2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 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, 1997
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 (I.R.S. Employer
incorporation or organization) Identification No.)
208 North Mayo Trail
Pikeville, Kentucky 41501
(address of principal executive offices) (Zip Code)
Registrant's telephone number (606) 432-1414
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___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common stock - 10,060,631 shares outstanding at October 31, 1997
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying information has not been audited by independent
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 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 generally accepted accounting
principles 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, 1996 for
further information in this regard.
Index to consolidated financial statements:
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
<PAGE>
Consolidated Balance Sheets
September 30 December 31
(In thousands except share data) 1997 1996
Assets:
Cash and due from banks $52,415 $63,048
Interest bearing deposits in
other financial institutions 220 836
Federal funds sold 28,690 0
Securities available-for-sale 170,593 229,952
Securities held-to-maturity (fair value
of $120,358 and
$137,383, respectively) 120,585 137,733
Loans 1,371,256 1,309,623
Allowance for loan losses (20,359) (18,825)
Net loans 1,350,897 1,290,798
Premises and equipment, net 45,172 46,275
Excess of cost over net assets
acquired (net of
accumulated amortization of
$7,467 and $6,674, respectively) 17,991 19,822
Other assets 36,348 27,196
Total Assets $ 1,822,911 $ 1,815,660
Liabilities and Shareholders' Equity:
Deposits:
Noninterest bearing $ 180,950 $ 200,222
Interest bearing 1,248,648 1,280,600
Total deposits 1,429,598 1,480,822
Federal funds purchased and other
short-term borrowings 40,279 44,585
Other liabilities 19,623 15,394
Advances from Federal Home Loan Bank 122,632 110,969
Long-term debt 53,477 19,136
Total Liabilities 1,665,609 1,670,906
Shareholders' Equity:
Preferred stock, 300,000 shares authorized and unissued
Common stock, $5 par value, shares authorized 25,000,000;
shares issued and outstanding,
1997 - 10,060,631; 1996 - 9,128,814 50,303 45,644
Capital surplus 28,058 27,915
Retained earnings 78,467 71,976
Net unrealized appreciation (depreciation)
on securities available-for-sale,
net of tax 474 (781)
Total Shareholders' Equity 157,302 144,754
Total Liabilities and
Shareholders' Equity $ 1,822,911 $ 1,815,660
The accompanying notes are an integral part of these statements.
<PAGE>
Consolidated Statements of Income
Three months ended Nine months ended
September 30 September 30
(In thousands except per share data) 1997 1996 1997 1996
Interest Income:
Interest and fees on loans $32,298 $30,843 $ 96,672 $ 86,972
Interest and dividends on securities
Taxable 3,860 5,030 12,963 17,239
Tax exempt 637 741 1,994 2,259
Interest on federal funds sold 292 0 881 450
Interest on deposits in other financial
institutions 5 20 23 43
Total Interest Income 37,092 36,634 112,533 106,963
Interest Expense:
Interest on deposits 15,480 15,029 46,000 45,375
Interest on federal funds purchased and
other short-term borrowings 418 399 1,232 957
Interest on advances from
Federal Home Loan Bank 1,234 1,636 4,744 3,728
Interest on long-term debt 1,192 447 2,653 1,493
Total Interest Expense 18,324 17,511 54,629 51,553
Net interest income 18,768 19,123 57,904 55,410
Provision for loan losses 4,069 2,003 7,518 5,177
Net interest income after
provision for loan losses 14,699 17,120 50,386 50,233
Noninterest Income:
Service charges on deposit accounts 1,696 1,634 5,209 4,517
Gains on sale of loans, net 367 698 814 1,449
Trust income 476 392 1,347 1,190
Securities gains, net 0 5 47 65
Other 4,515 967 6,822 3,396
Total Noninterest Income 7,054 3,696 14,239 10,617
Noninterest Expense:
Salaries and employee benefits 7,162 6,989 21,575 21,266
Occupancy, net 1,084 987 3,116 2,937
Equipment 952 926 2,872 2,810
Data processing 831 648 2,206 1,856
Stationery, printing and
office supplies 406 322 1,302 1,203
Taxes other than payroll,
property and income 520 512 1,591 1,523
FDIC insurance 70 7 184 20
Other 3,874 3,309 11,678 9,201
Total Noninterest Expense 14,899 13,700 44,524 40,816
Income before income taxes
and extraordinary gain 6,854 7,116 20,101 20,034
Extraordinary gain (loss), net of tax 0 0 3,085 0
Income before income taxes 6,854 7,116 23,186 20,034
Income tax expense 2,442 2,210 6,672 6,188
Net Income $ 4,412 $ 4,906 $ 16,514 $ 13,846
Net income per share $ 0.44 $ 0.49(1) $ 1.63 $ 1.38(1)
Average shares outstanding 10,062 10,053(1) 10,061 10,053(1)
(1) Per share data and average shares outstanding have been restated to
reflect the 10% stock dividend issued on April 15, 1997.
