18
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_________to_________
Commission file number 0-11129
COMMUNITY TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0979818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
208 North Mayo Trail
Pikeville, Kentucky 41501
(address of principal executive offices) (Zip Code)
Registrant's telephone number (606) 432-1414
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days. Yes X No___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common stock - 10,060,631 shares outstanding at July 31, 1997
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying information has not been audited by independent
public accountants; however, in the opinion of management such
information reflects all adjustments necessary for a fair presentation
of the results for the interim period. All such adjustments are of a
normal and recurring nature.
The accompanying financial statements are presented in accordance
with the requirements of Form 10-Q and consequently do not include all
of the disclosures normally required by generally accepted accounting
principles or those normally made in the registrant's annual report on
Form 10-K. Accordingly, the reader of the Form 10-Q should refer to
the registrant's Form 10-K for the year ended December 31, 1996 for
further information in this regard.
Index to consolidated financial statements:
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Consolidated Balance Sheets
June 30 December 31
(In thousands except share data) 1997 1996
Assets:
Cash and due from banks $ 56,386 $ 63,048
Interest bearing deposits in
other financial institutions 119 836
Federal funds sold 48,135 0
Securities available-for-sale 187,965 229,952
Securities held-to-maturity (fair value
of $132,649 and $137,383, respectively) 133,921 137,733
Loans 1,324,882 1,309,623
Allowance for loan losses (19,163) (18,825)
Net loans 1,305,719 1,290,798
Premises and equipment, net 47,263 46,275
Excess of cost over net assets acquired
(net of accumulated amortization of
$7,214 and $6,674, respectively) 19,298 19,822
Other assets 36,714 27,196
Total Assets $ 1,835,520 $ 1,815,660
Liabilities and Shareholders' Equity:
Deposits:
Noninterest bearing $ 190,475 $ 200,222
Interest bearing 1,270,263 1,280,600
Total deposits 1,460,738 1,480,822
Federal funds purchased and other
short-term borrowings 24,141 44,585
Other liabilities 18,566 15,394
Advances from Federal Home Loan Bank 124,597 110,969
Long-term debt 53,505 19,136
Total Liabilities 1,681,547 1,670,906
Shareholders' Equity:
Preferred stock, 300,000 shares authorized and unissued
Common stock, $5 par value, shares authorized 25,000,000;
shares issued and outstanding,
1997 - 10,060,494; 1996 - 9,128,814 50,302 45,644
Capital surplus 28,056 27,915
Retained earnings 75,866 71,976
Net unrealized appreciation (depreciation)
on securities available-for-sale,
net of tax (251) (781)
Total Shareholders' Equity 153,973 144,754
Total Liabilities and
Shareholders' Equity $ 1,835,520 $ 1,815,660
The accompanying notes are an integral part of these statements.
