22
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, 1998
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 - 10,062,597 shares outstanding at October 31, 1998
<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, 1997 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) 1998 1997
Assets:
Cash and due from banks $ 80,670 $ 60,611
Interest bearing deposits in
other financial institutions 109 793
Federal funds sold 174,000 0
Securities available-for-sale 278,471 165,611
Securities held-to-maturity (fair value of $96,558 and
$115,150, respectively) 88,534 115,931
Loans 1,510,275 1,428,429
Allowance for loan losses (28,310) (20,465)
Net loans 1,481,965 1,407,964
Premises and equipment, net 55,371 47,668
Excess of cost over net assets acquired (net of
accumulated amortization of
$8,226 and $7,720, respectively) 63,236 17,746
Other assets 37,493 36,343
Total Assets $2,259,849 $1,852,667
Liabilities and Shareholders' Equity:
Deposits:
Noninterest bearing $ 242,341 $ 193,353
Interest bearing 1,620,162 1,271,650
Total deposits 1,862,503 1,465,003
Federal funds purchased and other
short-term borrowings 50,917 57,949
Other liabilities 19,736 16,406
Advances from Federal Home Loan Bank 111,231 101,827
Long-term debt 53,338 53,463
Total Liabilities 2,097,725 1,694,648
Shareholders' Equity:
Preferred stock, 300,000 shares authorized and unissued
Common stock, $5 par value, shares authorized 25,000,000;
shares issued and outstanding,
1998 - 10,062,597; 1997 - 10,062,487 50,313 50,312
Capital surplus 28,037 28,067
Retained earnings 82,079 79,026
Accumulated other comprehensive income 1,695 614
Total Shareholders' Equity 162,124 158,019
Total Liabilities and
Shareholders' Equity $2,259,849 $1,852,667
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) 1998 1997 1998 1997
Interest Income:
Interest and fees on loans $34,866 $32,305 $103,011 $ 96,680
Interest and dividends on securities
Taxable 4,247 4,490 10,706 12,957
Tax exempt 597 684 1,747 1,994
Interest on federal funds sold 1,958 292 2,756 880
Interest on deposits in other financial
institutions 2 5 7 22
Total Interest Income 41,670 37,092 118,227 112,533
Interest Expense:
Interest on deposits 18,880 15,480 51,158 46,000
Interest on federal funds purchased and
other short-term borrowings 672 418 1,597 1,232
Interest on advances from Federal
Home Loan Bank 1,614 1,234 5,217 4,744
Interest on long-term debt 1,192 1,192 3,576 2,653
Total Interest Expense 22,358 18,324 61,548 54,629
Net interest income 19,312 18,768 56,679 57,904
Provision for loan losses 8,160 4,069 14,718 7,518
Net interest income after
provision for loan losses 11,152 14,699 41,961 50,386
Noninterest Income:
Service charges on deposit accounts 2,047 1,696 5,521 5,209
Gains on sale of loans, net 449 (9) 1,553 814
Trust income 506 476 1,417 1,347
Securities gains, net 0 42 12 47
Other 1,714 4,849 6,066 6,822
Total Noninterest Income 4,716 7,054 14,569 14,239
Noninterest Expense:
Salaries and employee benefits 7,318 7,162 21,230 21,575
Occupancy, net 1,155 1,083 3,317 3,116
Equipment 912 952 2,807 2,872
Data processing 819 831 2,497 2,206
Stationery, printing and office supplies 458 406 1,297 1,302
Taxes other than payroll,
property and income 522 519 1,587 1,591
FDIC insurance 75 69 207 184
Other 6,198 3,877 12,875 11,678
Total Noninterest Expense 17,457 14,899 45,817 44,524
Income before income taxes
and extraordinary gain (1,589) 6,854 10,713 20,101
Extraordinary gain (loss), net of tax 0 0 0 3,085
Income before income taxes (1,589) 6,854 10,713 23,186
Income tax expense (2,293) 2,442 1,606 6,672
Net Income 704 4,412 9,107 16,514
Other comprehensive income, net of tax:
Unrealized holding gains/(losses) arising
during period 951 725 1,081 1,255
Comprehensive income $1,655 $5,137 $10,188 $17,769
Basic earnings per share
before extra. gain $0.07 $0.44(1) $0.90 $1.33(1)
Basic earnings per share
extra. gain 0.00 0.00(1) 0.00 0.31(1)
Basic earnings per share
after extra. gain 0.07 0.44(1) 0.90 1.64(1)
Diluted earnings per share
before extra. gain 0.07 0.44(1) 0.90 1.33(1)
Diluted earnings per share
extra. gain 0.00 0.00(1) 0.00 0.31(1)
