SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2008
   
 
Or
   
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to _____________
   

Commission file number 0-11129

COMMUNITY TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)

Kentucky
61-0979818
(State or other jurisdiction of incorporation or organization)
IRS Employer Identification No.
   
346 North Mayo Trail
Pikeville, Kentucky
(address of principal executive offices)
41501
(Zip Code)

(606) 432-1414
(Registrant's telephone number)
 
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  ü
No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
Accelerated filer  ü
Non-accelerated filer
Smaller reporting company
   
(Do not check if a smaller reporting company)
  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes
   No ü

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.

Common stock – 15,064,570 shares outstanding at October 31, 2008
 
 

 
 
 
 

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements
 
The accompanying information has not been audited by independent registered public accountants; however, in the opinion of management such information reflects all adjustments necessary for a fair presentation of the results for the interim period.  All such adjustments are of a normal and recurring nature.
 
The accompanying condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Registrant's annual report on Form 10-K.  Accordingly, the reader of the Form 10-Q should refer to the Registrant's Form 10-K for the year ended December 31, 2007 for further information in this regard.


 
 
 

Community Trust Bancorp, Inc.
Condensed Consolidated Balance Sheets

(dollars in thousands)
  
(unaudited)
September 30
2008
    
December 31
2007
  
Assets:
            
Cash and due from banks
   $ 83,169     $ 105,209  
Federal funds sold
     21,766       32,041  
Cash and cash equivalents
     104,935       137,250  
                 
Securities available-for-sale at fair value
                
(amortized cost of $284,716 and $325,879, respectively)
     284,913       324,153  
Securities held-to-maturity at amortized cost
                
(fair value of $27,065 and $32,350, respectively)
     27,219       32,959  
Loans held for sale
     2,175       2,334  
                 
Loans
     2,316,020       2,227,897  
Allowance for loan losses
     (29,908 )     (28,054 )
Net loans
     2,286,112       2,199,843  
                 
Premises and equipment, net
     51,890       53,391  
Federal Reserve Bank and Federal Home Loan Bank stock
     29,036       28,060  
Goodwill
     65,059       65,059  
Core deposit intangible (net of accumulated amortization of $6,063 and
                
$5,588, respectively)
     1,441       1,917  
Bank owned life insurance
     23,894       23,285  
Mortgage servicing rights
     3,154       3,258  
Other assets
     29,100       31,175  
Total assets
   $ 2,908,928     $ 2,902,684  
                 
Liabilities and shareholders’ equity:
                
Deposits
                
Noninterest bearing
   $ 452,678     $ 449,861  
Interest bearing
     1,837,089       1,843,303  
Total deposits
     2,289,767       2,293,164  
                 
Repurchase agreements
     142,238       158,980  
Federal funds purchased and other short-term borrowings
     20,180       18,364  
Advances from Federal Home Loan Bank
     60,764       40,906  
Long-term debt
     61,341       61,341  
Other liabilities
     29,650       28,574  
Total liabilities
     2,603,940       2,601,329  
                 
Shareholders’ equity:
                
Preferred stock, 300,000 shares authorized and unissued
     -       -  
Common stock, $5 par value, shares authorized 25,000,000;
                
shares outstanding 2008 – 15,055,405; 2007 – 15,044,124
     75,277       75,221  
Capital surplus
     149,605       149,005  
Retained earnings
     79,978       78,251  
Accumulated other comprehensive income (loss), net of tax
     128       (1,122 )
Total shareholders’ equity
     304,988       301,355  
                 
Total liabilities and shareholders’ equity
   $ 2,908,928     $ 2,902,684  


See notes to condensed consolidated financial statements.