Consolidated Statements of Income
Three months ended Six months ended
June 30 June 30
(In thousands except per share data) 1997 1996 1997 1996
Interest Income:
Interest and fees on loans $32,656 $28,397 $64,374 $56,129
Interest and dividends on securities
Taxable 4,304 6,248 9,103 12,209
Tax exempt 684 756 1,357 1,518
Interest on federal funds sold 423 0 589 450
Interest on deposits in other financial
institutions 6 11 18 23
Total Interest Income 38,073 35,412 75,441 70,329
Interest Expense:
Interest on deposits 15,450 14,898 30,520 30,346
Interest on federal funds purchased and
other short-term borrowings 387 288 814 558
Interest on advances from
Federal Home Loan Bank 1,760 1,196 3,510 2,092
Interest on long-term debt 1,048 493 1,461 1,046
Total Interest Expense 18,645 16,875 36,305 34,042
Net interest income 19,428 18,537 39,136 36,287
Provision for loan losses 1,731 1,686 3,449 3,174
Net interest income after
provision for loan losses 17,697 16,851 35,687 33,113
Noninterest Income:
Service charges on deposit accounts 1,821 1,556 3,513 2,883
Gains on sale of loans, net 242 588 447 751
Trust income 474 406 871 798
Securities gains, net (46) 18 46 60
Other 1,250 1,094 2,308 2,429
Total Noninterest Income 3,741 3,662 7,185 6,921
Noninterest Expense:
Salaries and employee benefits 6,847 7,194 14,413 14,277
Occupancy, net 1,017 990 2,032 1,950
Equipment 939 945 1,920 1,884
Data processing 701 569 1,375 1,208
Stationery, printing and office supplies 455 379 896 881
Taxes other than payroll, property
and income 546 508 1,071 1,011
FDIC insurance 79 6 114 13
Other 4,152 3,048 7,804 5,892
Total Noninterest Expense 14,736 13,639 29,625 27,116
Income before income taxes and
extraordinary gain 6,702 6,874 13,247 12,918
Extraordinary gain (loss), net of tax 0 0 3,085 0
Income before income taxes 6,702 6,874 16,332 12,918
Income tax expense 2,146 2,137 4,230 3,978
Net Income $ 4,556 $ 4,737 $ 12,102 $ 8,940
Net income per share $ 0.45 $ 0.47(1)$ 1.20 $ 0.89(1)
Average shares outstanding 10,060 10,053(1) 10,059 10,052(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.
Consolidated Statements of Cash Flows
Six months ended
June 30
(In thousands) 1997 1996
Cash flows from operating activities:
Net income $ 12,102 $ 8,940
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,548 2,546
Provision for loan and other real estate losses 3,474 3,221
Securities gains, net (119) (8)
Gain on sale of loans, net (447) (751)
Gain on sale of assets 4 (31)
Net amortization of securities premiums 181 229
Net change in loans held for sale 77,793 5,276
Changes in:
Other assets (9,481) (21)
Other liabilities 3,187 653
Net cash provided by operating activities 89,242 20,054
Cash flows from investing activities:
Proceeds from:
Sale/call of securities available-for-sale 29,201 2,527
Maturity of securities available-for-sale 26,337 26,305
Maturity of securities held-to-maturity 2,792 6,638
Principal payments on mortgage-backed securities 1,927 24,933
Purchase of:
Securities available-for-sale (13,015) (39,639)
Securities held-to-maturity 0 (3,441)
Mortgage-backed securities (1,000) (1,228)
Net change in loans (95,790) (108,385)
Net change in premises and equipment (2,984) (1,519)
Other 0 980
Net cash used in investing activities (52,532) (92,829)
Cash flows from financing activities:
Net change in deposits (20,084) (5,683)
Net change in federal funds purchased and
other short-term borrowings (20,444) 398
Advances from Federal Home Loan Bank 70,232 57,000
Repayments of advances from
Federal Home Loan Bank (56,604) (10,239)
Proceeds from long-term debt 34,500 1,000
Payments on long-term debt (132) (6,919)
Issuance of common stock 230 -
Dividends paid (3,652) (3,285)
Net cash provided by financing activities 4,046 32,272
Net increase (decrease) in cash and cash
equivalents 40,756 (40,503)
Cash and cash equivalents at beginning of year 63,884 107,012
Cash and cash equivalents at end of period $ 104,640 $ 66,509
The accompanying notes are an integral part of these statements.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
The accounting and reporting policies of Community Trust Bancorp,
Inc. (the "Company"), and its subsidiaries on a consolidated basis
conform to generally accepted accounting principles and general
practices within the banking industry.
Principles of Consolidation - The unaudited consolidated
financial statements include the accounts of the Company and its
wholly owned subsidiaries Community Trust Bank, NA, Commercial Bank
(West Liberty), Community Trust Bank, FSB, Trust Company of Kentucky,
National Association, CTBI Preferred Capital Trust, and Community
Trust Funding Corporation. All significant intercompany transactions
have been eliminated in consolidation.
