Item
1. Condensed Consolidated Financial Statements
The
accompanying information has not
been audited by independent registered 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 condensed consolidated
financial statements are presented in accordance with the requirements of Form
10-Q and consequently do not include all of the disclosures normally required
by
accounting principles generally accepted in the United States of America or
those normally made in the Registrant's annual report on Form
10-K. Accordingly, the reader of the Form 10-Q should refer to the
Registrant's Form 10-K for the year ended December 31, 2006 for further
information in this regard.
Community
Trust Bancorp, Inc.
Condensed
Consolidated Balance Sheets
(dollars
in thousands)
|
|
(unaudited)
September
30
2007
|
|
|
December
31
2006
|
|
Assets:
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
86,070
|
|
|
$
|
95,438
|
|
Federal
funds sold
|
|
|
41,876
|
|
|
|
62,100
|
|
Cash
and cash equivalents
|
|
|
127,946
|
|
|
|
157,538
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale at fair value
|
|
|
|
|
|
|
|
|
(amortized
cost of $356,248 and $430,867, respectively)
|
|
|
352,973
|
|
|
|
425,851
|
|
Securities
held-to-maturity at amortized cost
|
|
|
|
|
|
|
|
|
(fair
value of $33,090 and $39,015, respectively)
|
|
|
34,107
|
|
|
|
40,508
|
|
Loans
held for sale
|
|
|
1,719
|
|
|
|
1,431
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
2,234,494
|
|
|
|
2,167,458
|
|
Allowance
for loan losses
|
|
|
(27,933
|
)
|
|
|
(27,526
|
)
|
Net
loans
|
|
|
2,206,561
|
|
|
|
2,139,932
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
53,650
|
|
|
|
55,665
|
|
Federal
Reserve Bank and Federal Home Loan Bank stock
|
|
|
28,041
|
|
|
|
28,027
|
|
Goodwill
|
|
|
65,059
|
|
|
|
65,059
|
|
Core
deposit intangible (net of accumulated amortization of $5,429
and
|
|
|
|
|
|
|
|
|
$4,953,
respectively)
|
|
|
2,075
|
|
|
|
2,551
|
|
Bank
owned life insurance
|
|
|
22,981
|
|
|
|
20,937
|
|
Other
assets
|
|
|
34,030
|
|
|
|
32,262
|
|
Total
assets
|
|
$
|
2,929,142
|
|
|
$
|
2,969,761
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders’ equity:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$
|
426,368
|
|
|
$
|
429,994
|
|
Interest
bearing
|
|
|
1,906,507
|
|
|
|
1,911,173
|
|
Total
deposits
|
|
|
2,332,875
|
|
|
|
2,341,167
|
|
|
|
|
|
|
|
|
|
|
Repurchase
agreements
|
|
|
146,876
|
|
|
|
161,630
|
|
Federal
funds purchased and other short-term borrowings
|
|
|
15,450
|
|
|
|
15,940
|
|
Advances
from Federal Home Loan Bank
|
|
|
40,971
|
|
|
|
81,245
|
|
Long-term
debt
|
|
|
61,341
|
|
|
|
61,341
|
|
Other
liabilities
|
|
|
36,713
|
|
|
|
26,063
|
|
Total
liabilities
|
|
|
2,634,226
|
|
|
|
2,687,386
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, 300,000 shares authorized and unissued
|
|
|
|
|
|
|
|
|
Common
stock, $5 par value, shares authorized 25,000,000;
|
|
|
|
|
|
|
|
|
shares
outstanding 2007 – 15,031,850; 2006 – 15,158,176
|
|
|
75,159
|
|
|
|
75,791
|
|
Capital
surplus
|
|
|
148,543
|
|
|
|
150,965
|
|
Retained
earnings
|
|
|
73,342
|
|
|
|
58,879
|
|
Accumulated
other comprehensive loss, net of tax
|
|
|
(2,128
|
)
|
|
|
(3,260
|
)
|
Total
shareholders’ equity
|
|
|
294,916
|
|
|
|
282,375
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
2,929,142
|
|
|
$
|
2,969,761
|
|
See
notes
to condensed consolidated financial
statements.
Community
Trust Bancorp, Inc.
Condensed
Consolidated Statements of Income and Other Comprehensive
Income
(unaudited)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
(in
thousands except per share data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans, including loans held for sale
|
|
$
|
43,454
|
|
|
$
|
42,114
|
|
|
$
|
128,835
|
|
|
$
|
120,510
|
|
Interest
and dividends on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
4,316
|
|
|
|
4,947
|
|
|
|
13,593
|
|
|
|
14,550
|
|
Tax
exempt
|
|
|
471
|
|
|
|
514
|
|
|
|
1,460
|
|
|
|
1,550
|
|
Interest
and dividends on other equity investments
|
|
|
453
|
|
|
|
398
|
|
|
|
1,340
|
|
|
|
1,170
|
|
Other,
including interest on federal funds sold
|
|
|
1,025
|
|
|
|
520
|
|
|
|
3,755
|
|
|
|
2,291
|
|
Total
interest income
|
|
|
49,719
|
|
|
|
48,493
|
|
|
|
148,983
|
|
|
|
140,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
19,345
|
|
|
|
16,546
|
|
|
|
57,996
|
|
|
|
45,558
|
|
Interest
on repurchase agreements and other short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
2,177
|
|
|
|
2,212
|
|
|
|
6,510
|
|
|
|
6,497
|
|
Interest
on advances from Federal Home Loan Bank
|
|
|
605
|
|
|
|
916
|
|
|
|
2,020
|
|
|
|
2,926
|
|
Interest
on long-term debt
|
|
|
1,000
|
|
|
|
1,354
|
|
|
|
3,364
|
|
|
|
4,061
|
|
Total
interest expense
|
|
|
23,127
|
|
|
|
21,028
|
|
|
|
69,890
|
|
|
|
59,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
26,592
|
|
|
|
27,465
|
|
|
|
79,093
|
|
|
|
81,029
|
|
Provision
for loan losses
|
|
|
1,915
|
|
|
|
1,755
|
|
|
|
4,231
|
|
|
|
3,105
|
|
Net
interest income after provision for loan losses
|
|
|
24,677
|
|
|
|
25,710
|
|
|
|
74,862
|
|
|
|
77,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
5,302
|
|
|
|
5,220
|
|
|
|
15,436
|
|
|
|
15,081
|
|
Gains
on sales of loans, net
|
|
|
384
|
|
|
|
265
|
|
|
|
996
|
|
|
|
885
|
|
Trust
income
|
|
|
1,240
|
|
|
|
927
|
|
|
|
3,619
|
|
|
|
2,669
|
|
Loan
related fees
|
|
|
606
|
|
|
|
661
|
|
|
|
2,494
|
|
|
|
1,774
|
|
Bank
owned life insurance
|
|
|
280
|
|
|
|
242
|
|
|
|
752
|
|
|
|
734
|
|
Other
|
|
|
2,122
|
|
|
|
876
|
|
|
|
4,109
|
|
|
|
2,844
|
|
Total
noninterest income
|
|
|
9,934
|
|
|
|
8,191
|
|
|
|
27,406
|
|
|
|
23,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
9,604
|
|
|
|
10,750
|
|
|
|
31,818
|
|
|
|
32,538
|
|
Occupancy,
net
|
|
|
1,641
|
|
|
|
1,489
|
|
|
|
5,043
|
|
|
|
4,960
|
|
Equipment
|
|
|
1,202
|
|
|
|
1,246
|
|
|
|
3,664
|
|
|
|
3,728
|
|
Data
processing
|
|
|
1,301
|
|
|
|
958
|
|
|
|
3,617
|
|
|
|
2,744
|
|
Bank
franchise tax
|
|
|
866
|
|
|
|
816
|
|
|
|
2,598
|
|
|
|
2,446
|
|
Legal
and professional fees
|
|
|
922
|
|
|
|
760
|
|
|
|
2,489
|
|
|
|
2,076
|
|
Other
|
|
|
3,788
|
|
|
|
3,938
|
|
|
|
13,529
|
|
|
|
11,409
|
|
Total
noninterest expense
|
|
|
19,324
|
|
|
|
19,957
|
|
|
|
62,758
|
|
|
|
59,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
15,287
|
|
|
|
13,944
|
|
|
|
39,510
|
|
|
|
42,010
|
|
Income
taxes
|
|
|
4,811
|
|
|
|
4,060
|
|
|
|
12,154
|
|
|
|
12,466
|
|
Net
income
|
|
|
10,476
|
|
|
|
9,884
|
|
|
|
27,356
|
|
|
|
29,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding (losses) on securities available-for-sale
|
|
|
1,969
|
|
|
|
2,627
|
|
|
|
1,132
|
|
|
|
(291
|
)
|
Comprehensive
income
|
|
$
|
12,445
|
|
|
$
|
12,511
|
|
|
$
|
28,488
|
|
|
$
|
29,253
|
|
See
notes
to condensed consolidated financial
statements.
