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, 2000
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.)
346 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 - 11,791,496 shares outstanding at July 31, 2000
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED 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, 1999 for further information in this regard.
Index to consolidated financial statements:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
2
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30 December 31
(IN THOUSANDS EXCEPT SHARE DATA) 2000 1999
- --------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 80,050 $ 99,383
Interest bearing deposits in
other financial institutions 575 390
Federal funds sold 8,350 7,684
Securities available-for-sale 243,059 270,281
Securities held-to-maturity (fair value of $52,085 and
$58,762, respectively) 54,028 60,307
Loans 1,676,272 1,619,480
Allowance for loan losses (25,706) (25,102)
---------- ----------
Net loans 1,650,566 1,594,378
---------- ----------
Premises and equipment, net 50,272 52,052
Excess of cost over net assets acquired (net of
accumulated amortization of
$12,965 and $12,187, respectively) 57,876 59,433
Other assets 31,690 32,182
---------- ----------
TOTAL ASSETS $2,176,466 $2,176,090
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest bearing $ 249,659 $ 261,880
Interest bearing 1,620,152 1,615,454
---------- ----------
Total deposits 1,869,811 1,877,334
Federal funds purchased and other
short-term borrowings 45,963 45,626
Other liabilities 16,182 10,113
Advances from Federal Home Loan Bank 15,185 16,924
Long-term debt 53,578 53,674
---------- ----------
TOTAL LIABILITIES 2,000,719 2,003,671
SHAREHOLDERS' EQUITY:
Preferred stock, 300,000 shares authorized and unissued
Common stock, $5 par value, shares authorized 25,000,000;
shares issued 2000 - 11,943,702; 1999 - 12,147,520 59,656 55,216
Capital surplus 57,473 45,306
Retained earnings 61,577 75,021
Accumulated other comprehensive income (2,959) (3,124)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 175,747 172,419
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,176,466 $2,176,090
========== ==========
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months ended Six months ended
June 30 June 30
(IN THOUSANDS EXCEPT PER SHARE DATA) 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $38,429 $34,419 $75,413 $68,068
Interest and dividends on securities
Taxable 3,782 4,536 7,862 9,222
Tax exempt 695 757 1,387 1,490
Interest on federal funds sold 250 985 468 2,328
Interest on deposits in other financial
institutions 3 2 4 4
------- ------- ------- -------
TOTAL INTEREST INCOME 43,159 40,699 85,134 81,112
------- ------- ------- -------
INTEREST EXPENSE:
Interest on deposits 19,909 17,850 38,695 35,879
Interest on federal funds purchased and
other short-term borrowings 630 473 1,290 957
Interest on advances from Federal Home Loan Bank 223 274 458 671
Interest on long-term debt 1,173 1,128 2,348 2,352
------- ------- ------- -------
TOTAL INTEREST EXPENSE 21,935 19,725 42,791 39,859
------- ------- ------- -------
Net interest income 21,224 20,974 42,343 41,253
Provision for loan losses 1,700 2,671 4,150 4,705
------- ------- ------- -------
Net interest income after provision for loan losses 19,524 18,303 38,193 36,548
------- ------- ------- -------
NONINTEREST INCOME:
Service charges on deposit accounts 2,432 2,431 4,773 4,586
Gains on sale of loans, net 132 384 265 1,088
Trust income 568 648 1,132 1,163
Other 1,484 1,707 3,098 3,328
------- ------- ------- -------
TOTAL NONINTEREST INCOME 4,616 5,170 9,268 10,165
------- ------- ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits 7,391 7,193 15,145 14,712
Occupancy, net 1,315 1,250 2,678 2,426
Equipment 1,091 1,176 2,151 2,439
Data processing 921 811 1,842 1,665
Stationery, printing and office supplies 204 407 613 772
Taxes other than payroll, property and income 545 356 988 797
FDIC insurance 95 25 190 147
Other 3,948 4,432 7,752 8,519
------- ------- ------- -------
TOTAL NONINTEREST EXPENSE 15,510 15,650 31,359 31,477
------- ------- ------- -------
Income before income taxes 8,630 7,823 16,102 15,236
Income tax expense 2,821 2,391 5,174 4,704
------- ------- ------- -------
Net Income 5,809 5,432 10,928 10,532
------- ------- ------- -------
Other comprehensive income, net of tax:
Unrealized holding gains/(losses) arising
during period 428 (470) 165 (1,157)
------- ------- ------- -------
Comprehensive income $ 6,237 $ 4,962 $11,093 $ 9,375
======= ======= ======= =======
Basic earnings per share 0.48(1) 0.45(1) 0.90(1) 0.86(1)
Diluted earnings per share 0.48(1) 0.44(1) 0.90(1) 0.86(1)
Average shares outstanding 12,124(1) 12,174(1) 12,131(1) 12,174(1)
(1) Per share data and average shares outstanding have been restated to reflect
the 10% stock dividends issued on April 15, 1999 and April 15, 2000.
