-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UwgrWyWPgdvj9i8UuEKVUnC3dy7A9PW3eJTMTEiHICMqPH8Tc1Zck8xtNsj1fWPX FjEMoR3hBmO8xBCoXsLAqg== 0000350852-99-000007.txt : 19991117 0000350852-99-000007.hdr.sgml : 19991117 ACCESSION NUMBER: 0000350852-99-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY TRUST BANCORP INC /KY/ CENTRAL INDEX KEY: 0000350852 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 610979818 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11129 FILM NUMBER: 99754761 BUSINESS ADDRESS: STREET 1: 208 NORTH MAYO TRAIL STREET 2: P O BOX 2947 CITY: PIKEVILLE STATE: KY ZIP: 41501 BUSINESS PHONE: 6064321414 MAIL ADDRESS: STREET 1: 208 NORTH MAYO TRAIL STREET 2: PO BOX 2947 CITY: PIKEVILLE STATE: KY ZIP: 41501 FORMER COMPANY: FORMER CONFORMED NAME: COMMUNITY TRUST BANCORP INC/ DATE OF NAME CHANGE: 19971124 10-Q 1 18 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 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 - 11,047,581 shares outstanding at October 31, 1999 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, 1998 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 2 Consolidated Balance Sheets September 30 December 31 (In thousands except share data) 1999 1998 Assets: Cash and due from banks $ 78,019 $ 97,487 Interest bearing deposits in other financial institutions 390 646 Federal funds sold 0 135,000 Securities available-for-sale 279,976 301,052 Securities held-to-maturity (fair value of $64,711 and $83,097, respectively) 65,549 83,359 Loans 1,614,371 1,502,386 Allowance for loan losses (25,710) (26,089) Net loans 1,588,661 1,476,297 Premises and equipment, net 52,800 54,796 Excess of cost over net assets acquired (net of accumulated amortization of $11,400 and $9,559, respectively) 60,212 62,497 Other assets 33,081 36,905 Total Assets $2,158,688 $2,248,039 Liabilities and Shareholders' Equity: Deposits: Noninterest bearing $ 245,351 $ 281,302 Interest bearing 1,609,616 1,639,839 Total deposits 1,854,967 1,921,141 Federal funds purchased and other short-term borrowings 46,387 43,405 Other liabilities 15,414 13,491 Advances from Federal Home Loan Bank 17,808 51,384 Long-term debt 53,691 53,823 Total Liabilities 1,988,267 2,083,244 Shareholders' Equity: Preferred stock, 300,000 shares authorized and unissued Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 1999 - 11,053,011; 1998 - 10,064,969 55,265 50,325 Capital surplus 45,611 28,057 Retained earnings 71,491 84,827 Accumulated other comprehensive income (1,946) 1,586 Total Shareholders' Equity 170,421 164,795 Total Liabilities and Shareholders' Equity $2,158,688 $2,248,039 The accompanying notes are an integral part of these statements. 3 Consolidated Statements of Income Three months ended Nine months ended September 30 September 30 (In thousands except per share data) 1999 1998 1999 1998 Interest Income: Interest and fees on loans $35,282 $34,866 $103,349 $103,011 Interest and dividends on securities Taxable 4,433 4,844 13,654 12,453 Tax exempt 737 0 2,227 0 Interest on federal funds sold 301 1,958 2,630 2,756 Interest on deposits in other financial institutions 2 2 6 7 Total Interest Income 40,755 41,670 121,866 118,227 Interest Expense: Interest on deposits 17,738 18,880 53,616 51,158 Interest on federal funds purchased and other short-term borrowings 436 672 1,392 1,597 Interest on advances from Federal Home Loan Bank 262 1,614 933 5,217 Interest on long-term debt 1,178 1,192 3,531 3,576 Total Interest Expense 19,614 22,358 59,472 61,548 Net interest income 21,141 19,312 62,394 56,679 Provision for loan losses 2,200 8,160 6,905 14,718 Net interest income after provision for loan losses 18,941 11,152 55,489 41,961 Noninterest Income: Service charges on deposit accounts 2,570 2,047 7,156 5,521 Gains on sale of loans, net 295 449 1,383 1,553 Trust income 604 506 1,768 1,417 Securities gains, net 0 0 0 12 Other 2,061 1,714 5,390 6,066 Total Noninterest Income 5,530 4,716 15,697 14,569 Noninterest Expense: Salaries and employee benefits 7,987 7,318 22,699 21,230 Occupancy, net 1,264 1,155 3,690 3,317 Equipment 1,206 912 3,644 2,807 Data processing 940 819 2,608 2,497 Stationery, printing and office supplies 388 458 1,160 1,297 Taxes other than payroll, property and income 237 522 1,034 1,587 FDIC insurance 77 75 224 