Community
Trust Bancorp, Inc.
Condensed
Consolidated Statements of Income and Other Comprehensive Income
(continued)
(unaudited)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
(in
thousands except per share data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.69
|
|
|
$
|
0.65
|
|
|
$
|
1.80
|
|
|
$
|
1.96
|
|
Diluted
earnings per share
|
|
|
0.68
|
|
|
|
0.64
|
|
|
|
1.77
|
|
|
|
1.93
|
|
Dividends
declared per share
|
|
|
0.27
|
|
|
|
0.26
|
|
|
|
0.81
|
|
|
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding-basic
|
|
|
15,183
|
|
|
|
15,129
|
|
|
|
15,186
|
|
|
|
15,064
|
|
Weighted
average shares outstanding-diluted
|
|
|
15,342
|
|
|
|
15,369
|
|
|
|
15,417
|
|
|
|
15,272
|
|
See
notes
to condensed consolidated financial
statements.
Community
Trust Bancorp, Inc.
Condensed
Consolidated Statements of Cash Flows
(unaudited)
|
|
Nine
months ended
|
|
|
|
September
30
|
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
27,356
|
|
|
$
|
29,544
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,299
|
|
|
|
4,347
|
|
Stock
based compensation
|
|
|
721
|
|
|
|
727
|
|
Provision
for loan and other real estate losses
|
|
|
4,579
|
|
|
|
3,314
|
|
Gains
on sale of mortgage loans held for sale
|
|
|
(996
|
)
|
|
|
(885
|
)
|
Gains
on sale of assets, net
|
|
|
159
|
|
|
|
252
|
|
Proceeds
from sale of mortgage loans held for sale
|
|
|
56,677
|
|
|
|
46,766
|
|
Funding
of mortgage loans held for sale
|
|
|
(55,969
|
)
|
|
|
(47,572
|
)
|
Amortization
of securities premiums, net
|
|
|
510
|
|
|
|
755
|
|
Change
in cash surrender value of bank owned life insurance
|
|
|
(653
|
)
|
|
|
(650
|
)
|
Changes
in:
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
9,438
|
|
|
|
13,201
|
|
Other
assets
|
|
|
397
|
|
|
|
(651
|
)
|
Net
cash provided by operating activities
|
|
|
46,518
|
|
|
|
49,148
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
Proceeds
from sales
|
|
|
106,800
|
|
|
|
103,900
|
|
Proceeds
from prepayments and maturities
|
|
|
37,179
|
|
|
|
46,988
|
|
Purchase
of securities
|
|
|
(69,800
|
)
|
|
|
(171,123
|
)
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
Proceeds
from prepayments and maturities
|
|
|
6,331
|
|
|
|
6,122
|
|
Change
in loans, net
|
|
|
(75,784
|
)
|
|
|
(53,321
|
)
|
Purchase
of premises, equipment, and other real estate
|
|
|
(1,808
|
)
|
|
|
(2,145
|
)
|
Proceeds
from sale of premises and equipment
|
|
|
0
|
|
|
|
32
|
|
Additional
investment in other equity securities
|
|
|
(14
|
)
|
|
|
(977
|
)
|
Redemption
of investment in unconsolidated subsidiaries
|
|
|
1,841
|
|
|
|
0
|
|
Investment
in unconsolidated subsidiaries
|
|
|
(1,841
|
)
|
|
|
0
|
|
Proceeds
from sale of other real estate and other repossessed
assets
|
|
|
2,290
|
|
|
|
3,251
|
|
Additions
in other real estate owned
|
|
|
(21
|
)
|
|
|
(72
|
)
|
Additional
investment in bank owned life insurance
|
|
|
(1,391
|
)
|
|
|
0
|
|
Net
assets acquired
|
|
|
0
|
|
|
|
(1,536
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
3,782
|
|
|
|
(68,881
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Change
in deposits, net
|
|
|
(8,292
|
)
|
|
|
33,154
|
|
Change
in repurchase agreements and other short-term borrowings,
net
|
|
|
(15,244
|
)
|
|
|
17,358
|
|
Payments
on advances from Federal Home Loan Bank
|
|
|
(40,274
|
)
|
|
|
(41,440
|
)
|
Payment
for redemption of junior subordinated debentures
|
|
|
(61,341
|
)
|
|
|
0
|
|
Additional
junior subordinated debentures
|
|
|
61,341
|
|
|
|
0
|
|
Issuance
of common stock
|
|
|
2,409
|
|
|
|
2,733
|
|
Purchase
of common stock
|
|
|
(6,184
|
)
|
|
|
0
|
|
Dividends
paid
|
|
|
(12,307
|
)
|
|
|
(11,722
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(79,892
|
)
|
|
|
83
|
|
Net
decrease in cash and cash equivalents
|
|
|
(29,592
|
)
|
|
|
(19,650
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
157,538
|
|
|
|
122,211
|
|
Cash
and cash equivalents at end of period
|
|
$
|
127,946
|
|
|
$
|
102,561
|
|
See
notes
to condensed consolidated financial
statements.
Community
Trust Bancorp, Inc.
Notes
to Condensed Consolidated
Financial Statements
(unaudited)
Note
1 - Summary of Significant Accounting Policies
In
the opinion of management, the
unaudited condensed consolidated financial statements include all adjustments
(which consist of normal recurring accruals) necessary, to present fairly the
condensed consolidated financial position as of September 30, 2007, the results
of operations for the three and nine months ended September 30, 2007 and 2006,
and the cash flows for the nine months ended September 30, 2007 and
2006. In accordance with accounting principles generally accepted in
the United States of America for interim financial information, these statements
do not include certain information and footnote disclosures required by
accounting principles generally accepted in the United States of America for
complete annual financial statements. The condensed consolidated
balance sheet as of December 31, 2006 has been derived from the audited
consolidated financial statements of Community Trust Bancorp, Inc. ("CTBI")
for
that period. The results of operations for the three and nine months
ended September 30, 2007 and 2006, and the cash flows for the nine months ended
September 30, 2007 and 2006, are not necessarily indicative of the results
to be
expected for the full year. For further information, refer to the
consolidated financial statements and footnotes thereto for the year ended
December 31, 2006, included in CTBI's Annual Report on Form 10-K.
Principles
of Consolidation
–
The unaudited condensed consolidated financial statements include
the
accounts of CTBI and its separate and distinct, wholly owned subsidiaries
Community Trust Bank, Inc. (the “Bank”) and Community Trust and Investment
Company. All significant intercompany transactions have been
eliminated in consolidation.