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 June 30, 1997 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 42,210 $ 42,400
Mortgage-backed pass through
certificates 93,244 93,079
Collateralized mortgage obligations 18,139 17,917
Other debt securities 18,593 18,446
Total debt securities 172,186 171,842
Equity securities 16,100 16,123
Total Securities $188,286 $187,965
The amortized cost and fair value of securities held-to-maturity
as of June 30, 1997 are summarized as follows:
Amortized Fair
(in thousands) Cost Value
U.S. Treasury and government agencies $ 26,352 $ 24,798
States and political subdivisions 52,753 53,626
Mortgage-backed pass through
certificates 40,626 40,240
Collateralized mortgage obligations 14,190 13,985
Total Securities $133,921 $132,649
Note 3 - Loans
Major classifications of loans are summarized as follows:
June 30 December 31
(in thousands) 1997 1996
Commercial, secured by real estate $ 271,506 $ 270,315
Commercial, other 264,798 234,793
Real Estate Construction 81,005 79,069
Real Estate Mortgage 414,901 411,067
Consumer 289,537 310,582
Equipment Lease Financing 3,135 3,797
$1,324,882 $1,309,623
Note 4 - Long-Term Debt
Long-Term Debt consists of the following:
June 30 December 31
1997 1996
(in thousands)
Trust Preferred Securities * $34,500 $ 0
Senior Notes 17,230 17,230
Other 1,774 1,906
$53,504 $19,136
Refer to the 1996 Securities and Exchange Commission Form 10-K
for information concerning rates and assets securing long-term debt.
* 9.0% cumulative, payable quarterly, maturing 2027, subordinated
to all other liabilities of the Company
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,
1997 the Company owned two commercial banks (see Commercial Bank, West
Liberty below), one savings bank and one trust company. Through its
affiliates, the Company has over sixty banking locations serving
85,000 households in various Eastern and Central Kentucky counties.
The Company had total assets of $1.84 billion and total shareholders'
equity of $154 million as of June 30, 1997. The Company's common
stock is listed on NASDAQ under the symbol CTBI. Market makers are
Herzog, Heine, Geduld, Inc., New York, New York; J.J.B. Hilliard, W.L.
Lyons, Inc., Louisville, Kentucky; Morgan, Keegan and Company, Inc.,
Memphis, Tennessee; J.C. Bradford & Co., Louisville, Kentucky; Bear,
Stearns & Co., Inc., New York, New York; Robinson Humphrey Co., Inc.,
Atlanta, Georgia and Stifel Nicolaus & Co., Incorporated, St. Louis,
Missouri.
Effective January 1, 1997, the Company changed its name from
Pikeville National Corporation to Community Trust Bancorp, Inc.,
changed the name of its lead bank from Pikeville National Bank and
Trust Company to Community Trust Bank, National Association (the
"Bank") and merged seven of its other commercial bank subsidiaries
into the Bank. As a result of these transactions, the Bank has $1.6
billion in assets and numerous locations throughout eastern and
central Kentucky. The Company's thrift and trust subsidiaries,
Community Trust Bank, FSB and Trust Company of Kentucky, N.A., remain
wholly-owned subsidiaries of the Company and will continue to operate
as independent entities.
Commercial Bank, West Liberty
The Company excluded its subsidiary Commercial Bank, West
Liberty, Kentucky ("West Liberty") from the merger of its commercial
bank subsidiaries into the Bank, in anticipation of selling West
Liberty, as first publicly announced in November 1996. The Company
had entered into a definitive agreement to sell West Liberty to
Commercial Bancshares, Inc., of West Liberty, Kentucky for cash of
approximately $10.2 million. This sale was completed in early July
1997, resulting in an after-tax gain of approximately $2.2 million.
West Liberty had $79 million in assets, constituting 4% of the
Company's total consolidated assets. Consistent with the Company's
strategic plan, the funds generated by the sale of West Liberty will
provide the Company with the opportunity to expand existing or enter
into new markets through either internal expansion or acquisitions.
