12
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 June 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 July 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
June 30 December 31
(In thousands except share data) 1998 1997
Assets:
Cash and due from banks $74,435 $60,611
Interest bearing deposits in
other financial institutions 101 793
Federal funds sold 210,171 0
Securities available-for-sale 146,897 165,611
Securities held-to-maturity (fair value
of $96,558 and $115,150, respectively) 97,105 115,931
Loans 1,476,247 1,428,429
Allowance for loan losses (22,541) (20,465)
Net loans 1,453,706 1,407,964
Premises and equipment, net 50,710 47,668
Excess of cost over net assets acquired
(net of accumulated amortization of
$8,226 and $7,720, respectively) 33,650 17,746
Other assets 39,631 36,343
Total Assets $2,106,406 $1,852,667
Liabilities and Shareholders' Equity:
Deposits:
Noninterest bearing $213,593 $193,353
Interest bearing 1,491,945 1,271,650
Total deposits 1,705,538 1,465,003
Federal funds purchased and other
short-term borrowings 40,146 57,949
Other liabilities 18,808 16,406
Advances from Federal Home Loan Bank 126,065 101,827
Long-term debt 53,367 53,463
Total Liabilities 1,943,924 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 83,388 79,026
Accumulated other comprehensive income 744 614
Total Shareholders' Equity 162,482 158,019
Total Liabilities and
Shareholders' Equity $2,106,406 $1,852,667
The accompanying notes are an integral part of these statements.
<PAGE>
Consolidated Statements of Income
Three months ended Six months ended
June 30 June 30
(In thousands except per share data) 1998 1997 1998 1997
Interest Income:
Interest and fees on loans $34,442 $32,656 $68,145 $64,374
Interest and dividends on securities
Taxable 3,088 4,304 6,460 9,103
Tax exempt 512 684 1,150 1,357
Interest on federal funds sold 603 423 798 589
Interest on deposits in other financial
institutions 0 6 5 18
Total Interest Income 38,645 38,073 76,558 75,441
Interest Expense:
Interest on deposits 16,433 15,450 32,278 30,520
Interest on federal funds purchased and
other short-term borrowings 402 387 925 814
Interest on advances from
Federal Home Loan Bank 1,841 1,760 3,603 3,510
Interest on long-term debt 1,192 1,048 2,384 1,461
Total Interest Expense 19,868 18,645 39,190 36,305
Net interest income 18,777 19,428 37,368 39,136
Provision for loan losses 4,053 1,731 6,558 3,449
Net interest income after
provision for loan losses 14,724 17,697 30,810 35,687
Noninterest Income:
Service charges on deposit accounts 1,836 1,821 3,474 3,513
Gains on sale of loans, net 666 242 1,104 447
Trust income 479 474 911 871
Securities gains, net 12 (46) 12 46
Other 2,824 1,250 4,352 2,308
Total Noninterest Income 5,817 3,741 9,853 7,185
Noninterest Expense:
Salaries and employee benefits 6,834 6,847 13,912 14,413
Occupancy, net 1,149 1,017 2,162 2,032
Equipment 939 939 1,895 1,920
Data processing 839 701 1,678 1,375
Stationery, printing and office supplies 458 455 839 896
Taxes other than payroll, property
and income 544 546 1,065 1,071
FDIC insurance 71 79 133 114
Other 3,468 4,152 6,676 7,804
Total Noninterest Expense 14,302 14,736 28,360 29,625
Income before income taxes and
extraordinary gain 6,239 6,702 12,303 13,247
Extraordinary gain (loss), net of tax 0 0 0 3,085
Income before income taxes 6,239 6,702 12,303 16,332
Income tax expense 1,999 2,146 3,899 4,230
Net Income 4,240 4,556 8,404 12,102
Other comprehensive income, net of tax:
Unrealized holding gains/(losses) arising
during period 30 1,460 130 530
Comprehensive income $4,274 $6,016 $8,534 $12,632
Basic earnings per share
before extra. gain $ 0.42 $0.45(1) $0.84 $0.89(1)
Basic earnings per share extra.gain 0.00 0.00(1) 0.00 0.31(1)
Basic earnings per share
after extra.gain 0.42 0.45(1) 0.84 1.20(1)
Diluted earnings per share
before extra. gain 0.42 0.45(1) 0.83 0.89(1)
Diluted earnings per share extra.gain 0.00 0.00(1) 0.00 0.30(1)
Diluted earnings per share
after extra.gain 0.42 0.45(1) 0.83 1.19(1)
Average shares outstanding 10,063 10,060(1) 10,063 10,057(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
Six months ended
June 30
(In thousands) 1998 1997
Cash flows from operating activities:
Net income $ 8,404 $12,102
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,420 2,548