Reclassifications
–
Certain reclassifications considered to be immaterial have been made in the
prior year consolidated financial statements to conform to current year
classifications.
New
Accounting
Standards
–
Ø
Accounting
for Uncertainty in Income Taxes –
In July 2006, the Financial
Accounting Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48"),
Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109
. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in accordance with FASB Statement No.
109,
Accounting for Income Taxes
. This statement also
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The evaluation of a tax position
in accordance with this statement is a two-step process. The first
step is a recognition process to determine whether it is more likely than not
that a tax position will be sustained upon examination, including resolution
of
any related appeals or litigation processes, based on the technical merits
of
the position. The second step is a measurement process whereby a tax
position that meets the more likely than not recognition threshold is calculated
to determine the amount of benefit to recognize in the financial
statements. FIN 48 is effective for fiscal years beginning after
December 15, 2006. CTBI adopted the provisions of FIN 48 on January
1, 2007. The cumulative effect of applying the provisions of this
statement was recognized as a $0.6 million adjustment to the beginning balance
of retained earnings. An additional $28 thousand increase to the FIN
48 liability was charged to current income tax expense during the quarter ended
March 31, 2007. The FIN 48 liability is carried in other liabilities
in the condensed consolidated balance sheet as of September 30,
2007. Approximately $0.2 million in FIN 48 liability is relative to
state nexus issues. It is anticipated that these issues can be
resolved through the filing of amended state tax returns, and management expects
that these amended returns will be filed within the next six
months. CTBI is subject to taxation in the United States and various
state and local jurisdictions. For federal tax purposes, CTBI’s tax
years for 2004 through 2007 are subject to examination by the tax
authorities. For state and local tax purposes, CTBI’s tax years for
2003 through 2007 are subject to examination by the tax
authorities. CTBI currently recognizes interest and penalties accrued
related to unrecognized tax benefits in income tax expense.
Ø
Fair
Value Measurements –
In September 2006, the FASB issued Statement of
Financial Accounting Standards No. 157,
Fair Value Measurements
("SFAS
157"), which provides guidance on how to measure assets and liabilities that
use
fair value. SFAS 157 will apply whenever another generally accepted
accounting principle standard requires (or permits) assets or liabilities to
be
measured at fair value but does not expand the use of fair value to any new
circumstances. This statement also will require additional
disclosures in both annual and quarterly reports. SFAS 157 will be
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and will be adopted by CTBI beginning in the first quarter
of
2008. CTBI is currently evaluating the potential impact this
statement may have on its financial position and results of operations, but
does
not believe the impact of the adoption will be material.
Ø
Fair
Value Option for Financial Assets and Financial Liabilities –
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159,
The Fair Value Option for Financial Assets and Financial
Liabilities
("SFAS 159"), which permits entities to choose to measure many
financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities using different measurement
techniques. SFAS 159 requires additional disclosures related to the
fair value measurements included in the entity's financial
statements. This statement is effective for financial statements
issued for fiscal years beginning after Nov. 15, 2007. Accordingly,
CTBI will adopt SFAS 159 in the first quarter of 2008. CTBI is
currently evaluating the potential impact this statement may have on its
financial position and results of operations, but does not believe the impact
of
the adoption will be material.
Note
2 – Stock-Based Compensation
CTBI’s
compensation expense related to
stock option grants was $159 thousand and $498 thousand, respectively, for
the
three and nine months ended September 30, 2007, compared to $157 thousand and
$477 thousand, respectively for the three and nine months ended September 30,
2006. As of September 30, 2007, there was a total of $2.0 million of
unrecognized compensation expense related to unvested stock option awards that
will be recognized as expense as the awards vest over a weighted average period
of 2.0 years compared to $1.5 million of unrecognized compensation at September
30, 2006.
There
were no options granted during
the three months ended September 30, 2007 or 2006. However, there
were 109,304 and 116,900 options granted during the nine months ended September
30, 2007 and 2006, respectively. The fair value of options granted
during the nine months ended September 30, 2007 and 2006, was established at
the
date of grant using a Black-Scholes option pricing model with the weighted
average assumptions as follows:
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
|
2007
|
|
|
2006
|
|
Expected
dividend yield
|
|
|
2.77
|
%
|
|
|
3.21
|
%
|
Risk-free
interest rate
|
|
|
4.81
|
%
|
|
|
4.53
|
%
|
Expected
volatility
|
|
|
33.50
|
%
|
|
|
36.39
|
%
|
Expected
term (in years)
|
|
|
7.5
|
|
|
|
7.5
|
|
Weighted
average fair value of options
|
|
$
|
12.74
|
|
|
$
|
10.51
|
|
Note
3 – Securities
Securities
are classified into
held-to-maturity and available-for-sale categories. Held-to-maturity
securities are those that CTBI has the positive intent and ability to hold
to
maturity and are reported at amortized cost. Available-for-sale
securities are those that CTBI 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 at September 30, 2007 are summarized as follows:
Available-for-Sale
(in
thousands)
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
U.S.
Treasury and government agencies
|
|
$
|
20,303
|
|
|
$
|
20,584
|
|
State
and political subdivisions
|
|
|
41,604
|
|
|
|
42,078
|
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
|
|
210,690
|
|
|
|
207,178
|
|
Collateralized
mortgage obligations
|
|
|
1
|
|
|
|
1
|
|
Total
debt securities
|
|
|
272,598
|
|
|
|
269,841
|
|
Marketable
equity securities
|
|
|
83,650
|
|
|
|
83,132
|
|
Total
available-for-sale securities
|
|
$
|
356,248
|
|
|
$
|
352,973
|
|
Held-to-Maturity
(in
thousands)
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
State
and political subdivisions
|
|
$
|
1,900
|
|
|
$
|
1,752
|
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
|
|
32,207
|
|
|
|
31,338
|
|
Total
held-to-maturity securities
|
|
$
|
34,107
|
|
|
$
|
33,090
|
|
The
amortized cost and fair value of
securities as of December 31, 2006 are summarized as follows:
Available-for-Sale
(in
thousands)
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
U.S.
Treasury and government agencies
|
|
$
|
20,291
|
|
|
$
|
20,491
|
|
State
and political subdivisions
|
|
|
44,887
|
|
|
|
45,562
|
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
|
|
245,038
|
|
|
|
239,590
|
|
Collateralized
mortgage obligations
|
|
|
1
|
|
|
|
1
|
|
Other
debt securities
|
|
|
20,000
|
|
|
|
19,557
|
|
Total
debt securities
|
|
|
330,217
|
|
|
|
325,201
|
|
Marketable
equity securities
|
|
|
100,650
|
|
|
|
100,650
|
|
Total
available-for-sale securities
|
|
$
|
430,867
|
|
|
$
|
425,851
|
|
Held-to-Maturity
(in
thousands)
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
State
and political subdivisions
|
|
$
|
3,068
|
|
|
$
|
2,832
|
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
|
|
37,440
|
|
|
|
36,183
|
|
Total
held-to-maturity securities
|
|
$
|
40,508
|
|
|
$
|
39,015
|
|
Note
4 – Loans
Major
classifications of loans are
summarized as follows:
(in
thousands)
|
|
September
30
2007
|
|
|
December
31
2006
|
|
Commercial
construction
|
|
$
|
139,531
|
|
|
$
|
133,902
|
|
Commercial
secured by real estate
|
|
|
659,612
|
|
|
|
632,881
|
|
Commercial
other
|
|
|
330,559
|
|
|
|
337,075
|
|
Real
estate construction
|
|
|
62,470
|
|
|
|
50,588
|
|
Real
estate mortgage
|
|
|
595,505
|
|
|
|
579,197
|
|
Consumer
|
|
|
439,518
|
|
|
|
422,291
|
|
Equipment
lease financing
|
|
|
7,299
|
|
|
|
11,524
|
|
Total
loans
|
|
$
|
2,234,494
|
|
|
$
|
2,167,458
|
|
Activity
in the allowance for loan and
lease losses was as follows:
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
Allowance
balance at January 1
|
|
$
|
27,526
|
|
|
$
|
29,506
|
|
Additions
to allowance charged against operations
|
|
|
4,231
|
|
|
|
3,105
|
|
Recoveries
credited to allowance
|
|
|
1,980
|
|
|
|
2,412
|
|
Losses
charged against allowance
|
|
|
(5,804
|
)
|
|
|
(7,017
|
)
|
Allowance
balance at September 30
|
|
$
|
27,933
|
|
|
$
|
28,006
|
|
Note
5 – Borrowings
Short-term
debt consists of the
following:
(in
thousands)
|
|
September
30
2007
|
|
|
December
31
2006
|
|
Subsidiaries:
|
|
|
|
|
|
|
Repurchase
agreements
|
|
$
|
146,876
|
|
|
$
|
161,630
|
|
Federal
funds purchased
|
|
|
15,450
|
|
|
|
15,940
|
|
Total
short-term debt
|
|
$
|
162,326
|
|
|
$
|
177,570
|
|
Effective
April 28, 2007, the
Corporation entered into a revolving note agreement for a line of credit in
the
amount of $12 million, all of which is currently available to meet any future
cash needs. The agreement will mature on April 30, 2008.