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
June 30
(IN THOUSANDS) 2000 1999
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,928 $ 10,532
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,598 3,862
Provision for loan and other real estate losses 4,217 4,733
Gain on sale of loans, net (265) (1,088)
(Gain)/loss on sale of assets 201 1
Net amortization of securities premiums 158 246
Net change in loans held for sale 340 1,465
Changes in:
Other assets 6,070 5,000
Other liabilities 667 3,884
-------- --------
Net cash provided by operating activities 25,914 28,635
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Sale/call of securities available-for-sale 68 1,278
Maturity of securities available-for-sale 19,500 47,242
Maturity of securities held-to-maturity 3,153 3,982
Principal payments on mortgage-backed securities 20,613 7,366
Purchase of:
Securities available-for-sale (7,677) (50,866)
Securities held-to-maturity (390) 0
Mortgage-backed securities (1,943) (10)
Net change in loans (61,683) (62,735)
Net change in premises and equipment (145) (855)
Other 894 0
-------- --------
Net cash used in investing activities (27,610) (54,598)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits (7,523) (42,357)
Net change in federal funds purchased and
other short-term borrowings 337 (2,981)
Advances from Federal Home Loan Bank 89 0
Repayments of advances from Federal Home Loan Bank (1,829) (32,728)
Payments on long-term debt (96) (99)
Payments for redemption of common stock (3,239) (244)
Dividends paid (4,525) (6,197)
-------- --------
Net cash used in by financing activities (16,786) (84,606)
-------- --------
Net decrease in cash and cash equivalents (18,482) (110,569)
Cash and cash equivalents at beginning of year 107,457 233,133
-------- --------
Cash and cash equivalents at end of period $ 88,975 $122,564
======== ========
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED 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 accounting
principles generally accepted in the United States of America 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.
Note 2 - Securities
Securities are classified into held-to-maturity and available-for-sale
categories. Held-to-maturity securities are those that the Company has the
positive intent and ability to hold to maturity and are reported at amortized
cost. Available-for-sale securities are those that 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, 2000 are summarized as follows:
Amortized Fair
(In thousands) Cost Value
- -------------- -------- --------
U.S. Treasury and government agencies $ 33,910 $ 33,736
States and political subdivisions 31,035 29,849
Mortgage-backed pass through
certificates 119,805 116,884
Collateralized mortgage obligations 35,500 35,077
Other debt securities 2,089 2,027
-------- --------
Total debt securities 222,339 217,573
Equity securities 25,688 25,486
-------- --------
Total Securities $248,027 $243,059
======== ========
The amortized cost and fair value of securities held-to-maturity as of June
30, 2000 are summarized as follows:
Amortized Fair
(In thousands) Cost Value
- -------------- ------- -------
U.S. Treasury and government agencies $11,499 $ 9,463
States and political subdivisions 30,305 30,557
Mortgage-backed pass through
certificates 8,826 8,710
Collateralized mortgage obligations 3,398 3,355
------- -------
Total Securities $54,028 $52,085
======= =======
6
Note 3 - Loans
Major classifications of loans are summarized as follows:
June 30 December 31
(In thousands) 2000 1999
- -------------- ---------- ----------
Commercial, secured by real estate $ 446,641 $ 406,330
Commercial, other 310,417 293,659
Real Estate Construction 94,654 98,990
Real Estate Mortgage 417,095 397,168
Consumer 400,276 415,935
Equipment Lease Financing 7,189 7,398
---------- ----------
$1,676,272 $1,619,480
========== ==========
Note 4 - Long-Term Debt
Long-Term Debt consists of the following:
June 30 December 31
(In thousands) 2000 1999
- -------------- ------- -------
Trust Preferred Securities* $34,500 $34,500
Senior Notes 12,230 12,230
Revolving Bank Note 5,500 5,500
Other 1,348 1,444
------- -------
$53,578 $53,674
======= =======
Refer to the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission for the year ended December 31, 1999 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 Company 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
Company. The Subordinated Debentures will mature on March 31, 2027, and are
unsecured obligations of the Company. The Subordinated Debentures are
irrevocably and unconditionally guaranteed by the Company 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.
