Community Trust Bancorp - 10-Q quarterly report FY

WASHINGTON, D.C. 20549

FORM 10-Q

Commission file number 0-11129

(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.

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.

Common stock - 11,610,158 shares outstanding at April 30, 2001

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 accounting principles generally accepted in the United States of America 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, 2000 for further information in this regard.

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Income

Condensed Consolidated Statements of Cash Flows

Notes to Condensed Consolidated Financial Statements

Note 1 - Summary of Significant Accounting Policies

In the opinion of management, the unaudited Condensed Consolidated Financial Statements include all adjustments (which consist of normal recurring accruals) necessary, to present fairly the consolidated financial position as of March 31, 2001 and 2000, the results of operations for the three months ended March 31, 2001 and 2000 and the statements of cash flows for the three months ended March 31, 2001 and 2000. In accordance with accounting principles generally accepted in the United States of America for interim financial information, these statements do not include certain information and footnote disclosures required by accounting principles generally accepted in the United States of America for complete annual financial statements. Financial information as of December 31, 2000 has been derived from the audited Consolidated Financial Statements of Community Trust Bancorp, Inc. (the "Registrant" or "Corporation"). The results of operations for the three months ended March 31, 2001 and 2000 and statements of cash flows for the three months ended March 31, 2001 and 2000 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the Consolidated Financial Statements and footnotes thereto for the year ended December 31, 2000, included in the Registrant's Annual Report on Form 10-K.

Principles of Consolidation - The unaudited condensed consolidated financial statements include the accounts of the Corporation and its separate and distinct, wholly owned subsidiaries Community Trust Bank, National Association; Trust Company of Kentucky, National Association; CTBI Preferred Capital Trust; and Community Trust Funding Corporation. All significant intercompany transactions have been eliminated in consolidation.

On January 1, 2001, the Corporation adopted Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and Certain Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives, including those embedded in other contracts, be recognized as either assets or liabilities and that those financial instruments be measured at fair value. The accounting for changes in the fair value of derivatives depends on their intended use and designation. Management has reviewed the requirements of SFAS No. 133 and has determined that the Corporation has no freestanding or embedded derivatives. All contracts that contain provisions meeting the definition of a derivative also meet the requirements of, and have been designated as, normal purchases or sales. The Corporation's policy is to not use freestanding derivatives and to not enter into contracts with terms that cannot be designated as normal purchases or sales. This statement did not impact the Corporation's financial position or results of operation.

On January 26, 2001, Community Trust Bank, N.A. acquired certain deposits, loans, and fixed assets of The Bank of Mt.Vernon, Inc. The offices acquired had deposits totaling $109.3 million and loans totaling $79 million. The addition of banking offices in Mt. Vernon, Somerset, Richmond, and Berea, Kentucky represents an in-market acquisition and should provide the corresponding synergies normally associated with this type of acquisition. The acquisition is expected to be accretive to shareholders during 2001.

Note 2 - Securities

Securities are classified into held-to-maturity and available-for-sale categories. Held-to-maturity securities are those that the Corporation has the positive intent and ability to hold to maturity and are reported at amortized cost. Available-for-sale securities are those that the Corporation 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, 2001 are summarized as follows:

The amortized cost and fair value of securities held-to-maturity as of March 31, 2001 are summarized as follows:

The amortized cost and fair value of securities available-for-sale as of December 31, 2000 are summarized as follows:

The amortized cost and fair value of securities held-to-maturity as of December 31, 2000 are summarized as follows:

Note 3 - Loans

Major classifications of loans are summarized as follows:

Note 4 - Borrowings

Short-term debt consists of the following:

Generally, federal funds purchased and securities purchased under agreements to resale mature and reprice daily. The average rates paid for federal funds purchased and repurchase agreements as of March 31, 2001 were 5.49% and 5.18%, respectively.