All
federal funds purchased and the
majority of repurchase agreements mature and reprice daily. The
average rates paid for federal funds purchased and repurchase agreements on
September 30, 2007 were 4.95% and 4.81%, respectively.
Federal
Home Loan Bank advances
consisted of the following monthly amortizing and term borrowings:
(in
thousands)
|
|
September
30
2007
|
|
|
December
31
2006
|
|
Monthly
amortizing
|
|
$
|
971
|
|
|
$
|
1,245
|
|
Term
|
|
|
40,000
|
|
|
|
80,000
|
|
|
|
$
|
40,971
|
|
|
$
|
81,245
|
|
The
advances from the Federal Home Loan
Bank that require monthly principal payments were due for repayment as
follows:
|
Principal
Payments Due by Period at September 30, 2007
|
(in
thousands)
|
Total
|
Within
1 Year
|
2
Years
|
3
Years
|
4
Years
|
5
Years
|
After
5 Years
|
Outstanding
advances, weighted average interest rate – 4.15%
|
$
|
971
|
$
|
221
|
$
|
71
|
$
|
623
|
$
|
8
|
$
|
8
|
$
|
40
|
The
term advances that require the
total payment to be made at maturity follow:
(in
thousands)
|
|
September
30
2007
|
|
|
December
31
2006
|
|
Advance
#145, 3.31%, due 8/30/07
|
|
$
|
0
|
|
|
$
|
40,000
|
|
Advance
#146, 3.70%, due 8/30/08
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
$
|
40,000
|
|
|
$
|
80,000
|
|
The
advances are collateralized by
Federal Home Loan Bank stock of $23.7 million and certain first mortgage loans
totaling $55.3 million as of September 30, 2007. Advances totaling
$41 million at September 30, 2007 had fixed interest rates ranging from 1.00%
to
6.20% with a weighted average rate of 3.71%. The advances are subject
to restrictions or penalties in the event of prepayment.
Long-term
debt consists of the
following:
(in
thousands)
|
|
September
30
2007
|
|
|
December
31
2006
|
|
Junior
subordinated debentures, 9.00%, due 3/31/27
|
|
$
|
0
|
|
|
$
|
35,568
|
|
Junior
subordinated debentures, 8.25%, due 3/31/32
|
|
|
0
|
|
|
|
25,773
|
|
Junior
subordinated debentures, 6.52%, due 6/1/37
|
|
|
61,341
|
|
|
|
0
|
|
Total
long-term debt
|
|
$
|
61,341
|
|
|
$
|
61,341
|
|
On
March 31, 2007, CTBI issued $61.3
million in junior subordinated debentures to a newly formed unconsolidated
Delaware statutory trust subsidiary which in turn issued $59.5 million of
capital securities in a private placement to institutional
investors. The debentures, which mature in 30 years but are
redeemable at par at CTBI's option after five years, were issued at a rate
of
6.52% until June 1, 2012, and thereafter at a floating rate based on the
three-month LIBOR plus 1.59%. The underlying capital securities were
issued at the equivalent rates and terms. The proceeds of the
debentures were used to fund the redemption on April 2, 2007 of all CTBI's
outstanding 9.0% and 8.25% junior subordinated debentures in the total amount
of
$61.3 million.
Note
6 – Earnings Per Share
The
following table sets forth the
computation of basic and diluted earnings per share:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
10,476
|
|
|
$
|
9,884
|
|
|
$
|
27,356
|
|
|
$
|
29,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
15,183
|
|
|
|
15,129
|
|
|
|
15,186
|
|
|
|
15,064
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive stock options
|
|
|
159
|
|
|
|
240
|
|
|
|
231
|
|
|
|
208
|
|
Adjusted
weighted average shares
|
|
|
15,342
|
|
|
|
15,369
|
|
|
|
15,417
|
|
|
|
15,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.69
|
|
|
$
|
0.65
|
|
|
$
|
1.80
|
|
|
$
|
1.96
|
|
Diluted
earnings per share
|
|
|
0.68
|
|
|
|
0.64
|
|
|
|
1.77
|
|
|
|
1.93
|
|
Options
to purchase 292,975 common
shares and 102,901 common shares, respectively, for both the three months and
nine months ended September 30, 2007 were excluded from the diluted calculations
above because the exercise prices on the options were greater than the average
market price for the period. No common shares for the three months
and nine months ended September 30, 2006 were excluded from the diluted
calculations.
Note
7 – Fair Market Value of Financial Instruments
The
estimated fair values of CTBI's
financial instruments are as follows:
|
|
September
30
2007
|
|
|
December
31
2006
|
|
(in
thousands)
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
127,946
|
|
|
$
|
127,946
|
|
|
$
|
157,538
|
|
|
$
|
157,538
|
|
Securities
|
|
|
387,080
|
|
|
|
386,063
|
|
|
|
466,359
|
|
|
|
464,866
|
|
Loans
(net of ALLL)
|
|
|
2,206,561
|
|
|
|
2,181,210
|
|
|
|
2,139,932
|
|
|
|
2,104,378
|
|
Loans
held for sale
|
|
|
1,719
|
|
|
|
1,738
|
|
|
|
1,431
|
|
|
|
1,451
|
|
Federal
Reserve Bank stock
|
|
|
4,304
|
|
|
|
4,304
|
|
|
|
4,290
|
|
|
|
4,290
|
|
Federal
Home Loan Bank stock
|
|
|
23,737
|
|
|
|
23,737
|
|
|
|
23,737
|
|
|
|
23,737
|
|
Accrued
interest receivable
|
|
|
18,161
|
|
|
|
18,161
|
|
|
|
17,321
|
|
|
|
17,321
|
|
Capitalized
mortgage servicing rights
|
|
|
3,461
|
|
|
|
3,461
|
|
|
|
3,390
|
|
|
|
3,416
|
|
|
|
$
|
2,772,969
|
|
|
$
|
2,746,620
|
|
|
$
|
2,813,998
|
|
|
$
|
2,776,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
2,332,875
|
|
|
$
|
2,328,780
|
|
|
$
|
2,341,167
|
|
|
$
|
2,341,474
|
|
Short-term
borrowings
|
|
|
162,326
|
|
|
|
163,230
|
|
|
|
177,570
|
|
|
|
177,853
|
|
Advances
from Federal Home Loan Bank
|
|
|
40,971
|
|
|
|
40,082
|
|
|
|
81,245
|
|
|
|
78,281
|
|
Long-term
debt
|
|
|
61,341
|
|
|
|
52,289
|
|
|
|
61,341
|
|
|
|
60,415
|
|
Accrued
interest payable
|
|
|
15,542
|
|
|
|
15,542
|
|
|
|
7,241
|
|
|
|
7,241
|
|
|
|
$
|
2,613,055
|
|
|
$
|
2,599,923
|
|
|
$
|
2,668,564
|
|
|
$
|
2,665,264
|
|
The
changes in the estimated fair
values from December 31, 2006 to September 30, 2007 are due to interest rate
changes and not impairment of any financial instruments.