 
 
 
 

Community Trust Bancorp, Inc.
Condensed Consolidated Statements of Operations and Other Comprehensive Income
(unaudited)
 
   
Three Months Ended
    
Nine Months Ended
  
   
September 30
    
September 30
  
(in thousands except per share data)
  
2008
    
2007
    
2008
    
2007
  
                         
Interest income:
                        
Interest and fees on loans, including loans held for sale
   $ 37,501     $ 43,454     $ 114,564     $ 128,835  
Interest and dividends on securities
                                
Taxable
     3,139       4,316       9,777       13,593  
Tax exempt
     472       471       1,417       1,460  
Interest and dividends on Federal Reserve and Federal
                                
Home Loan Bank stock
     394       453       1,188       1,340  
Other, including interest on federal funds sold
     198       1,025       1,108       3,755  
Total interest income
     41,704       49,719       128,054       148,983  
                                 
Interest expense:
                                
Interest on deposits
     12,713       19,345       41,762       57,996  
Interest on repurchase agreements and other short-term
                                
borrowings
     1,030       2,177       3,588       6,510  
Interest on advances from Federal Home Loan Bank
     462       605       1,215       2,020  
Interest on long-term debt
     1,000       1,000       3,000       3,364  
Total interest expense
     15,205       23,127       49,565       69,890  
                                 
Net interest income
     26,499       26,592       78,489       79,093  
Provision for loan losses
     2,875       1,915       7,892       4,231  
Net interest income after provision for loan losses
     23,624       24,677       70,597       74,862  
                                 
Noninterest income:
                                
Service charges on deposit accounts
     5,739       5,302       16,341       15,436  
Gains on sales of loans, net
     292       384       1,332       996  
Trust income
     1,260       1,240       3,749       3,619  
Loan related fees
     686       606       2,064       2,494  
Bank owned life insurance
     190       280       722       752  
Securities losses/other than temporary impairment charges
     (13,461 )     0       (13,511 )     0  
Other
     1,325       2,122       3,758       4,109  
Total noninterest income
     (3,969 )     9,934       14,455       27,406  
                                 
Noninterest expense:
                                
Salaries and employee benefits
     10,287       9,604       31,598       31,818  
Occupancy, net
     1,715       1,641       5,049       5,043  
Equipment
     1,088       1,202       3,255       3,664  
Data processing
     1,413       1,301       4,220       3,617  
Bank franchise tax
     891       866       2,695       2,598  
Legal and professional fees
     823       922       2,260       2,489  
Other
     5,083       3,788       12,667       13,529  
Total noninterest expense
     21,300       19,324       61,744       62,758  
                                 
Income (loss) before income taxes
     (1,645 )     15,287       23,308       39,510  
Income tax expense (benefit)
     (1,068 )     4,811       6,720       12,154  
Net income (loss)
     (577 )     10,476       16,588       27,356  
                                 
Other comprehensive income, net of tax:
                                
Unrealized holding gains on securities available-for-sale
     1,837       1,969       1,250       1,132  
Comprehensive income
   $ 1,260     $ 12,445     $ 17,838     $ 28,488  
                                 
Basic earnings (loss) per share
   $ (0.04 )   $ 0.69     $ 1.11     $ 1.80  
Diluted earnings (loss)  per share
   $ (0.04 )   $ 0.68     $ 1.09     $ 1.77  
                                 
Weighted average shares outstanding-basic
     15,011       15,183       15,000       15,186  
Weighted average shares outstanding-diluted
     15,263       15,342       15,153       15,417  
                                 
Dividends declared per share
   $ 0.29     $ 0.27     $ 0.87     $ 0.81  
 

See notes to condensed consolidated financial statements.

 
 
 
 

Community Trust Bancorp, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)

   
Nine months ended
  
   
September 30
  
(in thousands)
  
2008
    
2007
  
             
Cash flows from operating activities:
            
Net income
   $ 16,588     $ 27,356  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation and amortization
     3,847       4,299  
Change in net deferred tax liability
     (5,198 )     1,809  
Stock based compensation
     545       498  
Excess tax benefits of stock-based compensation
     878       721  
Provision for loan and other real estate losses
     8,103       4,579  
Securities losses/other than temporary impairment charges
     13,511       0  
Gains on sale of mortgage loans held for sale
     (1,332 )     (996 )
Losses on sale of assets, net
     415       159  
Proceeds from sale of mortgage loans held for sale
     69,527       56,677  
Funding of mortgage loans held for sale
     (68,036 )     (55,969 )
Amortization of securities premiums, net
     (134 )     510  
Change in cash surrender value of bank owned life insurance
     (609 )     (653 )
Fair value adjustments of mortgage servicing rights
     104       (71 )
Amortization/write-off of debt issuance costs
     0       1,950  
Changes in:
                
