18
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 March 31, 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 - 10,058,835 shares outstanding at April 30, 1997
<PAGE>
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
March 31 December 31
(In thousands except share data) 1997 1996
Assets:
Cash and due from banks $58,768 $63,048
Interest bearing deposits in
other financial institutions 784 836
Federal funds sold 12,265 0
Securities available-for-sale 191,013 229,952
Securities held-to-maturity (fair value
of $135,686 and
$137,383, respectively) 135,306 137,733
Loans 1,354,977 1,309,623
Allowance for loan losses (19,224) (18,825)
Net loans 1,335,753 1,290,798
Premises and equipment, net 46,018 46,275
Excess of cost over net assets acquired
(net of accumulated amortization of
$6,944 and $6,674, respectively) 19,560 19,822
Other assets 25,223 27,196
Total Assets $1,824,690 $1,815,660
Liabilities and Shareholders' Equity:
Deposits:
Noninterest bearing $195,773 $200,222
Interest bearing 1,291,472 1,280,600
Total deposits 1,487,245 1,480,822
Federal funds purchased and other
short-term borrowings 36,163 44,585
Other liabilities 20,639 15,394
Advances from Federal Home Loan Bank 111,796 110,969
Long-term debt 19,110 19,136
Total Liabilities 1,674,953 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 - 9,144,950; 1996 - 9,128,814 45,725 45,644
Capital surplus 28,032 27,915
Retained earnings 77,691 71,976
Net unrealized appreciation (depreciation)
on securities available-for-sale,
net of tax (1,711) (781)
Total Shareholders' Equity 149,737 144,754
Total Liabilities and
Shareholders' Equity $1,824,690 $1,815,660
The accompanying notes are an integral part of these statements.
<PAGE>
Consolidated Statements of Income
Three months ended
March 31
(In thousands except per share data) 1997 1996
Interest Income:
Interest and fees on loans $31,718 $27,732
Interest and dividends on securities
Taxable 4,799 5,961
Tax exempt 673 762
Interest on federal funds sold 166 450
Interest on deposits in other financial
institutions 12 12
Total Interest Income 37,368 34,917
Interest Expense:
Interest on deposits 15,070 15,448
Interest on federal funds purchased and
other short-term borrowings 427 270
Interest on advances from
Federal Home Loan Bank 1,749 896
Interest on long-term debt 414 553
Total Interest Expense 17,660 17,167
Net interest income 19,708 17,750
Provision for loan losses 1,718 1,488
Net interest income after provision
for loan losses 17,990 16,262
Noninterest Income:
Service charges on deposit accounts 1,692 1,327
Gains on sale of loans, net 205 163
Trust income 397 392
Securities gains, net 93 42
Other 1,057 1,335
Total Noninterest Income 3,444 3,259
Noninterest Expense:
Salaries and employee benefits 7,566 7,083
Occupancy, net 1,015 960
Equipment 981 939
Data processing 675 639
Stationery, printing and office supplies 441 502
Taxes other than payroll, property and income 526 503
FDIC insurance 35 7
Other 3,649 2,844
Total Noninterest Expense 14,888 13,477
Income before income taxes and
extraordinary gain 6,546 6,044
Extraordinary gain (loss), net of tax 3,085 0
Income before income taxes 9,631 6,044
Income tax expense 2,084 1,841
Net income $7,547 $4,203
Net income per share $ 0.74 $ 0.42 (1)
Average shares outstanding 10,042 10,037 (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
Three months ended
March 31
(In thou sands) 1997 1996
Cash flows from operating activities:
Net income $7,547 $4,203
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,293 1,284
Provision for loan and other real
estate losses 1,743 1,500
Securities gains, net (93) (42)
Gain on sale of loans, net (205) (163)
Gain on sale of assets 4 (31)
Net amortization of securities premiums 164 111
Net change in loans held for sale 53 (1,424)
Changes in:
Other assets 1,716 491
Other liabilities 5,241 626
Net cash provided by operating activities 17,463 6,555
Cash flows from investing activities:
Proceeds from:
Sale/call of securities available-for-sale 29,058 7,264
Maturity of securities available-for-sale 12,170 10,497
Maturity of securities held-to-maturity 1,673 4,649
Principal payments on mortgage-backed
securities 708 8,774
Purchase of:
Securities available-for-sale (2,937) (28,689)
Securities held-to-maturity 0 (633)
Mortgage-backed securities 0 (1,155)
Net change in loans (46,595) (42,886)
Net change in premises and equipment (958) (463)
Other 0 568
Net cash used in investing activities (6,702) (42,074)
Cash flows from financing activities:
Net change in deposits 6,423 (6,584)
Net change in federal funds purchased and
other short-term borrowings (8,422) 5,005
Advances from Federal Home Loan Bank 20,155 -
Repayments of advances from
Federal Home Loan Bank (19,328) (9,075)
Payments on long-term debt (26) (2,171)
Issuance of common stock 196 -
Dividends paid (1,826) (1,643)
Net cash provided by (used in)
financing activities (2,828) (14,468)
Net increase (decrease) in cash and
cash equivalents 7,933 (49,987)
Cash and cash equivalents at
beginning of year 63,884 107,012
Cash and cash equivalents at end of period $71,817 $57,025
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