7
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, 2000 the Company owned
one commercial bank, one savings bank and one trust company. Through its
affiliates, the Company has over sixty-five banking locations serving 85,000
households in Eastern and Central Kentucky and in West Virginia. The Company had
total assets of $2.18 billion and total shareholders' equity of $176 million as
of June 30, 2000. 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.
DIVIDENDS
On January 25, 2000, the Company's Board of Directors approved a 10% stock
dividend. The stock dividend was paid on April 15, 2000, to shareholders of
record on March 20, 2000. On April 15, 1999, there was a 10% stock dividend paid
to shareholders of record on March 20, 1999. All per share data has been
restated to reflect these stock dividends.
Regular quarterly cash dividends were paid on (1) April 1, 1999 of 17 cents per
share for shareholders of record on March 15, 1999, (2) July 1, 1999 of 18 cents
per share for shareholders of record on June 15, 1999, (3) October 1, 1999 of 18
cents per share for shareholders of record on September 15, 1999, (4) January 1,
2000 of 18 cents per share for shareholders of record on December 15, 1999, (5)
April 1, 2000 of 18 cents per share for shareholders of record on March 15, 2000
and (6) 19 cents per share for shareholders of record on June 15, 2000.
INCOME STATEMENT REVIEW
The Company's net income for the three months ended June 30, 2000 was $5.8
million or $0.48 per share as compared to $5.4 million or $0.45 per share for
the three months ended June 30, 1999. Net income for the six months ended June
30, 2000 was $10.9 million or $0.90 per share as compared to $10.5 million or
$0.86 per share for the six months ended June 30, 1999. The Company had average
shares outstanding of 12,131,000 and 12,174,000 for the six months ended June
30, 2000 and June 30, 1999, respectively. 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 month periods ending June 30, 2000
and 1999:
Three months ended Six months ended
June 30 June 30
2000 1999 2000 1999
----- ----- ----- -----
Return on average shareholders' equity 13.20% 12.96% 12.52% 12.66%
Return on average assets 1.08% 0.99% 1.02% 0.97%
The Company's net income for the second quarter of 2000 increased $377
thousand or 6.9% as compared to the same period in 1999. Earnings per share
increased $0.03 per share or 6.7% for the three months ended June 30, 2000,
as compared to the second quarter of 1999. The increase in net income was the
result of a decrease in provision for loan losses expense of $971 thousand
(36.4%) partially offset by a decrease in noninterest income of $554 thousand
(10.7%). A moderate increase in net interest income (1.2%) and a relatively
flat noninterest expense (LESS THAN 1%) also positively impacted the second
quarter 2000 net income.
8
NET INTEREST INCOME
Net interest income increased $250 thousand or 1.2% from $21.0 million for
the second quarter of 1999 to $21.2 million for the second quarter of 2000.
Interest income increased $2.5 million or 6.0% for the quarter ending June 30,
2000 as compared to the same period in 1999, while interest expense increased
$2.21 million or (11.2%).
