UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K
(Mark One)
For the fiscal year ended December 31, 2000
or
For the transition period from to
Commission file number 0-11129
COMMUNITY TRUST BANCORP, INC. (Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code: (606) 432-1414
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $5.00 par value(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the registrant as of February 28, 2001 was $166,456,304. The number of shares outstanding of the Registrant's Common Stock as of February 28, 2001 was 11,699,415. For the purpose of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the Form 10-K part indicated:
PART I
Item 1. Business
Community Trust Bancorp, Inc. (the "Corporation") is a bank holding company registered with the Board of Governors of the Federal Reserve System pursuant to section 5 (a) of the Bank Holding Company Act of 1956, as amended. The Corporation was incorporated August 12, 1980, under the laws of the Commonwealth of Kentucky for the purpose of becoming a bank holding company. On July 1, 1981, pursuant to a Merger Agreement dated May 30, 1981, the merger of Pikeville National Bank and Trust Company ("PNB") as a subsidiary of the Corporation was consummated, whereby PNB became a wholly-owned subsidiary of the Corporation through an exchange of one share of common stock of PNB for two shares of common stock of the Corporation. Prior to the date the merger became effective, the Corporation conducted no active business operations. Since the merger, the business of the Corporation has been to act as a holding company for affiliate financial institutions. The Corporation currently owns all the capital stock of one commercial bank and one trust company, serving small and mid-sized communities in eastern, central, south central Kentucky, and southern West Virginia. The commercial bank is Community Trust Bank, N.A., Pikeville, Kentucky. The trust company, Trust Company of Kentucky, N.A., Lexington, Kentucky, purchased the trust operations of its subsidiary banks and has additional offices in Pikeville, Ashland, Middlesboro, and Louisville, Kentucky. The trust subsidiary commenced business operations on January 1, 1994. At December 31, 2000, the Corporation had total consolidated assets of $2.3 billion and total consolidated deposits of $1.9 billion, making it the second largest bank holding company headquartered in the Commonwealth of Kentucky.
Effective January 1, 1997, the Corporation 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.
The Corporation sold its subsidiary Commercial Bank, West Liberty, Kentucky ("West Liberty") on July 1, 1997 for $10.2 million creating a gain on sale of $3 million. West Liberty had $76 million in assets, constituting 4% of the Corporation's total consolidated assets. Consistent with the Corporation's strategic plan, the funds generated by the sale of West Liberty provided the Corporation with the opportunity to expand existing markets and enter into new markets through internal expansion and acquisitions.
On June 26, 1998, the Corporation's wholly owned subsidiary, Community Trust Bank of West Virginia, N.A., purchased seven Banc One Corporation branches with deposits totaling $216 million. On December 31, 1998 Community Trust Bank of West Virginia, N.A. merged into Community Trust Bank, N.A. Also in 1998, Community Trust Bank, N.A. purchased five branch offices from PNC Bank, N.A. with deposits totaling $195 million.
On December 29, 2000, the Corporation merged its thrift subsidiary, Community Trust Bank, FSB, into the Bank.
On January 26, 2001, Community Trust Bank, National Association, the Corporation's lead bank, acquired the deposits, loans, and fixed assets of The Bank of Mt.Vernon, Inc., a subsidiary of Premier Financial Bancorp, Inc., (NASDAQ-PFBI) of Georgetown, Kentucky. The Bank of Mt. Vernon, Inc.'s offices are located in Mt. Vernon, Somerset, Richmond, and Berea, Kentucky. The offices acquired have deposits totaling $109.3 million and loans totaling $91 million. Additionally, for sixty days after the closing, the Bank has the right to put back and Premier has the obligation to purchase any loans the Bank deems to not fully meet its credit standards. The purchase price paid by Community Trust Bank, N.A. for the offices was a 9.5% premium on the non-brokered deposits as of the closing date plus approximately $1.6 million for fixed assets, $12.6 million for investment securities, and $1.0 million for the cash held at The Bank of Mt. Vernon's branches.
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Through its subsidiaries, the Corporation engages in a wide range of commercial and personal banking activities, which include accepting time and demand deposits; making secured and unsecured loans to corporations, individuals and others; providing cash management services to corporate and individual customers; issuing letters of credit; renting safe deposit boxes and providing funds transfer services. The lending activities of the Corporation's banking subsidiary include making commercial, construction, mortgage and personal loans. Also available are lease financing, lines of credit, revolving credits, term loans and other specialized loans including asset-based financing. Various corporate subsidiaries act as trustees of personal trusts, as executors of estates, as trustees for employee benefit trusts, as registrars, transfer agents and paying agents for bond and stock issues and as depositories for securities.
COMPETITION
The Corporation's subsidiaries face substantial competition for deposit, credit and trust relationships, as well as other sources of funding in the communities they serve. Competing providers include other national and state banks, thrifts and trust companies, insurance companies, mortgage banking operations, credit unions, finance companies, money market funds and other financial and non-financial companies which may offer products functionally equivalent to those offered by the Corporation's subsidiaries. Many of these providers offer services within and outside the market areas served by the Corporation's subsidiaries. The Corporation's subsidiaries strive to offer competitively priced products along with quality customer service to build banking relationships in the communities they serve.
Since July 1989, banking legislation in Kentucky places no limits on the number of banks or bank holding companies that a bank holding company may acquire. Interstate acquisitions are allowed where reciprocity exists between the laws of Kentucky and the home state of the bank or bank holding company to be acquired. Bank holding companies continue to be limited to control of less than 15% of deposits held by banks in the states where they do business (exclusive of inter-bank and foreign deposits).
The recently adopted Gramm-Leach-Bliley Act of 1999 (the "Gramm Act") has expanded the permissible activities of a bank holding company. The Gramm Act allows qualifying bank holding companies to elect to be treated as financial holding companies. A financial holding company may engage in activities that are financial in nature or are incidental or complementary to financial activities. The Gramm Act also eliminated restrictions imposed by the Glass-Steagall Financial Services Law, adopted in the 1930s, which prevented banking, insurance and securities firms from fully entering each other's business. While it is uncertain what the full impact of this legislation will be, it is likely to result in further consolidation in the financial services industry. In addition, removal of these restrictions will likely increase the number of entities providing banking services and thereby create additional competition.
In the 2000 session, the Kentucky legislature enacted legislation that permits statewide bank branching. While it is unclear at this time what the impact on the Corporation will be, statewide branching, like the recent federal legislation, can be expected to increase geographic expansion and growth opportunities for banks.
No material portion of the business of the Corporation is seasonal. The business of the Corporation is not dependent upon any one customer or a few customers, and the loss of any one or a few customers would not have a materially adverse affect on the Corporation. However, a certain portion of the Corporation's debtors are economically dependent on the coal industry (see note 16 to the consolidated financial statements).
The Corporation engages in no operations in foreign countries.
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EMPLOYEES
As of December 31, 2000, the Corporation and its subsidiaries had 795 full-time equivalent employees. Employees are provided with a variety of employee benefits. A retirement plan, employee stock ownership plan, group life, hospitalization, major medical insurance and annual management and employee incentive compensation plans are available to eligible personnel.
SUPERVISION AND REGULATION
The Corporation, as a registered bank holding company, is restricted to those activities permissible under the Bank Holding Company Act of 1956, as amended, and is subject to actions of the Board of Governors of the Federal Reserve System thereunder. It is required to file an annual report with the Federal Reserve Board and is subject to an annual examination by the Board.