Stock Dividend
On February 18, 1997, the Company's Board of Directors declared a
10% stock dividend. This stock dividend, paid on April 15, 1997 to
shareholders of record on March 15, 1997, was in addition to the
regular quarterly cash dividends paid on (1) April 1, 1997 of 18 cents
per share for shareholders of record on March 15, 1997, and (2) July
1, 1997 of 18 cents per share for shareholders of record on June 15,
1997. All per share data has been restated to reflect this stock
dividend.
Trust Preferred Offering
On April 16, 1997 the Company issued $34,500,000 of 9% Cumulative
Trust Preferred Securities. Proceeds from the offering were applied
to the Company's general funds to be used for expansion through new
branches and acquisitions, to fund growth in the Company's indirect
consumer loan portfolio and for general Company purposes.
The Trust Preferred Securities were issued by CTBI Preferred
Capital Trust, a newly formed Delaware business trust wholly owned by
the Company. The Trust Preferred Securities were issued at $25 per
share and are quoted on The Nasdaq Stock Market's National Market
under the symbol "CTBIP". Morgan Keegan & Company and J.J.B.
Hilliard, W.L. Lyons, Inc. were the underwriters for the offering.
Loan Securitization
On June 5, 1997 the Bank securitized approximately $81 million of
indirect retail installment loans as part of its overall strategy to
originate, sell and service indirect loans. This loan portfolio was
sold to Community Trust Funding Corporation, a wholly-owned subsidiary
of the Company, which subsequently sold the loan portfolio to CTB Auto
Grantor Trust 1997-A and issued trust certificates to institutional
investors. The Bank remains the servicer of the loan portfolio and
will use the proceeds from the transaction to originate additional
indirect retail installment sales contracts, to fund expansion and for
other general Company purposes.
Income Statement Review
The Company's net income before extraordinary items for the three
months ended June 30, 1997 was $4.6 million or $0.45 per share as
compared to $4.7 million or $0.47 per share for the three months ended
June 30, 1996. Total earnings for the six months ended June 30, 1997
were $12.1 million or $1.20 per share, including a first quarter
extraordinary item of $3.0 million or $0.30 per share received in a
settlement with a former vendor. The following table sets forth on an
annualized basis the return on average assets and return on average
shareholders' equity for the three and six months ended June 30, 1997
and 1996:
Three months ended Six months ended
June 30 June 30
1997 1996 1997 1996
Return on average shareholders' equity
before extraordinary item 11.98% 13.98% 12.05% 13.24%
after extraordinary item 11.98% 13.98% 16.17% 13.24%
Return on average assets
before extraordinary item 0.99% 1.09% 0.99% 1.04%
after extraordinary item 0.99% 1.09% 1.33% 1.04%
The Company's net income for the second quarter of 1997 decreased
$181 thousand or 4% as compared to the same period in 1996. Earnings
per share decreased $0.02 per share or 4% for the three months ended
June 30, 1997, as compared to the second quarter of 1996. The
decrease in net income was the result of increases in noninterest
expense, including personnel, training, and advertising, which were
to a large extent offset by increases in net interest income and
higher noninterest income. Training and personnel expenses were the
result of planning and implementation of the consolidation of the
merged affiliates which occurred on January 1, 1997. Advertising
increases occurred so that the Company's name change would be well
recognized in our market areas. Noninterest income increased $79
thousand for the quarter as compared to the second quarter of 1996.
Noninterest expense for the quarter increased by $1.1 million as
compared to the same period in 1996.
Provision for loan losses for the three months ended June 30,
1997 was $1.7 million, nearly unchanged when compared to $1.5 million
for the same period in 1996. For the six months ended June 30, 1997
the provision was $3.4 million, a 9% increase over the same period in
1996 resulting primarily from a 9% growth in the Company's loan
portfolio over the same period.