The increase in both interest income and interest expense can be attributed
to increases in interest rates experienced since June 30, 1999. The yield on
interest earning assets increased 56 basis points for the second quarter of 2000
as compared to the same period in 1999. The cost of interest bearing funds also
increased, by 58 basis points, for the second quarter of 2000 as compared to the
same period in 1999.
The Company's loan portfolio, its highest yielding asset, continues to
expand through internally generated growth. The Company's loan portfolio
increased 7.0% on an annualized basis from $1.62 billion at December 31, 1999 to
$1.68 billion at June 30, 2000.
The following table summarizes the annualized net interest spread and net
interest margin for the three and six months ended June 30, 2000 and 1999.
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
---- ---- ---- ----
Yield on interest earning assets 8.90% 8.34% 8.79% 8.34%
Cost of interest bearing funds 5.10% 4.52% 4.98% 4.58%
---- ---- ---- ----
Net interest spread 3.80% 3.82% 3.81% 3.76%
---- ---- ---- ----
Net interest margin 4.45% 4.37% 4.45% 4.32%
==== ==== ==== ====
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) 2000 1999
Allowance balance January 1 $ 25,102 $ 26,089
Additions to allowance charged against operations 4,150 4,705
Recoveries credited to allowance 3,071 3,102
Losses charged against allowance (6,617) (8,409)
---------- ----------
Allowance balance at June 30 $ 25,706 $ 25,487
========== ==========
Allowance for loan losses to period-end loans 1.53% 1.64%
Average loans, net of unearned income $1,641,606 $1,517,592
Provision for loan losses to
average loans, annualized 0.51% 0.63%
Loan charge-offs net of recoveries, to
average loans, annualized 0.43% 0.71%
The Company experienced a $336,000 (23.1%) decline in net charge-offs and a
$971,000 (36.4%) decrease in loan loss provision expense in the second quarter
of 2000 compared to the quarter ended June 30, 1999. Despite this decrease in
loan loss provision, the Company was able to maintain its policy of funding 100%
of its loan losses and funding new loan growth at the rate of 1.5% into our
allowance for loan losses.
Net charge-offs represent the amount of loans charged off less the amounts
recovered on loans previously charged off. Net charge-offs as a percentage of
average loans outstanding decreased 28 basis points to 0.43% for the six months
ended June 30, 2000 as compared to the same period in 1999. The Company's
non-performing loans (90
9
days or more past due and non-accrual) were 1.12% and 1.43% of outstanding loans
at December 31, 1999 and June 30, 2000, respectively.
Any loans classified as loss, doubtful, substandard or special mention that
are not included in non-performing loans do not (1) represent or result from
trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity or capital resources or (2) represent
material credits about which management has knowledge of any information which
would cause management to have serious doubts as to the ability of the borrowers
to comply with the loan repayment terms. The Company does not believe there are
currently any trends, events or uncertainties that are reasonably likely to have
a material effect on the volume of its non-performing loans.
NONINTEREST INCOME
The Company's noninterest income decreased 10.7% from $5.17 million for the
three months ended June 30, 1999 to $4.62 million for the three months ended
June 30, 2000. The decline in noninterest income compared to the same period in
1999 was driven by a $313,000 decline in loan related noninterest income
including gain on sale of loans, loan fees and insurance commissions. This is
primarily due to the decline in mortgage loan sales and consumer lending
activity that accompanies a rising interest rate environment and because the
Company has strengthened the underwriting standards of its consumer loan
portfolio. The changes in underwriting standards have resulted in a decrease in
the volume of new loans booked.
NONINTEREST EXPENSE
CTBI's noninterest expense for the three months ended June 30, 2000
experienced a modest decrease of $140,000 or 0.89% from the same period in 1999.