Provision for loan and
other real estate losses 6,574 3,474
Securities gains, net 0 (119)
Gain on sale of loans, net (1,104) (447)
Gain on sale of assets (3) 4
Net amortization of securities premiums 171 181
Net change in loans held for sale 1,220 77,793
Changes in:
Other assets 1,492 (9,481)
Other liabilities 2,178 3,187
Net cash provided by
operating activities 21,352 89,242
Cash flows from investing activities:
Proceeds from:
Sale/call of securities available-for-sale 2,189 29,201
Maturity of securities available-for-sale 29,131 26,337
Maturity of securities held-to-maturity 5,582 2,792
Principal payments on
mortgage-backed securities 13,198 1,927
Purchase of:
Securities available-for-sale (12,613) (13,015)
Securities held-to-maturity 0 0
Mortgage-backed securities 0 (1,000)
Net change in loans (32,759) (95,790)
Net change in premises and equipment (3,276) (2,984)
Other 1 0
Net cash used in investing activities 1,453 (52,532)
Cash flows from financing activities:
Net change in deposits 24,804 (20,084)
Net change in federal funds purchased and
other short-term borrowings (20,751) (20,444)
Advances from Federal Home Loan Bank 31,000 70,232
Repayments of advances from
Federal Home Loan Bank (6,762) (56,604)
Proceeds from long-term debt 0 34,500
Payments on long-term debt (96) (132)
Payments for redemption of common stock (96) 0
Issuance of common stock 67 230
Dividends paid (4,026) (3,652)
Net cash provided by financing activities 24,140 4,046
Net increase (decrease) in cash
and cash equivalents 46,945 40,756
Cash and cash equivalents
at beginning of year 61,404 63,884
Cash and cash equivalents
of acquired banks 176,358 0
Cash and cash equivalents at end of period $284,707 $104,640
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 June 30, 1998 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 38,780 $ 39,071
Mortgage-backed pass through
certificates 63,579 64,083
Collateralized mortgage obligations 17,335 17,256
Other debt securities 7,215 7,349
Total debt securities 126,909 127,759
Equity securities 18,977 19,138
Total Securities $145,886 $146,897
The amortized cost and fair value of securities held-to-maturity
as of June 30, 1998 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 16,475 $ 15,055
States and political subdivisions 44,017 45,178
Mortgage-backed pass through
certificates 30,695 30,585
Collateralized mortgage obligations 5,918 5,832
Total Securities $ 97,105 $ 96,650
<PAGE>
Note 3 - Loans
Major classifications of loans are summarized as follows:
June 30 December 31
(in thousands) 1998 1997
Commercial, secured by real estate $ 320,176 $ 310,092
Commercial, other 265,384 260,808
Real Estate Construction 89,811 85,825
Real Estate Mortgage 399,122 407,893
Consumer 395,235 361,927
Equipment Lease Financing 6,304 1,884
$1,476,032 $1,428,429
Note 4 - Long-Term Debt
Long-Term Debt consists of the following:
June 30 December 31
(in thousands) 1998 1997
Trust Preferred Securities * $ 34,500 $ 34,500
Senior Notes 17,230 17,230
Other 1,637 1,733
$ 53,367 $ 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 June 30,
1998 the Company owned 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 various counties in
Eastern and Central Kentucky and in Western and Central West Virginia.
The Company had total assets of $2.11 billion and total shareholders'
equity of $162 million as of June 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 $1.6
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. 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 Corporation 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 Peoples Banking and
<PAGE>
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 purchase these branches 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 May 26, 1998, Community Trust Bank, NA and PNC Bank, NA,
entered into a definitive agreement for Community Trust Bank to
purchase five branches in Central Kentucky from PNC Bank.
The agreement includes the purchase of PNC Bank branch
facilities, and related deposits, consumer loans and business banking
relationships for the following locations: Main Office, Harrodsburg
(Mercer County); Main Office and Eastern By-Pass Office, Richmond
(Madison County); Main Office and Winchester Plaza Office, Winchester
(Clark County).