Net Interest Income
Net interest income increased $0.9 million or 5% from $18.5
million for the second quarter of 1996 to $19.4 million for the second
quarter of 1997. Interest income and interest expense both increased
for the quarter ending June 30, 1997 as compared to the same period in
1996, with interest income increasing $2.7 million and interest
expense increasing $1.8 million.
The increase in net interest income for the three month period
was primarily due to increases in average earning assets due to loan
growth. The loan-to-deposit ratio at the end of June 1997 was 91.90%
as compared to 81.39% for the end of June 1996, after accounting for
the securitization of approximately $81 million in retail installment
contracts (see Loan Securitization).
The yield on interest earning assets increased 8 basis points for
the second quarter of 1997 as compared to the same period in 1996.
The cost of interest bearing funds increased 23 basis points for the
second quarter of 1997 as compared to the same period in 1996. As a
result the net interest margin decreased from 4.78% for the second
quarter of 1996 to 4.68% for the current quarter. For the six months
ended June 30, 1997 the yield on interest earning assets increased 10
basis points from 8.97% in 1996 to 9.07% in 1997. The cost of
interest bearing funds increased 9 basis point from 4.88% in 1996 to
4.98% in 1997. As a result, the net interest margin for the six
months ended June 30, 1997 increased 6 basis points to 4.76% over the
same period in 1996.
The increases in yield and interest margin are due in large part
from growth in the Company's loan portfolio, the highest yielding
asset. Loan portfolio growth was caused by internally generated
growth. The Company's average loans increased 3.5% from $1.16 billion
for the second quarter of 1996 to $1.34 billion for the second quarter
of 1997. Loans accounted for 85% of total interest income for the
second quarter of 1997 compared to 80% for the second quarter of 1996.
The following table summarizes the annualized net interest spread
and net interest margin for the three months ended June 30, 1997 and
1996.
Three Months Ended Six months ended
June 30 June 30
1997 1996 1997 1996
Yield on interest earning assets 9.05% 8.99% 9.07% 8.97%
Cost of interest bearing funds 5.05% 4.82% 4.98% 4.88%
Net interest spread 4.00% 4.17% 4.09% 4.09%
Net interest margin 4.68% 4.78% 4.76% 4.70%
Provision for Loan Losses
The analysis of the changes in the allowance for loan losses and
selected ratios is set forth below.
Six Months Ended
June 30
(in thousands) 1997 1996
Allowance balance January 1 $18,825 $16,082
Additions to allowance charged
against operations 3,449 3,174
Recoveries credited to allowance 1,844 1,218
Losses charged against allowance (4,955) (2,775)
Allowance balance at June 30 $19,163 $17,699
Allowance for loan losses to period-end loans 1.45% 1.46%
Average loans, net of unearned income $1,338,485 $1,159,339
Provision for loan losses to
average loans, annualized .52% .55%
Loan charge-offs, net of recoveries to
average loans, annualized .46% .27%
The Company increased its provision for loan losses as a result
of the growth in its loan portfolio, and to a lesser degree, due to
its increase in net charge-offs, measured in raw dollars. Net charge-
offs represent the amount of loans charged off less amounts recovered
on loans previously charged off. Net charge-offs as a percentage of
average loans outstanding increased 19 basis points to 0.46% for the
six months ended June 30, 1997 as compared to the same period in 1996.
The Company's non-performing loans (90 days past due and non-accrual)
were 1.21% and 1.47% of outstanding loans at December 31, 1996 and
June 30, 1997, respectively.
Any loans classified as loss, doubtful, substandard or special
mention that are not included in non-performing loans do not (1)
represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results,
liquidity or capital resources or (2) represent material credits about
which management has knowledge of any information which would cause
management to have serious doubts as to the ability of the borrowers
to comply with the loan repayment terms. The Company does not believe
there are currently any trends, events or uncertainties that are
reasonably likely to have a material effect on the volume of its non-
performing loans.
