19
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 - 11,062,141 shares outstanding at April 30, 1999
<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, 1998 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
2
<PAGE>
Consolidated Balance Sheets
March 31 December 31
(In thousands except share data) 1999 1998
Assets:
Cash and due from banks $ 84,011 $ 97,487
Interest bearing deposits in
other financial institutions 521 646
Federal funds sold 86,530 135,000
Securities available-for-sale 289,419 301,052
Securities held-to-maturity (fair value of
$79,637 and $83,097, respectively) 79,419 83,359
Loans 1,506,351 1,502,386
Allowance for loan losses (24,273) (26,089)
Net loans 1,482,078 1,476,297
Premises and equipment, net 53,943 54,796
Excess of cost over net assets acquired (net of
accumulated amortization of
$10,346 and $9,559, respectively) 61,769 62,497
Other assets 32,721 36,905
Total Assets $ 2,170,411 $ 2,248,039
Liabilities and Shareholders' Equity:
Deposits:
Noninterest bearing $ 261,925 $ 281,302
Interest bearing 1,612,144 1,639,839
Total deposits 1,874,069 1,921,141
Federal funds purchased and other
short-term borrowings 41,405 43,405
Other liabilities 14,751 13,491
Advances from Federal Home Loan Bank 19,526 51,384
Long-term debt 53,794 53,823
Total Liabilities 2,003,545 2,083,244
Shareholders' Equity:
Preferred stock, 300,000 shares authorized
and unissued
Common stock, $5 par value, shares
authorized 25,000,000; shares issued
1999 - 10,064,969; 1998 - 10,064,969 50,325 50,325
Capital surplus 28,057 28,057
Treasury Stock, 8,476 shares of common
stock at cost (199) 0
Retained earnings 87,784 84,827
Accumulated other comprehensive income 899 1,586
Total Shareholders' Equity 166,866 164,795
Total Liabilities and
Shareholders' Equity $2,170,411 $2,248,039
The accompanying notes are an integral part of these statements.
3
<PAGE>
Consolidated Statements of Income
Three months ended
March 31
(In thousands except per share data) 1999 1998
Interest Income:
Interest and fees on loans $ 33,647 $ 33,704
Interest and dividends on securities
Taxable 4,686 3,370
Tax exempt 733 638
Interest on federal funds sold 1,343 195
Interest on deposits in other financial
institutions 2 5
Total Interest Income 40,411 37,912
Interest Expense:
Interest on deposits 18,030 15,845
Interest on federal funds purchased and
other short-term borrowings 482 523
Interest on advances from Federal
Home Loan Bank 397 1,762
Interest on long-term debt 1,224 1,192
Total Interest Expense 20,133 19,322
Net interest income 20,278 18,590
Provision for loan losses 2,034 2,505
Net interest income after provision
for loan losses 18,244 16,085
Noninterest Income:
Service charges on deposit accounts 2,155 1,638
Gains on sale of loans, net 703 439
Trust income 515 432
Securities gains, net 0 0
Other 1,622 1,526
Total Noninterest Income 4,995 4,035
Noninterest Expense:
Salaries and employee benefits 7,519 7,078
Occupancy, net 1,176 1,013
Equipment 1,263 956
Data processing 855 839
Stationery, printing and office supplies 365 380
Taxes other than payroll, property and income 441 521
FDIC insurance 122 62
Other 4,085 3,207
Total Noninterest Expense 15,826 14,056
Income before income taxes 7,413 6,064
Income tax expense 2,313 1,900
Net Income 5,100 4,164
Other comprehensive income, net of tax:
Unrealized holding gains/(losses) arising
during period (687) 100
Comprehensive income $ 4,413 $ 4,264
Basic earnings per share 0.46 (1) 0.38 (1)
Diluted earnings per share 0.46 (1) 0.38 (1)
Average shares outstanding 11,067 (1) 11,069 (1)
(1) Per share data and average shares outstanding have been
restated to reflect the 10% stock dividend issued on April 15, 1999.
The accompanying notes are an integral part of these statements.