207 Other 4,220 6,198 12,739 12,875 Total Noninterest Expense 16,319 17,457 47,798 45,817 Income before income taxes 8,152 (1,589) 23,388 10,713 Income tax expense 2,514 (2,293) 7,218 1,606 Net Income 5,638 704 16,170 9,107 Other comprehensive income, net of tax: Unrealized holding gains/(losses) arising during period (2,375) 951 (3,532) 1,081 Comprehensive income $ 3,263 $ 1,655 $12,638 $10,188 Basic earnings per share 0.51(1) 0.06(1) 1.46(1) 0.82(1) Diluted earnings per share 0.50(1) 0.06(1) 1.44(1) 0.82(1) Average shares outstanding 11,068(1) 11,069(1) 11,067(1) 11,069(1) (1)Per share data and average shares outstanding have been restated to reflect the 10% stock dividend issued on April 15, 1999. The accompanying notes are an integral part of these statements. 4 Consolidated Statements of Cash Flows Nine months ended September 30 (In thousands) 1999 1998 Cash flows from operating activities: Net income $ 16,170 $ 9,108 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,763 3,890 Provision for loan and other real estate losses 7,024 14,777 Securities gains, net 0 0 Gain on sale of loans, net (1,383) (1,553) (Gain)/loss on sale of assets (5) (20) Net amortization of securities premiums 363 273 Net change in loans held for sale 3,337 1,415 Changes in: Other assets 7,073 2,574 Other liabilities 3,054 444 Net cash provided by operating activities 41,396 30,908 Cash flows from investing activities: Proceeds from: Sale/call of securities available-for-sale 1,491 2,189 Maturity of securities available-for-sale 68,200 37,352 Maturity of securities held-to-maturity 7,422 6,967 Principal payments on mortgage-backed securities 10,343 20,344 Purchase of: Securities available-for-sale (54,307) (150,549) Securities held-to-maturity 0 0 Mortgage-backed securities (10) 0 Net change in loans (122,798) (24,518) Net change in premises and equipment (1,418) (5,470) Other 0 0 Net cash used in investing activities (91,077) (113,685) Cash flows from financing activities: Net change in deposits (66,174) (11,839) Net change in federal funds purchased and other short-term borrowings 2,982 (9,980) Advances from Federal Home Loan Bank 0 31,000 Repayments of advances from Federal Home Loan Bank (33,576) (21,596) Proceeds from long-term debt 0 0 Payments on long-term debt (132) (125) Issuance and repurchase of common stock, net (457) (29) Dividends paid (7,686) (6,038) Net cash provided by financing activities (105,043) (18,607) Net increase (decrease) in cash and cash equivalents (154,724) (101,384) Cash and cash equivalents at beginning of year 233,133 61,404 Cash and cash equivalents of acquired banks 0 294,759 Cash and cash equivalents at end of period $ 78,409 $254,779 The accompanying notes are an integral part of these statements. 5 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, CTBI Preferred Capital Trust, and Community Trust Funding Corporation. All significant intercompany transactions have been eliminated in consolidation. Note 2 - Securities Securities are classified into held-to-maturity, available-for- sale, and trading categories. Held-to-maturity securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Available-for-sale securities are those which the Company may decide to sell if needed for liquidity, asset-liability management or other reasons. Available- for- sale securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax. The amortized cost and fair value of securities available-for- sale as of September 30, 1999 are summarized as follows: Amortized Fair (in thousands) Cost Value U.S. Treasury and government agencies $ 51,567 $ 51,552 Mortgage-backed pass through certificates 137,622 135,683 Collateralized mortgage obligations 40,205 39,741 Other debt securities 28,412 27,417 Total debt securities 257,806 254,393 Equity securities 25,563 25,583 Total Securities $283,369 $279,976 The amortized cost and fair value of securities held-to-maturity as of September 30, 1999 are summarized as follows: Amortized Fair (in thousands) Cost Value U.S. Treasury and government agencies $ 12,499 $ 11,128 States and political subdivisions 34,642 35,322 Mortgage-backed pass through certificates 14,788 14,690 Collateralized mortgage obligations 3,620 3,571 Total Securities $ 65,549 $ 64,711 6 Note 3 - Loans Major classifications