Noninterest Income
The Company's noninterest income increased 2% from $3.66 million
for the three months ended June 30, 1996 to $3.74 million for the
three months ended June 30, 1997. Deposit-related fees represent the
largest category of increase, while gains on the sale of loans
declined from the same period in 1996.
Noninterest Expense
The Company's noninterest expense increased by 8% from $13.6
million for the three months ended June 30, 1996 to $14.7 million for
the same period in 1997. Most major categories of noninterest expense
experienced increases for the quarter ended June 30, 1997 compared to
the same quarter in 1996. The categories showing larger increases
were salaries and employee benefits, occupancy and equipment, and data
processing. The increases are attributed to the cost of expansion as
the Company prepares to open additional branches over the next several
months and the temporary costs associated with consolidating the
processing functions of the seven commercial banks that merged into
the Bank on January 1, 1997.
Balance Sheet Review
Total assets increased from $1.82 billion at December 31, 1996 to
$1.84 billion at June 30, 1997, or an annualized rate of 5%. During
this time, loans increased from $1.29 billion to $1.31 billion, after
the securitization in June 1997 of approximately $81 million of the
Bank's retail installment contracts. The asset category which
declined most was securities available-for-sale; as these securities
mature, the liquidity is being used to fund the Company's loan
portfolio growth.
The Company's largest liability, deposits, declined from $1.48
billion as of December 31, 1996 to $1.46 billion as of June 30, 1997.
The decline in deposits was marginal in both interest bearing and
noninterest bearing as noninterest bearing deposits declined from
$200.2 million at December 31, 1996 to $190.5 million at June 30,
1997. The Company increased its long-term debt during the period from
$19.1 million as of December 31, 1996 to $53.5 million as of June 30,
1997, due to the issuance of $34.5 million in Trust Preferred
Securities in April 1997 (see Trust Preferred Offering). The
Company's advances from the Federal Home Loan Bank increased from
$110.9 million at December 31, 1996 to $124.6 million at June 30, 1997
as the Company used this liquidity as a source of funding for loan
growth.
Loans
Loans decreased from $1.35 billion as of March 31, 1997 to $1.32
billion as of June 30, 1997, primarily due to the securitization of
indirect retail installment contracts discussed earlier (see Loan
Securitization). The "Commercial- Other" loan category increased from
$250.0 million as of March 31, 1997 to $264.8 million as of June 30,
1997.
Non-accrual and 90 days past due loans amounted to 1.21% of total
loans outstanding as of December 31, 1996 and 1.47% of total loans
outstanding as of June 30, 1997. Non-accrual loans as a percentage
of total loans outstanding were 0.75% as of December 31, 1996 and at
0.98% at June 30, 1997. During the same period, loans 90 days or more
past due increased 5 basis points from 0.44% of total loans
outstanding to 0.49%. The allowance for loan losses increased from
1.44% of total loans outstanding as of December 31, 1996 to 1.45% as
of June 30, 1997. The allowance for loan losses as a percentage of
non-accrual loans and loans past due 90 days or more was 118% at
December 31, 1996 and 98% at June 30, 1997.
The following table summarizes the Company's loans that are non-
accrual or past due 90 days or more as of June 30, 1997 and December
31, 1996.