The accompanying notes are an integral part of these statements.
<PAGE>
Consolidated Statements of Cash Flows
Nine months ended
September 30
(In thousands) 1997 1996
Cash flows from operating activities:
Net income $ 16,514 $ 13,846
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,167 3,631
Provision for loan and other real estate losses 7,543 5,240
Securities gains, net (119) (65)
Gain on sale of loans, net (814) (1,449)
Gain on sale of assets 4 (18)
Net amortization of securities premiums 291 427
Net change in loans held for sale 77,652 4,543
Changes in:
Other assets (8,141) (9,931)
Other liabilities 4,244 1,049
Net cash provided by operating activities 101,341 17,273
Cash flows from investing activities:
Proceeds from:
Sale/call of securities available-for-sale 44,909 11,797
Maturity of securities available-for-sale 37,395 35,291
Maturity of securities held-to-maturity 13,992 10,239
Principal payments on mortgage-
backed securities 4,019 34,824
Purchase of:
Securities available-for-sale (21,510) (40,339)
Securities held-to-maturity 0 (3,441)
Mortgage-backed securities (1,000) (1,228)
Net change in loans (144,529) (157,853)
Net change in premises and equipment (2,412) (2,018)
Other 0 1,570
Net cash used in investing activities (69,136) (111,158)
Cash flows from financing activities:
Net change in deposits (51,224) (5,465)
Net change in federal funds purchased and
other short-term borrowings (4,306) 28,038
Advances from Federal Home Loan Bank 120,232 61,145
Repayments of advances from
Federal Home Loan Bank (108,569) (12,596)
Proceeds from long-term debt 34,500 1,000
Payments on long-term debt (159) (9,704)
Issuance of common stock 228 -
Dividends paid (5,466) (4,929)
Net cash provided by financing activities (14,764) 57,489
Net increase (decrease) in cash
and cash equivalents 17,441 (36,396)
Cash and cash equivalents at beginning of year 63,884 107,012
Cash and cash equivalents at end of period $ 81,325 $ 70,616
The accompanying notes are an integral part of these statements.
<PAGE>
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
The accounting and reporting policies of Community Trust Bancorp,
Inc. (the "Company"), and its subsidiaries on a consolidated basis
conform to generally accepted accounting principles and general
practices within the banking industry.
Principles of Consolidation - The unaudited consolidated
financial statements include the accounts of the Company and its
separate and distinct, wholly owned subsidiaries Community Trust Bank,
NA, Commercial Bank (West Liberty), Community Trust Bank, FSB, Trust
Company of Kentucky, National Association, CTBI Preferred Capital
Trust, and Community Trust Funding Corporation. All significant
intercompany transactions have been eliminated in consolidation.
<PAGE>
Note 2 - Securities
Securities are classified into held-to-maturity, available-for-
sale, and trading categories. Held-to-maturity securities are those
which the Company has the positive intent and ability to hold to
maturity and are reported at amortized cost. Available-for-sale
securities are those which the Company 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 available-for-
sale as of September 30, 1997 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 37,255 $ 37,526
Mortgage-backed pass through
certificates 77,130 77,370
Collateralized mortgage obligations 17,778 17,698
Other debt securities 19,167 19,173
Total debt securities 151,330 151,767
Equity securities 18,757 18,826
Total Securities $170,087 $170,593
The amortized cost and fair value of securities held-to-maturity
as of September 30, 1997 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 22,958 $ 21,855
States and political subdivisions 46,942 48,025
Mortgage-backed pass through
certificates 38,257 38,156
Collateralized mortgage obligations 12,428 12,322
Total Securities $120,585 $120,358
<PAGE>
Note 3 - Loans
Major classifications of loans are summarized as follows:
September 30 December 31
(in thousands) 1997 1996
Commercial, secured by real estate $ 291,291 $ 270,315
Commercial, other 257,738 234,793
Real Estate Construction 83,086 79,069
Real Estate Mortgage 409,013 411,067
Consumer 327,343 310,582
Equipment Lease Financing 2,785 3,797
$1,371,256 $1,309,623
Note 4 - Long-Term Debt
Long-Term Debt consists of the following:
September 30 December 31
(in thousands) 1997 1996
Trust Preferred Securities * $ 34,500 $ 0
Senior Notes 17,230 17,230
Other 1,747 1,906
$ 53,477 $ 19,136
Refer to the 1996 Securities and Exchange Commission Form 10-K
for information concerning rates and assets securing long-term debt.