Diluted earnings per share
after extra. gain 0.07 0.44(1) 0.90 1.64(1)
Average shares outstanding 10,063 10,061(1) 10,063 10,058(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) 1998 1997
Cash flows from operating activities:
Net income $ 9,108 $ 16,514
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,890 4,167
Provision for loan and other real estate losses 14,777 7,543
Securities gains, net 0 (119)
Gain on sale of loans, net (1,553) (814)
Gain on sale of assets (20) 4
Net amortization of securities premiums 273 291
Net change in loans held for sale 1,415 77,652
Changes in:
Other assets 2,574 (8,141)
Other liabilities 444 4,244
Net cash provided by operating activities 30,908 101,341
Cash flows from investing activities:
Proceeds from:
Sale/call of securities available-for-sale 2,189 44,909
Maturity of securities available-for-sale 37,352 37,395
Maturity of securities held-to-maturity 6,967 13,992
Principal payments on mortgage-backed securities 20,344 4,019
Purchase of:
Securities available-for-sale (150,549) (21,510)
Securities held-to-maturity 0 0
Mortgage-backed securities 0 (1,000)
Net change in loans (24,518) (144,529)
Net change in premises and equipment (5,470) (2,412)
Other 0 0
Net cash used in investing activities (113,685) (69,136)
Cash flows from financing activities:
Net change in deposits (11,839) (51,224)
Net change in federal funds purchased and
other short-term borrowings (9,980) (4,306)
Advances from Federal Home Loan Bank 31,000 120,232
Repayments of advances from
Federal Home Loan Bank (21,596) (108,569)
Proceeds from long-term debt 0 34,500
Payments on long-term debt (125) (159)
Payments for redemption of common stock (96) 0
Issuance of common stock 67 228
Dividends paid (6,038) (5,466)
Net cash provided by financing activities (18,607) (14,764)
Net increase (decrease) in cash
and cash equivalents (101,384) 17,441
Cash and cash equivalents at beginning of year 61,404 63,884
Cash and cash equivalents of acquired banks 294,759 0
Cash and cash equivalents at end of period $254,779 $ 81,325
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, Community Trust Bank, FSB, Trust Company of Kentucky, National
Association, Community Trust Bank of West Virginia, NA, CTBI Preferred
Capital Trust, and Community Trust Funding Corporation. All
significant intercompany transactions have been eliminated in
consolidation.
<PAGE>
Note 2 - Securities
Generally Accepted Accounting Principles requires that securities
be classified into held-to-maturity, available-for-sale, and trading
categories. We currently have held-to-maturity and available-for-sale
securities. 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, 1998 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 91,886 $ 92,745
Mortgage-backed pass through
certificates 116,594 117,539
Collateralized mortgage obligations 35,191 35,378
Other debt securities 12,065 12,256
Total debt securities 255,736 257,918
Equity securities 20,449 20,553
Total Securities $276,185 $278,471
The amortized cost and fair value of securities held-to-maturity
as of September 30, 1998 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 13,481 $ 11,693
States and political subdivisions 42,667 44,092
Mortgage-backed pass through
certificates 26,863 26,877
Collateralized mortgage obligations 5,523 5,524
Total Securities $ 88,534 $ 88,186
<PAGE>
Note 3 - Loans
Major classifications of loans are summarized as follows:
September 30 December 31
(in thousands) 1998 1997
Commercial, secured by real estate $ 316,961 $ 310,092
Commercial, other 283,572 260,808
Real Estate Construction 81,089 85,825
Real Estate Mortgage 408,837 407,893
Consumer 413,787 361,927
Equipment Lease Financing 6,029 1,884
$1,510,275 $1,428,429
Note 4 - Long-Term Debt
Long-Term Debt consists of the following:
September 30 December 31
(in thousands) 1998 1997
Trust Preferred Securities * $ 34,500 $ 34,500
Senior Notes 17,230 17,230
Other 1,609 1,733
$ 53,339 $ 53,463
Refer to the Corporation's Annual Report on Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31,
1997 for information concerning rates and assets securing long-term
debt.
