SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 2002
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 incorporation or organization)
IRS Employer Identification No.
346 North Mayo Trail
Pikeville, Kentucky
(address of principal executive offices)
41501
(Zip Code)
(606) 432-1414
(Registrant's telephone number)
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 ü
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 - 11,341,183 shares outstanding at July 31, 2002
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, 2001 for further information in this regard.
Condensed Consolidated Balance Sheets
(dollars in thousands except share data)
June 30
2002
December 31
2001
(unaudited)
Assets:
Cash and due from banks
$
75,278
96,173
Federal funds sold
39,730
113,623
Securities available-for-sale at fair value
(amortized cost of $444,803 and $364,218, respectively)
453,563
367,233
Securities held-to-maturity at amortized cost
(fair value of $59,374 and $85,088, respectively)
57,496
83,324
Loans
1,672,084
1,711,072
Allowance for loan losses
(24,166)
(23,648)
Net loans
1,647,918
1,687,424
Premises and equipment, net
50,449
51,101
Goodwill (net of accumulated amortization of $16,824)
60,416
59,545
Core deposit intangible (net of accumulated amortization of $2,261 and $1,972, respectively)
4,699
4,989
Other assets
38,076
40,493
Total assets
2,427,625
2,503,905
Liabilities and shareholders' equity:
Deposits
Noninterest bearing
309,247
320,437
Interest bearing
1,771,915
1,835,335
Total deposits
2,081,162
2,155,772
Federal funds purchased and other short-term borrowings
62,136
82,584
Advances from Federal Home Loan Bank
7,541
9,525
Trust preferred securities
59,500
34,500
Long-term debt
1,150
13,444
Other liabilities
14,463
16,474
Total liabilities
2,225,952
2,312,299
Shareholders' equity:
Preferred stock, 300,000 shares authorized and unissued
Common stock, $5 par value, shares authorized 25,000,000;
shares outstanding 2002 - 11,371,761; 2001 - 11,425,770
56,859
57,129
Capital surplus
49,817
51,122
Retained earnings
89,303
81,395
Accumulated other comprehensive income, net of tax
5,694
1,960
Total shareholders' equity
201,673
191,606
Total liabilities and shareholders' equity
Condensed Consolidated Statements of Income
Three months ended
Six months ended
(in thousands except per share data)
Interest income:
Interest and fees on loans
30,744
38,917
62,462
79,485
Interest and dividends on securities
Taxable
5,612
3,379
11,079
6,876
Tax exempt
686
715
1,385
1,444
Other, including interest on fed funds sold
322
2,246
939
4,133
Total interest income
37,364
45,257
75,865
91,938
Interest expense:
Interest on deposits
12,766
23,090
26,932
46,725
Interest on federal funds purchased and other short-term borrowings
355
942
799
1,922
Interest on advances from Federal Home Loan Bank
111
168
238
350
Interest on long-term debt and trust preferred securities
1,349
1,065
2,676
2,136
Total interest expense
14,581
25,265
30,645
51,133
Net interest income
22,783
19,992
45,220
40,805
Provision for loan and lease losses
3,145
1,842
5,886
3,917
Net interest income after provision for loan losses
19,638
18,150
39,334
36,888
Noninterest income:
Service charges on deposit accounts
2,909
2,900
5,675
5,373
Gains on sales of loans, net
472
657
1,331
1,030
Trust income
576
683
1,156
1,283
Securities gains, net
0
637
Other
1,485
1,954
2,874
3,778
Total noninterest income
5,442
6,831
11,036
12,101
Noninterest expense:
Salaries and employee benefits
8,395
7,801
16,852
15,634
Occupancy, net
1,357
1,325
2,792
2,713
Equipment
904
970
1,740
1,927
Data processing
886
1,042
2,018
1,988
Stationery, printing, and office supplies
491
368
830
747
Taxes other than payroll, property, and income
611
539
1,223
1,096
FDIC insurance
101
104
200
196
3,419
4,100
7,052
8,279
Total noninterest expense
16,164
16,249
32,707
32,580
Income before income taxes
8,916
8,732
17,663
16,409
Income taxes
2,539
2,818
4,964
5,253
Net income
6,377
5,914
12,699
11,156
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period
4,355
(514)