4
<PAGE>
Consolidated Statements of Cash Flows
Three months ended
March 31
(In thousands) 1999 1998
Cash flows from operating activities:
Net income $ 5,100 $ 4,164
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,951 1,106
Provision for loan and other real
estate losses 2,040 2,717
Securities gains, net 0 0
Gain on sale of loans, net (703) (439)
Gain on sale of assets 0 (1)
Net amortization of securities premiums 127 73
Net change in loans held for sale 2,598 (1,030)
Changes in:
Other assets 5,113 (492)
Other liabilities 3,115 235
Net cash provided by operating activities 19,341 6,333
Cash flows from investing activities:
Proceeds from:
Sale/call of securities available-for-sale 1,178 0
Maturity of securities available-for-sale 36,338 16,899
Maturity of securities held-to-maturity 251 2,777
Principal payments on mortgage-backed
securities 3,678 8,176
Purchase of:
Securities available-for-sale (27,042) (260)
Securities held-to-maturity 0 0
Mortgage-backed securities (10) 0
Net change in loans (10,332) (26,024)
Net change in premises and equipment (317) (1,206)
Other 0 0
Net cash used in investing activities 3,744 362
Cash flows from financing activities:
Net change in deposits (47,072) 15,265
Net change in federal funds purchased and
other short-term borrowings (2,000) (24,249)
Advances from Federal Home Loan Bank 0 31,000
Repayments of advances from Federal
Home Loan Bank (31,858) (938)
Proceeds from long-term debt 0 0
Payments on long-term debt (29) (28)
Payments for redemption of common stock (289) (96)
Issuance of treasury stock 61 67
Dividends paid (3,969) (2,013)
Net cash provided by financing activities(85,156) 19,008
Net increase (decrease) in cash and
cash equivalents (62,071) 25,703
Cash and cash equivalents at
beginning of year 233,133 61,404
Cash and cash equivalents at end of period $ 171,062 $ 87,107
The accompanying notes are an integral part of these statements.
5
<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, CTBI Preferred Capital Trust, and Community Trust Funding
Corporation. All significant intercompany transactions have been
eliminated in consolidation.
6
<PAGE>
Note 2 - Securities
Securities are classified into held-to-maturity, available-for-
sale, and trading categories. Held-to-maturity securities are those
which the Company has the positive intent and ability to hold to
maturity and are reported at amortized cost. Available-for-sale
securities are those which the Company may decide to sell if needed
for liquidity, asset-liability management or other reasons. Available-
for- sale securities are reported at fair value, with unrealized gains
or losses included as a separate component of equity, net of tax.
The amortized cost and fair value of securities available-for-
sale as of March 31, 1999 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 62,594 $ 63,041
Mortgage-backed pass through
certificates 134,225 134,651
Collateralized mortgage obligations 42,112 42,083
Other debt securities 23,497 23,619
Total debt securities 262,428 263,394
Equity securities 25,893 26,025
Total Securities $ 288,321 $ 289,419
The amortized cost and fair value of securities held-to-maturity
as of March 31, 1999 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 12,995 $ 11,825
States and political subdivisions 40,831 42,215
Mortgage-backed pass through
certificates 20,958 20,968
Collateralized mortgage obligations 4,635 4,629
Total Securities $ 79,419 $ 79,637
7
<PAGE>
Note 3 - Loans
Major classifications of loans are summarized as follows:
March 31 December 31
(in thousands) 1999 1998
Commercial, secured by real estate $ 346,232 $ 329,611
Commercial, other 286,646 279,406
Real Estate Construction 85,941 87,625
Real Estate Mortgage 388,275 399,035
Consumer 393,737 400,893
Equipment Lease Financing 5,520 5,816
$1,506,351 $1,502,386
Note 4 - Long-Term Debt
Long-Term Debt consists of the following:
March 31 December 31
(in thousands) 1999 1998
Trust Preferred Securities * $ 34,500 $ 34,500
Senior Notes 12,230 12,230
Revolving Bank Note 5,500 5,500
Other 1,564 1,593
$ 53,794 $ 53,823
Refer to the Corporation's Annual Report on Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31,
1998 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.