* In April 1997, CTBI Preferred Capital Trust ("CTBI Trust"), a
trust created under the laws of the State of Delaware, issued $34.5
million of 9.0% cumulative trust preferred securities ("Preferred
Securities"). The Corporation owns all of the beneficial interests
represented by common securities ("Common Securities") of CTBI Trust,
which exists for the sole purpose of issuing the Preferred Securities
and Common Securities and investing the proceeds thereof in an
equivalent amount of 9.0% Subordinated Debentures which were issued by
the Corporation. The Subordinated Debentures will mature on March 31,
2027, and are unsecured obligations of the Corporation. The
Subordinated Debentures are irrevocably and unconditionally guaranteed
by the Corporation and are subordinate and junior in right of payment
to all senior debt and other subordinated debt. There are no payments
due for this debt in the next five years.
<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, 1998 the Company owned two commercial banks, one savings bank and
one trust company. Through its affiliates, the Company has over sixty
five banking locations serving 85,000 households in various counties
in Eastern and Central Kentucky and in Western and Central West
Virginia. The Company had total assets of $2.26 billion and total
shareholders' equity of $162 million as of September 30, 1998. 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 $1.9
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. On June 26, 1998 the Company chartered a new
national assocation to operate as a national bank in the state of West
Virginia. This new wholly owned subsidiary, Community Trust Bank of
West Virginia, National Assocation (CTBWV) currently operates seven
branches in four counties in central and western West Virginia.
Commercial Bank, West Liberty
On July 1, 1997 the Company completed the sale of 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.
Acquisitions
After making no acquisitions during the years 1996 and 1997, on
June 26, 1998 the Company resumed its strategic policy of
diversification through acquisition.
Community Trust Bancorp,Inc.'s wholly owned subsidiary, Community
Trust Bank of West Virginia, National Association (CTBWV), purchased
sixteen Banc One Corporation branches located in West Virginia with
approximately $569 million in deposits on June 26, 1998. CTBWV paid
a 9.7% premium on these deposits. In concurrent transactions, CTBWV
sold three of these branches with deposits totaling $151 million to
Premier Financial Bancorp, Inc. of Georgetown, Kentucky receiving a
9.7% premium; four branches with deposits totaling $122 million to
<PAGE>
Peoples Banking and Trust Company of Marietta, Ohio receiving a 10.7%
premium; and two branches with deposits totaling $80 million to United
Bankshares of Charles Town, West Virginia receiving 11.7% premium. The
additional 1% premium paid by Peoples Banking and Trust Company and the
additional 2% premium paid by United Bankshares was divided evenly
between CTBWV and Premier Financial Bancorp, Inc. as part of a prior
agreement.
CTBWV retained seven branches with deposits totaling $216
million. The funds used to capitalize the new charter were provided
from the sale of Trust Preferred Securities that occurred in April
1997 and the sale of an affiliate bank in July 1997. The facilities
that were purchased will continue to operate as banking offices. This
acquisition will assist in growth of the Company outside of Kentucky
and provide a new customer base for generating additional revenues.
On September 18, 1998 Community Trust Bancorp, Inc. and PNC Bank
Corp. announced that their banking subsidiaries, Community Trust Bank,
N.A. and PNC Bank, N.A., closed Community Trust Bank's purchase of
five branches from PNC with total deposits of approximately
$195,000,000. These branches are located in Richmond, Winchester and
Harrodsburg, all located in central Kentucky.
This acquisition along with the acquisition of seven Bank One
branches in West Virginia on June 26, 1998, adds over $400,000,000 to
CTBI's deposits increasing CTBI's assets to $2.3 billion.
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, (3) October 1, 1997 of 18 cents per share for shareholders of
record on September 15, 1997, (4) January 1, 1998 of 20 cents per
share for shareholders of record on December 15, 1997, (5) April 1,
1998 of 20 cents per share for shareholders of record on March 15,
1998, (6) July 1, 1998 of 20 cents per share for shareholders of
record on June 15, 1998 and (7) October 1, 1998 of 20 cents per share
for shareholders of record on September 15, 1998. All per share data
has been restated to reflect this stock dividend.