The Bank is a national bank subsidiary subject to federal banking law and to regulation and periodic examinations by the Comptroller of the Currency under the National Bank Act and to the restrictions, including dividend restrictions, thereunder. The Bank is also a member of the Federal Reserve System and is subject to certain restrictions imposed by and to examination and supervision under, the Federal Reserve Act. The trust company subsidiary, Trust Company of Kentucky, N.A., is regulated by the Federal Reserve Board and the Office of the Comptroller of the Currency.
Deposits of the Corporation's subsidiary bank are insured by the Federal Deposit Insurance Corporation, which subjects banks to regulation and examination under the provisions of the Federal Deposit Insurance Act.
The operations of the Corporation and its subsidiaries also are affected by other banking legislation and policies and practices of various regulatory authorities. Such legislation and policies include statutory maximum rates on some loans, reserve requirements, domestic monetary and fiscal policy and limitations on the kinds of services that may be offered.
CAUTIONARY STATEMENT
Certain of the statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The Corporation's actual results may differ materially from those included in the forward-looking statements. Forward-looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "intend," "estimate," "may increase," "may fluctuate," and similar expressions or future or conditional verbs such as "will," "should," "would," and "could." These forward-looking statements involve risks and uncertainties including, but not limited to, economic conditions, portfolio growth, the credit performance of the portfolios, including bankruptcies, and seasonal factors; changes in general economic conditions including the performance of financial markets, the performance of coal and coal related industries, prevailing inflation and interest rates, realized gains from sales of investments, gains from asset sales, and losses on commercial lending activities; results of various investment activities; the effects of competitors' pricing policies, of changes in laws and regulations on competition and of demographic changes on target market populations' savings and financial planning needs; the adoption by the Corporation of an FFIEC policy that provides guidance on the reporting of delinquent consumer loans and the timing of associated credit charge-offs for financial institution subsidiaries; and the resolution of legal proceedings and related matters. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the Office of the Comptroller of Currency, the Federal Deposit Insurance Corporation, and state regulators, whose policies and regulations could affect the Corporation's results. These statements are representative only on the date hereof, and the Corporation undertakes no obligation to update any forward-looking statements made.
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SELECTED STATISTICAL INFORMATION
The following tables set forth certain statistical information relating to the Corporation and its subsidiaries on a consolidated basis and should be read together with the consolidated financial statements of the Corporation.
Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates
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Net Interest Differential
The following table illustrates the approximate effect of volume and rate changes on net interest differentials between 2000 and 1999 and also between 1999 and 1998.
For purposes of the above table, changes which are not solely due to rate or volume are allocated based on a percentage basis, using the absolute values of rate and volume variance as a basis for percentages. Income is stated at a fully taxable equivalent basis, assuming a 35% tax rate.
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Investment Portfolio
The maturity distribution and weighted average interest rates of securities at December 31, 2000 are as follows:
The calculations of the weighted average interest rates for each maturity category are based on yield weighted by the respective costs of the securities. The weighted average rates on state and political subdivisions are computed on a taxable equivalent basis using a 35% tax rate. For purposes of the above presentation, maturities of mortgage-backed pass through certificates and collateralized mortgage obligations are based on estimated maturities.
Excluding those holdings of the investment portfolio in U.S. Treasury securities and other agencies of the U.S. Government, there were no securities of any one issuer which exceeded 10% of the shareholders' equity of the Corporation at December 31, 2000.
Securities
The book value of securities available-for-sale and securities held-to-maturity as of December 31, 2000 and 1999 are presented in footnote 4.
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The book value of securities at December 31, 1998 is presented below:
Loan Portfolio
The total loans above are net of unearned income.
The following table shows the amounts of loans (excluding residential mortgages of 1-4 family residences, consumer loans and lease financing) which, based on the remaining scheduled repayments
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of principal are due in the periods indicated. Also, the amounts are classified according to sensitivity to changes in interest rates (fixed, variable).
Nonperforming Assets
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Nonaccrual, past due, and restructured loans
In 2000, gross interest income that would have been recorded on nonaccrual loans had the loans been current in accordance with their original terms amounted to $2 million. Interest income actually recorded and included in net income for the period was $0.2 million, leaving $1.8 million of interest income not recognized during the period.
Discussion of the Nonaccrual Policy
The accrual of interest income on loans is discontinued when the collection of interest and principal in full is not expected. When interest accruals are discontinued, interest income accrued in the current period is reversed. Any loans past due 90 days or more must be well secured and in the process of collection to continue accruing interest.
Potential Problem Loans
When management has serious doubts as to the ability of borrowers to comply with repayment terms, the loans are placed on nonaccrual status. Management, therefore, believes that no additional potential problem loans exist which would result in disclosure pursuant to Item III.
Foreign Outstandings
None
Loan Concentrations
The Corporation has no concentration of loans exceeding 10% of total loans, which is not otherwise disclosed at December 31, 2000.
Other Interest-Bearing Assets
The Corporation has no other interest-bearing assets that would be required to be disclosed under Item III.C.1 or 2, if such assets were loans, other than $0.3 million held as other real estate owned, included above in foreclosed properties.
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Analysis of the Allowance for Loan Losses
The allowance for loan losses balance is maintained by management at a level considered adequate to cover anticipated losses that are 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 provision may be required.
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Average Deposits and Other Borrowed Funds
Maturities of time deposits of $100,000 or more outstanding at December 31, 2000 are summarized as follows:
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Item 2. Properties
The Corporation's and the Bank's main offices are located at 346 North Mayo Trail, Pikeville, Kentucky, 41501 which is owned by the Bank.
The Bank is divided into seventeen operational markets and one operational center: Pikeville Market, Floyd/Knott Market, Tug Valley Market, Whitesburg Market, Lexington Market, Harrodsburg Market, Winchester Market, Richmond Market, Mount Sterling Market, Versailles Market, Ashland Market, Flemingsburg Market, Hamlin Market, Summersville Market, Middlesboro Market, Williamsburg Market, and Campbellsville Market.
The Bank presently has ten branch offices in the Pikeville Market including its main office. The Bank owns six of these branch-banking offices and leases the remaining four branch offices including the in-store branch located in a Wal-Mart superstore.
The Floyd/Knott Market has two branch offices. The Bank owns the two branch offices.
The Tug Valley Market has two branch offices. The Bank owns one branch office and leases one branch office.
The Whitesburg Market currently has five branch offices. The Bank owns three of these branch offices and leases two branch offices, one of which is leased under an obligation accounted for as a capital lease.
The Lexington Market has four branch offices. Two of these branches are in-store branches, which are located in a convenience store and in a Wal-Mart site. The Bank owns one branch office and leases the other three branch offices.
The Harrodsburg Market has one branch office. The Bank owns the one branch office.
The Winchester Market has three branch locations. The Bank owns one of the branch locations and leases two branch locations of which one is the in-store branch located in a Wal-Mart site.
The Richmond Market has three branch locations. The Bank owns two of the branch locations, including the land adjacent to one of the branch offices for a drive up window and leases one branch location which is the in-store branch located in a Wal-Mart site.
The Mount Sterling Market has three branch offices, of which one is an in-store branch located in a Wal-Mart superstore. The Bank owns two of the branch offices and leases the in-store site, the land for its ATM site, and the land adjacent to one of its branch offices for parking and a drive up window.
The Versailles Market has three branch locations. The Bank owns one of these branch offices and leases two branch offices including the in-store branch located in a Wal-Mart site.
The Ashland Market has five branch offices. The Bank owns all five of these branch offices. In the Ashland Market there are also two other properties, which are leased, the 16th Street Properties which is sub-leased, and the Old Meade Station Branch property which the Bank also receives tenant income. In addition to these two properties, the Bank receives income from office space leased to tenants, which is located in one of the branch offices as well as the Arcade, which adjoins the same branch office. A portion of the office space in the Arcade is used for Bank premises.