of loans are summarized as follows: September 30 December 31 (in thousands) 1999 1998 Commercial, secured by real estate $ 396,599 $ 329,611 Commercial, other 296,844 279,406 Real Estate Construction 99,275 87,625 Real Estate Mortgage 392,210 399,035 Consumer 422,227 400,893 Equipment Lease Financing 7,217 5,816 $1,614,372 $1,502,386 Note 4 - Long-Term Debt Long-Term Debt consists of the following: September 30 December 31 (in thousands) 1999 1998 Trust Preferred Securities * $ 34,500 $ 34,500 Senior Notes 12,230 12,230 Revolving Bank Note 5,500 5,500 Other 1,461 1,593 $ 53,691 $ 53,823 Refer to the Corporation's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1998 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. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Community Trust Bancorp, Inc. (the "Company") is a multi-bank holding company headquartered in Pikeville, Kentucky. At September 30, 1999 the Company owned one commercial bank, one savings bank, one trust company and two special purpose Delaware corporations. Through its affiliates, the Company has over sixty banking locations serving 85,000 households in Eastern and Central Kentucky and West Virginia. The Company had total assets of $2.16 billion and total shareholders' equity of $170 million as of September 30, 1999. The Company's common stock is listed on NASDAQ under the symbol CTBI. Market makers are Herzog, Heine, Geduld, Inc., New York, New York; J.J.B. Hilliard, W.L. Lyons, Inc., Louisville, Kentucky; Morgan, Keegan and Company, Inc., Memphis, Tennessee; Robinson Salomon Smith Barney, Atlanta, Georgia; J.C. Bradford & Co., Louisville, Kentucky; Keefe, Bruyette & Woods, Inc., New York, New York. Stock Dividend The Company's Board of Directors approved a 10% stock dividend in 1999. The stock dividend was paid on April 15, 1999 to shareholders of record on March 20, 1999, in addition to the regular quarterly cash dividends paid on (1) April 1, 1998 of 18 cents per share for shareholders of record on March 15, 1998, (2) July 1, 1998 of 18 cents per share for shareholders of record on June 15, 1998, (3) October 1, 1998 of 18 cents per share for shareholders of record on September 15, 1998, (4) January 1, 1999 of 19 cents per share for shareholders of record on December 15, 1998, (5) April 1, 1999 of 19 cents per share for shareholders of record on March 15, 1999, (6) July 1, 1999 of 20 cents per share for shareholders of record on June 15, 1999 and (7) October 1, 1999 of 20 cents per share for shareholders of record on September 15, 1999. All per share data has been restated to reflect this stock dividend. Income Statement Review The Company's net income for the three months ended September 30, 1999 was $5.6 million or $0.51 per share as compared to $0.7 million or $0.06 per share for the three months ended September 30, 1998 when the Company took a one time charge to clean up problems in its Indirect Lending Portfolio and to complete the efficiency initiative which began in 1997. Net income for the nine months ended September 30, 1999 was $16.2 million or $1.46 per share as compared to $9.1 million or $0.82 per share for the nine months ended September 30, 1999. 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 month periods ending September 30, 1999 and 1998: Three months ended Nine months ended September 30 September 30 1999 1998 1999 1998 Return on average shareholders' equity 13.14% 1.69% 12.82% 7.50% Return on average assets 1.03% 0.13% 0.99% 0.62% The Company's net income for the third quarter of 1999 increased $4.9 million or 700.9% as compared to the same period in 1998. Earnings per share increased $0.45 per share or 750.0% for the three months ended September 30, 1999, as compared to the third quarter of 1998. The Company's net income, excluding the special provision taken in 1998, increased $324 thousand or 6.1% for the three months ended September 30, 1999 as compared to same period in 1998. The increase in net income was the result of an increase in net interest income (9.5%), an increase in noninterest income (17.3%) and a decrease in noninterest expense (6.5%). 