Item
2. Management’s Discussion and Analysis of Financial
Condition
and
Results of Operations
Overview
Community
Trust Bancorp, Inc. (“CTBI”)
is a bank holding company headquartered in Pikeville, Kentucky. At
September 30, 2007, CTBI owned one commercial bank and one trust
company. Through its subsidiaries, CTBI has seventy-nine banking
locations in eastern, northeast, central, and south central Kentucky and
southern West Virginia, and five trust offices across Kentucky. CTBI
had total assets of $2.9 billion and total shareholders’ equity of $294.9
million as of September 30, 2007. CTBI’s common stock is listed on
NASDAQ under the symbol CTBI. Current market participants are Howe
Barnes Hoefer & Arnett, Inc.; Goldman, Sachs & Co.; UBS Securities, LLC;
Knight Equity Markets, L.P.; Sandler O'Neill & Partners; Morgan
Stanley & Co., Inc.; Lehman Brothers, Inc.; Citadel Derivatives Group, LLC;
Keefe, Bruyette & Woods, Inc.; Susquehanna Capital Group; J.J.B. Hilliard,
W.L. Lyons; Citigroup Global Markets, Inc.; and FTN Midwest Securities
Corp.
CTBI
terminated its Agreement and Plan
of Merger dated May 31, 2007 with Eagle Fidelity, Inc. On August 10,
2007, CTBI was informed that the Eagle Board of Directors had determined that
a
third party had made a “superior proposal” for the acquisition of
Eagle. CTBI’s Board of Directors determined that it would not
increase the consideration under the merger agreement. CTBI received
payment of a termination fee under the merger agreement in the amount of $1.2
million during the third quarter 2007.
Critical
Accounting Policies and Estimates
The
preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires the appropriate application of certain
accounting policies, many of which require us to make estimates and assumptions
about future events and their impact on amounts reported in our consolidated
financial statements and related notes. Since future events and their
impact cannot be determined with certainty, the actual results will inevitably
differ from our estimates. Such differences could be material to the
consolidated financial statements.
We
believe the application of
accounting policies and the estimates required therein are
reasonable. These accounting policies and estimates are constantly
reevaluated, and adjustments are made when facts and circumstances dictate
a
change. Historically, we have found our application of accounting
policies to be appropriate, and actual results have not differed materially
from
those determined using necessary estimates.
Our
accounting policies are more fully
described in the consolidated financial statements and footnotes thereto for
the
year ended December 31, 2006, included in CTBI's Annual Report on Form
10-K. We have identified the following critical accounting
policies:
Loans
–
Loans with the ability and the intent to be
held until maturity and/or payoff are reported at the carrying value of unpaid
principal reduced by unearned interest and an allowance for loan and lease
losses. Income is recorded on the level yield
basis. Interest accrual is discontinued when management believes,
after considering economic and business conditions, collateral value, and
collection efforts, that the borrower’s financial condition is such that
collection of interest is doubtful. Any loan greater than 90 days
past due must be well secured and in the process of collection to continue
accruing interest. Cash payments received on nonaccrual loans
generally are applied against principal, and interest income is only recorded
once principal recovery is reasonably assured. Loans are not
reclassified as accruing until principal and interest payments are brought
current and future payments appear reasonably certain.
Loan
origination and commitment fees
and certain direct loan origination costs are deferred and the net amount
amortized over the life of the related loans, leases, or commitments as a yield
adjustment.
Allowance
for Loan and Lease
Losses
–
We maintain an allowance for loan and
lease losses ("ALLL") at a level that is appropriate to cover estimated credit
losses on individually evaluated loans determined to be impaired, as well as
estimated credit losses inherent in the remainder of the loan and lease
portfolio. Since arriving at an appropriate ALLL involves a high
degree of management judgment, we use an ongoing quarterly analysis to develop
a
range of estimated losses. In accordance with accounting principles
generally accepted in the United States, we use our best estimate within the
range of potential credit loss to determine the appropriate
ALLL. Credit losses are charged and recoveries are credited to the
ALLL.
We
utilize an internal risk grading
system for commercial credits. Those larger commercial credits that
exhibit probable or observed credit weaknesses are subject to individual
review. The borrower’s cash flow, adequacy of collateral coverage,
and other options available to CTBI, including legal remedies, are
evaluated. The review of individual loans includes those loans that
are impaired as provided in Statement of Financial Accounting Standards ("SFAS")
No. 114,
Accounting by Creditors for Impairment of a
Loan
. We evaluate the collectibility of both principal and
interest when assessing the need for loss provision. Historical loss
rates are applied to other commercial loans not subject to specific
allocations. Management analyzes the average, maximum, minimum, and
median historical loss rates for the previous eight quarters and determines
the
most likely loss rate to apply by comparing these to migration analysis, which
computes the net charge-off experience on loans according to their internal
risk
grade, and other market factors.
Homogenous
loans, such as consumer
installment, residential mortgages, and home equity lines are not individually
risk graded. The associated ALLL for these loans is measured under
SFAS No. 5,
Accounting for Contingencies
. The ALLL
allocation for these pools of loans is established based on the average,
maximum, minimum, and median loss ratios over the previous eight
quarters.
Historical
loss rates for commercial
and retail loans are adjusted for significant factors that, in management’s
judgment, reflect the impact of any current conditions on loss
recognition. Factors that we consider include delinquency trends,
current economic conditions and trends, strength of supervision and
administration of the loan portfolio, levels of underperforming loans, level
of
recoveries to prior year's charge offs, trend in loan losses, industry
concentrations and their relative strengths, amount of unsecured loans and
underwriting exceptions. These factors are reviewed quarterly and a
weighted range developed with a "most likely" scenario
determined. The total of these weighted factors is then applied
against the total portfolio and the ALLL is adjusted accordingly.
Loans
Held for Sale –
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses, if any, are recognized in a
valuation allowance by charges to income.
Premises
and
Equipment
– Premises and equipment are stated at cost less accumulated
depreciation and amortization. Capital leases are included in
premises and equipment at the capitalized amount less accumulated
amortization. Premises and equipment are evaluated for impairment on
a quarterly basis.
Depreciation
and amortization are
computed primarily using the straight-line method. Estimated useful
lives range up to 40 years for buildings, 2 to 10 years for furniture, fixtures,
and equipment, and up to the lease term for leasehold
improvements. Capitalized leased assets are amortized on a
straight-line basis over the lives of the respective leases.
Goodwill
and Core Deposit
Intangible
–
We evaluate total goodwill and core
deposit intangible for impairment, based upon SFAS No. 142,
Goodwill and
Other Intangible Assets
and SFAS No. 147,
Acquisitions of Certain
Financial Institutions
, using fair value techniques including multiples of
price/equity. Goodwill and core deposit intangible are evaluated for
impairment on an annual basis or as other events may warrant.
