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 March 31, 1997 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 - 10,058,835 shares outstanding at April 30, 1997
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, 1996 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 March 31 December 31 (In thousands except share data) 1997 1996 Assets: Cash and due from banks $58,768 $63,048 Interest bearing deposits in other financial institutions 784 836 Federal funds sold 12,265 0 Securities available-for-sale 191,013 229,952 Securities held-to-maturity (fair value of $135,686 and $137,383, respectively) 135,306 137,733 Loans 1,354,977 1,309,623 Allowance for loan losses (19,224) (18,825) Net loans 1,335,753 1,290,798 Premises and equipment, net 46,018 46,275 Excess of cost over net assets acquired (net of accumulated amortization of $6,944 and $6,674, respectively) 19,560 19,822 Other assets 25,223 27,196 Total Assets $1,824,690 $1,815,660 Liabilities and Shareholders' Equity: Deposits: Noninterest bearing $195,773 $200,222 Interest bearing 1,291,472 1,280,600 Total deposits 1,487,245 1,480,822 Federal funds purchased and other short-term borrowings 36,163 44,585 Other liabilities 20,639 15,394 Advances from Federal Home Loan Bank 111,796 110,969 Long-term debt 19,110 19,136 Total Liabilities 1,674,953 1,670,906 Shareholders' Equity: Preferred stock, 300,000 shares authorized and unissued Common stock, $5 par value, shares authorized 25,000,000; shares issued and outstanding, 1997 - 9,144,950; 1996 - 9,128,814 45,725 45,644 Capital surplus 28,032 27,915 Retained earnings 77,691 71,976 Net unrealized appreciation (depreciation) on securities available-for-sale, net of tax (1,711) (781) Total Shareholders' Equity 149,737 144,754 Total Liabilities and Shareholders' Equity $1,824,690 $1,815,660 The accompanying notes are an integral part of these statements.
Consolidated Statements of Income Three months ended March 31 (In thousands except per share data) 1997 1996 Interest Income: Interest and fees on loans $31,718 $27,732 Interest and dividends on securities Taxable 4,799 5,961 Tax exempt 673 762 Interest on federal funds sold 166 450 Interest on deposits in other financial institutions 12 12 Total Interest Income 37,368 34,917 Interest Expense: Interest on deposits 15,070 15,448 Interest on federal funds purchased and other short-term borrowings 427 270 Interest on advances from Federal Home Loan Bank 1,749 896 Interest on long-term debt 414 553 Total Interest Expense 17,660 17,167 Net interest income 19,708 17,750 Provision for loan losses 1,718 1,488 Net interest income after provision for loan losses 17,990 16,262 Noninterest Income: Service charges on deposit accounts 1,692 1,327 Gains on sale of loans, net 205 163 Trust income 397 392 Securities gains, net 93 42 Other 1,057 1,335 Total Noninterest Income 3,444 3,259 Noninterest Expense: Salaries and employee benefits 7,566 7,083 Occupancy, net 1,015 960 Equipment 981 939 Data processing 675 639 Stationery, printing and office supplies 441 502 Taxes other than payroll, property and income 526 503 FDIC insurance 35 7 Other 3,649 2,844 Total Noninterest Expense 14,888 13,477 Income before income taxes and extraordinary gain 6,546 6,044 Extraordinary gain (loss), net of tax 3,085 0 Income before income taxes 9,631 6,044 Income tax expense 2,084 1,841 Net income $7,547 $4,203 Net income per share $ 0.74 $ 0.42 (1) Average shares outstanding 10,042 10,037 (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 Three months ended March 31 (In thou sands) 1997 1996 Cash flows from operating activities: Net income $7,547 $4,203 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,293 1,284 Provision for loan and other real estate losses 1,743 1,500 Securities gains, net (93) (42) Gain on sale of loans, net (205) (163) Gain on sale of assets 4 (31) Net amortization of securities premiums 164 111 Net change in loans held for sale 53 (1,424) Changes in: Other assets 1,716 491 Other liabilities 5,241 626 Net cash provided by operating activities 17,463 6,555 Cash flows from investing activities: Proceeds from: Sale/call of securities available-for-sale 29,058 7,264 Maturity of securities available-for-sale 12,170 10,497 Maturity of securities held-to-maturity 1,673 4,649 Principal payments on mortgage-backed securities 708 8,774 Purchase of: Securities available-for-sale (2,937) (28,689) Securities held-to-maturity 0 (633) Mortgage-backed securities 0 (1,155) Net