* 9.0% cumulative, payable quarterly, maturing 2027, subordinated
to all other liabilities of the Company
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Community Trust Bancorp, Inc. (the "Company") is a multi-bank
holding company headquartered in Pikeville, Kentucky. At September
30, 1997 the Company owned one commercial bank, one savings bank and
one trust company. Through its affiliates, the Company has over sixty
banking locations serving 85,000 households in various Eastern and
Central Kentucky counties. The Company had total assets of $1.82
billion and total shareholders' equity of $157 million as of September
30, 1997. The Company's common stock is listed on NASDAQ under the
symbol CTBI. Market makers are Herzog, Heine, Geduld, Inc., New York,
New York; J.J.B. Hilliard, W.L. Lyons, Inc., Louisville, Kentucky;
Morgan, Keegan and Company, Inc., Memphis, Tennessee; J.C. Bradford &
Co., Louisville, Kentucky; Bear, Stearns & Co., Inc., New York, New
York; Robinson Humphrey Co., Inc., Atlanta, Georgia and Stifel
Nicolaus & Co., Incorporated, St. Louis, Missouri.
Effective January 1, 1997, the Company changed its name from
Pikeville National Corporation to Community Trust Bancorp, Inc.,
changed the name of its lead bank from Pikeville National Bank and
Trust Company to Community Trust Bank, National Association (the
"Bank") and merged seven of its other commercial bank subsidiaries
into the Bank. As a result of these transactions, the Bank has $1.6
billion in assets and numerous locations throughout eastern and
central Kentucky. The Company's thrift and trust subsidiaries,
Community Trust Bank, FSB and Trust Company of Kentucky, N.A., remain
wholly-owned subsidiaries of the Company and will continue to operate
as independent entities.
Commercial Bank, West Liberty
On July 1, 1997 the Company completed the sale of its Commercial
Bank, West Liberty, Kentucky, a wholly owned state bank subsidiary for
approximately $10.2 million in cash, which resulted in a pre-tax
operating gain of $3.0 million. West Liberty had $79 million in
assets, constituting 4% of the Company's total consolidated assets.
Consistent with the Company's strategic plan, the funds generated by
the sale of West Liberty will provide the Company with the opportunity
to expand existing or enter into new markets through either internal
expansion or acquisitions.
Stock Dividend
On February 18, 1997, the Company's Board of Directors declared a
10% stock dividend. This stock dividend, paid on April 15, 1997 to
shareholders of record on March 15, 1997, was in addition to the
regular quarterly cash dividends paid on (1) April 1, 1997 of 18 cents
per share for shareholders of record on March 15, 1997, (2) July 1,
1997 of 18 cents per share for shareholders of record on June 15,
1997, and (3) October 1, 1997 of 18 cents per share for shareholders
of record on September 15, 1997. All per share data has been restated
to reflect this stock dividend.
<PAGE>
Income Statement Review
The Company's net income for the three months ended September 30,
1997 was $4.4 million or $0.44 per share as compared to $4.9 million
or $0.49 per share for the three months ended September 30, 1996.