wholly owned subsidiaries Community Trust Bank, NA, Commercial Bank
(West Liberty), Community Trust Bank, FSB and Trust Company of
Kentucky. 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 March 31, 1997 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 45,173 $ 45,195
Mortgage-backed pass through
certificates 109,424 108,365
Collateralized mortgage obligations 18,835 18,435
Other debt securities 3,264 3,167
Total debt securities 176,696 175,162
Equity securities 15,921 15,851
Total Securities $192,617 $191,013
The amortized cost and fair value of securities held-to-maturity
as of March 31, 1997 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 25,847 $ 23,936
States and political subdivisions 53,393 53,878
Mortgage-backed pass through
certificates 44,952 44,221
Collateralized mortgage obligations 11,114 10,832
Total Securities $135,306 $132,867
<PAGE>
Note 3 - Loans
Major classifications of loans are summarized as follows:
March 31 December 31
(in thousands) 1997 1996
Commercial, secured by real estate $ 278,150 $ 270,315
Commercial, other 250,262 234,793
Real Estate Construction 80,310 79,069
Real Estate Mortgage 411,724 411,067
Consumer 331,156 310,582
Equipment Lease Financing 3,375 3,797
$1,354,977 $1,309,623
Note 4 - Long-Term Debt
Long-Term Debt consists of the following:
March 31 December 31
1997 1996
(in thousands)
Senior Notes $17,230 $17,230
Other 1,880 1,906
$19,110 $19,136
Refer to the 1996 Securities and Exchange Commission Form 10-K
for information concerning rates and assets securing long-term debt.
<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. The Company
owns two commercial banks, one savings bank and one trust company.
Through its affiliates, the Company has over sixty banking locations
serving 85,000 households in nineteen Eastern and Central Kentucky
counties. The Company had total assets of $1.82 billion and total
shareholders' equity of $150 million as of March 31, 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 forty-two offices in twelve Kentucky counties.
The Company's thrift and trust subsidiaries, Community Trust Bank, FSB
and Trust Company of Kentucky, remain subsidiaries of the Company and
will continue to operate as independent entities.
The Company excluded its subsidiary Commercial Bank, West
Liberty, Kentucky ("West Liberty") from the merger of its commercial
bank subsidiaries into the Bank. The Company has entered into a
definitive agreement, subject to regulatory approval, to sell West
Liberty to Commercial Bancshares, Inc., of West Liberty, Kentucky for
cash of $10.2 million. West Liberty has $73 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 in 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, payable on April 15, 1997 to
shareholders of record on March 15, 1997, was in addition to the
regular quarterly cash dividend paid on April 1, 1997 of 18 cents per
share for shareholders of record on March 15, 1997. All per share data
has been restated to reflect this stock dividend.
Trust Preferred Offering
On April 16, 1997 the Company issued $34,500,000 of 9% Cumulative
Trust Preferred Securities. Proceeds from the offering will be
applied to the Company's general funds to be used for expansion
through new branches and acquisitions, to fund growth in the Company's
indirect consumer loan portfolio and for general corporate purposes.
<PAGE>
The Trust Preferred Securities were issued by CTBI Preferred
Capital Trust, a newly formed Delaware business trust subsidiary of
the Corporation. The Trust Preferred Securities were issued at $25
per share and are quoted on The Nasdaq Stock Market's National Market
under the symbol "CTBIP". Morgan Keegan & Company and J.J.B.
Hilliard, W.L. Lyons, Inc. were the underwriters for the offering.
Income Statement Review
The Company's net income before extraordinary income for the
three months ended March 31, 1997 was $4.5 million or $0.44 per share
as compared to $4.2 million or $0.42 per share for the three months
ended March 31, 1996. Total earnings for the period were $7.5
million or $0.74 per share including an extraordinary item of $3.0
million or $0.30 per share received in a settlement from 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 months ended March 31, 1997 and 1996:
Three months ended
March 31
1997 1996
Return on average shareholders' equity 20.45% 12.42%
Return on average assets 1.73% 0.98%
The Company's net income for the first quarter of 1997 increased
$3.3 million or 80% as compared to the same period in 1996. Earnings
per share increased $0.32 per share or 76% for the three months ended
March 31, 1997, as compared to the first quarter of 1996. The
increase in net income was caused by increases in the net interest
margin from 4.30% for the first quarter of 1996 to 4.87% for the first
quarter of 1997; by increases in average earning assets and the
extraordinary item described above. The increase in average earning
assets were caused by internally generated growth for the first
quarter as compared to 1996. Additionally, while total earnings
assets increased 2% over the period, the increase in average loans for
the period was 3.5%.