Long-term debt consists of the following:

Item 2. Management's Discussion and Analysis of Financial Condition

and Results of Operations

Overview

Community Trust Bancorp, Inc. (the "Corporation") is a multi-bank holding company headquartered in Pikeville, Kentucky. At March 31, 2001, the Corporation owned one commercial bank and one trust company. Through its subsidiaries, the Corporation has over sixty-eight banking locations serving 295,000 households in Eastern and Central Kentucky and West Virginia. The Corporation had total assets of $2.43 billion and total shareholders' equity of $185.3 million as of March 31, 2001. The Corporation'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; Keefe, Bruyette & Woods, Inc., New York, New York; Sandler O'Neill & Partners, New York, New York; Sherwood Securities Corp., New York, New York; Spear, Leeds & Kellogg, New York, New York.

Dividends

Regular quarterly cash dividends were paid on (1) January 1, 2000 of 18 cents per share for shareholders of record on December 15, 1999, (2) April 1, 2000 of 18 cents per share for shareholders of record on March 15, 2000, (3) July 1, 2000 of 19 cents per share for shareholders of record on June 15, 2000, (4) October 1, 2000 of 19 cents per share for shareholders of record on September 15, 2000, (5) January 1, 2001 of 19 cents per share for shareholders of record on December 15, 2000, and (6) April 1, 2001 of 20 cents per share for shareholders of record on March 15, 2001.

Mergers and Acquisitions

On January 26, 2001, Community Trust Bank, N.A. acquired certain deposits, loans, and fixed assets of The Bank of Mt.Vernon, Inc. The offices acquired had deposits totaling $109.3 million and loans totaling $79 million. The addition of banking offices in Mt. Vernon, Somerset, Richmond, and Berea, Kentucky represents an in-market acquisition and should provide the corresponding synergies normally associated with this type of acquisition. The acquisition is expected to be accretive to shareholders during 2001.

Income Statement Review

The Corporation's net income for the three months ended March 31, 2001 was $5.242 million or $0.45 per share as compared to $5.119 million or $0.42 per share for the three months ended March 31, 2000. The Corporation had average shares outstanding of 11,668,180 and 12,137,700 for the three months

ended March 31, 2001 and March 31, 2000, respectively. The following table sets forth on an annualized basis the return on average assets and return on average shareholders' equity for the three-month periods ending March 31, 2001 and 2000:

The Corporation's net income for the first quarter of 2001 represents a 3 cents per share increase in earnings compared to the same period last year. The increase in earnings per share is primarily attributable to the reduction in common shares outstanding resulting from the Corporation's stock repurchase program.

Net Interest Income

Net interest income decreased $306 thousand or (1.5%) from $21.1 million for the first quarter of 2000 to $20.8 million for the first quarter of 2001. Interest income increased $4.71 million or 11% for the quarter ending March 31, 2001 as compared to the same period in 2000, while interest expense increased $5.01 million or 24%.

The net interest margin continues to be negatively impacted by the repricing of assets quicker than liabilities as interest rates have declined and the competitive pressures to retain core deposits continue. The net interest margin for March 31, 2001 was 3.96%, reflecting a decline of 49 basis points from the 4.45% of March 31, 2000. Some of the pressure on the net interest margin has been offset by a 133 basis point increase in average earning assets as a percentage of total assets which were 92.16% on March 31, 2001 compared to 90.83% at March 31, 2000.

The Corporation's loan portfolio, its highest yielding asset, continues to expand. The Corporation's loan portfolio increased 19.2% on an annualized basis from $1.69 billion at December 31, 2000 to $1.78 billion at March 31, 2001.

The following table summarizes the annualized net interest spread and net interest margin for the three months ended March 31, 2001 and 2000.

Provision for Loan Losses

The analysis of the changes in the allowance for loan losses and selected ratios is set forth below:

The Corporation experienced a $621,000 (26%) decrease in net charge-offs and a $375,000 (15%) decrease in loan loss provision expense in the first quarter of 2001 compared to the quarter ended March 31, 2000. The Corporation increased loans by $79 million with the Mt. Vernon acquisition for which it did not increase its allocation to the reserve for losses on loans.

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 18 basis points to 0.42% for the three months ended March 31, 2001 as compared to the same period in 2000. The Corporation's non-performing loans (90 days or more past due and non-accrual) were 1.52% and 1.38% of outstanding loans at December 31, 2000 and March 31, 2001, respectively. The increase in non-performing loans is primarily the result of one large commercial relationship for which a specific reserve has been established and resolution is anticipated in the near future.