<PAGE>
Income Statement Review
The Company's net income before extraordinary items for the three
months ended September 30, 1998 was $0.7 million or $0.07 per share as
compared to $4.4 million or $0.44 per share for the three months ended
September 30, 1997. Total earnings for the nine months ended
September 30, 1998 were $9.1 million or $.90 per share. Total
earnings for the nine months ended September 30, 1997 were $16.5
million or $1.64 per share including an extraordinary item of $3.0
million or $0.31 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 and nine months ended September 30, 1998 and 1997:
Three months ended Nine months ended
September 30 September 30
1998 1997 1998 1997
Return on average shareholders' equity
before extraordinary item 1.69% 11.05% 7.50% 11.70%
after extraordinary item 1.69% 11.05% 7.50% 14.39%
Return on average assets
before extraordinary item 0.13% 0.99% 0.62% 0.99%
after extraordinary item 0.13% 0.99% 0.62% 1.22%
The Company's net income for the third quarter of 1998 decreased
$3.7 million or 84% as compared to the same period in 1997. Earnings
per share decreased $0.37 per share or 84% for the three months ended
September 30, 1998, as compared to the third quarter of 1997. The
Company took a one time charge of $0.9 million to cover expenses
associated with restructuring and reduction in staff. In addition,
the Company took a special provision of $7.3 million to clean up
identified problems in the Indirect Loan portfolio. This portfolio has
been a continuing problem and this special provision will allow management
to expedite the resolution of this issue. The third quarter results also
includes a reversal of income tax accruals of $1.5 million.
Provision for loan losses for the three months ended September
30, 1998 was $8.2 million, an increase of $4.1 million for the same
period in 1997. For the nine months ended September 30, 1998 the
provision was $14.7 million, a 96% increase over the same period in
1997 resulting primarily from the special provision discussed above.
The ratio of allowance for loan losses to total loans increased from
1.48% at September 30, 1997 to 1.87% at September 30, 1998. Net
noninterest income decreased $2.3 million for the quarter as compared
to the third quarter of 1997. The decrease was the result of the sale
of 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 in the third quarter of 1997.
Net noninterest expense for the quarter increased by $2.6 million as
compared to the same period in 1997. This is primarily due to the
special restructuring provision of $.9 million and that portion of the
indirect provision allocated to noninterest expense totalling $1.3
million.
Net Interest Income
Net interest income increased $544 thousand or 3.4% from $18.8
million for the third quarter of 1997 to $19.3 million for the third
quarter of 1998. Interest income and interest expense both increased
for the quarter ending September 30, 1998 as compared to the same
period in 1997, with interest income increasing $4.6 million and
interest expense increasing $4.0 million. The increases were due to
the acquistions described above which resulted in an increase in
deposits of $411,000 and a corresponding increase in earning assets.
<PAGE>
The net interest margin declined 65 basis points in the third
quarter from 4.67% for the three months ended September 30, 1997 to
4.02% for the three months ended September 30, 1998. The decrease in
margin was driven by a decrease in yield on earning assets. The
decrease in yield on earning assets is the result of the proceeds from
the company's two recent acquisitions being invested in short term
investments with lower yields.
The yield on interest earning assets decreased 56 basis points
for the third quarter of 1998 as compared to the same period in 1997.
The cost of interest bearing funds decreased 2 basis points for the
third quarter of 1998 as compared to the same period in 1997.
The Company's loan portfolio, its highest yielding asset,
continues to expand through acquisitions, new market share and
internally generated growth. The Company's loan portfolio increased
9.7% from $1.35 billion for the third quarter of 1997 to $1.48 billion
for the third quarter of 1998. Loans accounted for 84% of total
interest income for the third quarter of 1998 compared to 89% for the
third quarter of 1997. The decrease was the result of acquisition
proceeds being invested in short term investments.
The following table summarizes the annualized net interest spread
and net interest margin for the three months and nine months ended
September 30, 1998 and 1997.
Three Months Ended Nine Months ended
September 30 September 30
1998 1997 1998 1997
Yield on interest earning assets 8.56% 9.12% 8.86% 9.09%
Cost of interest bearing funds 5.14% 5.16% 5.21% 5.04%
Net interest spread 3.42% 3.96% 3.65% 4.05%
Net interest margin 4.02% 4.67% 4.32% 4.75%
Provision for Loan Losses
The analysis of the changes in the allowance for loan losses and
selected ratios are set forth below.