As a % of Accruing loans As a % of
Non-accrual loan balances past due 90 loan balances
loans by category days or more by category
(in thousands)
June 30, 1997
Commercial loans,
secured by real estate $ 4,962 1.83% $1,478 0.54%
Commercial loans, other 5,867 2.19 1,109 0.41
Consumer loans,
secured by real estate 1,783 0.36 2,667 0.54
Consumer loans, other 363 0.13 1,256 0.43
Total $12,975 0.98% $6,510 0.49%
December 31, 1996
Commercial loans,
secured by real estate $ 4,802 1.78% $1,075 0.40%
Commercial loans, other 3,217 1.27 1,424 0.60
Consumer loans,
secured by real estate 1,705 0.35 2,416 0.49
Consumer loans, other 432 0.14 885 0.28
Total $10,156 0.75% $5,800 0.44%
Allowance for loan losses
Management analyzes the adequacy of its allowance for loan losses
on a quarterly basis. The loan portfolio of each market region is
analyzed by each major loan category, with a review of the following
areas: (i) specific allocations based upon a review of selected loans
for loss potential; (ii) an allocation which estimates reserves based
upon the remaining pool of loans in each category derived from
historical net charge-off data, delinquency trends and other relevant
factors and (iii) an unallocated portion of the allowance which
provides for a margin of error in estimating the allocations described
above and provides for risks inherent in the portfolio which may not
be specifically addressed elsewhere.
Off-balance sheet risk is addressed by including letters of
credit in the Company's allowance adequacy analysis and through a
monthly review of all letters of credit outstanding. The Company's
loan review and problem loan analysis includes evaluation of
deteriorating letters of credit. Volume and trends in delinquencies
are monitored monthly by management, regional advisory boards and the
boards of directors of the respective banks.
Securities
The Company uses its securities held-to-maturity for production
of income and to manage cash flow needs through expected maturities.
The Company uses its securities available-for-sale for income and
balance sheet liquidity management. The book value of securities
available-for-sale decreased from $230.0 million as of December 31,
1996 to $188.0 million as of June 30, 1997. Securities held-to-
maturity declined from $137.7 million to $133.9 million during the
same period. Total securities as a percentage of total assets were
20.3% as of December 31, 1996 and 17.5% as of June 30, 1997.
Liquidity and Capital Resources
The Company's liquidity objectives are to ensure that funds are
available for the affiliate banks to meet deposit withdrawals and
credit demands without unduly penalizing profitability, and to ensure
that funding is available for the Company to meet ongoing cash needs
while maximizing profitability. The Company continues to identify
ways to provide for liquidity on both a current and long-term basis.
The subsidiary banks rely mainly on core deposits, certificates of
$100,000 or more, repayment of principal and interest on loans and
securities and federal funds sold and purchased to create long-term
liquidity. The subsidiary banks also rely on the sale of securities
under repurchase agreements, securities available-for-sale and Federal
Home Loan Bank borrowings.
Deposits decreased from $1.48 billion to $1.46 billion from
December 31, 1996 to June 30, 1997. Noninterest bearing deposits
decreased by $9.8 million while interest bearing deposits decreased by
$10.4 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 $187.9 million of securities valued at market
price that are designated as available-for-sale and available to meet
liquidity needs on a continuing basis. The Company also relies on
Federal Home Loan Bank advances for both liquidity and management of
its asset/liability position. These advances have sometimes been
matched against pools of residential mortgage loans which are not sold
in the secondary market, some of which have original maturities of ten
to fifteen years. Federal Home Loan Bank advances increased
from $111.0 million as of December 31, 1996 to $124.5
million as of June 30, 1997.
The Company generally relies upon net inflows of cash from
financing activities, supplemented by net inflows of cash from
operating activities, to provide cash for its investing activities.
As is typical of many financial institutions, significant financing
activities include deposit gathering, use of short-term borrowing
facilities such as federal funds purchased and securities sold under
repurchase agreements, and issuance of long-term debt. The Company
currently has a $17.5 million revolving line of credit available to
meet any future cash needs. (See long-term debt footnote to the
consolidated financial statements.) The Company's primary investing
activities include purchases of securities and loan originations.
In conjunction with maintaining a satisfactory level of
liquidity, management monitors the degree of interest rate risk
assumed on the balance sheet. The Company monitors its interest rate
risk by use of the static and dynamic gap models at the one year
interval. The static gap model monitors the difference in interest
rate sensitive assets and interest rate sensitive liabilities as a
percentage of total assets that mature within the specified time
frame. The dynamic gap model goes further in that it assumes that
interest rate sensitive assets and liabilities will be reinvested.