The Flemingsburg Market has four branch offices. The Bank owns all of these branch offices and also owns real property located in this Market which is leased to outside parties.
The Hamlin Market has three branch locations. The Bank owns the three branch offices.
The Summersville Market has one branch office. The Bank owns the one branch office.
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The Middlesboro Market has three branch locations. The Bank owns two of the branch offices and leases one branch office.
The Williamsburg Market has four branch offices. The Bank owns all four of the branch offices.
The Operations Center is located in Pikeville, Kentucky and the Bank owns the building and leases the land.
The Campbellsville Market has seven branch locations. The Bank owns six of the branch offices and leases one branch office.
Trust Company of Kentucky, N.A.'s main office is located in Lexington, Kentucky. The Lexington and Louisville offices are leased from outside parties. Trust Company of Kentucky, N.A. also has leased offices in the Bank's main office, Middlesboro Market's main office, and Ashland Market's main office.
See notes 7 and 13 to consolidated financial statements included herein for the year ended December 31, 2000, for additional information relating to commitments and amounts invested in premises and equipment.
Item 3. Legal Proceedings
The Corporation and its subsidiaries, and from time to time, its officers are named defendants in legal actions arising from normal business activities. Management, after consultation with legal counsel, believes these actions are without merit or that the ultimate liability, if any, will not materially affect the Corporation's consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders, through solicitation of proxies or otherwise, during the fourth quarter of 2000.
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Executive Officers of the Registrant
Set forth below are the executive officers of the Corporation at December 31, 2000, their positions with the Corporation and the year in which they first became an executive officer or director.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The Corporation's common stock is listed on The NASDAQ-Stock Market's National Market under the symbol CTBI. Additional information required by this item is included in the Quarterly Financial Data below:
Quarterly Financial Data
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There were approximately 3,400 holders of outstanding common shares of the Corporation at February 28, 2001.
Dividends
Due to a 10% stock dividend distributed on April 14, 2000, the 1999 cash dividend has been restated from $0.79 per share to $0.72 per share. The restated 2000 annual cash dividend was $0.75 per share. The Corporation has adopted a conservative policy of cash dividends with periodic stock dividends. Dividends are typically paid on a quarterly basis. Future dividends are subject to the discretion of the Corporation's Board of Directors, cash needs, general business conditions, dividends from the subsidiaries and applicable governmental regulations and policies. For information concerning restrictions on dividends from the subsidiary bank to the Corporation, see Note 18 to the consolidated financial statements included herein for the year ended December 31, 2000.
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Item 6. Selected Financial Data 1996-2000
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Community Trust Bancorp, Inc. reported record net earnings of $22.3 million for 2000, compared to $21.8 million for 1999 and $14 million for 1998. Earnings per share for 2000 were $1.87 compared to $1.79 per share for 1999 and $1.15 per share for 1998.
Earnings for 2000 reflected an increase in net interest income while noninterest income was negatively impacted by a decline in consumer loan related fees and the sale of secondary market residential real estate loans. The Corporation continues to improve efficiencies with a $2.5 million decline in noninterest expense compared to 1999. The loan loss provision remained materially even with only a slight $112 thousand increase year over year. The Corporation's return on average assets for 2000 was 1.02% as compared to 1.00% and 0.69% in 1999 and 1998, respectively, and the return on average equity for 2000 was 12.63% as compared to 12.89% and 8.59% for 1999 and 1998, respectively.
Total assets as of December 31, 2000 were $2.26 billion as compared to total assets of $2.18 billion on December 31, 1999. Total loans as of December 31, 2000 were $1.69 billion compared to $1.62 billion as of December 31, 1999, an increase of 4.63%. Total deposits increased 3.54% from $1.88 billion at December 31, 1999 to $1.94 billion at December 31, 2000.
Acquisitions
During 2000, the Corporation continued our strategic plan of expansion of our business through acquisitions within targeted markets. On January 26, 2001, Community Trust Bank, N.A. acquired the deposits, loans, and fixed assets of The Bank of Mt.Vernon, Inc., a subsidiary of Premier Financial Bancorp, Inc., (NASDAQ-PFBI) of Georgetown, Kentucky. The Bank of Mt. Vernon, Inc.'s offices are located in Mt. Vernon, Somerset, Richmond, and Berea, Kentucky. The offices acquired had deposits totaling $109.3 million and loans totaling $91 million. The Bank also opened a new branch location on October 17, 2000, in Corbin, Kentucky. The acquisition of the Mt. Vernon operations and the opening of the Corbin branch provide the Corporation with market coverage of the Interstate 75 Corridor from Lexington, Kentucky to the Tennessee state line. On December 29, 2000, the Corporation completed the merger of Community Trust Bank, FSB, into our lead bank, Community Trust Bank, N.A., to attain greater operational efficiencies.
Results of Operations
2000 Compared to 1999
Net income for 2000 was $22.3 million compared to $21.8 million for 1999. Basic earnings per share for 2000 were $1.87 compared to $1.79 per share for 1999. The number of shares outstanding at December 31, 2000 and December 31, 1999 were 11,700,895 and 12,147,519, respectively.
Net interest income for 2000 remained relatively flat as compared to 1999, rising from $83.8 million in 1999 to $84.2 million in 2000. Noninterest income decreased 7.13% from $21.0 million in 1999 to $19.5 million in 2000 while noninterest expense decreased 3.8% from $64.4 million in 1999 to $61.9 million in 2000. (See separate discussions of noninterest income and noninterest expense below.)
Return on average assets increased from 1.00% in 1999 to 1.02% in 2000, and return on average equity decreased from 12.89% in 1999 to 12.63% in 2000.
Net Interest Income:
The Company successfully held our net interest margin relatively stable for the year at 4.33% compared to 4.37% for 1999. Some of the pressure on the net interest margin was offset by a 75 basis
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point increase in our average earning assets as a percentage of total assets which were 91.31% at year-end 2000 compared to 90.56% at year-end 1999. See the table on page 6 titled "Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates" for further information.
The Corporation's average earning assets increased from $1.98 billion in 1999 to $2 billion in 2000. Average interest bearing liabilities also increased during the period, from $1.74 billion in 1999 to $1.75 billion in 2000. Average interest bearing liabilities as a percentage of average earning assets remained fairly stable, moving from 88.1% in 1999 to 87.4% in 2000.
The taxable equivalent yield on average earning assets increased from 8.39% in 1999 to 8.87% in 2000. The cost of average interest bearing liabilities also increased during the same period from 4.58% to 5.22%. The yield on interest bearing assets has been impacted by the change in the earning asset mix as well as by the increase in market rates in 2000. Loans accounted for 78.8% of all earning assets in 1999 while loans accounted for 83.1% of earning assets in 2000. Loans accounted for 74.9% of total assets as of December 31, 2000 compared to 74.4% as of December 31, 1999.
As presented in the interest rate sensitivity table in the Liquidity section that is included later in the Management Discussion and Analysis, the Corporation's balance sheet is positively gapped over a twelve-month period. This means that in an interest rate change, a larger dollar volume of interest bearing assets will reprice than will interest bearing liabilities. In a decreasing rate environment, such as that experienced in early 2001, our positive gap position could have a negative impact on the net interest margin.
Provision for Loan Losses:
The provision for loan losses increased from $9.1 million in 1999 to $9.2 million in 2000. Charge-offs, net of recoveries, as a percentage of average loans outstanding decreased from 0.65% in 1999 to 0.51% in 2000 as net charge-offs decreased by $1.7 million in 2000 to $8.4 million.