8
<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 March 31,
1999 the Company owned one commercial bank, one savings bank and one
trust company. Through its affiliates, the Company has over sixty
banking locations serving 85,000 households in various West Virginia
and Eastern and Central Kentucky counties. The Company had total
assets of $2.17 billion and total shareholders' equity of $167 million
as of March 31, 1999. 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;
Robinson Salomon Smith Barney, Atlanta, Georgia; J.C. Bradford & Co.,
Louisville, Kentucky; Keefe, Bruyette & Woods, Inc., New York, New
York.
Acquisitions
Community Trust Bancorp, Inc.'s wholly owned subsidiary,
Community Trust Bank of West Virginia, National Association (CTBWV,
which was later merged into the Company's lead bank, Community Trust
Bank, NA), 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 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 an 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 newly chartered CTBWV 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
million. These branches are located in Richmond, Winchester and
Harrodsburg, all located in Central Kentucky.
Stock Dividend
The Company's Board of Directors approved a 10% stock dividend.
The stock dividend was paid on April 15, 1999 to shareholders of
record on March 20, 1999, in addition to the regular quarterly cash
dividends paid on (1) April 1, 1998 of 18 cents per share for
shareholders of record on March 15, 1998, (2) July 1, 1998 of 18 cents
9
<PAGE>
per share for shareholders of record on June 15, 1998, (3) October 1,
1998 of 18 cents per share for shareholders of record on September 15,
1998, (4) January 1, 1999 of 19 cents per share for shareholders of
record on December 15, 1998 and (5) April 1, 1999 of 19 cents per
share for shareholders of record on March 15, 1999. All per share
data has been restated to reflect this stock dividend.
Income Statement Review
The Company's net income for the three months ended March 31,
1999 was $5.1 million or $0.46 per share as compared to $4.2 million
or $0.38 per share for the three months ended March 31, 1998. The
following table sets forth on an annualized basis the return on
average assets and return on average shareholders' equity for the
three month period ending March 31, 1999 and 1998:
Three months ended
March 31
1999 1998
Return on average shareholders' equity 12.35% 10.53%
Return on average assets 0.95% 0.91%
The Company's net income for the first quarter of 1999 increased
$936 thousand or 22.5% as compared to the same period in 1998.
Earnings per share increased $0.08 per share or 21.1% for the three
months ended March 31, 1999, as compared to the first quarter of 1998.
The increase in net income was the result of an increase in net
interest income (9.1%), an increase in noninterest income (23.8%), and
a decrease in provision for loan losses (18.8%). An increase in
noninterest expense (12.6%) partially offset the factors contributing
to the increase in net income.
Provision for loan losses for the three months ended March 31,
1999 was $2.0 million, compared to $2.5 million for the same period in
1998. See "Provision For Loan Losses" below for an explanation of the
decrease.
Net Interest Income
Net interest income increased $1.7 million or 9.1% from $18.6
million for the first quarter of 1998 to $20.3 million for the first
quarter of 1999. Interest income and interest expense both increased
for the quarter ending March 31, 1999 as compared to the same period
in 1998, with interest income increasing $2.5 million and interest
expense increasing $0.8 million.
The yield on interest earning assets decreased 72 basis points
for the first quarter of 1999 as compared to the same period in 1998.
The cost of interest bearing funds also decreased by 61 basis points
for the first quarter of 1999 as compared to the same period in 1998.
As a result, the net interest margin decreased from 4.52% for the
first quarter of 1998 to 4.27% for the current quarter.
The Company's loan portfolio, its highest yielding asset,
continues to expand through new markets and internally generated
growth. The Company's loan portfolio increased 4.1% from $1.45
billion for the first quarter of 1998 to $1.51 billion for the first
quarter of 1999.
10
<PAGE>
The following table summarizes the annualized net interest spread
and net interest margin for the three months ended March 31, 1999 and
1998.