Amortization
of core deposit intangible
is estimated at approximately $0.6 million annually for the next four years
and
approximately $0.3 million in year five.
Income
Taxes
– Income tax expense is based on the taxes due on the consolidated
tax return plus deferred taxes based on the expected future tax consequences
of
temporary differences between carrying amounts and tax bases of assets and
liabilities, using enacted tax rates.
Earnings
Per Share
("EPS")
– Basic EPS is calculated by dividing net income available to
common shareholders by the weighted average number of common shares
outstanding.
Diluted
EPS adjusts the number of
weighted average shares of common stock outstanding by the dilutive effect
of
stock options as prescribed in SFAS No. 123R.
Segments
–
Management
analyzes the operation of CTBI assuming one operating segment, community banking
services. CTBI, through its operating subsidiaries, offers a wide
range of consumer and commercial community banking services. These
services include: (i) residential and commercial real estate loans; (ii)
checking accounts; (iii) regular and term savings accounts and savings
certificates; (iv) full service securities brokerage services; (v) consumer
loans; (vi) debit cards; (vii) annuity and life insurance products; (viii)
Individual Retirement Accounts and Keogh plans; (ix)
commercial
loans; (x) trust services; and (xi) commercial
demand deposit accounts.
Bank
Owned Life Insurance –
CTBI's bank owned life insurance policies are carried at their cash
surrender value. We recognize tax-free income from the periodic
increases in cash surrender value of these policies and from death
benefits.
Dividends
The
following schedule shows the
quarterly cash dividends paid for the past six quarters:
Pay
Date
|
Record
Date
|
Amount
Per Share
|
October
1, 2007
|
September
15, 2007
|
$0.27
|
July
1, 2007
|
June
15, 2007
|
$0.27
|
April
1, 2007
|
March
15, 2007
|
$0.27
|
January
1, 2007
|
December
15, 2006
|
$0.27
|
October
1, 2006
|
September
15, 2006
|
$0.26
|
July
1, 2006
|
June
15, 2006
|
$0.26
|
On
October 23, 2007, the Corporation announced an increase in the cash dividend
to
$0.29 per share to be paid on January 1, 2008, to shareholders of record on
December 15, 2007.
Statement
of Income Review
CTBI
reported earnings for the quarter
ended September 30, 2007 of $10.5 million or $0.69 per basic share compared
to
$8.9 million or $0.58 per share earned during the quarter ended June 30, 2007
and $9.9 million or $0.65 per share earned during the third quarter of
2006. Earnings for the nine months ended September 30, 2007 were
$27.4 million or $1.80 per basic share compared to $29.5 million or $1.96 per
share earned for the first nine months of 2006.
Third
Quarter Highlights
v
|
CTBI's
basic earnings per share for the third quarter 2007 increased 19.0%
from
prior quarter and 6.2% from prior year third
quarter. Year-to-date earnings per basic share, however,
decreased 8.2% from the nine months ended September 30,
2006.
|
v
|
Current
quarter earnings were impacted by the receipt of a $1.2 million fee
in
relation to the termination of the acquisition of Eagle Fidelity,
Inc. and
the reversal of an employee incentive accrual in the amount of $1.5
million.
|
v
|
CTBI
repurchased 196,500 shares of its common stock during the third quarter
2007, leaving 382,019 shares remaining under CTBI's current repurchase
authorization.
|
v
|
Core
earnings for the quarter and YTD 2007 continue to reflect the pressure
on
our net interest income as CTBI continues operating within the inverted
yield curve.
|
v
|
Nonperforming
loans as a percentage of total loans at September 30, 2007 were 1.41%,
an
increase of $7.6 million over prior quarter and a $15.9 million increase
from same period prior year. The quarter over quarter increase
in nonperforming loans is driven by the residential real estate
development market in Central Kentucky and consists of three borrowing
relationships. The relationships have been thoroughly analyzed
and appropriate reserves established for any potential
loss.
|
v
|
Our
loan portfolio grew at an annualized rate of 3.5% during the quarter
and
3.7% from September 30, 2006.
|
v
|
Our
investment portfolio declined 15.2% from prior quarter and 14.5%
from
prior year resulting from the payment of a $40 million FHLB advance
and a
decline in deposits which were funded through the sale of auction
rate
securities. The FHLB advance was acquired in the third quarter
2004 to fund growth in our investment
portfolio.
|
CTBI
had basic weighted average shares
outstanding of 15.2 million and 15.1 million, respectively, for the three months
ended September 30, 2007 and 2006, and 15.2 million and 15.1 million,
respectively, for the nine months ended September 30, 2007 and
2006. 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, 2007 and 2006:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Return
on average shareholders' equity
|
|
|
14.04
|
%
|
|
|
14.40
|
%
|
|
|
12.53
|
%
|
|
|
14.89
|
%
|
Return
on average assets
|
|
|
1.39
|
|
|
|
1.34
|
|
|
|
1.22
|
|
|
|
1.34
|
|
Net
Interest Income
As
anticipated by
management, our net interest margin remained stable during the third quarter
2007. Our quarterly net interest margin remained at 3.86%, the same
as prior quarter, but was a decrease of 22 basis points from the third quarter
2006. Our year-to-date net interest margin has declined 19 basis
points from the first nine months of 2006.
Net
interest income for the quarter
remained at $26.6 million, the same as prior quarter, but decreased
3.2% from prior year third quarter, as the yield on average earnings assets
increased 2 basis points from September 2006 to September 2007 in comparison
to
the 33 basis point increase in the cost of interest bearing
funds. Year-to-date net interest income has decreased 2.4% compared
to the first nine months of 2006. Average earning assets have
increased 2.5% year over year.
The
following table summarizes the
annualized net interest spread and net interest margin for the three and nine
months ended September 30, 2007 and 2006.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Yield
on interest earning assets
|
|
|
7.18
|
%
|
|
|
7.16
|
%
|
|
|
7.21
|
%
|
|
|
6.96
|
%
|
Cost
of interest bearing funds
|
|
|
4.11
|
|
|
|
3.78
|
|
|
|
4.14
|
|
|
|
3.57
|
|
Net
interest spread
|
|
|
3.07
|
%
|
|
|
3.38
|
%
|
|
|
3.07
|
%
|
|
|
3.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
|
|
|
3.86
|
%
|
|
|
4.08
|
%
|
|
|
3.86
|
%
|
|
|
4.05
|
%
|
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)
|
|
2007
|
|
|
2006
|
|
Allowance
balance at January 1
|
|
$
|
27,526
|
|
|
$
|
29,506
|
|
Additions
to allowance charged against operations
|
|
|
4,231
|
|
|
|
3,105
|
|
Recoveries
credited to allowance
|
|
|
1,980
|
|
|
|
2,412
|
|
Losses
charged against allowance
|
|
|
(5,804
|
)
|
|
|
(7,017
|
)
|
Allowance
balance at September 30
|
|
$
|
27,933
|
|
|
$
|
28,006
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses to period-end loans
|
|
|
1.25
|
%
|
|
|
1.30
|
%
|
Average
loans, net of unearned income
|
|
$
|
2,195,940
|
|
|
$
|
2,122,011
|
|
Provision
for loan losses to average loans, annualized
|
|
|
0.26
|
%
|
|
|
0.20
|
%
|
Loan
charge-offs net of recoveries, to average loans,
annualized
|
|
|
0.23
|
%
|
|
|
0.29
|
%
|
Net
loan charge-offs for the quarter of
$1.7 million, or 0.30% of average loans annualized, was an increase from prior
quarter's 0.23% of average loans annualized and from the 0.29% from prior year
third quarter. Net loan charge-offs for the nine months ended
September 30, 2007 of 0.23% of average loans annualized was a decrease from
the
0.29% for the first nine months of 2006. Our reserve for losses on
loans as a percentage of total loans outstanding at September 30, 2007 remained
at 1.25% from prior quarter, a decrease from the 1.30% at September 30,
2006. The adequacy of our reserve for losses on loans is analyzed
quarterly and adjusted as necessary.