3,734
1,538
Comprehensive income
10,732
5,400
16,433
12,694
Basic earnings per share
0.56
0.51
1.11
0.96
Diluted earnings per share
0.55
1.10
Average shares outstanding
11,398
11,558
11,411
11,613
Condensed Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
2,195
3,791
Change in net deferred tax asset, net
22
(2,420)
Provision for loan and other real estate losses
5,929
4,079
(637)
Gains on sale of mortgage loans held for sale
(1,331)
(1,030)
Gains (losses) on sale of assets, net
(6)
Proceeds from sale of mortgage loans held for sale
62,296
48,410
Accretion of securities premiums, net
(46)
(128)
Change in mortgage loans held for sale, net
(2,882)
(323)
Changes in:
(2,011)
5,469
492
512
Net cash provided by operating activities
77,385
68,873
Cash flows from investing activities:
Securities available-for-sale:
Proceeds from sales
20,800
Proceeds from prepayments and maturities
49,561
53,217
Purchase of securities
(130,114)
(68,712)
Securities held-to-maturity:
25,842
6,439
Change in loans, net
(27,079)
(115,536)
Purchase of premises, equipment, and other real estate
(1,253)
(2,654)
Proceeds from sale of premises and equipment
179
Proceeds from sale of other real estate
2,443
4,080
Assets acquired net of cash
(871)
(9,431)
Net cash used in investing activities
(81,471)
(111,618)
Cash flows from financing activities:
Change in deposits, net
(74,610)
140,002
Change in federal funds purchased and other short-term borrowings, net
(20,448)
10,964
Payments on advances from Federal Home Loan Bank
(1,984)
(1,872)
Issuance of trust preferred debentures
25,000
Payments on long-term debt
(12,294)
(95)
Issuance of common stock, net
1,036
1,202
Repurchase of common stock
(2,611)
(5,674)
Dividends paid
(4,791)
(4,637)
Net cash provided by (used in) financing activities
(90,702)
139,890
Net increase (decrease) in cash and cash equivalents
(94,788)
97,145
Cash and cash equivalents at beginning of year
209,796
169,715
Cash and cash equivalents at end of period
115,008
266,860
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 condensed consolidated financial position as of June 30, 2002, the results of operations for the three and six months ended June 30, 2002 and 2001, and the statements of cash flows for the six months ended June 30, 2002 and 2001. 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, 2001 has been derived from the audited Consolidated Financial Statements of Community Trust Bancorp, Inc. (the "Corporation"). The results of operations for the three and six months ended June 30, 2002 an d 2001 and the statements of cash flows for the six months ended June 30, 2002 and 2001 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, 2001, included in the Corporation'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 CTBI Preferred Capital Trust II. All significant intercompany transactions have been eliminated in consolidation.
On January 1, 2001, the Corporation adopted Statement of Financial Accounting Standards (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.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
Effective January 1, 2002, the Corporation adopted SFAS No. 142. Upon adoption, the Corporation ceased amortizing goodwill of approximately $59.5 million arising from previous purchase transactions. This will reduce amortization expense on an annual basis by $3.1 million and increase earnings on an annual basis by $2.3 million. Goodwill will continue to be evaluated for impairment in accordance with SFAS No. 142. Second quarter and year-to-date 2002 earnings were positively impacted by $0.05 per share and $0.10 per share, respectively, due to the implementation of SFAS No. 142. The following tables show on a pro forma basis the results for the quarter and six months ended June 30, 2001 had SFAS No. 142 been implemented on January 1, 2001. Amortization of core deposit intangible for the quarter and six months ended June 30, 2002 was $145 thousand and $289 thousand, respectively. Anticipated amortization for the next five years is $578 thousand annually.