Total earnings for the nine months ended September 30, 1997 were
$16.5 million or $1.63 per share, including a first quarter
extraordinary item of $3.0 million or $0.30 per share received in a
settlement with a former vendor. The following table sets forth on an
annualized basis the return on average assets and return on average
shareholders' equity for the three and nine month periods ending
September 30, 1997 and 1996:
Three months ended Nine months ended
September 30 September 30
1997 1996 1997 1996
Return on average shareholders' equity
before extraordinary item 11.05% 13.92% 11.70% 13.47%
after extraordinary item 11.05% 13.92% 14.39% 13.47%
Return on average assets
before extraordinary item 0.99% 1.09% 0.99% 1.06%
after extraordinary item 0.99% 1.09% 1.22% 1.06%
The Company's net income for the third quarter of 1997 decreased
$494 thousand or 10% as compared to the same period in 1996. Earnings
per share decreased $0.05 per share or 10% for the three months ended
September 30, 1997, as compared to the third quarter of 1996. The
decrease in net income was the result of increases in noninterest
expense, including personnel, training, and advertising, which were
to a large extent offset by increases in net interest income and
higher noninterest income. Training and personnel expenses were the
result of planning and implementation of the consolidation of the
merged affiliates which occurred on January 1, 1997. Advertising
increases occurred so that the Company's name change would be well
recognized in our market areas. Noninterest income increased $358
thousand for the quarter, not counting the $3.0 million operating gain
on the sale of the West Liberty affiliate, as compared to the third
quarter of 1996. Noninterest expense for the quarter increased by
$1.2 million as compared to the same period in 1996. See "Noninterest
Expense" below for an explanation of the increase.
Provision for loan losses for the three months ended September
30, 1997 was $4.0 million, compared to $2.0 million for the same
period in 1996. For the nine months ended September 30, 1997 the
provision was $7.5 million, a 45% increase over the same period in
1996. See "Provision For Loan Losses" below for an explanation of the
increase.
Net Interest Income
Net interest income decreased $355 thousand or 2% from $19.1
million for the third quarter of 1996 to $18.7 million for the third
quarter of 1997. Interest income and interest expense both increased
for the quarter ending September 30, 1997 as compared to the same
period in 1996, with interest income increasing $5.6 million and
interest expense increasing $3.1 million.
The decrease in net interest income for the three month period
was primarily due to a lower net interest margin from a year-to-year
comparison. The loan-to-deposit ratio at the end of September 1997
was 92.83% as compared to 85.63% for the end of September 1996, after
accounting for the securitization of approximately $81 million in
retail installment contracts which were sold in June 1997.
<PAGE>
The yield on interest earning assets increased 18 basis points
for the third quarter of 1997 as compared to the same period in 1996.
The cost of interest bearing funds increased 34 basis points for the
third quarter of 1997 as compared to the same period in 1996. As a
result, the net interest margin decreased from 4.73% for the third
quarter of 1996 to 4.67% for the current quarter. For the nine months
ended September 30, 1997 the yield on interest earning assets
increased 13 basis points from 8.96% in 1996 to 9.09% in 1997. The
cost of interest bearing funds increased 18 basis points from 4.86% in
1996 to 5.04% in 1997. As a result, the net interest margin for the
nine months ended September 30, 1997 increased 4 basis points to 4.75%
from the same period in 1996.
The Company's loan portfolio, its highest yielding asset,
continues to expand through new market share and internally generated
growth. The Company's loan portfolio increased 7.9% from $1.27
billion for the third quarter of 1996 to $1.37 billion for the third
quarter of 1997, after giving effect to a reduction in the loan
portfolio resulting from the securitization of approximately $81
million of indirect retail installment loans in June 1997. Loans
accounted for 87% of total interest income for the third quarter of
1997 compared to 84% for the third quarter of 1996.
The following table summarizes the annualized net interest spread
and net interest margin for the three and nine months ended September
30, 1997 and 1996.
Three Months Ended Nine months ended
September 30 September 30
1997 1996 1997 1996
Yield on interest earning assets 9.12% 8.94% 9.09% 8.96%
Cost of interest bearing funds 5.16% 4.82% 5.04% 4.86%
Net interest spread 3.96% 4.12% 4.05% 4.10%
Net interest margin 4.67% 4.73% 4.75% 4.71%
Provision for Loan Losses
The analysis of the changes in the allowance for loan losses and
selected ratios is set forth below.