change in loans (46,595) (42,886) Net change in premises and equipment (958) (463) Other 0 568 Net cash used in investing activities (6,702) (42,074) Cash flows from financing activities: Net change in deposits 6,423 (6,584) Net change in federal funds purchased and other short-term borrowings (8,422) 5,005 Advances from Federal Home Loan Bank 20,155 - Repayments of advances from Federal Home Loan Bank (19,328) (9,075) Payments on long-term debt (26) (2,171) Issuance of common stock 196 - Dividends paid (1,826) (1,643) Net cash provided by (used in) financing activities (2,828) (14,468) Net increase (decrease) in cash and cash equivalents 7,933 (49,987) Cash and cash equivalents at beginning of year 63,884 107,012 Cash and cash equivalents at end of period $71,817 $57,025 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 wholly owned subsidiaries Community Trust Bank, NA, Commercial Bank (West Liberty), Community Trust Bank, FSB and Trust Company of Kentucky. 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 March 31, 1997 are summarized as follows: Amortized Fair (in thousands) Cost Value U.S. Treasury and government agencies $ 45,173 $ 45,195 Mortgage-backed pass through certificates 109,424 108,365 Collateralized mortgage obligations 18,835 18,435 Other debt securities 3,264 3,167 Total debt securities 176,696 175,162 Equity securities 15,921 15,851 Total Securities $192,617 $191,013 The amortized cost and fair value of securities held-to-maturity as of March 31, 1997 are summarized as follows: Amortized Fair (in thousands) Cost Value U.S. Treasury and government agencies $ 25,847 $ 23,936 States and political subdivisions 53,393 53,878 Mortgage-backed pass through certificates 44,952 44,221 Collateralized mortgage obligations 11,114 10,832 Total Securities $135,306 $132,867
Note 3 - Loans Major classifications of loans are summarized as follows: March 31 December 31 (in thousands) 1997 1996 Commercial, secured by real estate $ 278,150 $ 270,315 Commercial, other 250,262 234,793 Real Estate Construction 80,310 79,069 Real Estate Mortgage 411,724 411,067 Consumer 331,156 310,582 Equipment Lease Financing 3,375 3,797 $1,354,977 $1,309,623 Note 4 - Long-Term Debt Long-Term Debt consists of the following: March 31 December 31 1997 1996 (in thousands) Senior Notes $17,230 $17,230 Other 1,880 1,906 $19,110 $19,136 Refer to the 1996 Securities and Exchange Commission Form 10-K for information concerning rates and assets securing long-term debt.
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. The Company owns two commercial banks, one savings bank and one trust company. Through its affiliates, the Company has over sixty banking locations serving 85,000 households in nineteen Eastern and Central Kentucky counties. The Company had total assets of $1.82 billion and total shareholders' equity of $150 million as of March 31, 1997. 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 $1.6 billion in assets and forty-two offices in twelve Kentucky counties. The Company's thrift and trust subsidiaries, Community Trust Bank, FSB and Trust Company of Kentucky, remain subsidiaries of the Company and will continue to operate as independent entities. The Company excluded its subsidiary Commercial Bank, West Liberty, Kentucky ("West Liberty") from the merger of its commercial bank subsidiaries into the Bank. The Company has entered into a definitive agreement, subject to regulatory approval, to sell West Liberty to Commercial Bancshares, Inc., of West Liberty, Kentucky for cash of $10.2 million. West Liberty has $73 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 in existing or enter into new markets through either internal expansion or acquisitions. Stock Dividend On February 18, 1997, the Company's Board of Directors declared a 10% stock dividend. This stock dividend, payable on April 15, 1997 to shareholders of record on March 15, 1997, was in addition to the regular quarterly cash dividend paid on April 1, 1997 of 18 cents per share for shareholders of record on March 15, 1997. All per share data has been restated to reflect this stock dividend. Trust Preferred Offering On April 16, 1997 the Company issued $34,500,000 of 9% Cumulative Trust Preferred Securities. Proceeds from the offering will be applied to the Company's general funds to be used for expansion through new branches and acquisitions, to fund growth in the Company's indirect consumer loan portfolio and for general corporate purposes.