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 Corporation 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 Corporation's noninterest income increased 13% from $4.65 million for the three months ended March 31, 2000 to $5.27 million for the three months ended March 31, 2001. The increase in noninterest income compared to the same period in 2000 was driven by an increase in mortgage activity, which resulted in a $240,000 increase in gain on sale of loans. The $132,000 increase in deposit related fees is a result of the acquired Mt. Vernon deposits.

Noninterest Expense

CTBI's noninterest expense for the three months ended March 31, 2001 experienced an increase of $483,000 or 3% from the same period in 2000. The increase in noninterest expense is primarily due to $260,000 in non-recurring expenses, including $130,000 of costs related to the Mt. Vernon acquisition and $130,000 of legal expenses in connection with the collection of a problem credit. All of the legal expenses associated with the problem credit have subsequently been recovered. Personnel expense increased $531,000, driven by a 39 person increase in staff associated with the acquisition. Goodwill amortization increased $90,000.

Cash Basis Income

These calculations were specifically formulated by the Corporation and may not be comparable to similarly titled measures reported by other companies.

Balance Sheet Review

Total asset size grew 7.6% to $2.43 billion at March 31, 2001 from $2.26 billion at December 31, 2000. The asset growth is primarily attributable to the purchase and acquisition of the assets and liabilities of The Bank of Mt. Vernon, Inc. Internal growth for the first quarter of 2001 was an annualized 12%. The Corporation's largest liability, deposits, increased 7.0% from $1.94 billion as of December 31, 2000 to $2.08 billion as of March 31, 2001. Noninterest bearing deposits increased from $255 million at December 31, 2000 to $266 million at March 31, 2001. Interest bearing deposits increased from $1.69 billion at December 31, 2000 to $1.81 billion at March 31, 2001.

Loans

Loans increased from $1.69 billion as of December 31, 2000 to $1.78 billion as of March 31, 2001, primarily due to the addition of $79 million in loans from the Mt. Vernon acquisition. The Corporation experienced growth in the commercial loan portfolio of $43.68 million and $27.31 million in the real estate mortgage loan portfolio. The category of commercial loans secured by real estate increased from $469.7 million as of December 31, 2000 to $498.1 million as of March 31, 2001, while other commercial loans increased from $303 million as of December 31, 2000 to $319 million as of March 31, 2001. The category of real estate mortgage loans increased from $435 million as of December 31, 2000 to $461 million as of March 31, 2001. The consumer portfolio also increased from $386.5 million to $397.6 million from December 31, 2000 to March 31, 2001.

Non-accrual and 90 days past due loans amounted to 1.52% of total loans outstanding as of December 31, 2000 and 1.38% of total loans outstanding as of March 31, 2001. Non-accrual loans as a percentage of total loans outstanding were 1.34% as of December 31, 2000 and at 1.22% at March 31, 2001. During the same period, loans 90 days or more past due decreased 2 basis points from 0.18% of total loans outstanding to 0.16%. The allowance for loan losses decreased from 1.53% of total loans outstanding as of December 31, 2000 to 1.47% as of March 31, 2001. Specific reserves are established for all large loans where a loss may occur; therefore, no significant losses are anticipated except for those loans with specific reserve allocations. The allowance for loan losses as a percentage of non-accrual loans and loans past due 90 days or more was 100.6% at December 31, 2000 and 106.6% at March 31, 2001.

Loans on non-accrual status decreased from $22.7 million at December 31, 2000 to $21.6 million at March 31, 2001, a decrease of $1.13 million. This decrease was substantially due to a $785 thousand decrease in residential mortgage loans on non-accrual and a $236 thousand decrease resulting from the payoff of one commercial loan.

The following table summarizes the Corporation's loans that are non-accrual or past due 90 days or more as of March 31, 2001 and December 31, 2000.

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 Corporation's allowance adequacy analysis and through a monthly review of all letters of credit outstanding. The Corporation'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 Corporation uses its securities held-to-maturity for production of income and to manage cash flow needs through expected maturities. The Corporation uses its securities available-for-sale for income and balance sheet liquidity management. The book value of securities available-for-sale increased from $237 million as of December 31, 2000 to $252 million as of March 31, 2001. Securities held-to-maturity declined from $49 million to $46 million during the same period. Total securities as a percentage of total assets were 12.6% as of December 31, 2000 and 12.3% as of March 31, 2001.