Quarter Ended
June 30, 2001
Amortization
Reported Earnings
Goodwill
Pro Forma
Income before income tax expense
779
9,511
Income tax expense
205
3,023
574
6,488
0.05
Diluted earnings per common share
Six Months Ended
1,502
17,911
390
5,643
1,112
12,268
0.10
1.06
Note 2 - Business Combinations
On January 26, 2001, Community Trust Bank, National Association, the Corporation's lead bank, acquired the deposits, loans, and fixed assets of The Bank of Mt.Vernon, Inc. The offices acquired from The Bank of Mt. Vernon, Inc. are located in Mt. Vernon, Somerset, Richmond, and Berea, Kentucky. The offices acquired had deposits totaling $109.3 million and loans totaling $79 million. The purchase price paid by Community Trust Bank, N.A. for the offices was a 9.5% premium on the non-brokered deposits as of the closing date plus approximately $1.6 million for fixed assets, $12.6 million for investment securities, and $1.0 million for the cash held at the acquired branches of The Bank of Mt. Vernon, Inc.
During the third quarter 2001, the Corporation acquired 75.28% of the outstanding shares of Citizens National Bank and Trust of Hazard, Kentucky independently valued at that time at $15.1 million in lieu of a debt owed to the Corporation by a Citizens' shareholder. On January 3, 2002, the Corporation acquired the remaining 24.72% of Citizens National for $4.9 million. Citizens National had total assets of $138.5 million and equity capital of $19.4 million as of December 31, 2001. On March 15, 2002, Citizens National was merged into the Corporation's lead bank, Community Trust Bank, National Association.
Note 3 - 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 June 30, 2002 are summarized as follows:
Amortized Cost
Fair
Value
U.S. Treasury and Government agencies
37,575
38,021
States and political subdivisions
130,566
132,198
Mortgage-backed pass through certificates
237,641
244,448
Collateralized mortgage obligations
9,003
9,322
Other debt securities
1,001
1,050
Total debt securities
415,786
425,039
Equity securities
29,017
28,524
Total available-for-sale securities
444,803
The amortized cost and fair value of securities held-to-maturity as of June 30, 2002 are summarized as follows:
37,317
38,600
19,841
20,435
338
339
Total held-to-maturity securities
59,374
The amortized cost and fair value of securities available-for-sale as of December 31, 2001 are summarized as follows:
51,726
51,347
40,812
41,265
229,400
232,505
9,654
9,901
26,258
26,343
357,850
361,361
6,368
5,872
364,218
The amortized cost and fair value of securities held-to-maturity as of December 31, 2001 are summarized as follows:
57,499
58,645
23,739
24,341
2,086
2,102
85,088
Note 4 - Loans
Major classifications of loans are summarized as follows:
Commercial, secured by real estate
519,806
510,070
Commercial, other
273,839
280,222
Real estate - construction
87,755
98,441
Real estate mortgage
401,154
425,198
Consumer
380,431
390,311
Equipment lease financing
9,099
6,830
Total loans
Note 5 - Borrowings
Short-term debt consists of the following:
Parent Company:
$14 million revolving line of credit, 4.1875% interest due semiannually. Paid February 1, 2002.
8,000
Subsidiaries:
Federal funds purchased
13,315
16,864
Securities sold under agreements to repurchase
48,821
57,720
Total short-term debt
On April 29, 2002, the Corporation entered into a revolving note agreement for a line of credit in the amount of $12 million, all of which is currently available to meet any future cash needs. The agreement will mature on April 28, 2003.
Generally, federal funds purchased and securities sold under agreements to repurchase mature and reprice daily. The average rates paid for federal funds purchased and repurchase agreements on June 30, 2002 were 1.71% and 2.18%, respectively.
Long-term debt consists of the following:
Ten Year Senior Notes, 8.25% interest, due January 1, 2003; interest payable semiannually; redeemable in whole or in part at the option of the Corporation. Redeemed February 25, 2002.
12,230
Capital lease obligations, interest at lender's prime rate, payable in quarterly principal and interest installments of $53 thousand, adjusted for prime rate changes through September 2004, secured by real property. The Bank has a purchase option in September 2004 for $921 thousand or a renewal option for five years.