The Trust Preferred Securities were issued by CTBI Preferred Capital Trust, a newly formed Delaware business trust subsidiary of the Corporation. The Trust Preferred Securities were issued at $25 per share and are quoted on The Nasdaq Stock Market's National Market under the symbol "CTBIP". Morgan Keegan & Company and J.J.B. Hilliard, W.L. Lyons, Inc. were the underwriters for the offering. Income Statement Review The Company's net income before extraordinary income for the three months ended March 31, 1997 was $4.5 million or $0.44 per share as compared to $4.2 million or $0.42 per share for the three months ended March 31, 1996. Total earnings for the period were $7.5 million or $0.74 per share including an extraordinary item of $3.0 million or $0.30 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 months ended March 31, 1997 and 1996: Three months ended March 31 1997 1996 Return on average shareholders' equity 20.45% 12.42% Return on average assets 1.73% 0.98% The Company's net income for the first quarter of 1997 increased $3.3 million or 80% as compared to the same period in 1996. Earnings per share increased $0.32 per share or 76% for the three months ended March 31, 1997, as compared to the first quarter of 1996. The increase in net income was caused by increases in the net interest margin from 4.30% for the first quarter of 1996 to 4.87% for the first quarter of 1997; by increases in average earning assets and the extraordinary item described above. The increase in average earning assets were caused by internally generated growth for the first quarter as compared to 1996. Additionally, while total earnings assets increased 2% over the period, the increase in average loans for the period was 3.5%. Provision for loan losses increased by $0.2 million from $1.5 million for the three months ended March 31, 1996 to $1.7 million for the quarter ended March 31, 1997 as net charge-offs increased for the three month period as compared to the same period in 1996. The increase in net charge-offs were due to increases in the loan portfolio from internally generated growth. Net noninterest income increased $0.2 million for the quarter as compared to the first quarter of 1996. Net noninterest expense for the quarter increased by $1.4 million as compared to the same period in 1996. Net Interest Income Net interest income increased $2.0 million or 11% from $17.8 million for the first quarter of 1996 to $19.7 million for the first quarter of 1997. Interest income and interest expense both increased for the quarter ending March 31, 1997 as compared to the same period in 1996, with interest income increasing $2.5 million and interest expense increasing $0.5 million. The increase in net interest income for the three month period was driven by increases in net interest margin and increases in average earning assets due to internally generated growth. Average earning assets increased 1% from $1.66 billion for the three months ended March 31, 1996 to $1.68 billion for the same period in 1997. The yield on interest earning assets increased 21 basis points for the first quarter of 1997 as compared to the same period in 1996.