Nine Months Ended
September 30
(in thousands) 1998 1997
Allowance balance January 1 $20,465 $18,825
Allowance of purchased loans 1,066 0
Allowance of sold affiliate 0 (578)
Additions to allowance charged
against operations 14,717 7,518
Recoveries credited to allowance 3,241 2,540
Losses charged against allowance (11,179) (7,946)
Allowance balance at September 30 $28,310 $20,359
Allowance for loan losses to
period-end loans 1.87% 1.48%
Average loans, net of unearned income $1,455,941 $1,331,744
Provision for loan losses to
average loans, annualized 1.35% .56%
Loan charge-offs, net of recoveries to
average loans, annualized .73% .41%
<PAGE>
During the quarter the Company continued to strengthen the
allowance for loan losses as charge-offs in the Indirect Auto Loan
Portfolio continue at high levels. As reported previously, the Company
has tightened the credit underwriting and collection procedures in the
Indirect Auto Loan Portfolio. Analysis of new credits booked since
January 1, 1998 reflect improved credit quality in line with
management's expectations. The special provision taken in the third
quarter will allow management to expedite the resolution of the "Pre-
1998" Indirect Loans. 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
32 basis points to 0.73% for the nine months ended September 30, 1998
as compared to the same period in 1997. The Company's non-performing
loans (90 days or more past due and non-accrual) were 1.46% and 1.39%
of outstanding loans at December 31, 1997 and September 30, 1998,
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 decreased 33% from $7.1 million
for the three months ended September 30, 1997 to $4.7 million for the
three months ended September 30, 1998. The decrease is due to the gain
recorded in the third quarter of 1997 from the sale of our Commercial
Bank of West Liberty subsidiary for $3.0 million. Normalizing for
this, the company increased noninterest income by $0.3 million overall
in the third quarter of 1998 compared to the third quarter of 1997.
Gains on the sale of loans represents the largest growth category,
increasing $0.5 million for the three months ended September 30, 1998
as compared to the same period in 1997. Deposit related fees increased
21% over the same period in 1998 compared to 1997. Trust revenue
increased 6% for the three months ended September 30, 1998 as compared
to the same period in 1997. In addition, all noninterest income
categories have been impacted by the addition of the seven banking
locations acquired by Community Trust Bank of West Virginia, NA and
the five banking locations acquired by Community Trust Bank, NA on
June 26, 1998 and September 18, 1998 respectively.
Noninterest Expense
The Company's noninterest expense increased by 17.2% from $14.9
million for the three months ended September 30, 1997 to $17.5
million for the same period in 1998. This is primarily due to the
special restructuring provision of $0.9 million and that portion of
the indirect provision allocated to noninterest expense totalling $1.3
million. In addition, all noninterest expense categories have been
impacted by the addition of the seven banking locations acquired by
Community Trust Bank of West Virginia, NA and the five banking
locations acquired by Community Trust Bank, NA on June 26, 1998 and
September 18, 1998 respectively.
<PAGE>
Cash Basis Income
Quarter Ended
Septemer 30, 1998
Amortization
Reported Core Deposit "Cash"
Earnings Goodwill Intangible Earnings
Income before income tax expense $(1,589) $ 452 $ 86 $(1,051)
Income tax expense (2,293) 90 30 (2,173)
Net income $ 704 $ 362 $ 56 $ 1,122
Basic earnings per common share $ 0.07 $0.03 $0.01 $ 0.11
Diluted earnings per common share$ 0.07 $0.03 $0.01 $ 0.11
These calculations were specifically formulated by the Company and may
not be comparable to similarly titled measures reported by other
companies.
Balance Sheet Review
Total asset size was $1.85 billion at December 31, 1997 compared
to $2.26 billion at September 30, 1998. During the last nine months,
loans increased from $1.41 billion to $1.51 billion. Federal Funds
Sold increased from a zero balance at December 31, 1997 to $174.0
million at September 30, 1998. This increase is primarily the result
of the payment by PNC Bank on September 18, 1998 for the assumption of
deposits of the five branches acquired from PNC Bank by the Company's
lead bank. Securities available for sale increased $112.8 million as
the Company invested proceeds from its June 26, 1998 acquisition of
Bank One branches in West Virginia out of Federal Funds Sold and into
Securities Available for Sale.
As a result of the Bank One and PNC acquisitions the Company's
largest liability, deposits, increased from $1.47 billion as of
December 31, 1997 to $1.86 billion as of September 30, 1998.