PNC Bank will retain its large corporate, credit card, trust,
merchant services, mortgage and brokerage relationships in Mercer,
Madison, and Clark counties. It will also continue to operate four
branch offices in Lexington.
Community Trust Bank will acquire approximately $195 million in
deposits, and $50 million in consumer and business loans along with
related fixed assets, leases, safe deposit box business and other
agreements.
The transaction is expected to close by September 1998.
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 and (6) July 1, 1998 of 20 cents per share for shareholders of
record on June 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 June 30, 1998 was $4.2 million or $0.42 per share as
compared to $4.6 million or $0.45 per share for the three months ended
June 30, 1997. Total earnings for the six months ended June 30, 1998
were $8.4 million or $.84 per share. Total earnings for the six months
ended June 30, 1997 were $12.1 million or $1.20 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 six months ended June 30, 1998
and 1997:
Three months ended Six months ended
June 30 June 30
1998 1997 1998 1997
Return on average shareholders' equity
before extraordinary item 10.52% 11.98% 10.76% 12.05%
after extraordinary item 10.52% 11.98% 10.76% 16.17%
Return on average assets
before extraordinary item 0.90% 0.99% 0.91% 0.99%
after extraordinary item 0.90% 0.99% 0.91% 1.33%
The Company's net income for the second quarter of 1998 decreased
$316 thousand or 7% as compared to the same period in 1997. Earnings
per share decreased $0.03 per share or 7% for the three months ended
June 30, 1998, as compared to the second quarter of 1997. The
decrease in net income was the result of an increase in the provision
for loan losses. 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 in
the first quarter, 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.
Provision for loan losses for the three months ended June 30,
1998 was $4.1 million, an increase of $2.4 million for the same period
in 1997. For the six months ended June 30, 1998 the provision was
$6.6 million, a 90% increase over the same period in 1997 resulting
primarily from a 18% growth in the Company's allowance for loan losses
over the same period. The ratio of allowance for loan losses to total
loans increased from 1.45% at June 30, 1997 to 1.53% at June 30, 1998.
Net noninterest income increased $1.1 million for the quarter as
compared to the second quarter of 1997. As a result of the sale of the
nine branches discussed above in the West Virginia acquisition, a gain
was recorded which contributed to an increase of noninterest income
from $3,741,000 for the three months ended June 30, 1997 to $5,817,000
for the three months ended June 30, 1998. Net noninterest expense for
the quarter decreased by $434 thousand as compared to the same period
in 1997.
Net Interest Income
Net interest income decreased $651 thousand or 3.4% from $19.4
million for the second quarter of 1997 to $18.8 million for the second
quarter of 1998. Interest income and interest expense both increased
for the quarter ending June 30, 1998 as compared to the same period in
1997, with interest income increasing $0.6 million and interest
expense increasing $1.2 million.
The decrease in net interest income for the three month period
was primarily due to a lower net interest margin. The decrease in
margin was driven by a higher cost of funds.
<PAGE>
The yield on interest earning assets decreased 6 basis points for
the second quarter of 1998 as compared to the same period in 1997.
The cost of interest bearing funds increased 18 basis points for the
second quarter of 1998 as compared to the same period in 1997. As a
result, the net interest margin decreased from 4.68% for the second
quarter of 1997 to 4.43% for the current quarter.
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 10.7% from $1.31
billion for the second quarter of 1997 to $1.45 billion for the second
quarter of 1998. Loans accounted for 89% of total interest income for
the second quarters of both 1998 and 1997.
The following table summarizes the annualized net interest spread
and net interest margin for the three months and six months ended June
30, 1998 and 1997.
Three Months Ended Six months ended
June 30 June 30
1998 1997 1998 1997
Yield on interest earning assets 8.99% 9.05% 9.03% 9.07%
Cost of interest bearing funds 5.23% 5.05% 5.24% 4.98%
Net interest spread 3.76% 4.00% 3.79% 4.09%
Net interest margin 4.43% 4.68% 4.47% 4.76%
Provision for Loan Losses
The analysis of the changes in the allowance for loan losses and
selected ratios are set forth below.