The cost of interest bearing funds decreased 38 basis points for the first quarter of 1997 as compared to the same period in 1996. As a result the net interest margin increased from 4.30% for the first quarter of 1996 to 4.87% for the current quarter. The increases in yield and interest margin are due in large part from growth in the Company's loan portfolio, the highest yielding asset. Loan portfolio growth was caused by internally generated growth. The Company's average loans increased 3.5% from $1.29 billion for the first quarter of 1996 to $1.34 billion for the first quarter of 1997. Loans accounted for 85% of total interest income for the first quarter of 1997 compared to 79% for the first quarter of 1996. The following table summarizes the annualized net interest spread and net interest margin for the three months ended March 31, 1997 and 1996. Three Months Ended March 31 1997 1996 Yield on interest earning assets 8.97% 8.94% Cost of interest bearing funds 4.82% 4.95% Net interest spread 4.15% 3.99% Net interest margin 4.84% 4.62% Provision for Loan Losses The analysis of the changes in the allowance for loan losses and selected ratios is set forth below. Three Months Ended March 31 (in thousands) 1997 1996 Allowance balance January 1 $18,825 $16,082 Additions to allowance charged against operations 1,718 1,488 Recoveries credited to allowance 971 554 Losses charged against allowance (2,290) (1,698) Allowance balance at March 31 $19,224 $16,426 Allowance for loan losses to period-end loans 1.42% 1.25% Average loans, net of unearned income $1,327,239 $1,130,576 Provision for loan losses to average loans, annualized .52% .53% Loan charge-offs, net of recoveries to average loans, annualized .40% .40% The Company increased its provision for loan losses as a result of the growth in its loan portfolio, and to a lesser degree, due to its increase in net charge-offs, measured in raw dollars. 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 was the same during the first three months of 1997 as compared to the same period in 1996. The Company's non- performing loans (90 days past due and non-accrual) were 1.22% and 1.29% of outstanding loans at December 31, 1996 and March 31, 1997, 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 6% from $3.2 million for the three months ended March 31, 1996 to $3.4 million for the first quarter of 1997. All categories of noninterest income increased during the three month period for 1997, as compared to the same period in 1996, except for Other noninterest income which declined from $1.3 million to $1.1 million for the first quarter. Noninterest Expense The Company's noninterest expense increased by 10% from $13.5 million for the three months ended March 31, 1996 to $14.9 million for the same period in 1997. All categories of noninterest expense experienced increases for the quarter ended March 31, 1997 compared to the first quarter in 1996 with the exception of Stationery, printing and office supplies which showed a 12% decrease. The largest categories showing increases were Other noninterest expense and Salaries and employee benefits which increased by $0.8 million and $0.5 million, respectively. The increase is attributed to the cost of expansion as the Company prepares to open 5 additional branches over the next 12 months and the temporary costs associated with consolidating the processing functions of the 7 commercial banks that merged into the lead bank on January 1, 1997. Balance Sheet Review Total assets were at $1.82 billion at both December 31, 1996 and March 31, 1997. During this time, loans increased from $1.29 billion to $1.34 billion or an annualized rate of 14%. The asset category which declined most was Securities available-for-sale which declined from $230.0 million at December 31, 1996 to $191.0 million at March 31, 1997 as the Company chose not to reinvest proceeds from matured securities back into the securities portfolio but rather to retain the cash to fund anticipated future loan growth. The Company's largest liability, deposits, increased from $1.48 billion as of December 31, 1996 to $1.49 billion as of March 31, 1997. Noninterest bearing deposits increased from $200.2 million at December 31, 1996 to $195.8 million at March 31, 1997. Interest bearing deposits increased from $1.28 billion to $1.29 billion during the same period. The Company's long-term debt stayed at approximately the same level during the period at $19.1 million. The Company's advances from Federal Home Loan Bank increased only marginally from $111.0 million at December 31, 1996 to $111.8 million at March 31, 1997 as the Company relied primarily on deposit growth and maturing securities as the source of funding for the additional loan demand. Loans Loans increased from $1.31 billion as of December 31, 1996 to $1.35 billion as of March 31, 1997. The loan categories which increased most were commercial, other and consumer loans. Commercial, other increased from $234.8 million as of December 31, 1996 to $250.0 million as of March 31, 1997. Consumer loans increased from $310.6 million as of December 31, 1996 to $331.1 million as of March 31, 1997. Consumer loans increased due to the Company's aggressive expansion into the indirect consumer loan market in Kentucky. Other than lease financing, which declined from $3.8 million to $3.4