Provision for loan losses increased by $0.2 million from $1.5
million for the three months ended March 31, 1996 to $1.7 million for
the quarter ended March 31, 1997 as net charge-offs increased for the
three month period as compared to the same period in 1996. The
increase in net charge-offs were due to increases in the loan
portfolio from internally generated growth. Net noninterest income
increased $0.2 million for the quarter as compared to the first
quarter of 1996. Net noninterest expense for the quarter increased by
$1.4 million as compared to the same period in 1996.
Net Interest Income
Net interest income increased $2.0 million or 11% from $17.8
million for the first quarter of 1996 to $19.7 million for the first
quarter of 1997. Interest income and interest expense both increased
for the quarter ending March 31, 1997 as compared to the same period
in 1996, with interest income increasing $2.5 million and interest
expense increasing $0.5 million.
The increase in net interest income for the three month period
was driven by increases in net interest margin and increases in
average earning assets due to internally generated growth. Average
earning assets increased 1% from $1.66 billion for the three months
ended March 31, 1996 to $1.68 billion for the same period in 1997.
The yield on interest earning assets increased 21 basis points
for the first quarter of 1997 as compared to the same period in 1996.
<PAGE>
The cost of interest bearing funds decreased 38 basis points for the
first quarter of 1997 as compared to the same period in 1996. As a
result the net interest margin increased from 4.30% for the first
quarter of 1996 to 4.87% for the current quarter.
The increases in yield and interest margin are due in large part
from growth in the Company's loan portfolio, the highest yielding
asset. Loan portfolio growth was caused by internally generated
growth. The Company's average loans increased 3.5% from $1.29 billion
for the first quarter of 1996 to $1.34 billion for the first quarter
of 1997. Loans accounted for 85% of total interest income for the
first quarter of 1997 compared to 79% for the first quarter of 1996.
The following table summarizes the annualized net interest spread
and net interest margin for the three months ended March 31, 1997 and
1996.
Three Months Ended
March 31
1997 1996
Yield on interest earning assets 8.97% 8.94%
Cost of interest bearing funds 4.82% 4.95%
Net interest spread 4.15% 3.99%
Net interest margin 4.84% 4.62%
Provision for Loan Losses
The analysis of the changes in the allowance for loan losses and
selected ratios is set forth below.
Three Months Ended
March 31
(in thousands) 1997 1996
Allowance balance January 1 $18,825 $16,082
Additions to allowance charged against operations 1,718 1,488
Recoveries credited to allowance 971 554
Losses charged against allowance (2,290) (1,698)
Allowance balance at March 31 $19,224 $16,426
Allowance for loan losses to period-end loans 1.42% 1.25%
Average loans, net of unearned income $1,327,239 $1,130,576
Provision for loan losses to
average loans, annualized .52% .53%
Loan charge-offs, net of recoveries to
average loans, annualized .40% .40%
The Company increased its provision for loan losses as a result
of the growth in its loan portfolio, 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 was the same during the first three months
of 1997 as compared to the same period in 1996. The Company's non-
performing loans (90 days past due and non-accrual) were 1.22% and
1.29% of outstanding loans at December 31, 1996 and March 31, 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
<PAGE>
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 6% from $3.2 million
for the three months ended March 31, 1996 to $3.4 million for the
first quarter of 1997. All categories of noninterest income increased
during the three month period for 1997, as compared to the same period
in 1996, except for Other noninterest income which declined from $1.3
million to $1.1 million for the first quarter.
Noninterest Expense
The Company's noninterest expense increased by 10% from $13.5
million for the three months ended March 31, 1996 to $14.9 million for
the same period in 1997. All categories of noninterest expense
experienced increases for the quarter ended March 31, 1997 compared to
the first quarter in 1996 with the exception of Stationery, printing
and office supplies which showed a 12% decrease. The largest
categories showing increases were Other noninterest expense and
Salaries and employee benefits which increased by $0.8 million and
$0.5 million, respectively. The increase is attributed to the cost of
expansion as the Company prepares to open 5 additional branches over
the next 12 months and the temporary costs associated with
consolidating the processing functions of the 7 commercial banks that
merged into the lead bank on January 1, 1997.