Six Months Ended
June 30
(in thousands) 1998 1997
Allowance balance January 1 $20,465 $18,825
Allowance of purchased loans 311 0
Additions to allowance charged
against operations 6,558 3,449
Recoveries credited to allowance 2,136 1,844
Losses charged against allowance (6,929) (4,955)
Allowance balance at June 30 $22,541 $19,163
Allowance for loan losses
to period-end loans 1.53% 1.45%
Average loans, net of unearned income $1,433,777 $1,338,485
Provision for loan losses to
average loans, annualized .92% .52%
Loan charge-offs, net of recoveries to
average loans, annualized .67% .46%
<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 in the first quarter,
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. 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 21 basis points to 0.67% for the six months
ended June 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 1.43% of outstanding loans at December 31,
1997 and June 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
As a result of the sale of the nine branches discussed above in
the West Virginia acquisition, a gain was recorded which contributed
to an increase in noninterest income from $3,741,000 for the three
months ended June 30, 1997 to $5,817,000 for the three months ended
June 30, 1998, an increase of 55.5%. Gains on the sale of loans
represent the largest percentage growth category, increasing 175% for
the three months ended June 30, 1998 as compared to the same period in
1997. Other noninterest income increased 126% for the three months
ended June 30, 1998 as compared to the same period in 1997 due to the
gain on the sale of branches described above. Deposit related fees and
trust fees stayed unchanged from the second quarter of 1997.
Noninterest Expense
The Company's noninterest expense decreased by 2.9% from $14.7
million for the three months ended June 30, 1997 to $14.3 million for
the same period in 1998. The sale of the corporation's subsidiary,
Commercial Bank of West Liberty, accounted for the majority of the
reduction in noninterest expense. However; an aggressive cost
reduction program has allowed the Company to reduce its overall
operating expenses as well. Personnel costs have decreased by 3.8%
after adjusting for the sale of Commercial Bank of West Liberty; while
other noninterest expense decreased by 10.5% after adjusting for the
sale of Commercial Bank of West Liberty.
Balance Sheet Review
Total asset size was $1.85 billion at December 31, 1997 compared
to $2.11 billion at June 30, 1998. During the last six months, loans
increased from $1.41 billion to $1.45 billion. Federal Funds Sold
increased from a zero balance at December 31, 1997 to $210.17 million
at June 30, 1998. This increase is primarily the result of the
payment by Bank One on June 26, 1998 for the assumption of deposits of
the seven branches acquired from Bank One by the Company's West
Virginia affiliate. The asset category which declined most was
securities available-for-sale; declining from $165.6 million at
December 31, 1997 to $146.9 million at June 30, 1998.
<PAGE>
As a result of the West Virginia acquisition the Company's
largest liability, deposits, increased from $1.47 billion as of
December 31, 1997 to $1.71 billion as of June 31, 1998. Noninterest
bearing deposits increased from $193.3 million at December 31, 1997 to
$213.6 million at June 30, 1998. Interest bearing deposits increased
from $1,271.7 million at December 31, 1997 to $1,491.9 million at June
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 $40.1 million as of June 30, 1998. The Company's
advances from the Federal Home Loan Bank increased from $101.8 million
at December 31, 1997 to $126.1 million at June 30, 1998 as the Company
used this liquidity as a source of funding for loan growth.
Loans
Loans increased from $1.40 billion as of December 31, 1997 to
$1.45 billion as of June 30, 1998, due to 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 $673.9
million as of June 30, 1998 while consumer loans increased from $361.9
million as of December 31, 1997 to $395.2 million as of June 30, 1998.
Non-accrual and 90 days past due loans amounted to 1.46% of total
loans outstanding as of December 31, 1997 and 1.43% of total loans
outstanding as of June 30, 1998. Non-accrual loans as a percentage of
total loans outstanding were 0.84% as of December 31, 1997 and 0.92%
at June 30, 1998. During the same period, loans 90 days or more past
due decreased 11 basis points from 0.62% of total loans outstanding to
0.51%. The allowance for loan losses increased from 1.42% of total
loans outstanding as of December 31, 1997 to 1.53% as of June 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 107% June 30, 1998.