Liquidity and Capital Resources

The Corporation's liquidity objectives are to ensure that funds are available for the subsidiary banks to meet deposit withdrawals and credit demands without unduly penalizing profitability, and to ensure that funding is available for the Corporation to meet ongoing cash needs while maximizing profitability. The Corporation continues to identify ways to provide for liquidity on both a current and long-term basis. The subsidiary bank relies mainly on core deposits, certificates of deposits 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 bank also relies on the sale of securities under repurchase agreements, securities available-for-sale and Federal Home Loan Bank borrowings.

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 Corporation's liquidity needs.

The Corporation owns $252 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 Corporation also relies on Federal Home Loan Bank advances for both liquidity and management of its asset/liability position. Federal Home Loan Bank advances decreased from $13.3 million as of December 31, 2000 to $12.4 million as of March 31, 2001.

The Corporation 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 Corporation currently has a $14 million revolving line of credit; $8.5 million is currently available to meet any future cash needs. The Corporation's primary investing activities include purchases of securities and loan originations.

During the first quarter, the Corporation continued its stock repurchase program, acquiring 94,300 shares of the Corporation's stock. The Corporation's stock repurchase program continues to be accretive to shareholder value. The Corporation began a program of stock repurchase in December 1998 with the authorization to acquire up to 500,000 shares. The Corporation 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 Corporation 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 Corporation uses the Sendero system to monitor its interest rate risk. The Corporation desires an interest sensitivity gap of not more than fifteen percent of total assets at the one-year interval.

The Corporation's principal source of funds used to pay dividends to shareholders and service long-term debt is the dividends it receives from the subsidiary bank. Various federal 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 Corporation'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. During 2001, approximately $22.1 million plus any 2001 net profits can be paid by the Corporation's banking subsidiary without prior regulatory approval.

The primary source of capital for the Corporation is retained earnings. The Corporation paid cash dividends of $0.20 per share for the first three months of 2001 and $0.18 per share for the first three months of 2000. Earnings per share for the same periods were $0.45 and $0.42, respectively. The Corporation retained 56% of earnings for the first three months of 2001.

Under guidelines issued by banking regulators, the Corporation and its subsidiary bank is 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 Corporation must also maintain a minimum Tier 1 leverage ratio of 4%. The Corporation's Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios were 6.66%, 8.59%, and 9.84%, respectively as of March 31, 2001.

As of March 31, 2001, 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 Corporation's liquidity, capital resources, or operations.

Impact of Inflation and Changing Prices

The majority of the Corporation's assets and liabilities are monetary in nature. Therefore, the Corporation 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 Corporation'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.

FORWARD-LOOKING STATEMENTS

Certain of the statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The Corporation's actual results may differ materially from those included in the forward-looking statements. Forward-looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "intend," "estimate," "may increase," "may fluctuate," and similar expressions or future or conditional verbs such as "will," "should," "would," and "could." These forward-looking statements involve risks and uncertainties including, but not limited to, economic conditions, portfolio growth, the credit performance of the portfolios, including bankruptcies, and seasonal factors; changes in general economic conditions including the performance of financial markets, the performance of coal and coal related industries, prevailing inflation and interest rates, realized gains from sales of investments, gains from asset sales, and losses on commercial lending activities; results of various investment activities; the effects of competitors' pricing policies, of changes in laws and regulations on competition and of demographic changes on target market populations' savings and financial planning needs; the adoption by the Corporation of an FFIEC policy that provides guidance on the reporting of delinquent consumer loans and the timing of associated credit charge-offs for financial institution subsidiaries; and the resolution of legal proceedings and related matters. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the Office of the Comptroller of Currency, the Federal Deposit Insurance Corporation, and state regulators, whose policies and regulations could affect the Corporation's results. These statements are representative only on the date hereof, and the Corporation undertakes no obligation to update any forward-looking statements made.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Corporation currently does not engage in any derivative or hedging activity. Refer to the Corporation's 2000 Form 10-K for analysis of the interest rate sensitivity.

PART II - OTHER INFORMATION

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.