8 Provision for loan losses for the three months ended September 30, 1999 was $2.2 million, compared to $8.2 million for the same period in 1998. See "Provision For Loan Losses" below for an explanation of the decrease. Net Interest Income Net interest income increased $1.8 million or 9.5% from $19.3 million for the third quarter of 1998 to $21.1 million for the third quarter of 1999. Both interest income and interest expense decreased for the quarter ending September 30, 1999 as compared to the same period in 1998. Interest income decreased $0.9 million or 2.2% for the quarter ending September 30, 1999 as compared to the same period in 1998, while interest expense had a decrease of $2.7 million or 12.3%. The yield on interest earning assets decreased 19 basis points for the third quarter of 1999 as compared to the same period in 1998. The cost of interest bearing funds decreased by 62 basis points for the third quarter of 1999 as compared to the same period in 1998. The net interest margin increased from 4.02% for the third quarter of 1998 to 4.41% for the current quarter, a result of the Company's ability to redeploy funds into higher yielding loans. The Company's loan portfolio, its highest yielding asset, continues to expand through new markets and internally generated growth. The Company's loan portfolio increased 6.9% from $1.56 billion for the third quarter of 1998 to $1.61 billion for the third quarter of 1999. The following table summarizes the annualized net interest spread and net interest margin for the three and nine months ended September 30, 1999 and 1998. Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 Yield on interest earning asset s 8.37% 8.56% 8.35% 8.86% Cost of interest bearing funds 4.52% 5.14% 4.56% 5.21% Net interest spread 3.85% 3.42% 3.79% 3.65% Net interest margin 4.41% 4.02% 4.35% 4.30% Provision for Loan Losses The analysis of the changes in the allowance for loan losses and selected ratios is set forth below. Nine Months Ended September 30 (in thousands) 1999 1998 Allowance balance January 1 $26,089 $20,465 Allowance of acquired banks - 1,066 Additions to allowance charged against operations 6,905 14,717 Recoveries credited to allowance 4,176 3,241 Losses charged against allowance (11,460) (11,179) Allowance balance at September 30 $25,710 $28,310 Allowance for loan losses to period-end loans 1.59% 1.87% Average loans, net of unearned income $1,538,782 $1,455,941 Provision for loan losses to average loans, annualized 0.60% 1.35% Loan charge-offs, net of recoveries to average loans, annualized 0.63% 0.73% The Company decreased its provision for loan losses during the first nine months of 1999. This is the result of the special charge taken in September 1998. In September 1998, CTBI took a special charge of $7.3 million to clean up problems in the Indirect Loan Portfolio. Six million ($6.0 million) of this charge was booked as additional 9 Provision for Loan Losses. As a result, losses incurred in the Company's pre-1998 Indirect Lending Portfolio are charged against this provision. 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 decreased 10 basis points to 0.63% for the nine months ended September 30, 1999 as compared to the same period in 1998. The Company's non-performing loans (90 days or more past due and non-accrual) were 1.37% and 1.28% of outstanding loans at December 31, 1998 and September 30, 1999, respectively. Any loans classified as loss, doubtful, substandard or special mention that are not included in non-performing loans do not (1) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources or (2) represent material credits about which management has knowledge of any information which would cause management to have serious doubts as to the ability of the borrowers to comply with the loan repayment terms. The Company does not believe there are currently any trends, events or uncertainties that are reasonably likely to have a material effect on the volume of its non- performing loans. Noninterest Income The Company's noninterest income increased 17.3% from $4.72 million for the three months ended September 30, 1998 to $5.53 million for the three months ended September 30, 1999. This increase is largely contributed to an increase in service charges on deposit accounts of 25.5%. This increase is offset by a decrease in gains on sale of loans from $449 thousand for the three months ended September 30, 1998 as compared to $295 thousand