1,148
1,212
2
Total long-term debt
Note 6 - Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely the Junior Subordinated Debentures of the Corporation
The following table is a summary of the obligated trust preferred securities as of June 30, 2002.
Issuance
Trust
Issuance Date
Amount
Rate Amount
Rate Type
Maturity Date
Redemption Date
CTBI Preferred Capital Trust
3/31/97
$34,500
9.00%
Fixed
3/31/27
3/31/07
CTBI Preferred Capital Trust II
2/1/02
$25,000
8.25%
3/31/32
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 June 30, 2002, the Corporation owned one commercial bank and one trust company. Through its subsidiaries, the Corporation has seventy-four banking locations in Eastern and Central Kentucky and West Virginia. The banking locations are segmented into eighteen markets within four regions. The Corporation had total assets of $2.4 billion and total shareholders' equity of $201.7 million as of June 30, 2002. The Corporation's common stock is listed on NASDAQ under the symbol CTBI. Market participants are Ferris, Baker Watts Incorporated, Baltimore, Maryland; Herzog, Heine, Geduld, Inc., New York, New York; J.J.B. Hilliard, W.L. Lyons, Inc., Louisville, Kentucky; Keefe, Bruyette & Woods, Inc., New York, New York; Midwest Securities, Nashville, Tennessee; Robinson Salomon Smith Barney, Atlanta, Georgia; Sandler O'Neill & Partners, New York, New York; Sherwood S ecurities Corp., New York, New York; and Spear, Leeds & Kellogg, New York, New York.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements.
The Corporation believes the application of accounting policies and the estimates required therein are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, the Corporation has found its application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.
The Corporation's accounting policies are more fully described in note 1 to the condensed consolidated financial statements. The Corporation has identified the following critical accounting policies:
Loans are reported at the carrying value of unpaid principal reduced by unearned interest and an allowance for loan losses. Income is recorded on the level yield basis. Interest accrual is discontinued when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. Any loan greater than 90 days past due must be well secured and in the process of collection to continue accruing interest. Cash payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured. Loans are not reclassified as accruing until principal and interest payments are brought current and future payments appear reasonably certain.
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income.
The adequacy of the allowance is reviewed quarterly by management using a methodology that includes several key factors. The Corporation utilizes an internal risk grading system for commercial credits, and those larger commercial credits identified through this grading system as having weaknesses are individually reviewed for their ability and potential to repay their loans. The borrower's cash flow, adequacy of collateral held for the loan, and other options available to the Corporation including legal avenues are all evaluated. Based upon this individual credit evaluation, a specific allocation to the allowance may be made for the loan.
For other commercial loans that are not individually evaluated, an allowance allocation is determined by applying an eight-quarter moving average historical loss rate for this group of loans. Consumer installment and residential mortgage loans are not individually risk graded. Allowance allocations are provided for these pools of loans based upon an eight-quarter moving average historical loss rate for each of these categories of loans.
A portion of the allowance that is not allocated to any particular loan type is maintained in recognition of the inherent inability to precisely determine the loss potential in any particular loan or pool of loans. Among the factors used by management in determining the unallocated portion of the allowance are current economic conditions; trends in the Corporation's loan portfolio delinquency, losses and recoveries; level of underperforming and nonperforming loans; and concentrations of loans in any one industry. These factors are reviewed quarterly and adjusted as deemed appropriate by management. Management also considers the overall growth of the loan portfolio. Adjustment of these factors could result in an adjustment to results of operations.
The Corporation has not substantively changed any aspect of its overall approach in the determination of the allowance for loan losses, except converting to an eight quarter moving average for determining historical loss rates and for using specific allocations for homogenous pools of loans. There have been no material changes in assumptions or estimation techniques as compared to prior years that impacted the determination of the current year allowance.