The allowance for loan losses (ALLL) declined from 1.55% of total loans at December 31, 1999 to 1.53% at December 31, 2000. The special provision of $6.0 million that was added to the ALLL in 1998 to cover remaining anticipated losses of pre-1998 indirect loans has been substantially utilized. The improving quality and loss experience of our indirect portfolio indicates an above-normal reserve is not required for this loan product.
Overall loss experience improved for 2000, and all categories of loans saw reduced losses except commercial loans, which increased from 0.12% to 0.26%. However, the loss ratio in 1999 was abnormally low, as the three-year moving average for commercial losses was 0.21% as of December 31, 2000. Nonperforming loans, which are primarily commercial loans, increased from 1.12% of total loans at December 31, 1999 to 1.52% at December 31, 2000. As a result, an additional $2.2 million loss reserve was allocated to commercial loans at December 31, 2000. Allocation for indirect losses was reduced by $3.9 million due to the improved quality of the indirect portfolio and the substantial recognition of the remaining losses in the pre-1998 indirect loans.
The allowance for loan losses is established at a level believed adequate by management to absorb probable losses inherent in the loan portfolio. Management's determination of the adequacy of the allowance is based upon estimates derived from an analysis of individual credits, prior and current loss experience, loan portfolio delinquency levels, overall growth in the loan portfolio, and current economic conditions. Such factors are considered when establishing the overall adequacy of the allowance for loan losses. As a result, a portion of the allowance for loan losses is not allocated to a specific loan product. These estimates are susceptible to changes that could result in an adjustment to results of operations. The provision for loan losses represents a charge against current earnings in order to maintain the allowance for loan losses at an appropriate level.
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Reserve allocations are calculated for each loan category based upon a three-year moving average of the loss experience for that loan category. In addition, where the potential for loss on specific loans has been identified, that amount is also included in the reserve allocation. The ALLL is then adjusted for overall characteristics of the current loan portfolio, such as delinquency trends, level of non-performing loans, industry concentrations of credit, and loss recovery rates. In addition, adjustments are made for changes in current economic conditions. Management also considers the overall growth of the loan portfolio.
Noninterest Income:
Noninterest income decreased 7.13% from $21.0 million in 1999 to $19.5 million in 2000, due to a decline in consumer loan related fees and sales of secondary market residential real estate loans. Service charges on deposit related products generated $9.7 million for the year, as compared to $9.6 million for the previous year. Trust income increased from $2.4 million in 1999 to $2.5 million in 2000 as trust assets under management increased during the year. Gains on sale of residential mortgage loans decreased from $1.7 million in 1999 to $0.688 million in 2000, while a gain of $0.254 million was recognized in 2000 on the sale of two commercial loans not previously held for sale. Other noninterest income decreased from $7.4 million in 1999 to $6.3 million in 2000. Securities gains and losses were not a significant factor in either 1999 or 2000, as the Corporation incurred net securities gains of $59,000 in 2000 and neither a gain nor loss in 1999.
Noninterest Expense:
The Company continued to experience improvements in operational efficiencies due to consolidation efforts commenced during the past three years as total noninterest expenses for 2000 of $61.9 million were $2.5 million (4%) less than the $64.4 million for 1999. The efficiency ratio improved 161 basis points, decreasing to 58.53% from 60.14% at year-end 1999. The deposit to FTE (full-time equivalent) ratio increased from $1.96 million to $2.12 million year over year. Salaries and employee benefits decreased from $30.5 million in 1999 to $29.7 million in 2000. Occupancy expense increased from $4.9 million in 1999 to $5.1 million in 2000 while equipment expense decreased from $4.8 million to $3.9 million, respectively. Data processing costs increased from $3.5 million in 1999 to $3.7 million in 2000 and stationery and printing costs decreased from $1.6 million in 1999 to $1.2 million in 2000. Taxes other than payroll, property and income, which consists mainly of franchise taxes on the equity and deposits of the Corporation, increased from $1.3 million in 1999 to $2.1 million in 2000. Other categories of noninterest expense declined from $17.6 million in 1999 to $16.3 million in 2000.
1999 Compared to 1998
Net income for 1999 was $21.8 million compared to $14.0 million for 1998. Basic earnings per share for 1999 were $1.79 compared to $1.15 per share for 1998.
Net interest income for 1999 increased 9.4% as compared to 1998, rising from $76.6 million in 1998 to $83.8 million in 1999. Noninterest income increased 8.0% from $19.5 million in 1998 to $21.0 million in 1999 while noninterest expense increased 3.6% from $62.2 million in 1998 to $64.4 million in 1998. (See separate discussions of noninterest income and noninterest expense below.)
Return on average assets increased from 0.69% in 1998 to 1.00% in 1999, and return on average equity increased from 8.59% in 1998 to 12.89% in 1999.
The Corporation's net interest margin increased from 4.21% at the end of 1998 to 4.37% at the end of 1999 as a result of the increase in loans outstanding, the management of deposit cost, and the increase in yield on loans as a result of market changes. See the table on page 6 titled "Consolidated
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Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates" for further information.
The Corporation's average earning assets increased from $1.87 billion in 1998 to $1.98 billion in 1999. Average interest bearing liabilities also increased during the period, from $1.64 billion in 1998 to $1.74 billion in 1999. Average interest bearing liabilities as a percentage of average earning assets remained fairly stable, moving from 87.8% in 1998 to 88.1% in 1999.
The taxable equivalent yield on average earning assets decreased from 8.68% in 1998 to 8.39% in 1999. The cost of average interest bearing liabilities also decreased from 5.11% to 4.58% during the same period. The yield on interest bearing assets has been impacted by the change in the earning asset mix as well as by the decline in market rates. Loans accounted for 78.5% of all earning assets in 1998 while loans accounted for 78.8% of earning assets in 1999. Loans accounted for 74.4% of total assets as of December 31, 1999 compared to 66.8% as of December 31, 1998.
The Corporation acquired twelve new branches during 1998 through a purchase of assets and assumption of liabilities, affecting deposit growth and to a lessor degree, loan growth. The two acquisitions resulted in a net cash flow to the Corporation of approximately $345.0 million.
The provision for loan losses decreased from $16.0 million in 1998 to $9.1 million in 1999. In September 1998, CTBI took a special charge of $7.3 million due to conditions that were recognized in 1998 in the Indirect Loan Portfolio (this portfolio consists primarily of new and used auto loans originated by non affiliated dealers). Six million ($6.0 million) of this charge was booked as additional Provision for Loan Losses. The indirect portfolio had been a continuing problem and this special provision allowed management to expedite the resolution of this issue. The remaining $1.3 million was recorded as a write down of the retained interest in the 1997 securitization of indirect auto loans.
Charge-offs, net of recoveries, as a percentage of average loans outstanding decreased from 0.78% in 1998 to 0.65% in 1999 as gross charge-offs decreased and recoveries increased for 1999. The allowance for loan losses decreased slightly from $26.1 million at December 31, 1998 to $25.1 million at December 31, 1999.
Noninterest income increased 8.0% from $19.5 million in 1998 to $21.0 million in 1999. Service charges on deposit-related products generated $9.6 million for the year, an increase of $1.7 million over the previous year. This was fueled by the acquisition of approximately $411 million in deposits during 1998 and by increasing our collection rates on service charges assessed. Trust income increased from $2.0 million in 1998 to $2.4 million in 1999 as trust assets under management increased during the year. Gains on sale of residential mortgage loans decreased from $2.1 million in 1998 to $1.7 million in 1999. Other noninterest income decreased marginally from $7.5 million in 1998 to $7.4 million in 1998. Securities gains and losses were not a significant factor in either 1998 or 1999, as the Corporation incurred net securities gains of $12,000 in 1998 and neither a gain nor loss in 1999.