as of the same period in 1999. Noninterest Expense The Company's noninterest expense decreased by 6.5% from $17.5 million for the three months ended September 30, 1998 to $16.3 million for the same period in 1999. In the third quarter of 1998 a one time charge of $1.3 million was taken to complete the efficiency initiative which began in 1997. When excluding this one time charge noninterest expense was held relatively flat. 10 Cash Basis Income Three Months Ended September 30, 1999 Amortization Reported Core Deposit "Cash" Earnings Goodwill Intangible Earnings Income before income tax expense $ 8,152 $ 642 $ 145 $ 8,939 Income tax expense 2,514 205 51 2,770 Net income $ 5,638 $ 437 $ 94 $ 6,169 Basic earnings per common share $ 0.51 $0.04 $0.01 $ 0.56 Diluted earnings per common share $ 0.50 $0.04 $0.01 $ 0.56 Nine Months Ended September 30, 1999 Amortization Reported Core Deposit "Cash" Earnings Goodwill Intangible Earnings Income before income tax expense $23,388 $1,926 $ 435 $25,749 Income tax expense 7,218 614 152 7,984 Net income $16,170 $1,312 $ 283 $17,765 Basic earnings per common share $ 1.46 $ 0.12 $0.03 $ 1.61 Diluted earnings per common share $ 1.44 $ 0.12 $0.03 $ 1.59 These calculations were specifically formulated by the Company and may not be comparable to similarly titled measures reported by other companies. Earnings per share calculations have been restated to reflect the 10% stock dividend payable April 15, 1999. Balance Sheet Review Total asset size was $2.25 billion at December 31, 1998 compared to $2.16 billion at September 30, 1999. During the last nine months, loans increased 9.9% on an annualized basis from $1.50 billion to $1.61 billion. The Company has successfully redeployed funds into higher yielding assets as is reflected in the elimination of federal funds sold of $135.0 million at December 31, 1998. This decrease was also driven by reductions in Federal Home Loan Bank advances of $33.6 million and total deposits of $66.2 million. The Company's largest liability, deposits, decreased from $1.92 billion as of December 31, 1998 to $1.85 billion as of September 30, 1999. Noninterest bearing deposits declined from $281.3 million at December 31, 1998 to $245.4 million at September 30, 1999. Interest bearing deposits also decreased from $1,639.8 million at December 31, 1998 to $1,609.6 million at September 30, 1999. The Company used the liquidity from the branch acquisitions in 1998 to pay down its advances from Federal Home Loan Bank as the opportunity arises. For the nine months ended September 30, 1999, the Company reduced its Federal Home Loan Bank advances from $51.4 million to $17.8 million. 11 Loans Loans increased from $1.50 billion as of December 31, 1998 to $1.61 billion as of September 30, 1999, primarily due to the growth of the Company's commercial loan portfolio. The category of commercial loans secured by real estate increased from $329.6 million as of December 31, 1998 to $396.6 million as of September 30, 1999 while other commercial loans increased from $279.4 million as of December 31, 1998 to $296.8 million as of September 30, 1999. Non-accrual and 90 days past due loans amounted to 1.37% of total loans outstanding as of December 31, 1998 and 1.28% of total loans outstanding as of September 30, 1999. Non-accrual loans as a percentage of total loans outstanding were 0.99% as of December 31, 1998 and at 1.07% at September 30, 1999. During the same period, loans 90 days or more past due decreased 16 basis points from 0.38% of total loans outstanding to 0.22%. The allowance for loan losses decreased from 1.74% of total loans outstanding as of December 31, 1998 to 1.59% as of September 30, 1999. This is consistent with our plan to absorb losses taken in our pre-1998 Indirect Lending Portfolio in the allowance after the special provision was made in September 1998. The allowance for loan losses as a percentage of non-accrual loans and loans past due 90 days or more was 126.9% at December 31, 1998 and 124.0% at September 30, 1999. The following table summarizes the Company's loans that are non- accruing or past due 90 days or more as of September 30, 1999 and December 31, 1998. 