CASH BASIS INCOME
Three Months Ended
June 30, 2000
-----------------------------------------------
Amortization
------------
Reported Core Deposit "Cash"
Earnings Goodwill Intangible Earnings
-------- -------- ---------- --------
Income before income tax expense $8,630 $ 634 $ 145 $9,409
Income tax expense 2,821 205 51 3,077
Net income $5,809 $ 429 $ 94 $6,332
Basic earnings per common share $ 0.48 $ 0.04 $ 0.01 $ 0.53
Diluted earnings per common share $ 0.48 $ 0.04 $ 0.01 $ 0.53
Six Months Ended
June 30, 2000
-----------------------------------------------
Amortization
------------
Reported Core Deposit "Cash"
Earnings Goodwill Intangible Earnings
-------- -------- ---------- --------
Income before income tax expense $16,102 $ 1,268 $ 290 $17,660
Income tax expense 5,174 410 102 5,686
Net income $10,928 $ 858 $ 188 $11,974
Basic earnings per common share $ 0.90 $ 0.07 $ 0.02 $ 0.99
Diluted earnings per common share $ 0.90 $ 0.07 $ 0.02 $ 0.99
10
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
dividends payable April 15, 1999 and April 15, 2000.
BALANCE SHEET REVIEW
Total asset size was $2.18 billion at both June 30, 2000 and December
31, 1999. The Company's largest liability, deposits, decreased from $1.88
billion as of December 31, 1999 to $1.87 billion as of June 30, 2000.
Noninterest bearing deposits declined from $261.9 million at December 31,
1999 to $249.7 million at June 30, 2000. Interest bearing deposits increased
from $1,615.5 million at December 31, 1999 to $1,620.2 million at June 30,
2000. The lack in asset growth is attributable to the decline in deposit
balances that necessitated funding new loans by a reduction in Cash and due
from banks and proceeds from investment maturities. As a result, while
Securities decreased $33.5 million or 20.4% and Cash and due froms decreased
$19.3 million or 39.1%, loans increased $56.8 million or 7.0% (all
percentages provided on an annualized basis). This change in asset mix has
increased loans as a percentage of earning assets to 84.6% at June 30, 2000
from 82.7% at December 31, 1999.
LOANS
Loans increased from $1.62 billion as of December 31, 1999 to $1.68 billion
as of June 30, 2000, primarily due to the growth of $57.1 million in the
Company's commercial loan portfolio and $19.9 million in the Company's real
estate mortgage loan portfolio. The category of commercial loans secured by real
estate increased from $406.3 million as of December 31, 1999 to $446.6 million
as of June 30, 2000 while other commercial loans increased from $293.7 million
as of December 31, 1999 to $310.4 million as of June 30, 2000. The category of
real estate mortgage loans increased from $397.2 million as of December 31, 1999
to $417.1 million as of June 30, 2000. These increases were partially offset by
a decrease in consumer loans of $15.7 million. This is primarily due to the
decline in consumer lending activity that accompanies a rising interest rate
environment and because the Company has strengthened the underwriting standards
of its consumer loan portfolio. The changes in underwriting standards have
resulted in a decrease in the volume of new loans booked.
Non-accrual and 90 days past due loans amounted to 1.12% of total loans
outstanding as of December 31, 1999 and 1.43% of total loans outstanding as of
June 30, 2000. Non-accrual loans as a percentage of total loans outstanding were
0.92% as of December 31, 1999 and at 1.12% at June 30, 2000. During the same
period, loans 90 days or more past due increased 11 basis points from 0.20% of
total loans outstanding to 0.31%. The allowance for loan losses decreased from
1.55% of total loans outstanding as of December 31, 1999 to 1.53% as of June 30,
2000. The allowance for loan losses as a percentage of non-accrual loans and
loans past due 90 days or more was 138.7% at December 31, 1999 and 107.5% at
June 30, 2000.
Loans on non-accrual status increased from $14.8 million at December 31,
1999 to $18.8 million at June 30, 2000, an increase of $4.0 million. This
increase was substantially due to the additions of two secured commercial loans
to the category of non-accrual loans totaling $4.6 million. Both businesses
continue to operate. Their owners are actively pursuing the sale of both
businesses. The Company does not anticipate a material loss from these two
loans.