Noninterest expense increased from $62.2 million in 1998 to $64.4 million in 1999. This increase is primarily the result of additional operating expenses from the 1998 acquisition of the twelve new branches discussed above. Although noninterest expense has increased due to the twelve new branches, there was a decrease in the efficiency ratio from 63.44% at December 31, 1998 to 60.14% at December 31, 1999. The deposit to FTE ratio increased from $1.75 million to $1.96 million year over year. Salaries and employee benefits increased from $28.7 million in 1998 to $30.5 million in 1999. Occupancy and equipment expense likewise increased from $4.5 million in 1998 to $4.9 million in 1999 and $4.0 million in 1998 to $4.8 million in 1999, respectively. Data processing costs increased from
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$3.3 million in 1998 to $3.5 million in 1999 and stationery and printing costs decreased from $1.8 million in 1998 to $1.6 million in 1999. Taxes other than payroll, property, and income, which consists mainly of Kentucky Franchise taxes on the equity and deposits of the affiliate banks, decreased from $2.1 million in 1998 to $1.3 million in 1999. Other categories of noninterest expense remained relatively flat from $17.7 million in 1998 to $17.9 million in 1999.
Liquidity and Market Risk
The objective of the Corporation's Asset/Liability management function is to maintain consistent growth in net interest income within the Corporation's policy limits. This objective is accomplished through management of the Corporation's balance sheet composition, liquidity, and interest rate risk exposures arising from changing economic conditions, interest rates and customer preferences. The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand or unexpected deposit withdrawals. This is accomplished by maintaining liquid assets in the form of investment securities, maintaining sufficient unused borrowing capacity and growth in core deposits. As of December 31, 2000, the Corporation had approximately $210.6 million in securities and other short-term investments maturing or repricing within one year. Additional asset-driven liquidity is provided by the remainder of the securities portfolio and the repayment of loans. These sources, in addition to the Corporation's 8% average equity capital base, provide a stable funding base. In addition to core deposit funding, the Corporation also accesses a variety of other short-term and long-term funding sources. The Corporation also uses the Federal Home Loan Bank (FHLB) as a funding source, with an available credit capacity of $314.3 million. The Corporation also has significant unused funding capacity in national market certificates of deposit. The Corporation has the availability of two national investment firms both of which have issued commitment letters committing them to market certificates of deposit issued by the Corporation in an amount not to exceed 15% of the Corporation's total deposits. Management does not rely on any one source of liquidity and manages availability in response to changing balance sheet needs.
The Corporation began a program of stock repurchase in December 1998 with the authorization to acquire up to 500,000 shares. The Corporation issued a press release in July 2000 announcing its intention to repurchase up to an additional 1,000,000 shares. During 2000, the Corporation continued its stock repurchase program which continues to be accretive to shareholder value. Through this program, the Corporation repurchased 521,460, 76,348, and 3,146 shares during 2000, 1999, and 1998, respectively.
Management considers interest rate risk the Corporation's most significant market risk. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of the Corporation's net interest revenue is largely dependent upon the effective management of interest rate risk. The Corporation employs a variety of measurement techniques to identify and manage its interest rate risk including the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain, and as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.
The Corporation's Asset/Liability Management Committee (ALCO), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk within Board-approved policy limits. The Corporation's current interest rate risk policy limits are
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determined by measuring the anticipated change in net interest income over a 12 month horizon assuming a 200 basis point immediate and sustained increase or decrease in all interest rates. The following table shows the Corporation's estimated earnings sensitivity profile as of December 31, 2000:
The following table shows the Corporation's estimated earnings sensitivity profile as of December 31, 1999:
Given an immediate and sustained 200 basis point increase in the yield curve used in the simulation model, it is estimated that net interest income for the Corporation would increase by 14% over one year. A 200 basis point immediate and sustained decrease in interest rates would decrease net interest income by 10% over one year. In order to reduce the exposure to interest rate fluctuations and to manage liquidity, the Corporation has developed sale procedures for several types of interest-sensitive assets. All long-term, fixed rate single family residential mortgage loans underwritten according to Federal Home Loan Mortgage Corporation guidelines are sold for cash upon origination. Periodically, additional assets such as short-term commercial loans are also sold. In 2000 and 1999, $28.8 million and $77.1 million, respectively, of fixed rate residential mortgages were sold. In addition in 2000, certain primarily fixed rate, short-term commercial loans were sold to a third party. Management focuses its efforts on consistent net interest revenue and net interest margin growth through each of the retail and wholesale business lines. The Corporation does not currently engage in trading activities.
Capital Resources
Total shareholders' equity increased from $172.4 million at December 31, 1999 to $181.9 million at December 31, 2000. The primary source of capital of the Corporation is retained earnings. Cash dividends were $0.75 per share for 2000 and $0.72 per share for 1999.
Regulatory guidelines require bank holding companies, commercial banks, and savings banks to maintain certain minimum ratios and define companies as "well capitalized" that sufficiently exceed the minimum ratios. The banking regulators may alter minimum capital requirements as a result of revising their internal policies and their ratings of individual institutions. To be "well capitalized" banks and bank holding companies must maintain a Tier 1 leverage ratio of no less than 5.0%, a Tier 1 risk based ratio of no less than 6.0% and a total risk based ratio of no less than 10.0%. The Corporation's ratios as of December 31, 2000 were 7.29%, 9.26%, and 10.51%, respectively. Community Trust Bancorp, Inc. and all banking affiliates met the criteria for "well capitalized" at December 31, 2000.
As of December 31, 2000, management is not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material adverse impact on the Corporation's liquidity, capital resources, or operations.
Impact of Inflation and Changing Prices
The majority of the Corporation's assets and liabilities are monetary in nature. Therefore, the Corporation differs greatly from most commercial and industrial companies that have significant
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investments in non-monetary assets, such as fixed assets and inventories. However, inflation does have an important impact on the growth of assets in the banking industry and on the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other expenses, which tend to rise during periods of general inflation.
Management believes the most significant impact on financial and operating results is the Corporation's ability to react to changes in interest rates. Management seeks to maintain an essentially balanced position between interest sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company currently does not engage in any derivative or hedging activity. Analysis of the Company's interest rate sensitivity can be found on page 24.
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Item 8. Financial Statements
Consolidated Balance Sheets
See notes to consolidated financial statements.
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Consolidated Statements of Income
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Consolidated Statements of Changes in Shareholders' Equity
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Consolidated Statements of Cash Flows
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Notes to Consolidated Financial Statements
1. Accounting Policies
Basis of Presentation—The consolidated financial statements include Community Trust Bancorp, Inc. (the "Corporation") and its subsidiaries, including its principal subsidiary, Community Trust Bank, National Association (the "Bank"). Intercompany transactions and accounts have been eliminated in consolidation. In preparing financial statements, management must make certain estimates and assumptions. These estimates and assumptions affect the amounts reported for assets, liabilities, revenues, and expenses, as well as affecting the disclosures provided. Future results could differ from the current estimates. Such estimates include, but are not limited to, the allowance for loan losses and goodwill (the excess of cost over net assets acquired).
Nature of Operations—Substantially all assets, liabilities, revenues, and expenses are related to banking operations, including lending, investing of funds, and obtaining of deposits and other financing. All of the Corporation's business offices and the majority of its business are located in eastern and central Kentucky and central and western West Virginia.
Cash and Cash Equivalents—Cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits in other financial institutions and federal funds sold. Generally, federal funds are sold for one day periods.