Noninterest bearing deposits increased from $193.3 million at December
31, 1997 to $242.3 million at September 30, 1998. Interest bearing
deposits increased from $1,271.7 million at December 31, 1997 to
$1,620.1 million at September 30, 1998. The Company decreased its
Federal funds purchased and other short term borrowings during the
period from $57.9 million as of December 31, 1997 to $50.1 million as
of September 30, 1998. The Company's advances from the Federal Home
Loan Bank increased from $101.8 million at December 31, 1997 to $111.2
million at September 30, 1998 as the Company used this liquidity as a
source of funding for loan growth prior to the Bank One and PNC
acquisitions.
Loans
Loans increased from $1.40 billion as of December 31, 1997 to
$1.51 billion as of September 30, 1998, due to the PNC acquisiton and
the growth of the Company's commercial and consumer loan portfolios.
The category of commercial loans increased from $648.9 million as of
December 31, 1997 to $676.9 million as of September 30, 1998 while
consumer loans increased from $361.9 million as of December 31, 1997
to $413.8 million as of September 30, 1998 and mortgage loans
increased from $417.6 million as of December 31, 1997 to $419.6
million as of September 30, 1998.
Non-accrual and 90 days past due loans amounted to 1.46% of total
loans outstanding as of December 31, 1997 and 1.39% of total loans
outstanding as of September 30, 1998. Non-accrual loans as a
percentage of total loans outstanding were 0.84% as of December 31,
<PAGE>
1997 and 0.97% at September 30, 1998. During the same period, loans
90 days or more past due decreased 20 basis points from 0.62% of total
loans outstanding to 0.42%. The allowance for loan losses increased
from 1.42% of total loans outstanding as of December 31, 1997 to 1.87%
as of September 30, 1998. The allowance for loan losses as a
percentage of non-accrual loans and loans past due 90 days or more was
98% at December 31, 1997 and 135% September 30, 1998.
The following table summarizes the Company's loans that are non-
accrual or past due 90 days or more as of September 30, 1998 and
December 31, 1997.
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, 1998
Commercial loans,
secured by real estate $ 1,772 0.46% $ 80 0.02%
Commercial loans, other 7,943 2.74 2,523 0.87
Consumer loans,
secured by real estate 4,638 1.11 2,014 0.48
Consumer loans, other 285 0.07 1,726 0.42
Total $14,638 0.97% $6,343 0.42%
December 31, 1997
Commercial loans,
secured by real estate $ 3,881 1.25% $2,339 0.75%
Commercial loans, other 6,294 2.40 878 0.33
Consumer loans,
secured by real estate 1,569 0.32 3,857 0.78
Consumer loans, other 314 0.09 1,789 0.49
Total $12,058 0.84% $8,863 0.62%
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 increased from $165.6 million as of December 31,
<PAGE>
1997 to $278.5 million as of September 30, 1998. Securities held-to-
maturity declined from $115.9 million to $88.5 million during the same
period. Total securities as a percentage of total assets were 15.2%
as of December 31, 1997 and 16.2% as of September 30, 1998.
Disclosures Regarding Year 2000
Many companies have undertaken major projects to address "Year
2000" readiness, which relates to the recognition of dates beyond
1999. Many software programs and hardware systems are in a two digit
format which will not process into the next century. Community Trust
Bancorp, Inc. has already taken steps necessary to ensure that this
Company will be "Year 2000 compliant". Community Trust Bancorp, Inc.
realized the importance of Year 2000 readiness early and has committed
people and resources to prepare its systems for January 1, 2000 and
beyond. Achieving Year 2000 readiness is the company's top technology
priority. Early on we formed both a Year 2000 Executive Steering Committee
consisting of our top executives and top management, along with a Year
2000 Working Team made up of employees from each key business area.
These company leaders have taken responsibility to identify and repair
instances where dates may not process correctly within their area of
operation and to test for interdependencies with clients, vendors and
other corporate units. We have identified and contacted the banks
significant vendors to inquire about their own Year 2000 readiness
plans, and are tracking and monitoring their progress. To ensure that
all areas are covered, these efforts are coordinated and tracked centrally
by the Year 2000 Working Team and reported to the Year 2000 Executive
Steering Committee and the Board of Directors on a regular basis.