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, 1999 Commercial loans, secured by real estate $ 7,182 1.50% $ 950 0.20% Commercial loans, other 4,238 1.39 227 0.07 Consumer loans secured by real estate 5,268 1.29 1,244 0.30 Consumer loans, other 553 0.13 1,076 0.25 Total $17,241 1.07% $3,497 0.22% December 31, 1998 Commercial loans, secured by real estate $ 5,294 1.61% $ 680 0.21% Commercial loans, other 4,458 1.56 708 0.25 Consumer loans, secured by real estate 4,771 0.98 2,077 0.43 Consumer loans, other 407 0.10 2,170 0.54 Total $14,930 0.99% $5,635 0.38% 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. 12 Securities The Company uses its securities held-to-maturity for production of income and to manage cash flow needs through expected maturities. The Company uses its securities available-for-sale for income and balance sheet liquidity management. The book value of securities available-for-sale decreased from $301.1 million as of December 31, 1998 to $280.0 million as of September 30, 1999. Securities held-to- maturity declined from $83.4 million to $65.5 million during the same period. Total securities as a percentage of total assets were 17.1% as of December 31, 1998 and 16.0% as of September 30, 1999. 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 properly process into the next century. Community Trust Bancorp, Inc. has already taken the steps to be "Year 2000 compliant". Community Trust Bancorp, Inc. realized the importance of Year 2000 readiness early and committed the people and resources to prepare its systems for January 1, 2000 and beyond. Achieving Year 2000 readiness has been 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, and a Year 2000 Working Team made up of employees from each key business area. These company leaders identified and repaired instances where dates may not have processed correctly within their area of operation and tested for interdependencies with clients, vendors and other corporate units. We identified and contacted the bank's significant vendors, inquiring about their own Year 2000 readiness plans, and have tracked and monitored their progress. These efforts were 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 Phase - (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 - (Complete) - 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. Validation Phase - (Complete) - Testing, while inherent in each phase, played a key role in the success of our entire Year 2000 project. This phase included 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 was performed. During this phase, monitoring and communications with our 13 service and software vendors was maintained to assure these vendor efforts were 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, installed Year 2000 upgrades to their data processing systems in October of 1998. We have successfully performed substantial off-site and on-site testing of this upgrade. Implementation Phase - (Complete) -Our data processing Systems have been certified as Year 2000 compliant. This phase included controlled date change testing to ensure that any new systems or subsequent changes to verified systems are compliant with Year 2000 requirements. We have completed testing and determined that all of our major systems are Year 2000 ready. We have also verified that our systems will recognize that 2000 is a leap year. We 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. The costs associated with the Year 2000 project were $600,000 in 1998 and are estimated to be $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 1999 costs associated with the Year 2000 project are based upon management's current best estimates, which were derived based upon numerous assumptions of future events, including 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 decreased from $1.921 billion to $1.855 billion from December 31, 1998 to September 30, 1999. Noninterest bearing deposits decreased by $36.0 million while interest-bearing deposits decreased by $30.2 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 $280.0 million of securities valued at market price that are designated as available-for-sale and available to meet liquidity needs on a continuing basis. The Company also relies on Federal Home Loan Bank advances for both liquidity and management of its asset/liability position. These advances have sometimes been matched against pools of residential mortgage loans, which are not sold in the secondary market, some of which have original maturities of ten to fifteen years. Federal Home Loan Bank advances decreased from $51.4 million as of December 31, 1998 to $17.8 million as of September 30, 1999. 