Securities—Management determines the classification of securities at purchase. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Corporation classifies securities into held-to-maturity or available-for-sale categories. Held-to-maturity securities are those which the Corporation has the positive intent and ability to hold to maturity and are reported at amortized cost. Available-for-sale securities are those the Corporation may decide to sell if needed for liquidity, asset-liability management, or other reasons. Available-for-sale securities are reported at fair value, with unrealized gains and losses included as a separate component of shareholders' equity, net of tax. If declines in fair value are not temporary, the carrying value of the securities is written down to fair value as a realized loss.
Gains or losses on disposition of securities are computed by specific identification for all securities except for shares in mutual funds, which are computed by average cost. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings.
Loans—Loans are reported at the carrying value of unpaid principal reduced by unearned interest and an allowance for loan losses. Income is recorded on the level yield basis. Interest accrual is discontinued when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. Any loan greater than 90 days past due must be well secured and in the process of collection to continue accruing interest. Cash payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured. Loans are not reclassified as accruing until principal and interest payments are brought current and future payments appear reasonably certain.
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income.
The allowance for loan losses is established at a level believed adequate by management to absorb probable losses inherent in the loan portfolio. Management's determination of the adequacy of the allowance is based upon estimates derived from an analysis of individual credits, prior and current loss experience, loan portfolio delinquency levels, overall growth in the loan portfolio, and current economic
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conditions. Such factors are considered when establishing the overall adequacy of the allowance for loan losses. As a result, a portion of the allowance for loan losses is not allocated to a specific loan product. These estimates are susceptible to changes that could result in an adjustment to results of operations. The provision for loan losses represents a charge against current earnings in order to maintain the allowance for loan losses at an appropriate level.
In determining the adequacy of the allowance for loan loss, management reviews and evaluates on an ongoing basis the necessity of a reserve for individual loans classified by management. Management determines a specific reserve for a classified loan based on its estimate of the borrower's ability to repay the loan given the availability of collateral, other sources of cash flow, and legal options available to the Corporation. Once a review is completed, the Corporation determines the need for a specific reserve and allocates the reserve to the loan. Other loans not specifically reviewed by management are evaluated using the historical charge-off experience ratio calculated by type of loan. The historical charge-off experience ratio factors into account the homogeneous nature of the loans. When evaluating the adequacy of the allowance for loan losses, additional consideration is given to other factors affecting loan losses, including geographic concentration, experience of the lending staff, and the closely associated effect of changing economic conditions. Specific reserves on individual loans, historical ratios, and the additional factors considered are reviewed on an ongoing basis and adjusted as necessary based on subsequent collections, loan upgrades or downgrades, nonperforming trends, or actual principal charge-off.
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.
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.
Other Real Estate—Real estate acquired by foreclosure is carried at the lower of the investment in the property or its fair value. An allowance for estimated losses on real estate is provided by a charge to operating expense when a subsequent decline in value occurs. Operating expenses of such properties, net of related income, and gains and losses on disposition are included in other expenses.
Purchase Accounting—At date of purchase, net assets of subsidiaries acquired are recorded at fair value. Any excess of cost over net assets acquired (goodwill) is amortized by the straight line method primarily over fifteen years. Management reviews the earnings of the operations acquired for evidence of impairment of the unamortized amount.
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 under the treasury stock method, which includes the dilutive effect of stock options.
Basic and diluted EPS have been restated for 1999 and 1998 to reflect the 10 percent common stock dividend paid on April 15, 2000.
Derivative Instruments and Hedging Activities—On January 1, 2001, the Corporation adopted Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and Certain Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative
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Instruments and Certain Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives, including those embedded in other contracts, be recognized as either assets or liabilities and that those financial instruments be measured at fair value. The accounting for changes in the fair value of derivatives depends on their intended use and designation. Management has reviewed the requirements of SFAS No. 133 and has determined that the Corporation has no freestanding or embedded derivatives. All contracts that contain provisions meeting the definition of a derivative also meet the requirements of, and have been designated as, normal purchases or sales. The Corporation's policy is to not use freestanding derivatives and to not enter into contracts with terms that cannot be designated as normal purchases or sales. This statement did not impact the Corporation's financial position or results of operation.
Reclassification—Certain reclassifications have been made in the prior year financial statements to conform to current year classifications.
2. Business Combinations
On June 26, 1998 the Corporation chartered a new national association to operate as a national bank in the state of West Virginia. This new wholly owned subsidiary, Community Trust Bank of West Virginia, National Association ("CTBWV"), purchased sixteen Banc One Corporation branches located in West Virginia with approximately $569 million in deposits. CTBWV paid a 9.7% premium on these deposits. In concurrent transactions, CTBWV sold three of these branches with deposits totaling $151 million to Premier Financial Bancorp, Inc. of Georgetown, Kentucky receiving a 9.7% premium; four branches with deposits totaling $122 million to Peoples Banking and Trust Company of Marietta, Ohio receiving a 10.7% premium; and two branches with deposits totaling $80 million to United Bankshares of Charles Town, West Virginia receiving 11.7% premium. The additional 1% premium paid by Peoples Banking and Trust Company and the additional 2% premium paid by United Bankshares was divided evenly between CTBWV and Premier Financial Bancorp, Inc. as part of a prior agreement.
CTBWV retained seven branches with deposits totaling $216 million. The funds used to purchase these branches were provided from the sale of Trust Preferred Securities that occurred in April 1997 and the sale of an affiliate bank in July 1997. The facilities that were purchased will continue to operate as banking offices.
On September 18, 1998 Community Trust Bank, N.A. purchased five branches from PNC Bank, N.A. with total deposits of $195 million. These branches are located in Richmond, Winchester, and Harrodsburg, Kentucky.
On December 31, 1998 CTBWV merged into Community Trust Bank, N.A.
On December 29, 2000, the Corporation merged its thrift affiliate, Community Trust Bank, FSB, into Community Trust Bank, N.A.
On January 26, 2001, Community Trust Bank, N.A. acquired the deposits, loans, and fixed assets of The Bank of Mt. Vernon, Inc., a subsidiary of Premier Financial Bancorp, Inc. (NASDAQ-PFBI) of Georgetown, Kentucky. The Bank of Mt. Vernon, Inc.'s offices are located in Mt. Vernon, Somerset, Richmond, and Berea, Kentucky. The offices acquired have deposits totaling $109.3 million and loans totaling $91 million. Additionally, for sixty days after the closing, the Bank has the right to put back and Premier has the obligation to purchase any loans the Bank deems to not fully meet its credit standards. The purchase price paid by Community Trust Bank, N.A. for the offices was a 9.5% premium on the non-brokered deposits as of the closing date plus approximately $1.6 million for fixed assets, $12.6 million for investment securities, and $1.0 million for the cash held at The Bank of Mt. Vernon's branches.
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3. Cash and Due from Banks
Included in cash and due from banks are noninterest bearing deposits that are held at the Federal Reserve or maintained in vault cash in accordance with regulatory reserve requirements. The balance requirement was $21.3 million and $44.8 million at December 31, 2000 and 1999, respectively. In late June 2000, the Corporation implemented, with Federal Reserve's approval, a "Threshold Balance Program" which allows for the reporting of certain transaction accounts as non-transaction accounts thus lowering its reserve requirements. Cash paid during the years ended 2000, 1999, and 1998 for interest was $89.3 million, $80.0 million, and $83.6 million, respectively. Cash paid during the same periods for income taxes was $8.1 million, $9.6 million and $3.4 million, respectively.
4. Securities
Amortized cost and fair value of securities at December 31, 2000 are as follows:
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Amortized cost and fair value of securities at December 31, 1999 are as follows:
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The amortized cost and fair value of securities at December 31, 2000 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
There were gross gains of $59 thousand realized on sales and calls in 2000, no gains or losses realized in 1999, and gross gains of $12 thousand realized in 1998.