Nine Months Ended
September 30
(in thousands) 1997 1996
Allowance balance January 1 $18,825 $16,082
Allowance of sold affiliate (578) 0
Additions to allowance charged
against operations 7,518 5,177
Recoveries credited to allowance 2,540 1,784
Losses charged against allowance (7,946) (4,279)
Allowance balance at September 30 $20,359 $18,764
Allowance for loan losses to
period-end loans 1.48% 1.48%
Average loans, net of unearned income $1,331,744 $1,190,893
Provision for loan losses to
average loans, annualized .56% .43%
Loan charge-offs, net of recoveries to
average loans, annualized .41% .21%
<PAGE>
The Company increased its provision for loan losses as a result
of the growth in its consumer loan portfolio, a loan category which
traditionally experiences higher charge-offs and higher yields than
other loans; and to a lesser degree, due to its increase in net charge-
offs, measured in raw dollars. Net charge-offs represent the amount
of loans charged off less amounts recovered on loans previously
charged off. Net charge-offs as a percentage of average loans
outstanding increased 20 basis points to 0.41% for the nine months
ended September 30, 1997 as compared to the same period in 1996. The
Company's non-performing loans (90 days or more past due and non-
accrual) were 1.22% and 1.44% of outstanding loans at December 31,
1996 and September 30, 1997, respectively.
Any loans classified as loss, doubtful, substandard or special
mention that are not included in non-performing loans do not (1)
represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results,
liquidity or capital resources or (2) represent material credits about
which management has knowledge of any information which would cause
management to have serious doubts as to the ability of the borrowers
to comply with the loan repayment terms. The Company does not believe
there are currently any trends, events or uncertainties that are
reasonably likely to have a material effect on the volume of its non-
performing loans.
Noninterest Income
The Company's noninterest income increased 91% from $3.70 million
for the three months ended September 30, 1996 to $7.05 million for the
three months ended September 30, 1997. This increase included a $3.0
million operating gain from the sale of the Company's West Liberty
affiliate, which was sold on July 1. Otherwise, deposit-related fees
represent the largest category of increase, while gains on the sale of
loans declined from the same period in 1996.
Noninterest Expense
The Company's noninterest expense increased by 9% from $13.7
million for the three months ended September 30, 1996 to $14.9 million
for the same period in 1997. Most major categories of noninterest
expense experienced increases for the quarter ended September 30, 1997
compared to the same quarter in 1996. The categories showing larger
increases were salaries and employee benefits, occupancy and
equipment, and data processing. The increases are attributed to: (1)
the cost of expansion as the Company has opened additional branches
over the past several months and (2) the temporary costs associated
with consolidating the processing functions of the seven commercial
banks that merged into the Bank on January 1, 1997.
Balance Sheet Review
Total asset size was $1.82 billion at December 31, 1996 compared
to $1.82 billion at September 30, 1997. The Company's total assets
were impacted by the sale of Commercial Bank, West Liberty in July
1997, which had assets of $76 million. During the last nine months,
loans increased from $1.31 billion to $1.37 billion, excluding the $81
million loan securitization. The asset category which declined most
was securities available-for-sale; as these securities are sold or
mature, the liquidity is being used to fund the Company's loan
portfolio growth.
<PAGE>
The Company's largest liability, deposits, declined from $1.48
billion as of December 31, 1996 to $1.43 billion as of September 30,
1997. The decline in deposits was marginal in both interest bearing
and noninterest bearing as noninterest bearing deposits declined from
$200.2 million at December 31, 1996 to $180.9 million at September 30,
1997. The Company increased its long-term debt during the period from
$19.1 million as of December 31, 1996 to $53.5 million as of September
30, 1997, due to the issuance of $34.5 million in Trust Preferred
Securities in April 1997. The Company's advances from the Federal
Home Loan Bank increased from $111.0 million at December 31, 1996 to
$122.6 million at September 30, 1997 as the Company used this
liquidity as a source of funding for loan growth.
Loans
Loans increased from $1.32 billion as of June 30, 1997 to $1.35
billion as of September 30, 1997, primarily due to the growth of the
Company's consumer loan portfolio. The category of commercial loans
secured by real estate increased from $271.5 million as of June 30,
1997 to $291.3 million as of September 30, 1997.
Non-accrual and 90 days past due loans amounted to 1.22% of total
loans outstanding as of December 31, 1996 and 1.44% of total loans
outstanding as of September 30, 1997. Non-accrual loans as a
percentage of total loans outstanding were 0.78% as of December 31,
1996 and at 0.87% at September 30, 1997. During the same period,
loans 90 days or more past due increased 13 basis points from 0.44% of
total loans outstanding to 0.57%. The allowance for loan losses
increased from 1.44% of total loans outstanding as of December 31,
1996 to 1.48% as of September 30, 1997. The allowance for loan losses
as a percentage of non-accrual loans and loans past due 90 days or
more was 118% at December 31, 1996 and 103% at September 30, 1997.