Three Months Ended
March 31
1999 1998
Yield on interest earning assets 8.35% 9.07%
Cost of interest bearing funds 4.64% 5.25%
Net interest spread 3.71% 3.82%
Net interest margin 4.27% 4.52%
Provision for Loan Losses
The analysis of the changes in the allowance for loan losses and
selected ratios is set forth below.
Three Months Ended
March 31
(in thousands) 1999 1998
Allowance balance January 1 $26,089 $20,465
Additions to allowance charged
against operations 2,034 2,505
Recoveries credited to allowance 1,670 977
Losses charged against allowance (5,520) (3,532)
Allowance balance at March 31 $24,273 $20,415
Allowance for loan losses to
period-end loans 1.61% 1.40%
Average loans, net of unearned
income $1,501,450 $1,433,092
Provision for loan losses to
average loans, annualized .55% .71%
Loan charge-offs, net of recoveries to
average loans, annualized 1.04% .72%
The Company decreased its provision for loan losses during the
first quarter of 1999. This is the result of the special charge taken
in September 1998. In September 1998, CTBI took a special charge of
$7.3 million to clean up problems in the Indirect Loan Portfolio. Six
million ($6.0 million) of this charge was booked as additional
Provision for Loan Losses. As a result, losses incurred in the
Company's pre-1998 Indirect Lending Portfolio are charged against this
provision.
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
1.04% for the three months ended March 31, 1999 as compared to the
same period in 1998. The Company's non-performing loans (90 days or
more past due and non-accrual) were 1.37% and 1.47% of outstanding
loans at December 31, 1998 and March 31, 1999, 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.
11
<PAGE>
Noninterest Income
The Company's noninterest income increased 23.8% from $4.03
million for the three months ended March 31, 1998 to $5.00 million for
the three months ended March 31, 1999. Gains on the sale of loans
represents the largest growth category, increasing 60.1% for the three
months ended March 31, 1999 as compared to the same period in 1998.
Service charges on deposit accounts increased 31.6% for the three
months ended March 31, 1999 as compared to the same period in 1998.
Noninterest Expense
The Company's noninterest expense increased by 12.6% from $14.1
million for the three months ended March 31, 1998 to $15.8 million for
the same period in 1999. All major categories of noninterest expense
experienced increases for the quarter ended March 31, 1999 compared to
the same quarter in 1998. This is primarily the result of the
Company's 1998 acquisition of twelve additional branches (see
discussion of acquisitions above). While the total noninterest
expense increased, the noninterest expense expressed in terms of a
percentage to average assets decreased from 0.75% for the three months
ended March 31, 1998 to 0.72% for the same period in 1999.
Cash Basis Income
Quarter Ended
March 31, 1999
Amortization
Reported Core Deposit "Cash"
Earnings Goodwill Intangible Earnings
Income before income
tax expense $7,413 $ 642 $ 145 $8,200
Income tax expense 2,313 154 51 2,518
Net income $5,100 $ 488 $ 94 $5,682
Basic earnings per
common share $ 0.46 $ 0.04 $ 0.01 $ 0.51
Diluted earnings per
common share $ 0.46 $ 0.04 $ 0.01 $ 0.51
These calculations were specifically formulated by the Company and may
not be comparable to similarly titled measures reported by other
companies.
Earnings per share calculations have been restated to reflect the 10%
stock dividend payable April 15, 1999.
Balance Sheet Review
Total asset size was $2.25 billion at December 31, 1998 compared
to $2.17 billion at March 31, 1999. During the last three months,
loans increased 1.1% on an annualized basis from $1.50 billion to
$1.51 billion. Federal funds sold decreased from $135.0 million at
December 31, 1998 to $86.5 million at March 31, 1999. This decrease
was driven by reductions in Federal Home Loan Bank advances of $31.9
million and total deposits of $47.1 million.
The Company's largest liability, deposits, decreased from $1.92
billion as of December 31, 1998 to $1.87 billion as of March 31, 1999.