     Other liabilities
     4,118       7,852  
     Other assets
     3,651       (1,482 )
Net cash provided by operating activities
     45,978       47,239  
                 
Cash flows from investing activities:
                
Securities available-for-sale:
                
Proceeds from sales
     29,950       106,800  
Proceeds from prepayments and maturities
     53,067       37,179  
Purchase of securities
     (55,264 )     (69,800 )
Securities held-to-maturity:
                
Proceeds from prepayments and maturities
     5,773       6,331  
Change in loans, net
     (99,361 )     (75,784 )
Purchase of premises, equipment, and other real estate
     (2,384 )     (1,808 )
Proceeds from sale of premises and equipment
     8       0  
Additional investment in equity securities
     (976 )     (14 )
Redemption of investment in unconsolidated subsidiaries
     0       1,841  
Investment in unconsolidated subsidiaries
     0       (1,841 )
Proceeds from sale of other real estate and other repossessed assets
     3,623       2,290  
Additional investment in other real estate owned
     (119 )     (21 )
Additional investment in bank owned life insurance
     0       (1,391 )
Net cash provided by (used in) investing activities
     (65,683 )     3,782  
                 
Cash flows from financing activities:
                
Change in deposits, net
     (3,397 )     (8,292 )
Change in repurchase agreements and other short-term borrowings, net
     (14,926 )     (15,244 )
Advances from Federal Home Loan Bank
     20,000       0  
Payments on advances from Federal Home Loan Bank
     (142 )     (40,274 )
Payment for redemption of junior subordinated debentures
     0       (61,341 )
Additional junior subordinated debentures
     0       61,341  
Issuance of common stock
     2,408       2,409  
Purchase of common stock
     (2,630 )     (6,184 )
Excess tax benefits of stock-based compensation
     (878 )     (721 )
Dividends paid
     (13,045 )     (12,307 )
Net cash used in financing activities
     (12,610 )     (80,613 )
Net decrease in cash and cash equivalents
     (32,315 )     (29,592 )
Cash and cash equivalents at beginning of period
     137,250       157,538  
Cash and cash equivalents at end of period
   $ 104,935     $ 127,946  
                 
Supplemental disclosures:
                
Income taxes paid
   $ 13,171     $ 8,388  
Interest paid
     45,078       61,589  
Non-cash activities
                
Loans to facilitate the sale of other real estate and other repossessed assets
     935       184  
Common stock dividends accrued, paid in subsequent quarter
     4,356       4,058  
Real estate acquired in settlement of loans
     6,135       5,063  
Other than temporary impairment of investment securities
     13,461       0  

 
See notes to condensed consolidated financial statements.

 
 
 
 

Community Trust Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1 - Summary of Significant Accounting Policies
 
In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (which consist of normal recurring accruals) necessary, to present fairly the condensed consolidated financial position as of September 30, 2008, the results of operations for the three and nine months ended September 30, 2008 and 2007, and the cash flows for the nine months ended September 30, 2008 and 2007.  In accordance with accounting principles generally accepted in the United States of America for interim financial information, these statements do not include certain information and footnote disclosures required by accounting principles generally accepted in the United States of America for complete annual financial statements.  The condensed consolidated balance sheet as of December 31, 2007 has been derived from the audited consolidated financial statements of Community Trust Bancorp, Inc. ("CTBI") for that period.  The results of operations for the three and nine months ended September 30, 2008 and 2007, and the cash flows for the nine months ended September 30, 2008 and 2007, are not necessarily indicative of the results to be expected for the full year.  For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2007, included in CTBI's Annual Report on Form 10-K.
 
Principles of Consolidation – The unaudited condensed consolidated financial statements include the accounts of CTBI and its separate and distinct, wholly owned subsidiaries Community Trust Bank, Inc. (the “Bank”) and Community Trust and Investment Company.  All significant intercompany transactions have been eliminated in consolidation.
 
Reclassifications – Certain reclassifications considered to be immaterial have been made in the prior year consolidated financial statements to conform to current year classifications.  These reclassifications had no effect on net income.

New Accounting Standards –
 
Ø Determining the Fair Value of a Financial Asset When the Market For That Asset is Not Active – FASB Staff Position (“FSP”) No. FAS 157-3 clarifies the application of FASB No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active.  This FSP was effective October 10, 2008, and did not have a significant impact on our consolidated financial statements.