Effect of Accounting Change
Effective January 1, 2002, the Corporation adopted Statement of Financial Accounting Standard ("SFAS") No. 142, Goodwill and Other Intangible Assets. Upon adoption, the Corporation ceased amortizing goodwill of approximately $59.5 million arising from previous purchase transactions. This will reduce amortization expense on an annual basis beginning in 2002 by $3.1 million and increase earnings on an annual basis beginning in 2002 by $2.3 million. Goodwill will continue to be evaluated for impairment in accordance with SFAS No. 142. The Corporation believes its past branch acquisitions meet the provisions of SFAS No. 142 which requires that goodwill not be amortized but be evaluated for impairment. Second quarter and year-to-date 2002 earnings were positively impacted by $0.05 per share and $0.10 per share, respectively, due to the implementation of SFAS No. 142. The following tables show on a pro forma basis the results for the quarter and six months ended June 30, 2001 had SFAS No . 142 been implemented on January 1, 2001.
Dividends
The following schedule shows the quarterly cash dividends paid for the past six quarters:
Pay Date
Record Date
April 1, 2001
March 15, 2001
20 cents per share
July 1, 2001
June 15, 2001
October 1, 2001
September 15, 2001
January 1, 2002
December 15, 2001
21 cents per share
April 1, 2002
March 15, 2002
July 1, 2002
June 15, 2002
Mergers and Acquisitions
Income Statement Review
The Corporation's net income for the three months ended June 30, 2002 was $6.4 million or $0.56 basic earnings per share. This exceeds by $0.05 per share the $5.9 million or $0.51 basic earnings per share earned during the same period in 2001. Earnings for the six months ended June 30, 2002 were $12.7 million or $1.11 basic earnings per share, a 15.6% increase from the $11.2 million or $0.96 basic earnings per share earned during the first six months of 2001. Second quarter and year-to-date 2002 earnings were positively impacted by $0.05 per share and $0.10 per share, respectively, due to the implementation of SFAS No. 142. The Corporation had average shares outstanding of 11.4 million and 11.6 million for the six months ended June 30, 2002 and 2001, 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 ended June 30, 2002 and 2001:
Return on average shareholders' equity
12.81
%
12.74
12.90
12.12
Return on average assets
1.04
0.97
1.03
0.94
Net Interest Income
Net interest income increased $2.8 million or 14% to $22.8 million for the second quarter of 2002 from $20.0 million for the second quarter of 2001. Interest income decreased $7.9 million or 17% for the quarter ending June 30, 2002 as compared to the same period in 2001, and interest expense decreased $10.7 million or 42%.
Our net interest margin increased 12.6% to 4.11% for the quarter ended June 30, 2002 from the 3.65% for the quarter ended June 30, 2001. During the period of rate reductions experienced in 2001, more of the Company's assets repriced than liabilities and resulted in a decline in our net interest margin during the first three quarters of 2001. As anticipated by management, beginning in the fourth quarter of 2001 and continuing in 2002, our net interest margin has improved as our liabilities mature and reprice at current market rates, reducing our cost of funds.
The following table summarizes the annualized net interest spread and net interest margin for the three and six months ended June 30, 2002 and 2001.
Yield on interest earning assets
6.69
8.14
6.76
8.44
Cost of interest bearing funds
3.01
5.16
3.15
5.32
Net interest spread
3.68
2.98
3.61
3.12
Net interest margin
4.11
3.65
4.06
3.80
Provision for Loan Losses
The analysis of the changes in the allowance for loan losses and selected ratios is set forth below:
Allowance balance at January 1
23,648
25,886
Additions to allowance charged against operations
Recoveries credited to allowance
2,024
2,073
Losses charged against allowance
(7,392)
(7,377)
Allowance balance at June 30
24,166
24,499
Allowance for loan losses to period-end loans
1.45
1.40
Average loans, net of unearned income
1,682,336
1,756,693
Provision for loan losses to average loans, annualized
0.71
0.45
Loan charge-offs net of recoveries, to average loans, annualized
0.64
0.61
Net charge-offs for the quarter ending June 30, 2002 were $2.5 million, a 28.6% decrease from the $3.5 million experienced during the second quarter of 2001. Our reserve for losses on loans and leases as a percentage of total loans was 1.45% on June 30, 2002 compared to 1.40% on June 30, 2001. The increase in the reserve for losses on loans is in recognition of the increase in nonperforming loans from prior year. Also, total loans include $51.0 million purchased during 2001 and recorded at their net realizable value at that time for which no reserve was required to be established.
