22 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 September 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_________to_________ Commission file number 0-11129 COMMUNITY TRUST BANCORP, INC. (Exact name of registrant as specified in its charter) Kentucky 61-0979818 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 208 North Mayo Trail Pikeville, Kentucky 41501 (address of principal executive offices) (Zip Code) Registrant's telephone number (606) 432-1414 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common stock - 10,062,597 shares outstanding at October 31, 1998
PART I - FINANCIAL INFORMATION Item 1. Financial Statements The accompanying information has not been audited by independent public accountants; however, in the opinion of management such information reflects all adjustments necessary for a fair presentation of the results for the interim period. All such adjustments are of a normal and recurring nature. The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by generally accepted accounting principles or those normally made in the registrant's annual report on Form 10-K. Accordingly, the reader of the Form 10-Q should refer to the registrant's Form 10-K for the year ended December 31, 1997 for further information in this regard. Index to consolidated financial statements: Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6
Consolidated Balance Sheets September 30 December 31 (In thousands except share data) 1998 1997 Assets: Cash and due from banks $ 80,670 $ 60,611 Interest bearing deposits in other financial institutions 109 793 Federal funds sold 174,000 0 Securities available-for-sale 278,471 165,611 Securities held-to-maturity (fair value of $96,558 and $115,150, respectively) 88,534 115,931 Loans 1,510,275 1,428,429 Allowance for loan losses (28,310) (20,465) Net loans 1,481,965 1,407,964 Premises and equipment, net 55,371 47,668 Excess of cost over net assets acquired (net of accumulated amortization of $8,226 and $7,720, respectively) 63,236 17,746 Other assets 37,493 36,343 Total Assets $2,259,849 $1,852,667 Liabilities and Shareholders' Equity: Deposits: Noninterest bearing $ 242,341 $ 193,353 Interest bearing 1,620,162 1,271,650 Total deposits 1,862,503 1,465,003 Federal funds purchased and other short-term borrowings 50,917 57,949 Other liabilities 19,736 16,406 Advances from Federal Home Loan Bank 111,231 101,827 Long-term debt 53,338 53,463 Total Liabilities 2,097,725 1,694,648 Shareholders' Equity: Preferred stock, 300,000 shares authorized and unissued Common stock, $5 par value, shares authorized 25,000,000; shares issued and outstanding, 1998 - 10,062,597; 1997 - 10,062,487 50,313 50,312 Capital surplus 28,037 28,067 Retained earnings 82,079 79,026 Accumulated other comprehensive income 1,695 614 Total Shareholders' Equity 162,124 158,019 Total Liabilities and Shareholders' Equity $2,259,849 $1,852,667 The accompanying notes are an integral part of these statements.
Consolidated Statements of Income Three months ended Nine months ended September 30 September 30 (In thousands except per share data) 1998 1997 1998 1997 Interest Income: Interest and fees on loans $34,866 $32,305 $103,011 $ 96,680 Interest and dividends on securities Taxable 4,247 4,490 10,706 12,957 Tax exempt 597 684 1,747 1,994 Interest on federal funds sold 1,958 292 2,756 880 Interest on deposits in other financial institutions 2 5 7 22 Total Interest Income 41,670 37,092 118,227 112,533 Interest Expense: Interest on deposits 18,880 15,480 51,158 46,000 Interest on federal funds purchased and other short-term borrowings 672 418 1,597 1,232 Interest on advances from Federal Home Loan Bank 1,614 1,234 5,217 4,744 Interest on long-term debt 1,192 1,192 3,576 2,653 Total Interest Expense 22,358 18,324 61,548 54,629 Net interest income 19,312 18,768 56,679 57,904 Provision for loan losses 8,160 4,069 14,718 7,518 Net interest income after provision for loan losses 11,152 14,699 41,961 50,386 Noninterest Income: Service charges on deposit accounts 2,047 1,696 5,521 5,209 Gains on sale of loans, net 449 (9) 1,553 814 Trust income 506 476 1,417 1,347 Securities gains, net 0 42 12 47 Other 1,714 4,849 6,066 6,822 Total Noninterest Income 4,716 7,054 14,569 14,239 Noninterest Expense: Salaries and employee benefits 7,318 7,162 21,230 21,575 Occupancy, net 1,155 1,083 3,317 3,116 Equipment 912 952 2,807 2,872 Data processing 819 831 2,497 2,206 Stationery, printing and office supplies 458 406 1,297 1,302 Taxes other than payroll, property and income 522 519 1,587 1,591 FDIC insurance 75 69 207 184 Other 6,198 3,877 12,875 11,678 Total Noninterest Expense 17,457 14,899 45,817 44,524 Income before income taxes and extraordinary gain (1,589) 6,854 10,713 20,101 Extraordinary gain (loss), net of tax 0 0 0 3,085 Income before income taxes (1,589) 6,854 10,713 23,186 Income tax expense (2,293) 2,442 1,606 6,672 Net Income 704 4,412 9,107 16,514 Other comprehensive income, net of tax: Unrealized holding gains/(losses) arising during period 951 725 1,081 1,255 Comprehensive income $1,655 $5,137 $10,188 $17,769 Basic earnings per share before extra. gain $0.07 $0.44(1) $0.90 $1.33(1) Basic earnings per share extra. gain 0.00 0.00(1) 0.00 0.31(1) Basic earnings per share after extra. gain 0.07 0.44(1) 0.90 1.64(1) Diluted earnings per share before extra. gain 0.07 0.44(1) 0.90 1.33(1) Diluted earnings per share extra. gain 0.00 0.00(1) 0.00 0.31(1) Diluted earnings per share after extra. gain 0.07 0.44(1) 0.90 1.64(1) Average shares outstanding 10,063 10,061(1) 10,063 10,058(1) (1) Per share data and average shares outstanding have been restated to reflect the 10% stock dividend issued on April 15, 1997. The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows Nine months ended September 30 (In thousands) 1998 1997 Cash flows from operating activities: Net income $ 9,108 $ 16,514 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,890 4,167 Provision for loan and other real estate losses 14,777 7,543 Securities gains, net 0 (119) Gain on sale of loans, net (1,553) (814) Gain on sale of assets (20) 4 Net amortization of securities premiums 273 291 Net change in loans held for sale 1,415 77,652 Changes in: Other assets 2,574 (8,141) Other liabilities 444 4,244 Net cash provided by operating activities 30,908 101,341 Cash flows from investing activities: Proceeds from: Sale/call of securities available-for-sale 2,189 44,909 Maturity of securities available-for-sale 37,352 37,395 Maturity of securities held-to-maturity 6,967 13,992 Principal payments on mortgage-backed securities 20,344 4,019 Purchase of: Securities available-for-sale (150,549) (21,510) Securities held-to-maturity 0 0 Mortgage-backed securities 0 (1,000) Net change in loans (24,518) (144,529) Net change in premises and equipment (5,470) (2,412) Other 0 0 Net cash used in investing activities (113,685) (69,136) Cash flows from financing activities: Net change in deposits (11,839) (51,224) Net change in federal funds purchased and other short-term borrowings (9,980) (4,306) Advances from Federal Home Loan Bank 31,000 120,232 Repayments of advances from Federal Home Loan Bank (21,596) (108,569) Proceeds from long-term debt 0 34,500 Payments on long-term debt (125) (159) Payments for redemption of common stock (96) 0 Issuance of common stock 67 228 Dividends paid (6,038) (5,466) Net cash provided by financing activities (18,607) (14,764) Net increase (decrease) in cash and cash equivalents (101,384) 17,441 Cash and cash equivalents at beginning of year 61,404 63,884 Cash and cash equivalents of acquired banks 294,759 0 Cash and cash equivalents at end of period $254,779 $ 81,325 The accompanying notes are an integral part of these statements.
Notes to Consolidated Financial Statements Note 1 - Summary of Significant Accounting Policies The accounting and reporting policies of Community Trust Bancorp, Inc. (the "Company"), and its subsidiaries on a consolidated basis conform to generally accepted accounting principles and general practices within the banking industry. Principles of Consolidation - The unaudited consolidated financial statements include the accounts of the Company and its separate and distinct, wholly owned subsidiaries Community Trust Bank, NA, Community Trust Bank, FSB, Trust Company of Kentucky, National Association, Community Trust Bank of West Virginia, NA, CTBI Preferred Capital Trust, and Community Trust Funding Corporation. All significant intercompany transactions have been eliminated in consolidation.