Securities in the amount of $225 million and $200 million at December 31, 2000 and 1999, respectively, were pledged to secure public deposits, trust funds, securities sold under repurchase agreements, and advances from the Federal Home Loan Bank.
5. Loans
Major classifications of loans, net of unearned income, are summarized as follows:
Included in loan balances are loans held for sale in the amount of $0.7 million and $0.5 million at December 31, 2000 and at December 31, 1999, respectively. The amount of loans on a non-accruing income status was $22.7 million and $14.9 million for December 31, 2000 and December 31, 1999, respectively. Additional interest which would have been recorded during 2000, 1999, and 1998 if such loans had been accruing interest was approximately $2 million, $1.3 million, and $1.5 million, respectively.
At December 31, 2000 and 1999, the recorded investment in impaired loans was $15.6 million and $9.5 million, respectively. Included in these amounts at December 31, 2000 and December 31, 1999, respectively are $5.6 million and $1.4 million of impaired loans for which specific reserves for loan
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losses are carried in the amounts of $2.4 million and $0.4 million. The average investment in impaired loans for 2000 and 1999 was $15.6 million and $9.5 million, respectively while interest income of $176 thousand and $259 thousand was recognized on cash payments of $176 thousand and $259 thousand.
In the ordinary course of business, the Corporation's banking subsidiary has made loans at prevailing interest rates and terms to directors and executive officers of the Corporation or its banking subsidiary, including their associates (as defined by the Securities and Exchange Commission). Management believes such loans were made on substantially the same terms, including interest rate and collateral, as those prevailing at the same time for comparable transactions with other persons. The aggregate amount of these loans at January 1, 2000 was $32.3 million. During 2000, activity with respect to these loans included new loans of $3.9 million, repayment of $4.7 million, and a net decrease of $0.8 million due to changes in the status of executive officers and directors. As a result of these activities, the aggregate balance of these loans was $30.7 million at December 31, 2000.
At December 31, 2000, 1999, and 1998, loans serviced for the benefit of others, not included in the detail above, totaled $255 million, $276 million, and $283 million, respectively.
6. Allowance for Losses
Activity in the allowance for loan losses is as follows:
Activity in the allowance for other real estate losses is as follows:
Other real estate owned by the Corporation, net of reserves, included in Other assets at December 31, 2000 and 1999 was $5.4 million and $2.9 million, respectively.
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7. Premises and Equipment
Premises and equipment are summarized as follows:
8. Deposits
Major classifications of deposits are categorized as follows:
Interest expense on deposits is categorized as follows:
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9. Advances from Federal Home Loan Bank
The advances from the Federal Home Loan Bank are due for repayment as follows:
These advances generally require monthly principal payments and are collateralized by Federal Home Loan Bank stock of $16.3 million and certain first mortgage loans totaling $18 million as of December 31, 2000. Fixed rate advances total $13.3 million and have interest rates ranging from 1.00% to 7.05%. There were no variable rate advances at year-end.
10. Borrowings
Short-term debt is categorized as follows:
Generally, federal funds purchased and securities purchased under agreements to resale mature and reprice daily. The average rates paid for federal funds purchased and repurchase agreements as of December 31, 2000 were 6.46% and 5.76%, respectively.
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Long-term debt is categorized as follows:
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11. Federal Income Taxes
The components of the provision for income taxes, exclusive of tax effect of unrealized securities gains, are as follows:
The components of the net deferred tax asset as of December 31 are as follows:
The Corporation reports income taxes on the liability method, which places primary emphasis on the valuation of current and deferred tax assets and liabilities. The amount of income tax expense recognized for a period is the amount of income taxes currently payable or refundable, plus or minus the change in aggregate deferred tax assets and liabilities. The method focuses first on the balance sheet, and the amount of income tax expense is determined by changes in the components of the balance sheet.
In 1998, Other, net includes the reversal of $1.5 million in tax accruals after substantial issues related to an examination of prior years were settled.
12. Employee Benefits
The Corporation has a KSOP plan covering substantially all employees. Half of the first 8% of wages contributed by an employee is matched and goes into the savings and retirement portion of the plan. Employees may contribute additional non-matched amounts up to maximum limits provided by
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IRS regulations, and the Corporation may at its discretion, contribute an additional percentage of covered employees' gross wages.
The Corporation currently contributes 4% of covered employees gross wages to the employee stock ownership plan (ESOP) portion of the plan. The ESOP uses the contribution to acquire shares of the Corporation's common stock. The ESOP portion of the KSOP plan owned 338,783 shares of Corporation stock at December 31, 2000. The 401(k) portion of the KSOP plan owned 543,536 shares of Corporation stock at December 31, 1999. Substantially all shares owned by the KSOP were allocated to employees' accounts at December 31, 2000. The market price of the shares at the date of allocation is essentially the same as the market price at the date of purchase.
The total retirement plan expense, including KSOP expense, for 2000, 1999, and 1998 was $1.4 million in each year.
The Corporation currently maintains two incentive stock option plans covering key employees; however, only one plan is active. The 1998 Stock Option Plan ("1998 Plan") was approved by the Board of Directors and the Shareholders in 1998. The 1998 Plan has 786,500 shares authorized, 552,519 of which were available at December 31, 2000 for future grants. All options granted have a maximum term of ten years. Options granted as management retention options vest after five years, all other options vest ratably over four years.
The Corporation has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of all employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized.
The Corporation's stock option activity for the 1998 Plan for the years ended December 31, 2000, 1999, and 1998 is summarized as follows:
The 1998 Stock Option Plan had options with the following remaining lives at December 31, 2000:
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The 1989 Stock Option Plan ("1989 Plan") has no remaining options available for grant. The maximum term is ten years. Options granted as management retention options vest after five years, all other options vest ratably over four years.
The Corporation's stock option activity for the 1989 Plan for the years ended December 31, 2000, 1999, and 1998 is summarized as follows:
The 1989 Stock Option Plan had options with the following remaining lives at December 31, 2000:
The related information for both plans for the years ended December 31, 1999 and December 31, 1998 is summarized below:
The weighted average fair value of options granted during the years 1998, 1999, and 2000 was $8.22, $2.05, and $5.79 per share, respectively.
Had compensation cost for the Corporation's stock options granted in 2000, 1999, and 1998 been determined under the fair value approach described in FASB Statement No. 123, Accounting for Stock-
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Based Compensation, the Corporation's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
The fair value of the options presented above was estimated at the date of the grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2000, 1999, and 1998, respectively: risk-free interest rates of 6.87%, 5.50%, and 5.50%, dividend yields of 1.06%, 3.95%, and 3.45%, volatility factors of the expected market price of the Corporation's common stock of 0.300, 0.170, and 0.310 and a weighted average expected option life of 4.28, 6.0, and 6.0 years.
13. Operating Leases
Certain premises and equipment are leased under operating leases. Minimum rental payments are as follows:
Rental expense under operating leases was $0.6 million, $0.9 million, and $1.0 million in 2000, 1999, and 1998, respectively.
14. Fair Market Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Cash Equivalents—The carrying amount approximates fair value.
Securities—Fair values are based on quoted market prices or dealer quotes.
Loans and Loans Held for Sale—The fair value of fixed rate loans and variable rate mortgage loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. For other variable rate loans, the carrying amount approximates fair value.
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FHLB Stock—The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.
Deposits—The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.
Short-term Borrowings—The carrying amount approximates fair value.