Noninterest
Income
Noninterest
income for the third
quarter 2007 remained relatively stable to prior quarter after normalizing
for
the receipt of a $1.2 million fee associated with the termination of the Eagle
Fidelity, Inc. acquisition, but increased 6.6% normalized from the third quarter
2006. Year-to-date noninterest income normalized increased more than
9% from the nine months ended September 30, 2006, with increases in gains on
sales of loans, deposit service charges, trust revenue, and loan related
fees.
Noninterest
Expense
Noninterest
expense for the quarter
decreased 7.7% from prior quarter as a result of the reversal of an employee
incentive accrual. Year-to-date noninterest expense, however,
increased 4.8% as the third quarter accrual reversal was offset by the first
quarter charge related to unamortized debt issuance costs with the redemption
of
trust preferred securities.
Balance
Sheet Review
CTBI’s
total assets decreased $71.7
million or 2.4% from prior quarter and $40.6 million, or an annualized 1.8%,
from prior year-end, resulting from the payoff of a $40 million FHLB advance
and
a decline in deposits which were funded through the sale of auction rate
securities. Loans outstanding at September 30, 2007 were $2.2 billion
reflecting a $19.4 million, annualized 3.5%, increase during the quarter, and
a
$67.0 million or 4.1% increase from prior year-end. CTBI's investment
portfolio decreased $74.7 million from prior quarter and $79.3 million from
December 31, 2006. Deposits, including repurchase agreements,
declined $39.7 million, an annualized 6.3%, during the quarter and $23.0
million, an annualized 1.2%, during the first nine months of the year, as CTBI
continued its focus on managing deposit growth and pricing controls due to
its
liquidity position.
Shareholders’
equity
of $294.9 million
on September 30, 2007 was an annualized increase of 4.4% from June 30, 2007
and
an annualized 5.9% increase from the $282.4 million on December 31,
2006. Our annualized dividend yield to shareholders as of September
30, 2007 was 3.60%.
Loans
Loan
growth occurred in the residential
and consumer loan portfolios during the third quarter 2007 and in all three
major loan categories—commercial, residential, and consumer—from prior
year-end. For the first nine months of 2007, the commercial loan
portfolio increased $21.6 million, residential real estate loans increased
$28.2
million, and the consumer portfolio increased $17.2 million.
The
following tables summarize CTBI’s
nonperforming loans as of September 30, 2007 and December 31, 2006.
(in
thousands)
|
|
Nonaccrual
Loans
|
|
|
As
a % of Loan Balances by Category
|
|
|
Restructured
Loans
|
|
|
As
a % of Loan Balances by Category
|
|
|
Accruing
Loans Past Due 90 Days or More
|
|
|
As
a % of Loan Balances by Category
|
|
|
Total
Loan Balances
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
construction
|
|
$
|
4,868
|
|
|
|
3.49
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
2,856
|
|
|
|
2.05
|
%
|
|
$
|
139,531
|
|
Commercial
secured by real estate
|
|
|
6,418
|
|
|
|
0.97
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
3,540
|
|
|
|
0.54
|
|
|
|
659,612
|
|
Commercial
other
|
|
|
4,717
|
|
|
|
1.43
|
|
|
|
61
|
|
|
|
0.02
|
|
|
|
2,986
|
|
|
|
0.90
|
|
|
|
330,559
|
|
Consumer
real estate construction
|
|
|
615
|
|
|
|
0.98
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
62,470
|
|
Consumer
real estate secured
|
|
|
2,574
|
|
|
|
0.43
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
2,487
|
|
|
|
0.42
|
|
|
|
595,505
|
|
Consumer
other
|
|
|
0
|
|
|
|
0.00
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
392
|
|
|
|
0.09
|
|
|
|
439,518
|
|
Equipment
lease financing
|
|
|
0
|
|
|
|
0.00
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
7,299
|
|
Total
|
|
$
|
19,192
|
|
|
|
0.86
|
%
|
|
$
|
61
|
|
|
|
0.00
|
%
|
|
$
|
12,261
|
|
|
|
0.55
|
%
|
|
$
|
2,234,494
|
|
(in
thousands)
|
|
Nonaccrual
Loans
|
|
|
As
a % of Loan Balances by Category
|
|
|
Restructured
Loans
|
|
|
As
a % of Loan Balances by Category
|
|
|
Accruing
Loans Past Due 90 Days or More
|
|
|
As
a % of Loan Balances by Category
|
|
|
Total
Loan Balances
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
construction
|
|
$
|
430
|
|
|
|
0.32
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
$
|
283
|
|
|
|
0.21
|
%
|
|
$
|
133,902
|
|
Commercial
secured by real estate
|
|
|
3,631
|
|
|
|
0.57
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
938
|
|
|
|
0.15
|
|
|
|
632,881
|
|
Commercial
other
|
|
|
3,227
|
|
|
|
0.96
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
873
|
|
|
|
0.26
|
|
|
|
337,075
|
|
Consumer
real estate construction
|
|
|
361
|
|
|
|
0.71
|
|
|
|
66
|
|
|
|
0.13
|
|
|
|
405
|
|
|
|
0.80
|
|
|
|
50,588
|
|
Consumer
real estate secured
|
|
|
2,212
|
|
|
|
0.38
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
1,507
|
|
|
|
0.26
|
|
|
|
579,197
|
|
Consumer
other
|
|
|
2
|
|
|
|
0.00
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
288
|
|
|
|
0.07
|
|
|
|
422,291
|
|
Equipment
lease financing
|
|
|
0
|
|
|
|
0.00
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
11,524
|
|
Total
|
|
$
|
9,863
|
|
|
|
0.46
|
%
|
|
$
|
66
|
|
|
|
0.00
|
%
|
|
$
|
4,294
|
|
|
|
0.20
|
%
|
|
$
|
2,167,458
|
|
Nonperforming
loans at September 30,
2007 were $31.5 million compared to $23.9 million at June 30, 2007 and $17.3
million at December 31, 2006. All nonperforming loans are
individually reviewed with specific reserves established when
appropriate. The increase in nonperforming loans is driven primarily
by three relationships related to residential development. We
anticipate nonperforming loans to remain higher than recent history as the
normal legal collection time period for real estate secured assets has been
slowed due to increased volumes in the industry. Our loan portfolio
management processes focus on maintaining appropriate reserves for potential
losses.
Foreclosed
properties at September 30,
2007 of $6.6 million were a $2.7 million increase from the $3.9 million
on June
30, 2007 and a $2.1 million increase from the $4.5 million on December
31,
2006. The increase was driven by a $2.6 million increase in single
family residential properties from our Central Kentucky Region where the
market
has softened. The market has not experienced deflation in residential
real estate, but the time on the market before sale has
extended.
Allowance
for Loan Losses
The
allowance for loan and lease losses
balance is maintained by management at a level considered adequate to cover
anticipated probable losses based on past loss experience, general economic
conditions, information about specific borrower situations including their
financial position and collateral values, and other factors and estimates which
are subject to change over time. This analysis is completed quarterly
and forms the basis for allocation of the loan loss reserve and what charges
to
the provision may be required. For further discussion of the
allowance for loan losses, see the Critical Accounting Policies and Estimates
section presented earlier in Item 2.