Note 2 - Securities Generally Accepted Accounting Principles requires that securities be classified into held-to-maturity, available-for-sale, and trading categories. We currently have held-to-maturity and available-for-sale securities. Held-to-maturity securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Available-for-sale securities are those which the Company may decide to sell if needed for liquidity, asset- liability management or other reasons. Available-for- sale securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax. The amortized cost and fair value of securities available-for- sale as of September 30, 1998 are summarized as follows: Amortized Fair (in thousands) Cost Value U.S. Treasury and government agencies $ 91,886 $ 92,745 Mortgage-backed pass through certificates 116,594 117,539 Collateralized mortgage obligations 35,191 35,378 Other debt securities 12,065 12,256 Total debt securities 255,736 257,918 Equity securities 20,449 20,553 Total Securities $276,185 $278,471 The amortized cost and fair value of securities held-to-maturity as of September 30, 1998 are summarized as follows: Amortized Fair (in thousands) Cost Value U.S. Treasury and government agencies $ 13,481 $ 11,693 States and political subdivisions 42,667 44,092 Mortgage-backed pass through certificates 26,863 26,877 Collateralized mortgage obligations 5,523 5,524 Total Securities $ 88,534 $ 88,186
Note 3 - Loans Major classifications of loans are summarized as follows: September 30 December 31 (in thousands) 1998 1997 Commercial, secured by real estate $ 316,961 $ 310,092 Commercial, other 283,572 260,808 Real Estate Construction 81,089 85,825 Real Estate Mortgage 408,837 407,893 Consumer 413,787 361,927 Equipment Lease Financing 6,029 1,884 $1,510,275 $1,428,429 Note 4 - Long-Term Debt Long-Term Debt consists of the following: September 30 December 31 (in thousands) 1998 1997 Trust Preferred Securities * $ 34,500 $ 34,500 Senior Notes 17,230 17,230 Other 1,609 1,733 $ 53,339 $ 53,463 Refer to the Corporation's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1997 for information concerning rates and assets securing long-term debt. * In April 1997, CTBI Preferred Capital Trust ("CTBI Trust"), a trust created under the laws of the State of Delaware, issued $34.5 million of 9.0% cumulative trust preferred securities ("Preferred Securities"). The Corporation owns all of the beneficial interests represented by common securities ("Common Securities") of CTBI Trust, which exists for the sole purpose of issuing the Preferred Securities and Common Securities and investing the proceeds thereof in an equivalent amount of 9.0% Subordinated Debentures which were issued by the Corporation. The Subordinated Debentures will mature on March 31, 2027, and are unsecured obligations of the Corporation. The Subordinated Debentures are irrevocably and unconditionally guaranteed by the Corporation and are subordinate and junior in right of payment to all senior debt and other subordinated debt. There are no payments due for this debt in the next five years.
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 September 30, 1998 the Company owned two commercial banks, one savings bank and one trust company. Through its affiliates, the Company has over sixty five banking locations serving 85,000 households in various counties in Eastern and Central Kentucky and in Western and Central West Virginia. The Company had total assets of $2.26 billion and total shareholders' equity of $162 million as of September 30, 1998. The Company's common stock is listed on NASDAQ under the symbol CTBI. Market makers are Herzog, Heine, Geduld, Inc., New York, New York; J.J.B. Hilliard, W.L. Lyons, Inc., Louisville, Kentucky; Morgan, Keegan and Company, Inc., Memphis, Tennessee; J.C. Bradford & Co., Louisville, Kentucky; Bear, Stearns & Co., Inc., New York, New York; Robinson Humphrey Co., Inc., Atlanta, Georgia and Stifel Nicolaus & Co., Incorporated, St. Louis, Missouri. Effective January 1, 1997, the Company changed its name from Pikeville National Corporation to Community Trust Bancorp, Inc., changed the name of its lead bank from Pikeville National Bank and Trust Company to Community Trust Bank, National Association (the "Bank") and merged seven of its other commercial bank subsidiaries into the Bank. As a result of these transactions, the Bank has $1.9 billion in assets and numerous locations throughout eastern and central Kentucky. The Company's thrift and trust subsidiaries, Community Trust Bank, FSB and Trust Company of Kentucky, N.A., remain wholly-owned subsidiaries of the Company and will continue to operate as independent entities. On June 26, 1998 the Company chartered a new national assocation to operate as a national bank in the state of West Virginia. This new wholly owned subsidiary, Community Trust Bank of West Virginia, National Assocation (CTBWV) currently operates seven branches in four counties in central and western West Virginia. Commercial Bank, West Liberty On July 1, 1997 the Company completed the sale of Commercial Bank, West Liberty, Kentucky, a wholly owned state bank subsidiary for approximately $10.2 million in cash, which resulted in a pre-tax operating gain of $3.0 million. West Liberty had $79 million in assets, constituting 4% of the Company's total consolidated assets. Consistent with the Company's strategic plan, the funds generated by the sale of West Liberty will provide the Company with the opportunity to expand existing or enter into new markets through either internal expansion or acquisitions. Acquisitions After making no acquisitions during the years 1996 and 1997, on June 26, 1998 the Company resumed its strategic policy of diversification through acquisition. Community Trust Bancorp,Inc.'s wholly owned subsidiary, Community Trust Bank of West Virginia, National Association (CTBWV), purchased sixteen Banc One Corporation branches located in West Virginia with approximately $569 million in deposits on June 26, 1998. CTBWV paid a 9.7% premium on these deposits. In concurrent transactions, CTBWV sold three of these branches with deposits totaling $151 million to Premier Financial Bancorp, Inc. of Georgetown, Kentucky receiving a 9.7% premium; four branches with deposits totaling $122 million to