The following table summarizes the Company's loans that are non-
accrual or past due 90 days or more as of June 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)
June 30, 1998
Commercial loans,
secured by real estate $ 2,002 0.50% $ 323 0.08%
Commercial loans, other 8,010 2.95 3,096 1.14
Consumer loans,
secured by real estate 3,203 0.79 2,450 0.60
Consumer loans, other 331 0.08 1,649 0.42
Total $13,546 0.92% $7,518 0.51%
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%
<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 $165.6 million as of December 31,
1997 to $146.9 million as of June 30, 1998. Securities held-to-
maturity declined from $115.9 million to $97.1 million during the same
period. Total securities as a percentage of total assets were 15.2%
as of December 31, 1997 and 11.6% as of June 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". Those steps include the
following:
* We have assessed the significant issues throughout our
organization and our customer base, in order to be prepared for proper
processing of information.
* We have implemented a Steering Committee and Project Team to
oversee the successful attainment of Year 2000 compliance.
* We have completed an inventory of all hardware, software,
systems, and facilities to identify products which must be replaced,
retired, or renovated.
* We have contacted all respective third party providers of
computer-related services and have requested that they provide
evidence to us by June 1998 of their intention to be Year 2000
compliant.
* We have created a test environment to validate software,
hardware, and systems as new releases become available.
* The Company's Board of Directors and Executive Management has
committed to providing the appropriate resources and workforce
necessary to ensure compliance with Year 2000.
<PAGE>
We anticipate that all internal hardware upgrades or replacements
will be completed by March 1999. The costs associated with hardware
and software upgrades will be approximately $450,000 in 1998 and
$1,400,000 in 1999. Management believes that these estimates are
generous and that these costs are not material to the financial
condition of the Company.
Our most significant exposure will be relying upon third party
vendors and processors and managing our relationship with their
product or service as we test their Year 2000 Ready product. Our core
third party data processor, one of the country's leading suppliers of
financial institution data processing services, has already provided
assurances that they will be Year 2000 compliant prior to mid-year
1999.
As testing occurs throughout 1998, any vendors who cannot certify
their intentions to be Year 2000 compliant will be abandoned and new
vendors will be contacted. We anticipate being finished with Year
2000 issues by the middle of 1999. The Federal Financial Institution
Examination Council has issued guidelines for all financial
institutions to assess their Year 2000 readiness. Management has
reviewed these guidelines and has determined that their plan is in
compliance with them.
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 $1.706 billion from
December 31, 1997 to June 30, 1998. Noninterest bearing deposits
increased by $20.2 million while interest bearing deposits increased
by $220.3 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 $131.9 million as of March
31, 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 June 30, 1998. The impact on operations of interest rate swaps and
options was not material during the first six 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 $0.40 per share for the
first six months of 1998 and $0.36 per share for the first six months
of 1997. Earnings per share for the same periods were $0.84 and
$1.20, respectively. The Company retained 52% of earnings for the
first six 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 June 30, 1998. The Company's Tier 1 leverage, Tier 1 risk-based
and total risk-based ratios were 9.18%, 10.94% and 12.20%,
respectively as of June 30, 1998.
As of June 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
of Security Holders
The Company's Annual Meeting of Shareholders was held on April 28,
1998. The following items were approved:
1) Election of the following members to the Company's Board
of Directors for the ensuing year.
Nominee In Favor Withheld
Charles J. Baird 7,234,624 78,930
Burlin Coleman 7,241,113 72,441
Nick A. Cooley 7,144,494 169,060
William A. Graham, Jr. 7,242,623 70,931
Jean R. Hale 7,242,618 70,936
Brandt T. Mullins 7,239,212 74,342
M. Lynn Parrish 7,244,024 69,530
Ernest M. Rogers 7,239,212 74,342
Porter P. Welch 7,239,712 73,842
2) Approval of the 1998 Stock Option Plan.
The votes of the shareholders on this item were as follows:
In Favor Opposed Abstained
5,642,098 939,375 128,333
3)Ratification of Ernst & Young, L.L.P. as the Company's
independent certified public accountants for 1998.
The votes of the shareholders on this item were as follows:
In Favor Opposed Abstained
7,250,621 33,175 29,758
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
During the second quarter of 1998, the Company filed a
Current Report on Form 8-K (filing date June 2, 1998) with
respect to the execution of a definitive agreement relating
to Community Trust Bank's proposed purchase of five branch
offices located in Central Kentucky from PNC Bank, NA.
<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: August 14, 1998 /s/Burlin Coleman
Burlin Coleman
Chairman of the Board,
President and
Principal Executive Officer
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