Noninterest Income
Noninterest income for the quarter ended June 30, 2002 of $5.4 million was a 20.3% decrease from the $6.8 million earned during the same period in 2001. The decrease in noninterest income is primarily the result of a $637 thousand decrease in securities gains, a $185 thousand decrease in gains on sale of loans, and a $419 thousand decrease in other noninterest income which consists primarily of nonrecurring events related to other real estate owned and tax settlements. The decrease in gains on sale of loans is a result of the Company's decision to begin securitizing its secondary market residential real estate loans into mortgage-backed securities held in its investment portfolio.
Noninterest Expense
Noninterest expense for the second quarter 2002 remained relatively flat to second quarter 2001 at $16.2 million. The Company's efficiency ratio improvement to 57.4% from the 60.9% for the same period 2001 is reflective of our continuing focus on consolidation of operations and expense control.
Balance Sheet Review
The Corporation's assets decreased 3% from December 31, 2001 to June 30, 2002 from $2.5 billion to $2.4 billion. The Corporation's largest liability, deposits, decreased 3.5% to $2.1 billion from the $2.2 billion at December 31, 2001. Noninterest bearing deposits and interest bearing deposits both decreased at the same rate of 3.5%.
The loan portfolio remained relatively flat from December 31, 2001 to June 30, 2002 at $1.7 billion. The Company's balance sheet continues to be impacted by current economic conditions as is evidenced by the lack of internal loan growth resulting from the continuing weak commercial loan demand and the migration of portfolio residential real estate loans to long-term fixed rate secondary market loans.
Foreclosed properties on June 30, 2002 were $2.1 million, an increase from the $2.0 million reported at December 31, 2001. The slight increase is reflective of normal foreclosure and liquidation activities in the residential loan portfolio.
Nonperforming loans amounted to 1.97% of total loans outstanding as of June 30, 2002 and 1.96% of total loans outstanding as of December 31, 2001. During the second quarter of 2002, the Company reduced its nonperforming loans by successfully liquidating, with no loss of principal, the collateral of one large commercial real estate loan. Currently, $8.1 million, 24.6%, of the Company's nonperforming loans are two large commercial credits which are both collateralized by real estate. 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 increased from 1.38% of total loans outstanding as of December 31, 2001 to 1.45% as of June 30, 2002. The allowance for loan losses as a percentage of nonperforming loans was 70.3% at December 31, 2001 and 73.3% at June 30, 2002.
The following table summarizes the Corporation's nonperforming loans as of June 30, 2002 and December 31, 2001.
Nonaccrual loans
As a % of Loan Balances by Category
Restructured Loans
Accruing Loans Past Due 90 Days or More
Balances
June 30, 2002
Commercial loans-real estate secured
16,269
2.76
290
1,744
0.30
588,932
Commercial loans-other
3,877
1.37
0.00
856
282,938
Consumer loans-real estate secured
8,739
2.08
477
0.11
419,783
Consumer loans-other
89
0.02
613
0.16
Total
28,974
1.73
3,690
0.22
December 31, 2001
13,967
2.37
349
0.06
801
0.14
588,578
7,030
2.45
169
358
0.12
287,052
9,397
2.11
892
0.20
445,131
102
0.03
589
0.15
30,496
1.78
518
2,640
Allowance for Loan Losses
Management analyzes the adequacy of its allowance for loan losses on a quarterly basis. The loan portfolio of each market 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; and (iii) an unallocated portion of the allowance using delinquency trends and other relevant factors 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. Volume and trends in delinquencies are monitored monthly by management and the boards of directors of the Bank and the Corporation quarterly.
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 fair value of securities available-for-sale increased from $367 million as of December 31, 2001 to $454 million at June 30, 2002. Securities held-to-maturity declined from $83 million to $57 million during the same period. Total securities as a percentage of total assets were 18.0% as of December 31, 2001 and 21.1% as of June 30, 2002.