Peoples Banking and Trust Company of Marietta, Ohio receiving a 10.7% premium; and two branches with deposits totaling $80 million to United Bankshares of Charles Town, West Virginia receiving 11.7% premium. The additional 1% premium paid by Peoples Banking and Trust Company and the additional 2% premium paid by United Bankshares was divided evenly between CTBWV and Premier Financial Bancorp, Inc. as part of a prior agreement. CTBWV retained seven branches with deposits totaling $216 million. The funds used to capitalize the new charter were provided from the sale of Trust Preferred Securities that occurred in April 1997 and the sale of an affiliate bank in July 1997. The facilities that were purchased will continue to operate as banking offices. This acquisition will assist in growth of the Company outside of Kentucky and provide a new customer base for generating additional revenues. On September 18, 1998 Community Trust Bancorp, Inc. and PNC Bank Corp. announced that their banking subsidiaries, Community Trust Bank, N.A. and PNC Bank, N.A., closed Community Trust Bank's purchase of five branches from PNC with total deposits of approximately $195,000,000. These branches are located in Richmond, Winchester and Harrodsburg, all located in central Kentucky. This acquisition along with the acquisition of seven Bank One branches in West Virginia on June 26, 1998, adds over $400,000,000 to CTBI's deposits increasing CTBI's assets to $2.3 billion. Stock Dividend On February 18, 1997, the Company's Board of Directors declared a 10% stock dividend. This stock dividend, paid on April 15, 1997 to shareholders of record on March 15, 1997, was in addition to the regular quarterly cash dividends paid on (1) April 1, 1997 of 18 cents per share for shareholders of record on March 15, 1997, (2) July 1, 1997 of 18 cents per share for shareholders of record on June 15, 1997, (3) October 1, 1997 of 18 cents per share for shareholders of record on September 15, 1997, (4) January 1, 1998 of 20 cents per share for shareholders of record on December 15, 1997, (5) April 1, 1998 of 20 cents per share for shareholders of record on March 15, 1998, (6) July 1, 1998 of 20 cents per share for shareholders of record on June 15, 1998 and (7) October 1, 1998 of 20 cents per share for shareholders of record on September 15, 1998. All per share data has been restated to reflect this stock dividend.
Income Statement Review The Company's net income before extraordinary items for the three months ended September 30, 1998 was $0.7 million or $0.07 per share as compared to $4.4 million or $0.44 per share for the three months ended September 30, 1997. Total earnings for the nine months ended September 30, 1998 were $9.1 million or $.90 per share. Total earnings for the nine months ended September 30, 1997 were $16.5 million or $1.64 per share including an extraordinary item of $3.0 million or $0.31 per share received in a settlement from a former vendor. The following table sets forth on an annualized basis the return on average assets and return on average shareholders' equity for the three and nine months ended September 30, 1998 and 1997: Three months ended Nine months ended September 30 September 30 1998 1997 1998 1997 Return on average shareholders' equity before extraordinary item 1.69% 11.05% 7.50% 11.70% after extraordinary item 1.69% 11.05% 7.50% 14.39% Return on average assets before extraordinary item 0.13% 0.99% 0.62% 0.99% after extraordinary item 0.13% 0.99% 0.62% 1.22% The Company's net income for the third quarter of 1998 decreased $3.7 million or 84% as compared to the same period in 1997. Earnings per share decreased $0.37 per share or 84% for the three months ended September 30, 1998, as compared to the third quarter of 1997. The Company took a one time charge of $0.9 million to cover expenses associated with restructuring and reduction in staff. In addition, the Company took a special provision of $7.3 million to clean up identified problems in the Indirect Loan portfolio. This portfolio has been a continuing problem and this special provision will allow management to expedite the resolution of this issue. The third quarter results also includes a reversal of income tax accruals of $1.5 million. Provision for loan losses for the three months ended September 30, 1998 was $8.2 million, an increase of $4.1 million for the same period in 1997. For the nine months ended September 30, 1998 the provision was $14.7 million, a 96% increase over the same period in 1997 resulting primarily from the special provision discussed above. The ratio of allowance for loan losses to total loans increased from 1.48% at September 30, 1997 to 1.87% at September 30, 1998. Net noninterest income decreased $2.3 million for the quarter as compared to the third quarter of 1997. The decrease was the result of the sale of Commercial Bank, West Liberty, Kentucky, a wholly owned state bank subsidiary for approximately $10.2 million in cash, which resulted in a pre-tax operating gain of $3.0 million in the third quarter of 1997. Net noninterest expense for the quarter increased by $2.6 million as compared to the same period in 1997. This is primarily due to the special restructuring provision of $.9 million and that portion of the indirect provision allocated to noninterest expense totalling $1.3 million. Net Interest Income Net interest income increased $544 thousand or 3.4% from $18.8 million for the third quarter of 1997 to $19.3 million for the third quarter of 1998. Interest income and interest expense both increased for the quarter ending September 30, 1998 as compared to the same period in 1997, with interest income increasing $4.6 million and interest expense increasing $4.0 million. The increases were due to the acquistions described above which resulted in an increase in deposits of $411,000 and a corresponding increase in earning assets.