Securities
CTBI
uses its securities
held-to-maturity for production of income and to manage cash flow needs through
expected maturities. CTBI uses its securities available-for-sale for
income and balance sheet liquidity management. Securities
available-for-sale reported at fair value decreased from $425.9 million as
of
December 31, 2006 to $353.0 million at September 30, 2007; the excess of cost
over market decreased from $5.0 million to $3.3 million. The
reduction in securities available-for-sale resulted from the payment of a $40
million FHLB advance and a decline in deposits which were funded through the
sale of auction rate securities. Securities held-to-maturity
decreased from $40.5 million to $34.1 million during the same
period. Total securities as a percentage of total assets were 15.7%
as of December 31, 2006 and 13.2% as of September 30, 2007.
Liquidity
and Capital Resources
CTBI’s
liquidity objectives are to
ensure that funds are available for the subsidiary bank to meet deposit
withdrawals and credit demands without unduly penalizing
profitability. Additionally, CTBI's objectives ensure that funding is
available for CTBI to meet ongoing cash needs while maximizing
profitability. CTBI continues to identify ways to provide for
liquidity on both a current and long-term basis. The subsidiary bank
relies mainly on core deposits, certificates of deposits of $100,000 or more,
repayment of principal and interest on loans and securities and federal funds
sold and purchased to create long-term liquidity. The subsidiary bank
also has available the sale of securities under repurchase agreements,
securities available-for-sale, and Federal Home Loan Bank ("FHLB") borrowings
as
secondary sources of liquidity.
Due
to the nature of the markets served
by the subsidiary bank, management believes that the majority of its
certificates of deposit of $100,000 or more and its repurchase agreements are
no
more volatile than its core deposits. During periods of interest rate
volatility, these deposit balances have remained stable as a percentage of
total
deposits. In addition, an arrangement has been made with a
correspondent bank for the purchase of federal funds on an unsecured basis,
up
to $20 million, if necessary, to meet CTBI’s liquidity needs.
CTBI
owns securities with an estimated
fair value of $353 million that are designated as available-for-sale and
available to meet liquidity needs on a continuing basis. CTBI also
has available Federal Home Loan Bank advances for both liquidity and management
of its asset/liability position. FHLB advances decreased from $81.2
million at December 31, 2006 to $41.0 million at September 30, 2007, resulting
from the payment of a $40 million advance that was acquired in the third quarter
2004 to fund growth in our investment portfolio. FHLB borrowing
capacity at September 30, 2007 was $396.4 million. Long-term debt
remained at $61.3 million from December 31, 2006 to September 30,
2007. At September 30, 2007, federal funds sold were $41.9 million
compared to $62.1 million at December 31, 2006. Additionally,
management projects cash flows from CTBI's investment portfolio to generate
additional liquidity over the next 90 days.
CTBI
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. CTBI’s primary investing
activities include purchases of securities and loan originations.
The
investment portfolio continues to
consist of high-quality short-term issues. The majority of the
investment portfolio is in U.S. government and government sponsored agency
issuances. The average life of the portfolio
is
3.11 years.
Available-for-sale
("AFS") securities comprise approximately 85%
of the total
investment portfolio. At the end of the third quarter, the AFS
portfolio
was approximately 120%
of
equity capital.
At September 30, 2007, eighty-eight
percent
of the pledge eligible portfolio was
pledged.
CTBI's
stock repurchase program began
in December 1998 with the authorization to acquire up to 500,000 shares and
was
increased by an additional 1,000,000 shares in July 2000 and in May
2005. CTBI repurchased 196,500 shares of its common stock during the
third quarter 2007, leaving 382,019 shares remaining under CTBI's current
repurchase authorization. As of September 30, 2007, a total of 2.1
million shares have been repurchased through this program.
In
conjunction with maintaining a
satisfactory level of liquidity, management monitors the degree of interest
rate
risk assumed on the consolidated balance sheet. CTBI monitors its
interest rate risk by use of the static gap model and dynamic gap model at
the
one-year interval. CTBI uses the Sendero system to monitor its
interest rate risk. 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. CTBI desires an interest sensitivity gap of not more than
fifteen percent of total assets at the one-year interval.
CTBI’s
principal source of funds used
to pay dividends to shareholders and service long-term debt is the dividends
it
receives from the subsidiary bank. Various federal statutory
provisions, in addition to regulatory policies and directives, limit the amount
of dividends that subsidiary banks can pay without prior regulatory
approval. These restrictions have had no major impact on CTBI’s
dividend policy or its ability to service long-term debt, nor is it anticipated
that they would have any major impact in the foreseeable
future. During the remainder of 2007, approximately $60.6 million
plus any remaining 2007 net profits can be paid by CTBI’s banking subsidiary
without prior regulatory approval.
The
primary source of capital for CTBI
is retained earnings. CTBI paid cash dividends of $0.81 per share
during the first nine months of 2007. Basic earnings per share for
the same period was $1.80. CTBI retained 55.0% of earnings for the
first nine months of 2007.
Under
guidelines issued by banking
regulators, CTBI and its subsidiary bank are required to maintain a minimum
Tier
1 risk-based capital ratio of 4% and a minimum total risk-based ratio of
8%. In order to be considered “well-capitalized” CTBI must maintain
ratios of 6% and 10%, respectively. Risk-based capital ratios weight
the relative risk factors of all assets and consider the risk associated with
off-balance sheet items. CTBI must also maintain a minimum Tier 1
leverage ratio of 4%. The well-capitalized ratio for Tier 1 leverage
is 5%. CTBI’s Tier 1 leverage, Tier 1 risk-based, and total
risk-based ratios were 9.88%, 12.75%, and 13.99%, respectively, as of September
30, 2007, all exceeding the threshold for meeting the definition of
well-capitalized.
As
of September 30, 2007, 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 CTBI’s liquidity, capital resources, or
operations.
Impact
of Inflation and Changing Prices
The
majority of CTBI’s assets and
liabilities are monetary in nature. Therefore, CTBI 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 one of the most
significant impacts on financial and operating results is CTBI’s ability to
react to changes in interest rates. Management seeks to maintain an
essentially balanced position between interest rate sensitive assets and
liabilities in order to protect against the effects of wide interest rate
fluctuations.
FORWARD-LOOKING
STATEMENTS
Certain
of the statements contained
herein that are not historical facts are forward-looking statements within
the
meaning of the Private Securities Litigation Reform Act. CTBI’s
actual results may differ materially from those included in the forward-looking
statements. Forward-looking statements are typically identified by
words or phrases such as "believe," "expect," "anticipate," "intend,"
"estimate," "may increase," "may fluctuate," and similar expressions or future
or conditional verbs such as "will," "should," "would," and
"could." These forward-looking statements involve risks and
uncertainties including, but not limited to, economic conditions, portfolio
growth, the credit performance of the portfolios, including bankruptcies, and
seasonal factors; changes in general economic conditions including the
performance of financial markets, prevailing inflation and interest rates,
realized gains from sales of investments, gains from asset sales, and losses
on
commercial lending activities; results of various investment activities; the
effects of competitors’ pricing policies, changes in laws and regulations,
competition, and demographic changes on target market populations’ savings and
financial planning needs; industry changes in information technology systems
on
which we are highly dependent; failure of acquisitions to produce revenue
enhancements or cost savings at levels or within the time frames originally
anticipated or unforeseen integration difficulties; the adoption by CTBI of
a
Federal Financial Institutions Examination Council (FFIEC) policy that provides
guidance on the reporting of delinquent consumer loans and the timing of
associated credit charge-offs for financial institution subsidiaries; and the
resolution of legal proceedings and related matters. In
addition, the banking industry in general is subject to various monetary and
fiscal policies and regulations, which include those determined by the Federal
Reserve Board, the Federal Deposit Insurance Corporation, and state regulators,
whose policies and regulations could affect CTBI’s results. These
statements are representative only on the date hereof, and CTBI undertakes
no
obligation to update any forward-looking statements made.