Obligated Trust Preferred Securities
On February 1, 2002, the Corporation issued an additional $25 million of trust preferred securities through an issuance by CTBI Preferred Capital Trust II, a wholly owned subsidiary grantor trust. The debentures, in the amount of $25.8 million, bear interest at an annual rate of 8.25%, have a redemption date of March 31, 2007, and mature on March 31, 2032. Proceeds of $8 million from this offering were used to pay off a revolving line of credit; $12.4 million was used for the redemption of senior notes on February 25, 2002.
Liquidity and Capital Resources
The Corporation's liquidity objectives are to ensure that funds are available for the subsidiary bank 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 bank, 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, an arrangement has been made with a correspondent bank for the purchase of federal funds on an unsecured basis, up to $20 million, if necessary, to meet the Corporation's liquidity needs.
The Corporation owns $454 million of securities valued at estimated fair value 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 $9.5 million at December 31, 2001 to $7.5 million at June 30, 2002.
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 $12 million revolving line of credit, all of which is currently available to meet any future cash needs. The Corporation's primary investing activities include purchases of securities and loan originations.
During the second quarter of 2002, the Corporation continued its stock repurchase program, acquiring 57,500 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 gap model and dynamic gap model 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 the remainder of 2002, approximately $13.9 million plus any remaining 2002 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 $0.42 per share during the first six months of 2002 and $0.40 per share during the first six months of 2001. Earnings per share for the same periods were $1.11 and $0.96, respectively. The Corporation retained 62% of earnings for the first six months of 2002.
Under guidelines issued by banking regulators, the Corporation and its subsidiary bank 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 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 7.91%, 10.97%, and 12.22%, respectively as of June 30, 2002.
As of June 30, 2002, 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 investme nts, 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; industry changes in information technology systems on which we are highly dependent; failure of acquisitions to produce revenue enhancements or cost savings at levels or within the time frames originally anticipated or unforeseen integration difficulties; 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 the 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
Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Corporation uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. Given an immediate, sustained 200 basis point increase to the yield curve used in the simulation model, it is estimated net interest income for the Corporation would decrease by 4.4 percent over one year and decrease by 6.58 percent over two years. A 200 basis point immediate, sustained decrease in the yield curve would increase net interest income by an estimated 2.83 percent over one year and increase by 6.06 percent over two years. For further discussion of the Corporation's market risk, see the Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Market Risk included in the Annual Report on Form 10-K for the year ended December 31, 2001.
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
None
Item 2.
Changes in Securities
Item 3.
Defaults Upon Senior Securities
Item 4.
Submission of Matters to a Vote of Security Holders
The Corporation's Annual Meeting of Shareholders was held on April 23, 2002. The following items were approved:
1) Election of the following members to the Corporation's Board of Directors for the ensuing year.
Nominee
In Favor
Withheld
Abstained
Charles J. Baird
8,853,603
45,936
3,505
Burlin Coleman
8,835,967
27,521
Nick A. Cooley
8,869,677
27,153
William A. Graham, Jr.
8,872,386
26,911
Jean R. Hale
8,467,316
431,715
M. Lynn Parrish
20,939
Ernest M. Rogers
8,863,109
30,344
2) Ratification of Deloitte & Touche, LLP as the Corporation's independent certified public accountants for 2002.
The votes of the shareholders on this item were as follows:
9,110,183
24,281
61,954
Item 5.
Other Information
Item 6.
Exhibits and Reports on Form 8-K:
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.1
Exhibit 99.2
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.
By:
Date: August 14, 2002
/s/ Jean R. Hale
Vice Chairman, President, and
Chief Executive Officer
/s/ Kevin J. Stumbo
Kevin J. Stumbo
Executive Vice President/Controller
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Community Trust Bancorp, Inc. (the "Corporation") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jean R. Hale, Vice Chairman, President and Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Corporation.
Vice Chairman, President and CEO
August 14, 2002
In connection with the quarterly report of Community Trust Bancorp, Inc. (the "Corporation") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin J. Stumbo, Executive Vice President/Controller of the Corporation, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.