The net interest margin declined 65 basis points in the third quarter from 4.67% for the three months ended September 30, 1997 to 4.02% for the three months ended September 30, 1998. The decrease in margin was driven by a decrease in yield on earning assets. The decrease in yield on earning assets is the result of the proceeds from the company's two recent acquisitions being invested in short term investments with lower yields. The yield on interest earning assets decreased 56 basis points for the third quarter of 1998 as compared to the same period in 1997. The cost of interest bearing funds decreased 2 basis points for the third quarter of 1998 as compared to the same period in 1997. The Company's loan portfolio, its highest yielding asset, continues to expand through acquisitions, new market share and internally generated growth. The Company's loan portfolio increased 9.7% from $1.35 billion for the third quarter of 1997 to $1.48 billion for the third quarter of 1998. Loans accounted for 84% of total interest income for the third quarter of 1998 compared to 89% for the third quarter of 1997. The decrease was the result of acquisition proceeds being invested in short term investments. The following table summarizes the annualized net interest spread and net interest margin for the three months and nine months ended September 30, 1998 and 1997. Three Months Ended Nine Months ended September 30 September 30 1998 1997 1998 1997 Yield on interest earning assets 8.56% 9.12% 8.86% 9.09% Cost of interest bearing funds 5.14% 5.16% 5.21% 5.04% Net interest spread 3.42% 3.96% 3.65% 4.05% Net interest margin 4.02% 4.67% 4.32% 4.75% Provision for Loan Losses The analysis of the changes in the allowance for loan losses and selected ratios are set forth below. Nine Months Ended September 30 (in thousands) 1998 1997 Allowance balance January 1 $20,465 $18,825 Allowance of purchased loans 1,066 0 Allowance of sold affiliate 0 (578) Additions to allowance charged against operations 14,717 7,518 Recoveries credited to allowance 3,241 2,540 Losses charged against allowance (11,179) (7,946) Allowance balance at September 30 $28,310 $20,359 Allowance for loan losses to period-end loans 1.87% 1.48% Average loans, net of unearned income $1,455,941 $1,331,744 Provision for loan losses to average loans, annualized 1.35% .56% Loan charge-offs, net of recoveries to average loans, annualized .73% .41%
During the quarter the Company continued to strengthen the allowance for loan losses as charge-offs in the Indirect Auto Loan Portfolio continue at high levels. As reported previously, the Company has tightened the credit underwriting and collection procedures in the Indirect Auto Loan Portfolio. Analysis of new credits booked since January 1, 1998 reflect improved credit quality in line with management's expectations. The special provision taken in the third quarter will allow management to expedite the resolution of the "Pre- 1998" Indirect Loans. Net charge-offs represent the amount of loans charged off less amounts recovered on loans previously charged off. Net charge-offs as a percentage of average loans outstanding increased 32 basis points to 0.73% for the nine months ended September 30, 1998 as compared to the same period in 1997. The Company's non-performing loans (90 days or more past due and non-accrual) were 1.46% and 1.39% of outstanding loans at December 31, 1997 and September 30, 1998, 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 33% from $7.1 million for the three months ended September 30, 1997 to $4.7 million for the three months ended September 30, 1998. The decrease is due to the gain recorded in the third quarter of 1997 from the sale of our Commercial Bank of West Liberty subsidiary for $3.0 million. Normalizing for this, the company increased noninterest income by $0.3 million overall in the third quarter of 1998 compared to the third quarter of 1997. Gains on the sale of loans represents the largest growth category, increasing $0.5 million for the three months ended September 30, 1998 as compared to the same period in 1997. Deposit related fees increased 21% over the same period in 1998 compared to 1997. Trust revenue increased 6% for the three months ended September 30, 1998 as compared to the same period in 1997. In addition, all noninterest income categories have been impacted by the addition of the seven banking locations acquired by Community Trust Bank of West Virginia, NA and the five banking locations acquired by Community Trust Bank, NA on June 26, 1998 and September 18, 1998 respectively. Noninterest Expense The Company's noninterest expense increased by 17.2% from $14.9 million for the three months ended September 30, 1997 to $17.5 million for the same period in 1998. This is primarily due to the special restructuring provision of $0.9 million and that portion of the indirect provision allocated to noninterest expense totalling $1.3 million. In addition, all noninterest expense categories have been impacted by the addition of the seven banking locations acquired by Community Trust Bank of West Virginia, NA and the five banking locations acquired by Community Trust Bank, NA on June 26, 1998 and September 18, 1998 respectively.