Ø Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities – This FASB Staff Position No. EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings Per Share.  This FSP is effective January 1, 2009, and is not expected to have a significant impact on our consolidated financial statements.

Ø Fair Value Option for Financial Assets and Financial Liabilities – In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure many financial instruments and certain other items at fair value.  The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments.  SFAS 159 is effective for fiscal years beginning after November 15, 2007. CTBI has not elected the fair value option for any financial assets or liabilities at September 30, 2008.

Ø Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards – On June 14, 2007, the Emerging Issues Task Force (“EITF”) reached a final consensus on Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.  This consensus was ratified by FASB on June 27, 2007.  This issue states that tax benefits received on dividends paid to employees associated with their unvested stock compensation awards should be recorded in additional paid-in capital (“APIC”) for awards expected to vest.  Currently, such dividends are accounted for as a permanent tax deduction reducing the annual effective income tax rate.  This issue is to be applied prospectively to dividends declared in fiscal years beginning after December 15, 2007.  Retrospective application of this Issue is prohibited.  Issue No. 06-11 did not have a material effect on our consolidated financial statements.

Ø Business Combinations (Revised 2007) – The FASB recently issued SFAS 141(R), which replaces FAS 141, Business Combinations, and applies to all transactions and other events in which one entity obtains control over one or more other businesses.  SFAS 141R requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities, and any non-controlling interest in the acquiree at fair value as of the acquisition date.  Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt.  This fair value approach replaces the cost-allocation process required under SFAS 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value.  SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed as was previously the case under SFAS 141.  Under SFAS 141R, the requirements of SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, would have to be met in order to accrue for a restructuring plan in purchase accounting.  Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting, and instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS 5, Accounting for Contingencies.  SFAS 141R is expected to have a significant impact on our accounting for business combinations closing on or after January 1, 2009.

Ø Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements – EITF Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements requires the recognition of a liability and related compensation expense for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to post-retirement periods.  Under EITF 06-4, life insurance policies purchased for the purpose of providing such benefits do not effectively settle an entity’s obligation to the employee.  Accordingly, the entity must recognize a liability and related compensation expense during the employee’s active service period based on the future cost of insurance to be incurred during the employee’s retirement.  If the entity has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS 106, Employer’s Accounting for Postretirement Benefits Other Than Pensions.  CTBI adopted EITF 06-4 as a change in accounting principle through a $1.8 million cumulative-effect adjustment to retained earnings based on the cost of insurance.

Note 2 – Stock-Based Compensation
 
Effective January 1, 2008, CTBI adopted SFAS No. 157, Fair Value Measurements.  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances.  In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability.  In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.  The fair value hierarchy is as follows:

Level 1 Inputs – Unadjusted quoted process in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
 
 
 
 
CTBI’s compensation expense related to stock option grants was $505 thousand and $498 thousand, respectively, for the nine months ended September 30, 2008 and 2007, respectively.  Restricted stock expense for the first nine months of 2008 was $40 thousand.  There were no restricted stock grants made prior to the first quarter of 2008.  As of September 30, 2008, there was a total of $1.3 million of unrecognized compensation expense related to unvested stock option awards that will be recognized as expense as the awards vest over a weighted average period of 1.5 years.
 
There were no options granted during the three months ended September 30, 2008; however, there were options to purchase 74,776 shares of CTBI common stock and 11,076 shares of restricted stock granted during the nine months ended September 30, 2008.  The options were granted pursuant to the terms of the 2006 Stock Ownership Incentive Plan, with an exercise price per share of $28.32 (equal to fair market value on date of grant), a term of 10 years, and vesting in five years.   The restrictions on the restricted stock will lapse at the end of five years.  However, in the event of a change in control of CTBI or the death of the participant, the restrictions will lapse.  In the event of the disability of the participant, the restrictions will lapse on a pro rata basis (with respect to 20% of the participant’s restricted stock for each year since the date of award). The Compensation Committee of the Board of Directors will have discretion to review and revise restrictions applicable to a participant’s restricted stock in the event of the participant’s retirement.  There were options to purchase 109,304 shares of CTBI common stock granted during the nine months ended September 30, 2007.
 