Advances from Federal Home Loan Bank—The fair value of these fixed-maturity advances is estimated by discounting future cash flows using rates currently offered for advances of similar remaining maturities.
Long-term Debt—The fair value of long-term debt is estimated based on prices of comparable instruments.
Other Financial Instruments—The estimated fair value for other financial instruments and off-balance sheet loan commitments approximates cost at December 31, 2000 and 1999. Off-balance sheet loan commitments at December 31, 2000 and 1999 were $260,876,000 and $258,114,000, respectively.
Commitments to Extend Credit—The fair value of commitments to extend credit is based upon the difference between the interest rate at which the Corporation is committed to make the loans and the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for the estimated volume of loan commitments actually expected to close. The fair value of such commitments is not material.
15. Off-Balance Sheet Transactions
The Corporation's banking subsidiary is a party to transactions with off-balance sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include standby letters of credit and commitments to extend credit in the form of unused lines of credit. The Corporation's banking subsidiary uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments and includes these commitments and conditional obligations in its calculations as to the adequacy of its allowance for loan losses.
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At December 31, the Bank had the following financial instruments, whose approximate contract amounts represent credit risk:
Standby letters of credit represent conditional commitments to guarantee the performance of a third party. The credit risk involved is essentially the same as the risk involved in making loans.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer's credit-worthiness on a case-by-case basis. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. A portion of the commitments is to extend credit at fixed rates. Fixed rate loan commitments at December 31, 2000 of $16.2 million have interest rates and terms ranging predominantly from 7.75% to 10.75% and 6 months to 1 year, respectively. These credit commitments are based on prevailing rates, terms, and conditions applicable to other loans being made at December 31, 2000. Collateral held varies but may include accounts receivable, inventory, property, and equipment and income-producing properties.
16. Concentration of Credit Risk
The Corporation's banking subsidiary grants commercial, residential and consumer related loans to customers primarily located in Eastern Kentucky, Central Kentucky, and West Virginia. The banking subsidiary is continuing to increase all components of its portfolio mix in a manner to reduce risk from changes in economic conditions. Although the loan portfolio is diverse, a certain portion of our debtors is economically dependent upon the coal industry for their ability to repay. Concentrations of Credit are reviewed quarterly by management to ensure that internally established limits based on total capital are not exceeded. At December 31, 2000 and 1999, the Corporation's concentration of coal mining and related support industries credits as a percentage of total capital was 42% and 50%, respectively, well within the Corporation's internally established limits.
17. Commitments and Contingencies
18. Limitation on Subsidiary Bank Dividends
The Corporation's principal source of funds is dividends received from the subsidiary bank. Regulations limit the amount of dividends that may be paid by the Corporation's banking subsidiary without prior approval. During 2001, approximately $22.1 million plus any 2001 net profits can be paid by the Corporation's banking subsidiary without prior regulatory approval.
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19. Regulatory Matters
The Corporation and its banking subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material adverse effect on the Corporation's financial statements. Under capital adequacy and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I Capital (as defined in the regulations) to risk weighted assets (as defined) and of Tier I Capital (as defined) to average assets (as defined). These measures also define banks and bank holding companies as "well capitalized" which meet or exceed higher minimum amounts and ratios (also set forth in the table below). Management believes, as of December 31, 2000, the Corporation meets all capital adequacy requirements for which it is subject to be defined as well capitalized.
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20. Parent Company Financial Statements
Condensed Balance Sheets:
Condensed Statements of Income:
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Condensed Statements of Cash Flows:
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21. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
At December 31, 2000, 329,948 stock options at prices ranging from $16.16 to $25.92 and a weighted average price of $19.43 were outstanding and were not used in the computation of diluted earnings per share because their price was greater than the average market value of the common stock. At December 31, 1999, 146,380 stock options at prices ranging from $20.45 to $25.92 and a weighted average price of $21.26 were outstanding and were not used in the computation of diluted earnings per share because their price was greater than the average market value of the common stock. At December 31, 1998, 21,758 stock options at prices ranging from $25.73 to $25.92 and a weighted average price of $25.84 were outstanding and were not used in the computation of diluted earnings per share because their price was greater than the average market value of the common stock.
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Report of Management
The management of Community Trust Bancorp, Inc. has the responsibility for the preparation, integrity and reliability of the financial statements and related financial information contained in this annual report. Management believes the consolidated financial statements and related financial information reflect fairly the substance of the transactions and present fairly the Corporation's financial position and results of operations in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry including necessary judgments and estimates as required.
In meeting its responsibilities for the reliability of the financial statements and related financial information, management has established and is responsible for maintaining a system of internal accounting controls. The system is designed to provide reasonable assurance that assets are safeguarded and that transactions are properly authorized and recorded to facilitate preparation of financial statements which present fairly the financial position and results of operations of the Corporation in accordance with accounting principles generally accepted in the United States of America. Although internal accounting controls are designed to achieve these objectives, it must be recognized that errors or fraud may nonetheless occur. Management believes that its system of internal accounting controls provides reasonable assurance that errors or fraud that could be material to the financial statements are prevented or would be detected within a reasonable period of time in the normal course of business. A vital part of the system is a continual and thorough internal audit program.
The Board of Directors of the Corporation has an audit committee composed of four directors who are not officers or employees of the Corporation. The committee meets periodically with management, internal auditors, and the independent public accountants to review audit results and to assure that the audit and internal control functions are being properly discharged.
Deloitte & Touche LLP, independent auditors have been engaged to render an independent professional opinion on the Corporation's financial statements. Their audit is conducted in accordance with auditing standards generally accepted in the United States of America and forms the basis for their reports as to the fair presentation of the Corporation's financial position and results of operations contained in this annual report.
Management has made an assessment of the Corporation's internal control and procedures over financial reporting using the criteria described in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management believes that the Corporation maintained an effective system of internal control for financial reporting as of December 31, 2000.
Jean R. Hale President and Chief Executive Officer
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Report of Independent Auditors
To the Board of Directors and ShareholdersCommunity Trust Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Community Trust Bancorp, Inc. and subsidiaries as of December 31, 2000 and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of Community Trust Bancorp, Inc. and subsidiaries for the years ended December 31, 1999 and 1998 were audited by other auditors whose report, dated January 12, 2000, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 2000 consolidated financial statements present fairly, in all material respects, the financial position of Community Trust Bancorp, Inc. and subsidiaries at December 31, 2000, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
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We have audited the accompanying consolidated balance sheets of Community Trust Bancorp, Inc. and subsidiaries as of December 31, 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Community Trust Bancorp, Inc. and subsidiaries at December 31, 1999, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
The Corporation's Audit Committee replaced Ernst & Young LLP with Deloitte & Touche LLP as independent auditors for 2000. Ernst & Young LLP had issued an unqualified opinion on the Corporation's 1999 consolidated financial statements. There were no disagreements with the present or former accountants on any matter of accounting principles or practices, financial statement disclosure, or scope of audit procedures. The Corporation has authorized the former accountant to respond fully to the inquiries of the successor accountant. For further information, refer to the Corporation's 8-K and 8-K/A filed with the Securities and Exchange Commission for the event of April 25, 2000.
PART III
Items 10, 11, 12 and 13. Directors and Executive Officers of the Registrant; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management; and Certain Relationships and Related Transactions.
The information required by these Items other than the information set forth above under Part I, "Executive Officers of Registrant," is omitted because the Corporation is filing a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report which includes the required information. The required information contained in the Corporation's proxy statement is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Financial Statements and Financial Statement Schedules
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None.
The response to this portion of Item 14 is submitted as a separate section of this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf the undersigned, thereunto duly authorized.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
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Community Trust Bancorp, Inc. and Subsidiaries Index to Exhibits
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