Cash Basis Income Quarter Ended Septemer 30, 1998 Amortization Reported Core Deposit "Cash" Earnings Goodwill Intangible Earnings Income before income tax expense $(1,589) $ 452 $ 86 $(1,051) Income tax expense (2,293) 90 30 (2,173) Net income $ 704 $ 362 $ 56 $ 1,122 Basic earnings per common share $ 0.07 $0.03 $0.01 $ 0.11 Diluted earnings per common share$ 0.07 $0.03 $0.01 $ 0.11 These calculations were specifically formulated by the Company and may not be comparable to similarly titled measures reported by other companies. Balance Sheet Review Total asset size was $1.85 billion at December 31, 1997 compared to $2.26 billion at September 30, 1998. During the last nine months, loans increased from $1.41 billion to $1.51 billion. Federal Funds Sold increased from a zero balance at December 31, 1997 to $174.0 million at September 30, 1998. This increase is primarily the result of the payment by PNC Bank on September 18, 1998 for the assumption of deposits of the five branches acquired from PNC Bank by the Company's lead bank. Securities available for sale increased $112.8 million as the Company invested proceeds from its June 26, 1998 acquisition of Bank One branches in West Virginia out of Federal Funds Sold and into Securities Available for Sale. As a result of the Bank One and PNC acquisitions the Company's largest liability, deposits, increased from $1.47 billion as of December 31, 1997 to $1.86 billion as of September 30, 1998. Noninterest bearing deposits increased from $193.3 million at December 31, 1997 to $242.3 million at September 30, 1998. Interest bearing deposits increased from $1,271.7 million at December 31, 1997 to $1,620.1 million at September 30, 1998. The Company decreased its Federal funds purchased and other short term borrowings during the period from $57.9 million as of December 31, 1997 to $50.1 million as of September 30, 1998. The Company's advances from the Federal Home Loan Bank increased from $101.8 million at December 31, 1997 to $111.2 million at September 30, 1998 as the Company used this liquidity as a source of funding for loan growth prior to the Bank One and PNC acquisitions. Loans Loans increased from $1.40 billion as of December 31, 1997 to $1.51 billion as of September 30, 1998, due to the PNC acquisiton and the growth of the Company's commercial and consumer loan portfolios. The category of commercial loans increased from $648.9 million as of December 31, 1997 to $676.9 million as of September 30, 1998 while consumer loans increased from $361.9 million as of December 31, 1997 to $413.8 million as of September 30, 1998 and mortgage loans increased from $417.6 million as of December 31, 1997 to $419.6 million as of September 30, 1998. Non-accrual and 90 days past due loans amounted to 1.46% of total loans outstanding as of December 31, 1997 and 1.39% of total loans outstanding as of September 30, 1998. Non-accrual loans as a percentage of total loans outstanding were 0.84% as of December 31,
1997 and 0.97% at September 30, 1998. During the same period, loans 90 days or more past due decreased 20 basis points from 0.62% of total loans outstanding to 0.42%. The allowance for loan losses increased from 1.42% of total loans outstanding as of December 31, 1997 to 1.87% as of September 30, 1998. The allowance for loan losses as a percentage of non-accrual loans and loans past due 90 days or more was 98% at December 31, 1997 and 135% September 30, 1998. The following table summarizes the Company's loans that are non- accrual or past due 90 days or more as of September 30, 1998 and December 31, 1997. As a % of Accruing loans As a % of Non-accrual loan balances past due 90 loan balances loans by category days or more by category (in thousands) September 30, 1998 Commercial loans, secured by real estate $ 1,772 0.46% $ 80 0.02% Commercial loans, other 7,943 2.74 2,523 0.87 Consumer loans, secured by real estate 4,638 1.11 2,014 0.48 Consumer loans, other 285 0.07 1,726 0.42 Total $14,638 0.97% $6,343 0.42% December 31, 1997 Commercial loans, secured by real estate $ 3,881 1.25% $2,339 0.75% Commercial loans, other 6,294 2.40 878 0.33 Consumer loans, secured by real estate 1,569 0.32 3,857 0.78 Consumer loans, other 314 0.09 1,789 0.49 Total $12,058 0.84% $8,863 0.62% 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 increased from $165.6 million as of December 31,
1997 to $278.5 million as of September 30, 1998. Securities held-to- maturity declined from $115.9 million to $88.5 million during the same period. Total securities as a percentage of total assets were 15.2% as of December 31, 1997 and 16.2% as of September 30, 1998. Disclosures Regarding Year 2000 Many companies have undertaken major projects to address "Year 2000" readiness, which relates to the recognition of dates beyond 1999. Many software programs and hardware systems are in a two digit format which will not process into the next century. Community Trust Bancorp, Inc. has already taken steps necessary to ensure that this Company will be "Year 2000 compliant". Community Trust Bancorp, Inc. realized the importance of Year 2000 readiness early and has committed people and resources to prepare its systems for January 1, 2000 and beyond. Achieving Year 2000 readiness is the company's top technology priority. Early on we formed both a Year 2000 Executive Steering Committee consisting of our top executives and top management, along with a Year 2000 Working Team made up of employees from each key business area. These company leaders have taken responsibility to identify and repair instances where dates may not process correctly within their area of operation and to test for interdependencies with clients, vendors and other corporate units. We have identified and contacted the banks significant vendors to inquire about their own Year 2000 readiness plans, and are tracking and monitoring their progress. To ensure that all areas are covered, these efforts are coordinated and tracked centrally