Noninterest bearing deposits declined from $281.3 million at December
31, 1998 to $261.9 million at March 31, 1999. Interest bearing
12
<PAGE>
deposits decreased slightly from $1,639.8 million at December 31, 1998
to $1,612.1 million at March 31, 1999. The Company is using the
liquidity from the branch acquisitions to pay down its advances from
Federal Home Loan Bank as the opportunity arises. For the three
months ended March 31, 1999, the Company reduced its Federal Home Loan
Bank advances from $51.4 million to $19.5 million.
Loans
Loans increased slightly from $1.50 billion as of December 31,
1998 to $1.51 billion as of March 31, 1999, primarily due to the
growth of the Company's commercial loan portfolio. The category of
commercial loans secured by real estate increased from $329.6 million
as of December 31, 1998 to $346.2 million as of March 31, 1999 while
other commercial loans increased from $279.4 million as of December
31, 1998 to $286.6 million as of March 31, 1999.
Non-accrual and 90 days past due loans amounted to 1.37% of total
loans outstanding as of December 31, 1998 and 1.47% of total loans
outstanding as of March 31, 1999. Non-accrual loans as a percentage
of total loans outstanding were 0.99% as of December 31, 1998 and at
1.18% at March 31, 1999. During the same period, loans 90 days or
more past due decreased 9 basis points from 0.38% of total loans
outstanding to 0.29%. The allowance for loan losses decreased from
1.74% of total loans outstanding as of December 31, 1998 to 1.61% as
of March 31, 1999. This is consistent with our plan to absorb losses
taken in our pre-1998 Indirect Lending Portfolio in the allowance
after the special provision was made in September 1998. The allowance
for loan losses as a percentage of non-accrual loans and loans past
due 90 days or more was 126.9% at December 31, 1998 and 109.7% at
March 31, 1999.
The following table summarizes the Company's loans that are non-
accrual or past due 90 days or more as of March 31, 1999 and December
31, 1998.
As a % of Accruing loans As a % of
Non-accrual loan balances past due 90 loan balances
loans by category days or more by category
(in thousands)
March 31, 1999
Commercial loans,
secured by real estate $ 8,080 1.93% $ 523 0.12%
Commercial loans, other 4,166 1.43 1,771 0.61
Consumer loans,
secured by real estate 4,972 1.24 1,128 0.28
Consumer loans, other 504 0.13 981 0.25
Total $17,722 1.18% $ 4,403 0.29%
December 31, 1998
Commercial loans,
secured by real estate $ 5,294 1.61% $ 680 0.21%
Commercial loans, other 4,458 1.56 708 0.25
Consumer loans,
secured by real estate 4,771 0.98 2,077 0.43
Consumer loans, other 407 0.10 2,170 0.54
Total $14,930 0.99% $5,635 0.38%
13
<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 $301.1 million as of December 31,
1998 to $289.4 million as of March 31, 1999. Securities held-to-
maturity declined from $83.4 million to $79.4 million during the same
period. Total securities as a percentage of total assets were 17.1%
as of December 31, 1998 and 17.0% as of March 31, 1999.
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 properly process into the next century.
Community Trust Bancorp, Inc. has already taken the steps to be "Year
2000 compliant". Community Trust Bancorp, Inc. realized the
importance of Year 2000 readiness early and committed the 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 bank's 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,
14
<PAGE>
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 - (Complete) - 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.
Validation Phase - (Substantially Complete) - Testing, while inherent
in each phase, plays a key role 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 substantial off-site and
on-site testing of this upgrade.
Implementation Phase - (In-Process) -Our data processing 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 have
completed testing and determined that all of our major systems are
Year 2000 ready. We have also verified 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.
The costs associated with the Year 2000 project were $600,000 in
1998 and are estimated to be $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 compliant are based upon
management's current best estimates, which were derived based upon
numerous assumptions of future events, including availability of
certain resources, third party modification plans and other factors.
Actual results could vary from those anticipated.
15
<PAGE>
Liquidity and Capital Resources
The Company's liquidity objectives are to ensure that funds are
available for the affiliate banks to meet deposit withdrawals and
credit demands without unduly penalizing profitability, and to ensure
that funding is available for the Company to meet ongoing cash needs
while maximizing profitability. The Company continues to identify
ways to provide for liquidity on both a current and long-term basis.