The fair values of options granted during the nine months ended September 30, 2008 and 2007, were established at the date of grant using a Black-Scholes option pricing model with the weighted average assumptions as follows:

   
Nine Months Ended
  
   
September 30
  
   
2008
    
2007
  
Expected dividend yield
     4.10 %     2.77 %
Risk-free interest rate
     3.23 %     4.81 %
Expected volatility
     31.01 %     33.50 %
Expected term (in years)
     7.5       7.5  
Weighted average fair value of options
   $ 6.41     $ 12.74  

Note 3 – Securities
 
Securities are classified into held-to-maturity and available-for-sale categories.  Held-to-maturity securities are those that CTBI has the positive intent and ability to hold to maturity and are reported at amortized cost.  Available-for-sale securities are those that CTBI may decide to sell if needed for liquidity, asset-liability management or other reasons.  Available-for-sale securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax.
 
The amortized cost and fair value of securities at September 30, 2008 are summarized as follows:

Available-for-Sale

(in thousands)
  
Amortized
Cost
    
Fair
Value
  
U.S. Treasury and government agencies
   $ 23,320     $ 23,691  
State and political subdivisions
     43,136       43,160  
U.S. government sponsored agencies and mortgage-backed pass through certificates
     196,666       196,991  
Collateralized mortgage obligations
     1       1  
Total debt securities
     263,123       263,843  
Marketable equity securities
     21,593       21,070  
Total available-for-sale securities
   $ 284,716     $ 284,913  

Held-to-Maturity

 (in thousands)
  
Amortized
Cost
    
Fair
Value
  
State and political subdivisions
   $ 1,575     $ 1,587  
U.S. government sponsored agencies and mortgage-backed pass through certificates
     25,644       25,478  
Total held-to-maturity securities
   $ 27,219     $ 27,065  

The amortized cost and fair value of securities as of December 31, 2007 are summarized as follows:

Available-for-Sale

(in thousands)
  
Amortized
Cost
    
Fair
Value
  
U.S. Treasury and government agencies
   $ 20,307     $ 20,736  
State and political subdivisions
     40,472       41,137  
U.S. government sponsored agencies and mortgage-backed pass through certificates
     205,049       202,542  
Collateralized mortgage obligations
     1       1  
Other debt securities
     20,000       19,687  
Total debt securities
     285,829       284,103  
Marketable equity securities
     40,050       40,050  
Total available-for-sale securities
   $ 325,879     $ 324,153  

Held-to-Maturity

(in thousands)
  
Amortized
Cost
    
Fair
Value
  
State and political subdivisions
   $ 1,901     $ 1,914  
U.S. government sponsored agencies and mortgage-backed pass through certificates
     31,058       30,436  
Total held-to-maturity securities
   $ 32,959     $ 32,350  
 
 
 
Note 4 – Loans

Major classifications of loans, net of unearned income and deferred loan origination costs, are summarized as follows:

(in thousands)
  
September 30
2008
    
December 31
2007
  
Commercial construction
   $ 153,325     $ 143,773  
Commercial secured by real estate
     652,610       640,574  
Commercial other
     358,896       333,774  
Real estate construction
     61,141       69,021  
Real estate mortgage
     605,944       599,665  
Consumer
     472,588       435,273  
Equipment lease financing
     11,516       5,817  
Total loans
   $ 2,316,020     $ 2,227,897  

Activity in the allowance for loan and lease losses was as follows:

   
Nine Months Ended
  
   
September 30
  
(in thousands)
  
2008
    
2007
  
Allowance balance at January 1
   $ 28,054     $ 27,526  
Additions to allowance charged against operations
     7,892       4,231  
Recoveries credited to allowance
     1,846       1,980  
Losses charged against allowance
     (7,884 )     (5,804 )
Allowance balance at September 30
   $ 29,908     $ 27,933  
 
Note 5 – Mortgage Servicing Rights

The following table presents the components of mortgage banking income:

   
Nine Months Ended
  
   
September 30
  
(in thousands)
  
2008
    
2007
  
Net gain on sale of loans held for sale
   $ 1,332     $ 996  
Net loan servicing income
                
Servicing fees
     658       648  
Late fees
     43       50  
Ancillary fees
     146       108  
Fair value adjustments
     (446 )