by the Year 2000 Working Team and reported to the Year 2000 Executive Steering Committee and the Board of Directors on a regular basis. Awareness - (Complete) - We defined the Year 2000 problem and allocated the appropriate resources necessary to perform our compliance work. We established both a Year 2000 Executive Steering Committee and a Year 2000 Working Team and developed an overall strategy for our Year 2000 efforts that encompasses in-house systems, service bureaus for systems that are outsourced, vendors, auditors, customers, and suppliers. Assessment Phase - (Complete) - We then assessed the size and complexity of the problem and the magnitude of the effort necessary to address our Year 2000 issues. This phase identified all hardware, software, networks, automated teller machines, and other processing platforms, along with customer and vendor interdependencies affected by the Year 2000 date change. We have completed an inventory of systems in the bank, prioritized those that were identified, and made detailed plans to renovate and test modifications to make them Year 2000 ready. Our assessment went well beyond information systems and included environmental systems that are dependent on embedded microchips, such as security systems, elevators, and vaults. Renovation Phase - (In-Process) - Strategies were developed for the code enhancements, hardware renovation or replacements, software upgrades and vendor certification, along with other associated changes. This work was prioritized based on the information gathered during our assessment phase. A millennium test site was developed to assure that testing of our hardware and software could occur outside of our working environment before being implemented on our production systems. Plans were made for on-going communications and monitoring of our key vendors, third-party service providers, and software providers throughout our Year 2000 project timeline. Planned date of completion 12-31-1998.
Validation Phase - (In-Process) - Testing, while inherent in each phase, plays a key roll in the success of our entire Year 2000 project. This phase includes testing of all incremental changes to hardware and software components, along with interfaces and connections with other systems. Also, validation from both internal and external users is required. During this phase, monitoring and communications with our service and software vendors will be maintained to assure these vendor efforts are tracked and their progress closely monitored. Our core third party data processor, one of the country's leading suppliers of financial institution data processing services, has already installed Year 2000 upgrades to their data processing systems. We have performed susbtantial off site testing of this upgrade and have scheduled on-site testing for the first quarter of 1999. Implementation Phase - (In-Process) -Systems will be certified as Year 2000 compliant. For any system failing certification, the business effect will be clearly assessed and the organization's Year 2000 contingency plans will be implemented. This phase will also ensure that any new systems or subsequent changes to verified systems are compliant with Year 2000 requirements. We also expect to verify that our systems will recognize that 2000 is a leap year, and continue to work closely with our client and vendor companies to verify that they also are prepared for the century date change. In addition, we have drafted our "Business Resumption Plan" which provides contingency plans for all identified Year 2000 issues. We anticipate that all internal hardware upgrades or replacements will be completed by March 1999. The costs associated with the purchase and installation of hardware and software upgrades are estimated to be $845,000 in 1998 and $886,000 in 1999. Because Community Trust Bancorp, Inc. is utilizing internal staff for the management and implementation of its Year 2000 Compliance program, it does not expect to incur any material costs with outside contractors. Subsequently, it does not anticipate a material increase in operating costs to be incurred. The cost of the Year 2000 project and the date by which the Company believes it will be Year 2000 complaint are based on management's current best estimates, which were derived based on numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. Actual results could vary from those anticipated. Liquidity and Capital Resources The Company's liquidity objectives are to ensure that funds are available for the affiliate banks to meet deposit withdrawals and credit demands without unduly penalizing profitability, and to ensure that funding is available for the Company to meet ongoing cash needs while maximizing profitability. The Company continues to identify ways to provide for liquidity on both a current and long-term basis. The subsidiary banks rely mainly on core deposits, certificates of $100,000 or more, repayment of principal and interest on loans and securities and federal funds sold and purchased to create long-term liquidity. The subsidiary banks also rely on the sale of securities under repurchase agreements, securities available-for-sale and Federal Home Loan Bank borrowings. Deposits increased from $1.465 billion to $1.863 billion from December 31, 1997 to September 30, 1998. Noninterest bearing deposits increased by $49.0 million while interest bearing deposits increased by $348.5 million. Due to the nature of the markets served by the subsidiary banks, management believes that the majority of its certificates of deposits of $100,000 or more are no more volatile than its core deposits. During the periods of low interest rates, these deposit balances remained stable as a percentage of total deposits. In addition, arrangements have been made with correspondent banks for the purchase of federal funds on an unsecured basis, up to an aggregate of nearly $100 million, if necessary, to meet the Company's liquidity needs.