million, all other loan categories increased during the period from December 31, 1996 to March 31, 1997. Non-accrual and 90 days past due loans amounted to 1.21% of total loans outstanding as of December 31, 1996 and 1.29% of total loans outstanding as of March 31, 1997. Non-accrual loans as a percentage of total loans outstanding were at 0.75% as of December 31, 1996 and March 31, 1997. During the same period, loans 90 days or more past due increased 9 basis points from 0.44% of total loans outstanding to 0.53%. The allowance for loan losses decreased from 1.44% of total loans outstanding as of December 31, 1996 to 1.42% as of March 31, 1997. The allowance for loan losses as a percentage of non-accrual loans and loans 90 days or past due was 103% at December 31, 1996 and 110% at March 31, 1997. The following table summarizes the Company's loans that are non- accrual or past due 90 days or more as of March 31, 1997 and December 31, 1996. 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) March 31, 1997 Commercial loans, secured by real estate $ 4,033 1.45% $2,553 0.92% Commercial loans, other 4,031 1.59 1,430 0.53 Consumer loans, secured by real estate 1,660 0.34 2,381 0.48 Consumer loans, other 498 0.15 913 0.28 Total $10,222 0.75% $7,277 0.53% December 31, 1996 Commercial loans, secured by real estate $ 4,802 1.78% $1,075 0.40% Commercial loans, other 3,217 1.27 1,424 0.60 Consumer loans, secured by real estate 1,705 0.35 2,416 0.49 Consumer loans, other 432 0.14 885 0.28 Total $10,156 0.75% $5,800 0.44% Allowance for loan losses Management analyzes the adequacy of its allowance for loan losses on a quarterly basis. The loan portfolio of each affiliate bank is analyzed by each major loan category, with a review of the following areas: (i) specific allocations based upon a review of selected loans for loss potential; (ii) an allocation which estimates reserves based upon the remaining pool of loans in each category derived from historical net charge-off data, delinquency trends and other relevant factors and (iii) an unallocated portion of the allowance which provides for a margin of error in estimating the allocations described above and provides for risks inherent in the portfolio which may not be specifically addressed elsewhere. Off-balance sheet risk is addressed by including letters of credit in the Company's allowance adequacy analysis and through a monthly review of all letters of credit outstanding. The Company's loan review and problem loan analysis includes evaluation of deteriorating letters of credit. Volume and trends in delinquencies are monitored monthly by management, regional advisory boards and the boards of directors of the respective banks.
Securities The Company uses its securities held-to-maturity for production of income and to manage cash flow needs through expected maturities. The Company uses its securities available-for-sale for income and balance sheet liquidity management. The book value of securities available-for-sale decreased from $230.0 million as of December 31, 1996 to $191.0 million as of March 31, 1997. Securities held-to- maturity declined from $137.7 million to $135.3 million during the same period. Total securities as a percentage of total assets was 20.3% as of December 31, 1996 and 17.7% as of March 31, 1997. 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 $1.48 billion to $1.50 billion from December 31, 1996 to March 31, 1997. Noninterest bearing deposits increased by $13 million while noninterest bearing deposits increased by $10 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 $87 million, if necessary, to meet the Company's liquidity needs. The Company owns $191 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 marginally from $111.0 million as of December 31, 1996 to $111.8 million as of March 31, 1997. 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 now uses 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 has 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 has sold 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 March 31, 1997. The impact on operations of interest rate swaps and options was not material during the first three months of 1996 or 1997. 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' 1997 profits, approximately $4.5 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 declared dividends of $0.18 per share for the first quarter of 1997 and $0.16 for the first quarter of 1996. Earnings per share for the same periods were $0.74 and $0.42, respectively. The Company retained 76% of earnings for the first three months of 1997. 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 March 31, 1997. The Company's Tier 1 leverage, Tier 1 risk- based and total risk-based ratios were 7.55%, 9.88% and 11.13%, respectively as of March 31, 1997. As of March 31, 1997, 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 Form 8-K was filed on January 24, 1997 reporting a settlement on a lawsuit which had been pending with a former software vendor resulting in a net extraordinary gain of $3 million.
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: May 15, 1997 Richard M. Levy Richard M. Levy Executive Vice President Principal Financial Officer