The Company uses the Sendero system to monitor its interest rate risk.
The Company desires an interest sensitivity gap of not more than
fifteen percent of total assets at the one year interval.
On a limited basis, the Company now uses interest rate swaps and
sales of options on securities as additional tools in managing
interest rate risk. Interest rate swaps involve an exchange of cash
flows based on the notional principal amount and agreed upon fixed and
variable interest rates. In this transaction, the Company has agreed
to pay a floating interest rate based on London Inter-Bank Offering
Rate (LIBOR) and receive a fixed interest rate in return. On options,
the Company has sold the right to a third party to purchase securities
the Company currently owns at a fixed price on a future date. The
Company had no options outstanding at June 30, 1997. The impact on
operations of interest rate swaps and options was not material during
the first six months of 1996 or 1997.
The Company's principal source of funds used to pay dividends to
shareholders and service long-term debt is the dividends it receives
from subsidiary banks. Various federal and state statutory
provisions, in addition to regulatory policies and directives, limit
the amount of dividends that subsidiary banks can pay without prior
regulatory approval. These restrictions have had no major impact on
the Company's dividend policy or its ability to service long-term
debt, nor is it anticipated that they will have any major impact in
the foreseeable future. In addition to the subsidiary banks' 1997
profits, approximately $4.5 million can be paid to the Company as
dividends without prior regulatory approval.
The primary source of capital for the Company is retained
earnings. The Company paid cash dividends of $0.36 per share for the
first half of 1997 and $0.32 per share for the first half of 1996.
Earnings per share for the same periods were $1.20 and $0.89,
respectively. The Company retained 70% of earnings for the first six
months of 1997.
Under guidelines issued by banking regulators, the Company and
its subsidiary banks are required to maintain a minimum Tier 1 risk-
based capital ratio of 4% and a minimum total risk-based ratio of 8%.
Risk-based capital ratios weight the relative risk factors of all
assets and consider the risk associated with off-balance sheet items.
The Company must also maintain a minimum Tier 1 leverage ratio of 4%
as of March 31, 1997. The Company's Tier 1 leverage, Tier 1 risk-
based and total risk-based ratios were 7.37%, 9.89% and 11.14%,
respectively as of June 30, 1997.
As of June 30, 1997, management is not aware of any current
recommendations by banking regulatory authorities which, if they were
to be implemented, would have, or would be reasonably likely to have,
a material adverse impact on the Company's liquidity, capital
resources, or operations.
Impact of Inflation and Changing Prices
The majority of the Company's assets and liabilities are monetary
in nature. Therefore, the Company differs greatly from most
commercial and industrial companies that have significant investment
in nonmonetary assets, such as fixed assets and inventories. However,
inflation does have an important impact on the growth of assets in the
banking industry and on the resulting need to increase equity capital
at higher than normal rates in order to maintain an appropriate equity
to assets ratio. Inflation also affects other expenses, which tend to
rise during periods of general inflation.
Management believes the most significant impact on financial and
operating results is the Company's ability to react to changes in
interest rates. Management seeks to maintain an essentially balanced
position between interest rate sensitive assets and liabilities in
order to protect against the effects of wide interest rate
fluctuations.
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 22,
1997. 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 7,058,912 19,975
Burlin Coleman 7,068,412 10,475
Nick A. Cooley 7,068,412 10,475
William A. Graham, Jr. 7,068,412 10,475
Jean R. Hale 7,068,412 10,475
Brandt T. Mullins 7,068,412 10,475
M. Lynn Parrish 7,068,412 10,475
Porter P. Welch 7,068,412 10,475
2)Ratification of Ernst & Young, L.L.P. as the Company's
independent certified public accountants for 1997.
The votes of the shareholders on this item was as follows:
In Favor Opposed Abstained
7,000,215 13,867 64,806
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
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, 1997
Richard M. Levy
Executive Vice President
Principal Financial Officer