The Company owns $149.1 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 increased from $101.8 million as of December 31, 1997 to $111.2 million as of September 30, 1998. The Company generally relies upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash for its investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, use of short-term borrowing facilities such as federal funds purchased and securities sold under repurchase agreements, and issuance of long-term debt. The Company currently has a $17.5 million revolving line of credit available to meet any future cash needs. (See long-term debt footnote to the consolidated financial statements.) The Company's primary investing activities include purchases of securities and loan originations. In conjunction with maintaining a satisfactory level of liquidity, management monitors the degree of interest rate risk assumed on the balance sheet. The Company monitors its interest rate risk by use of the static and dynamic gap models at the one year interval. The static gap model monitors the difference in interest rate sensitive assets and interest rate sensitive liabilities as a percentage of total assets that mature within the specified time frame. The dynamic gap model goes further in that it assumes that interest rate sensitive assets and liabilities will be reinvested. The Company uses the Sendero system to monitor its interest rate risk. The Company desires an interest sensitivity gap of not more than fifteen percent of total assets at the one year interval. On a limited basis, the Company 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 agreed to pay a floating interest rate based on London Inter- Bank Offering Rate (LIBOR) and receive a fixed interest rate in return. On options, the Company would typically sell the right to a third party to purchase securities the Company currently owns at a fixed price on a future date. The Company had no options outstanding at September 30, 1998. The impact on operations of interest rate swaps and options was not material during the first nine months of 1997 or 1998. The Company's principal source of funds used to pay dividends to shareholders and service long-term debt is the dividends it receives from subsidiary banks. Various federal and state statutory provisions, in addition to regulatory policies and directives, limit the amount of dividends that subsidiary banks can pay without prior regulatory approval. These restrictions have had no major impact on the Company's dividend policy or its ability to service long-term debt, nor is it anticipated that they will have any major impact in the foreseeable future. In addition to the subsidiary banks' 1998 profits, approximately $1.7 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 $0.60 per share for the first nine months of 1998 and $0.54 per share for the first nine months of 1997. Earnings per share for the same periods were $0.90 and $1.64, respectively. The Company retained 33% of earnings for the first nine months of 1998.
Under guidelines issued by banking regulators, the Company and its subsidiary banks are required to maintain a minimum Tier 1 risk- based capital ratio of 4% and a minimum total risk-based ratio of 8%. Risk-based capital ratios weight the relative risk factors of all assets and consider the risk associated with off-balance sheet items. The Company must also maintain a minimum Tier 1 leverage ratio of 4% as of September 30, 1998. The Company's Tier 1 leverage, Tier 1 risk- based and total risk-based ratios were 6.36%, 8.30% and 9.56%, respectively as of September 30, 1998. As of September 30, 1998, management is not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or would be reasonably likely to have, a material adverse impact on the Company's liquidity, capital resources, or operations. Impact of Inflation and Changing Prices The majority of the Company's assets and liabilities are monetary in nature. Therefore, the Company differs greatly from most commercial and industrial companies that have significant investment in nonmonetary assets, such as fixed assets and inventories. However, inflation does have an important impact on the growth of assets in the banking industry and on the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other expenses, which tend to rise during periods of general inflation. Management believes the most significant impact on financial and operating results is the Company's ability to react to changes in interest rates. Management seeks to maintain an essentially balanced position between interest rate sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations.
PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a vote None of Security Holders Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit 27. Financial Data Schedule b. Reports on Form 8-K None
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMUNITY TRUST BANCORP, INC. by Date: November 16, 1998 /s/Burlin Coleman Burlin Coleman Chairman of the Board, President and Principal Executive Officer