The following table summarizes the Company's loans that are non-
accrual or past due 90 days or more as of September 30, 1997 and
December 31, 1996.
As a % of Accruing loans As a % of
Non-accrual loan balances past due 90 loan balances
loans by category days or more by category
(in thousands)
September 30, 1997
Commercial loans,
secured by real estate $ 3,167 1.09% $ 2,877 0.99%
Commercial loans, other 6,154 2.36 531 0.20
Consumer loans,
secured by real estate 2,136 0.43 2,778 0.56
Consumer loans, other 425 0.13 1,695 0.52
Total $11,882 0.87% $ 7,881 0.57%
December 31, 1996
Commercial loans,
secured by real estate $ 4,802 1.78% $ 1,075 0.40%
Commercial loans, other 3,217 1.27 1,424 0.60
Consumer loans,
secured by real estate 1,705 0.35 2,416 0.49
Consumer loans, other 432 0.14 885 0.28
Total $10,156 0.78% $ 5,800 0.44%
<PAGE>
Allowance for loan losses
Management analyzes the adequacy of its allowance for loan losses
on a quarterly basis. The loan portfolio of each market region is
analyzed by each major loan category, with a review of the following
areas: (i) specific allocations based upon a review of selected loans
for loss potential; (ii) an allocation which estimates reserves based
upon the remaining pool of loans in each category derived from
historical net charge-off data, delinquency trends and other relevant
factors and (iii) an unallocated portion of the allowance which
provides for a margin of error in estimating the allocations described
above and provides for risks inherent in the portfolio which may not
be specifically addressed elsewhere.
Off-balance sheet risk is addressed by including letters of
credit in the Company's allowance adequacy analysis and through a
monthly review of all letters of credit outstanding. The Company's
loan review and problem loan analysis includes evaluation of
deteriorating letters of credit. Volume and trends in delinquencies
are monitored monthly by management, regional advisory boards and the
boards of directors of the respective banks.
Securities
The Company uses its securities held-to-maturity for production
of income and to manage cash flow needs through expected maturities.
The Company uses its securities available-for-sale for income and
balance sheet liquidity management. The book value of securities
available-for-sale decreased from $230.0 million as of December 31,
1996 to $170.6 million as of September 30, 1997. Securities held-to-
maturity declined from $137.8 million to $120.6 million during the
same period. Total securities as a percentage of total assets were
20.3% as of December 31, 1996 and 16.0% as of September 30, 1997.
Liquidity and Capital Resources
The Company's liquidity objectives are to ensure that funds are
available for the affiliate banks to meet deposit withdrawals and
credit demands without unduly penalizing profitability, and to ensure
that funding is available for the Company to meet ongoing cash needs
while maximizing profitability. The Company continues to identify
ways to provide for liquidity on both a current and long-term basis.
The subsidiary banks rely mainly on core deposits, certificates of
$100,000 or more, repayment of principal and interest on loans and
securities and federal funds sold and purchased to create long-term
liquidity. The subsidiary banks also rely on the sale of securities
under repurchase agreements, securities available-for-sale and Federal
Home Loan Bank borrowings.
Deposits decreased from $1.48 billion to $1.43 billion from
December 31, 1996 to September 30, 1997. Noninterest bearing deposits
decreased by $19.3 million while interest bearing deposits decreased
by $32.0 million.
Due to the nature of the markets served by the subsidiary banks,
management believes that the majority of its certificates of deposits
of $100,000 or more are no more volatile than its core deposits.
During the periods of low interest rates, these deposit balances
remained stable as a percentage of total deposits. In addition,
arrangements have been made with correspondent banks for the purchase
of federal funds on an unsecured basis, up to an aggregate of nearly
$100 million, if necessary, to meet the Company's liquidity needs.
<PAGE>
The Company owns $170.6 million of securities valued at market
price that are designated as available-for-sale and available to meet
liquidity needs on a continuing basis. The Company also relies on
Federal Home Loan Bank advances for both liquidity and management of
its asset/liability position. These advances have sometimes been
matched against pools of residential mortgage loans which are not sold
in the secondary market, some of which have original maturities of ten
to fifteen years. Federal Home Loan Bank advances increased from
$111.0 million as of December 31, 1996 to $122.6 million as of
September 30, 1997.
The Company generally relies upon net inflows of cash from
financing activities, supplemented by net inflows of cash from
operating activities, to provide cash for its investing activities.