Awareness - (Complete) - We defined the Year 2000 problem and
allocated the appropriate resources necessary to perform our
compliance work. We established both a Year 2000 Executive Steering
Committee and a Year 2000 Working Team and developed an overall
strategy for our Year 2000 efforts that encompasses in-house systems,
service bureaus for systems that are outsourced, vendors, auditors,
customers, and suppliers.
Assessment Phase - (Complete) - We then assessed the size and
complexity of the problem and the magnitude of the effort necessary to
address our Year 2000 issues. This phase identified all hardware,
software, networks, automated teller machines, and other processing
platforms, along with customer and vendor interdependencies affected
by the Year 2000 date change. We have completed an inventory of
systems in the bank, prioritized those that were identified, and made
detailed plans to renovate and test modifications to make them Year
2000 ready. Our assessment went well beyond information systems and
included environmental systems that are dependent on embedded
microchips, such as security systems, elevators, and vaults.
Renovation Phase - (In-Process) - Strategies were developed for the
code enhancements, hardware renovation or replacements, software
upgrades and vendor certification, along with other associated
changes. This work was prioritized based on the information gathered
during our assessment phase. A millennium test site was developed to
assure that testing of our hardware and software could occur outside
of our working environment before being implemented on our production
systems. Plans were made for on-going communications and monitoring of
our key vendors, third-party service providers, and software providers
throughout our Year 2000 project timeline. Planned date of completion
12-31-1998.
<PAGE>
Validation Phase - (In-Process) - Testing, while inherent in each
phase, plays a key roll in the success of our entire Year 2000
project. This phase includes testing of all incremental changes to
hardware and software components, along with interfaces and
connections with other systems. Also, validation from both internal
and external users is required. During this phase, monitoring and
communications with our service and software vendors will be
maintained to assure these vendor efforts are tracked and their
progress closely monitored. Our core third party data processor, one
of the country's leading suppliers of financial institution data
processing services, has already installed Year 2000 upgrades to their
data processing systems. We have performed susbtantial off site
testing of this upgrade and have scheduled on-site testing for the
first quarter of 1999.
Implementation Phase - (In-Process) -Systems will be certified as Year
2000 compliant. For any system failing certification, the business
effect will be clearly assessed and the organization's Year 2000
contingency plans will be implemented. This phase will also ensure
that any new systems or subsequent changes to verified systems are
compliant with Year 2000 requirements. We also expect to verify that
our systems will recognize that 2000 is a leap year, and continue
to work closely with our client and vendor companies to verify
that they also are prepared for the century date change. In addition,
we have drafted our "Business Resumption Plan" which provides contingency
plans for all identified Year 2000 issues.
We anticipate that all internal hardware upgrades or replacements
will be completed by March 1999. The costs associated with the
purchase and installation of hardware and software upgrades are
estimated to be $845,000 in 1998 and $886,000 in 1999. Because
Community Trust Bancorp, Inc. is utilizing internal staff for the
management and implementation of its Year 2000 Compliance program, it
does not expect to incur any material costs with outside contractors.
Subsequently, it does not anticipate a material increase in operating
costs to be incurred.
The cost of the Year 2000 project and the date by which the Company
believes it will be Year 2000 complaint are based on management's current
best estimates, which were derived based on numerous assumptions of
future events, including the continued availability of certain resources,
third party modification plans and other factors. Actual results could
vary from those anticipated.
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 $1.465 billion to $1.863 billion from
December 31, 1997 to September 30, 1998. Noninterest bearing deposits
increased by $49.0 million while interest bearing deposits increased
by $348.5 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 $149.1 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
$101.8 million as of December 31, 1997 to $111.2 million as of
September 30, 1998.
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, 1998. The impact on operations of interest rate
swaps and options was not material during the first nine months of
1997 or 1998.
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' 1998
profits, approximately $1.7 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 $0.60 per share for the
first nine months of 1998 and $0.54 per share for the first nine
months of 1997. Earnings per share for the same periods were $0.90
and $1.64, respectively. The Company retained 33% of earnings for the
first nine months of 1998.
<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, 1998. The Company's Tier 1 leverage, Tier 1 risk-
based and total risk-based ratios were 6.36%, 8.30% and 9.56%,
respectively as of September 30, 1998.
As of September 30, 1998, 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
b. Reports on Form 8-K None
<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 16, 1998 /s/Burlin Coleman
Burlin Coleman
Chairman of the Board,
President and
Principal Executive Officer
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