the overload may be more severe in his area, Mr. Coleman said.
Community Trust has raised its standards on indirect auto loans, Mr. Coleman said, but is still worried about loans on its books. The $7.25 million in additional reserves would cover the portfolio even if all the loans went bad.
Keith Leggett, senior economist with the American Bankers Association, said Community Trust is not alone in tightening its standards for indirect lending. Banks are being more cautious, he said, because indirect loans usually have higher delinquency rates than direct loans from banks.
"The car dealer wants to make the sale, so they might do things to try to make the sale happen that a bank would not do," he said.
Alan F. Morel, an analyst with Hilliard & Lyons Inc., Louisville, Ky., remained upbeat about Community Trust, even as he lowered his 1998 earnings expectations to $1.40 a share, from $1.80.
He commended the company for adding to its loan-loss reserves and taking a restructuring charge in a single quarter, rather than saving the charge for a later date. Mr. Morel increased his estimate for 1999 to $2.20, from $2.13.
"It was something they were going to have to do eventually, either slowly or in one big lump," he said. "I would rather see this than have a slow bleeding continue down the line.
Community Trust's thinly traded stock has held steady since the announcement. It was trading at $26.50 at midafternoon Tuesday, down from a 52-week high of $33.6875 in August.
Mr. Coleman said the reorganization would not keep Community Trust from looking for bank deals. The company has been an active buyer this year, buying five Kentucky branches with $195 million of deposits from PNC Bank Corp. and 12 branches in West Virginia from Banc One Corp.
Because Community Trust is in slow-growing eastern Kentucky, Mr. Morel said, it is important that it keep looking for merger opportunities.
"The main thing they have going for them is their ability to expand," he said.