The following table summarizes the Company's loans that are non-accrual or
past due 90 days or more as of June 30, 2000 and December 31, 1999.
11
As a % of Accruing loans As a % of
Non-accrual loan balances past due 90 loan balances
(In thousands) loans by category days or more by category
JUNE 30, 2000
Commercial loans,
secured by real estate $ 7,580 1.44% $2,681 0.51%
Commercial loans, other 6,206 1.95 91 0.03
Consumer loans
secured by real estate 4,750 1.10 1,448 0.34
Consumer loans, other 253 0.06 898 0.22
------- ------ ------ -----
TOTAL $18,789 1.12% $5,118 0.31%
======= ==== ====== ====
DECEMBER 31, 1999
Commercial loans,
secured by real estate $ 5,887 1.21% $ 271 0.06%
Commercial loans, other 3,518 1.17 546 0.18
Consumer loans,
secured by real estate 5,098 1.23 1,305 0.31
Consumer loans, other 358 0.09 1,115 0.27
------- ----- ------ -----
TOTAL $14,861 0.92% $3,237 0.20%
======= ==== ====== ====
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 $270.3 million as
of December 31, 1999 to $243.1 million as of June 30, 2000. Securities
held-to-maturity declined from $60.3 million to $54.0 million during the same
period. Total securities as a percentage of total assets were 15.2% as of
December 31, 1999 and 13.7% as of June 30, 2000.
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.
12
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 periods of interest rate
volatility, these deposit balances have 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 $243.1 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 decreased from $16.9
million as of December 31, 1999 to $15.2 million as of June 30, 2000.
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 $21.0 million revolving line of credit, $15.5
million 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. The Company began a program of stock repurchase in December
1998 with the authorization to acquire up to 500,000 shares. Through this
program during the first six months of 2000 the Company acquired 235,750
shares of stock at an average price of $15.19. The total shares purchased
through June 30, 2000 during this stock repurchase program have been 332,750
shares. The Company issued a press release in July 2000 announcing its
intention to repurchase up to an additional 1,000,000 shares.
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 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 swaps or options outstanding at June 30,
2000.
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' 2000
profits, approximately $27.4 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 $0.37 per share for the first six months of 2000
and $0.35 per
13
share for the first six months of 1999. Earnings per share for the same periods
were $0.90 and $0.86, respectively. The Company retained 59% of earnings for the
first six months of 2000.
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%. The Company's Tier 1 leverage, Tier 1
risk-based and total risk-based ratios were 7.34%, 8.98% and 10.23%,
respectively as of June 30, 2000.
As of June 30, 2000, 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.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company currently does not engage in any derivative or hedging
activity. Refer to the Company's 1999 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
of Security Holders
The Company's Annual Meeting of Shareholders was held on April 25, 2000. 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 7,335,170 55,965
Burlin Coleman 7,373,970 17,166
Nick A. Cooley 7,367,708 23,427
William A. Graham, Jr 7,376,245 14,890
Jean R. Hale 7,374,982 16,154
M. Lynn Parrish 7,375,930 15,205
Ernest M. Rogers 7,368,441 22,694
Steven L. Lawson 7,376,544 14,591
2) Ratification of Deloitte & Touche, LLP as the Company's independent
certified public accountants for 2000.
The votes of the shareholders on this item were as follows:
In Favor Opposed Abstained
-------- ------- ---------
7,415,742 20,889 78,792
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 2000, the Company filed a Current
Report on Form 8-K (filing date April 28, 2000) with respect to a
change in the Registrant's Certifying Accountant.
During the second quarter of 2000, the Company filed a Current
Report on Form 8-K/A (filing date May 16, 2000) with respect to a
change in the Registrant's Certifying Accountant.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company 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, 2000 /s/ Jean R. Hale
-----------------------------
Jean R. Hale
President and
Principal Executive Officer
/s/ Kevin Stumbo
-----------------------------
Kevin Stumbo
Chief Accounting Officer
16