The subsidiary banks rely mainly on core deposits, certificates of
$100,000 or more, repayment of principal and interest on loans and
securities and federal funds sold and purchased to create long-term
liquidity. The subsidiary banks also rely on the sale of securities
under repurchase agreements, securities available-for-sale and Federal
Home Loan Bank borrowings.
Deposits decreased from $1.921 billion to $1.874 billion from
December 31, 1998 to March 31, 1999. Noninterest bearing deposits
decreased by $19.4 million while interest-bearing deposits decreased
by $27.7 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.
The Company owns $86.5 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 decreased
from $51.4 million as of December 31, 1998 to $19.5 million as of
March 31, 1999.
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, $12.0 million
of which is currently 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
16
<PAGE>
flows based on the notional principal amount and agreed upon fixed and
variable interest rates. In this transaction, the Company would
typically agree 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 March 31, 1999.
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 would have any major impact in the
foreseeable future. In addition to the subsidiary banks' 1999
profits, approximately $14.5 million can be paid to the Company as
dividends without prior regulatory approval.
The primary source of capital for the Company is retained
earnings. The Company paid cash dividends of $0.19 per share for the
first three months of 1999 and $0.18 per share for the first three
months of 1998. Earnings per share for the same periods were $0.46
and $0.38, respectively. The Company retained 59% of earnings for the
first three months of 1999.
Under guidelines issued by banking regulators, the Company and
its subsidiary banks are required to maintain a minimum Tier 1 risk-
based capital ratio of 4% and a minimum total risk-based ratio of 8%.
Risk-based capital ratios weight the relative risk factors of all
assets and consider the risk associated with off-balance sheet items.
The Company must also maintain a minimum Tier 1 leverage ratio of 4%
as of September 30, 1997. The Company's Tier 1 leverage, Tier 1 risk-
based and total risk-based ratios were 6.50%, 8.69% and 9.94%,
respectively as of March 31, 1999.
As of March 31, 1999, 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.
17
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company currently does not engage in any derivative or
hedging activity. Refer the Company's 1998 10-K for analysis of the
interest rate sensitivity.
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
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Corporation has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COMMUNITY TRUST BANCORP, INC.
by
Date: May 14, 1999 /s/ Burlin Coleman
Burlin Coleman
Chairman of the Board,
President and
Principal Executive Officer
/s/ Kevin Stumbo
Kevin Stumbo
Chief Accounting Officer
19
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 84011
<INT-BEARING-DEPOSITS> 521
<FED-FUNDS-SOLD> 86530
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 289419
<INVESTMENTS-CARRYING> 79419
<INVESTMENTS-MARKET> 79637
<LOANS> 1506351
<ALLOWANCE> 24273
<TOTAL-ASSETS> 2170411
<DEPOSITS> 1874069
<SHORT-TERM> 41405
<LIABILITIES-OTHER> 14751
<LONG-TERM> 73320
0
0
<COMMON> 50325
<OTHER-SE> 116541
<TOTAL-LIABILITIES-AND-EQUITY> 2170411
<INTEREST-LOAN> 33647
<INTEREST-INVEST> 5419
<INTEREST-OTHER> 1345
<INTEREST-TOTAL> 40411
<INTEREST-DEPOSIT> 18030
<INTEREST-EXPENSE> 20133
<INTEREST-INCOME-NET> 20278
<LOAN-LOSSES> 2034
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 15826
<INCOME-PRETAX> 7413
<INCOME-PRE-EXTRAORDINARY> 7413
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5100
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
<YIELD-ACTUAL> 8.24
<LOANS-NON> 17722
<LOANS-PAST> 4403
<LOANS-TROUBLED> 388
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 26089
<CHARGE-OFFS> 5520
<RECOVERIES> 1670
<ALLOWANCE-CLOSE> 24273
<ALLOWANCE-DOMESTIC> 24273
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 24273
</TABLE>