As is typical of many financial institutions, significant financing
activities include deposit gathering, use of short-term borrowing
facilities such as federal funds purchased and securities sold under
repurchase agreements, and issuance of long-term debt. The Company
currently has a $17.5 million revolving line of credit available to
meet any future cash needs. (See long-term debt footnote to the
consolidated financial statements.) The Company's primary investing
activities include purchases of securities and loan originations.
In conjunction with maintaining a satisfactory level of
liquidity, management monitors the degree of interest rate risk
assumed on the balance sheet. The Company monitors its interest rate
risk by use of the static and dynamic gap models at the one year
interval. The static gap model monitors the difference in interest
rate sensitive assets and interest rate sensitive liabilities as a
percentage of total assets that mature within the specified time
frame. The dynamic gap model goes further in that it assumes that
interest rate sensitive assets and liabilities will be reinvested.
The Company uses the Sendero system to monitor its interest rate risk.
The Company desires an interest sensitivity gap of not more than
fifteen percent of total assets at the one year interval.
On a limited basis, the Company may use interest rate swaps and
sales of options on securities as additional tools in managing
interest rate risk. Interest rate swaps involve an exchange of cash
flows based on the notional principal amount and agreed upon fixed and
variable interest rates. In this transaction, the Company would
typically agreed to pay a floating interest rate based on London Inter-
Bank Offering Rate (LIBOR) and receive a fixed interest rate in
return. On options, the Company would typically sell the right to a
third party to purchase securities the Company currently owns at a
fixed price on a future date. The Company had no options outstanding
at September 30, 1997. The impact on operations of interest rate
swaps and options was not material during the first nine months of
1996 or 1997.
The Company's principal source of funds used to pay dividends to
shareholders and service long-term debt is the dividends it receives
from subsidiary banks. Various federal and state statutory
provisions, in addition to regulatory policies and directives, limit
the amount of dividends that subsidiary banks can pay without prior
regulatory approval. These restrictions have had no major impact on
the Company's dividend policy or its ability to service long-term
debt, nor is it anticipated that they will have any major impact in
the foreseeable future. In addition to the subsidiary banks' 1997
profits, approximately $4.5 million can be paid to the Company as
dividends without prior regulatory approval.
The primary source of capital for the Company is retained
earnings. The Company paid cash dividends of $0.54 per share for the
first nine months of 1997 and $0.48 per share for the first nine
months of 1996. Earnings per share for the same periods were $1.63
and $1.38, respectively. The Company retained 75% of earnings for the
first nine months of 1997.
<PAGE>
Under guidelines issued by banking regulators, the Company and
its subsidiary banks are required to maintain a minimum Tier 1 risk-
based capital ratio of 4% and a minimum total risk-based ratio of 8%.
Risk-based capital ratios weight the relative risk factors of all
assets and consider the risk associated with off-balance sheet items.
The Company must also maintain a minimum Tier 1 leverage ratio of 4%
as of September 30, 1997. The Company's Tier 1 leverage, Tier 1 risk-
based and total risk-based ratios were 7.94%, 10.21% and 11.46%,
respectively as of September 30, 1997.
As of September 30, 1997, management is not aware of any current
recommendations by banking regulatory authorities which, if they were
to be implemented, would have, or would be reasonably likely to have,
a material adverse impact on the Company's liquidity, capital
resources, or operations.
Impact of Inflation and Changing Prices
The majority of the Company's assets and liabilities are monetary
in nature. Therefore, the Company differs greatly from most
commercial and industrial companies that have significant investment
in nonmonetary assets, such as fixed assets and inventories. However,
inflation does have an important impact on the growth of assets in the
banking industry and on the resulting need to increase equity capital
at higher than normal rates in order to maintain an appropriate equity
to assets ratio. Inflation also affects other expenses, which tend to
rise during periods of general inflation.
Management believes the most significant impact on financial and
operating results is the Company's ability to react to changes in
interest rates. Management seeks to maintain an essentially balanced
position between interest rate sensitive assets and liabilities in
order to protect against the effects of wide interest rate
fluctuations.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a vote None
of Security Holders
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27. Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Corporation has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COMMUNITY TRUST BANCORP, INC.
by
Date: November 14, 1997 Richard M. Levy
Richard M. Levy
Executive Vice President
Principal Financial Officer
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sep 97
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