Balance Sheet Review
Total assets were at $1.82 billion at both December 31, 1996 and
March 31, 1997. During this time, loans increased from $1.29 billion
to $1.34 billion or an annualized rate of 14%. The asset category
which declined most was Securities available-for-sale which declined
from $230.0 million at December 31, 1996 to $191.0 million at March
31, 1997 as the Company chose not to reinvest proceeds from matured
securities back into the securities portfolio but rather to retain the
cash to fund anticipated future loan growth.
The Company's largest liability, deposits, increased from $1.48
billion as of December 31, 1996 to $1.49 billion as of March 31, 1997.
Noninterest bearing deposits increased from $200.2 million at December
31, 1996 to $195.8 million at March 31, 1997. Interest bearing
deposits increased from $1.28 billion to $1.29 billion during the same
period. The Company's long-term debt stayed at approximately the same
level during the period at $19.1 million. The Company's advances from
Federal Home Loan Bank increased only marginally from $111.0 million
at December 31, 1996 to $111.8 million at March 31, 1997 as the
Company relied primarily on deposit growth and maturing securities as
the source of funding for the additional loan demand.
Loans
Loans increased from $1.31 billion as of December 31, 1996 to
$1.35 billion as of March 31, 1997. The loan categories which
increased most were commercial, other and consumer loans. Commercial,
other increased from $234.8 million as of December 31, 1996 to $250.0
million as of March 31, 1997. Consumer loans increased from $310.6
million as of December 31, 1996 to $331.1 million as of March 31,
1997. Consumer loans increased due to the Company's aggressive
expansion into the indirect consumer loan market in Kentucky. Other
than lease financing, which declined from $3.8 million to $3.4
<PAGE>
million, all other loan categories increased during the period from
December 31, 1996 to March 31, 1997.
Non-accrual and 90 days past due loans amounted to 1.21% of total
loans outstanding as of December 31, 1996 and 1.29% of total loans
outstanding as of March 31, 1997. Non-accrual loans as a percentage
of total loans outstanding were at 0.75% as of December 31, 1996 and
March 31, 1997. During the same period, loans 90 days or more past
due increased 9 basis points from 0.44% of total loans outstanding to
0.53%. The allowance for loan losses decreased from 1.44% of total
loans outstanding as of December 31, 1996 to 1.42% as of March 31,
1997. The allowance for loan losses as a percentage of non-accrual
loans and loans 90 days or past due was 103% at December 31, 1996 and
110% at March 31, 1997.
The following table summarizes the Company's loans that are non-
accrual or past due 90 days or more as of March 31, 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)
March 31, 1997
Commercial loans,
secured by real estate $ 4,033 1.45% $2,553 0.92%
Commercial loans, other 4,031 1.59 1,430 0.53
Consumer loans,
secured by real estate 1,660 0.34 2,381 0.48
Consumer loans, other 498 0.15 913 0.28
Total $10,222 0.75% $7,277 0.53%
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 0.75% $5,800 0.44%
Allowance for loan losses
Management analyzes the adequacy of its allowance for loan losses
on a quarterly basis. The loan portfolio of each affiliate bank 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.
<PAGE>
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 $191.0 million as of March 31, 1997. Securities held-to-
maturity declined from $137.7 million to $135.3 million during the
same period. Total securities as a percentage of total assets was
20.3% as of December 31, 1996 and 17.7% as of March 31, 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 increased from $1.48 billion to $1.50 billion from
December 31, 1996 to March 31, 1997. Noninterest bearing deposits
increased by $13 million while noninterest bearing deposits increased
by $10 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 $87
million, if necessary, to meet the Company's liquidity needs.
The Company owns $191 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
marginally from $111.0 million as of December 31, 1996 to $111.8
million as of March 31, 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
<PAGE>
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 now uses 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 has 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 has sold 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 March 31, 1997. The impact on
operations of interest rate swaps and options was not material during
the first three 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 declared dividends of $0.18 per share for the
first quarter of 1997 and $0.16 for the first quarter of 1996.
Earnings per share for the same periods were $0.74 and $0.42,
respectively. The Company retained 76% of earnings for the first
three months of 1997.
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 March 31, 1997. The Company's Tier 1 leverage, Tier 1 risk-
based and total risk-based ratios were 7.55%, 9.88% and 11.13%,
respectively as of March 31, 1997.
As of March 31, 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
<PAGE>
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
b. Reports on Form 8-K
Form 8-K was filed on January 24, 1997 reporting a
settlement on a lawsuit which had been pending with a former
software vendor resulting in a net extraordinary gain of $3
million.
<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: May 15, 1997 Richard M. Levy
Richard M. Levy
Executive Vice President
Principal Financial Officer
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