14 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, $12.0 million of which is currently available to meet any future cash needs. (See long-term debt footnote to the consolidated financial statements.) The Company's primary investing activities include purchases of securities and loan originations. In conjunction with maintaining a satisfactory level of liquidity, management monitors the degree of interest rate risk assumed on the balance sheet. The Company monitors its interest rate risk by use of the static and dynamic gap models at the one-year interval. The static gap model monitors the difference in interest rate sensitive assets and interest rate sensitive liabilities as a percentage of total assets that mature within the specified time frame. The dynamic gap model goes further in that it assumes that interest rate sensitive assets and liabilities will be reinvested. The Company uses the Sendero system to monitor its interest rate risk. The Company desires an interest sensitivity gap of not more than fifteen percent of total assets at the one-year interval. On a limited basis, the Company may use interest rate swaps and sales of options on securities as additional tools in managing interest rate risk. Interest rate swaps involve an exchange of cash flows based on the notional principal amount and agreed upon fixed and variable interest rates. In this transaction, the Company would typically agree to pay a floating interest rate based on London Inter- Bank Offering Rate (LIBOR) and receive a fixed interest rate in return. On options, the Company would typically sell the right to a third party to purchase securities the Company currently owns at a fixed price on a future date. The Company had no options outstanding at September 30, 1999. The Company's principal source of funds used to pay dividends to shareholders and service long-term debt is the dividends it receives from subsidiary banks. Various federal and state statutory provisions, in addition to regulatory policies and directives, limit the amount of dividends that subsidiary banks can pay without prior regulatory approval. These restrictions have had no major impact on the Company's dividend policy or its ability to service long-term debt, nor is it anticipated that they would have any major impact in the foreseeable future. In addition to the subsidiary banks' 1999 profits, approximately $14.5 million can be paid to the Company as dividends without prior regulatory approval. The primary source of capital for the Company is retained earnings. The Company paid cash dividends of $0.20 per share for the third quarter of 1999 and $0.18 per share for the third quarter of 1998. Earnings per share for the same periods were $0.51 and $0.06, respectively. The Company retained 61% of earnings for the third quarter of 1999. 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, 1997. The Company's Tier 1 leverage, Tier 1 risk- based and total risk-based ratios were 6.96%, 8.86% and 10.11%, respectively as of September 30, 1999. As of September 30, 1999, 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. 15 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company currently does not engage in any derivative or hedging activity. Refer to the Company's 1998 10-K for analysis of the interest rate sensitivity. 16 PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a vote of Security Holders None 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 17 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 15, 1999 /s/Jean R. Hale Jean R. Hale President and Principal Executive Officer /s/Kevin Stumbo Kevin Stumbo Chief Accounting Officer 18 EX-27 2
9 9-MOS DEC-31-1999 SEP-30-1999 78019 390 0 0 279976 65549 64711 1614371 25710 2158688 1854967 46387 15414 71499 0 0 55265 115156 2158688 103349 15881 2636 121866 53616 59472 62394 6905 0 47798 23388 23388 0 0 16170 1.46 1.44 6.22 17241 3497 185 0 26089 6905 4176 25710 25710 0 25710
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