UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 2001
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 0-11129
COMMUNITY TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky
61-0979818
(State or other jurisdiction of incorporation or organization)
IRS Employer Identification No.
346 North Mayo Trail
Pikeville, Kentucky (address of principal executive offices)
41501 (Zip Code)
(606) 432-1414
(Registrant’s telephone number)
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 ý
No o
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.
Yes o
No ý
The aggregate market value of voting stock held by non-affiliates of the registrant as of February 28, 2002 was $270,484,719. The number of shares outstanding of the Registrant’s Common Stock as of February 28, 2002 was 11,436,986. For the purpose of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates.
Portions of the following documents are incorporated by reference into the Form 10-K part indicated:
Document
Form 10-K
(1) Proxy statement for the annual meeting of shareholders to be held April 23, 2002
Part III
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. At December 31, 2001, the Corporation owned all the capital stock of two commercial banks and one trust company, serving small and mid-sized communities in eastern, central, south central Kentucky, and southern West Virginia. The commercial banks are Community Trust Bank, National Association, Pikeville, Kentucky (the “Bank”) and Citizens National Bank & Trust, Hazard, Kentucky (“Citizens National”). The trust company, Trust Company of Kentucky, National Association, Lexington, Kentucky, purchased the trust assets and assumed the operations of the Corporation’s subsidiary banks and has additional offices in Pikeville, Ashland, Middlesboro, and Versailles, Kentucky. The trust subsidiary commenced business operations on January 1, 1994. At December 31, 2001, the Corporation had total consolidated assets of $2.5 billion and total consolidated deposits of $2.2 billion, making it the largest bank holding company headquartered in the Commonwealth of Kentucky.
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. The offices acquired from The Bank of Mt. Vernon, Inc. are located in Mt. Vernon, Somerset, Richmond, and Berea, Kentucky. The offices acquired had deposits totaling $109.3 million and loans totaling $79 million. 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 acquired branches of The Bank of Mt. Vernon.
During the third quarter 2001, the Corporation acquired 75.28% of the outstanding shares of Citizens National Bank and Trust of Hazard, Kentucky independently valued at that time at $15.1 million in lieu of a debt owed to the Corporation by a Citizens’ shareholder. On January 3, 2002, the Corporation acquired the remaining 24.72% of Citizens National for $4.9 million. Citizens National had total assets of $138.5 million and equity capital of $19.4 million as of December 31, 2001. On March 15, 2002, Citizens National was merged into the Corporation’s lead bank, Community Trust Bank, National Association.
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 subsidiaries 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 customer relationships in the communities they serve.
1
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 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. This legislation has resulted in further consolidation in the financial services industry. In addition, removal of these restrictions has increased the number of entities providing banking services and thereby created additional competition.
In the 2000 session, the Kentucky legislature enacted legislation that permits statewide bank branching. Statewide branching has increased 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 material adverse effect on the Corporation. However, a certain portion of the Corporation’s debtors are economically dependent on the coal industry (see note 17 to the consolidated financial statements).
The Corporation engages in no operations in foreign countries.
EMPLOYEES
As of December 31, 2001, the Corporation and its subsidiaries had 883 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 and Citizens National are national bank subsidiaries subject to federal banking law and to regulation and periodic examination by the Comptroller of the Currency under the National Bank Act and to the restrictions, including dividend restrictions, thereunder. Both are also members of the Federal Reserve System and are 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 Office of the Comptroller of the Currency and the Federal Reserve Board.
2
Deposits of the Corporation’s subsidiary banks 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; 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 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 the 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.
3
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
2001
2000
1999
Average Balances
Interest
Average Rate
(in thousands)
Earning assets:
Loans, net of unearned income (1)(2)(3)
$
1,749,892
151,444
8.65
%
1,666,062
155,980
9.36
1,557,703
140,412
9.01
Securities:
U.S. Treasury and agencies
236,493
13,642
5.77
175,838
10,724
6.10
226,543
13,371
5.90
Tax exempt state and political subdivisions (3)
60,651
4,434
7.32
60,221
4,502
7.48
61,144
4,541
7.43
Other securities
51,320
3,100
6.04
65,333
4,235
6.48
70,996
4,549
6.41
Federal funds sold
157,858
6,186
3.92
37,000
2,404
6.50
60,134
2,890
4.81
Interest bearing deposits
217
11
5.07
232
13
5.60
159
7
4.40
Total earning assets
2,256,341
178,817
7.93
2,004,686
177,858
8.87
1,976,679
165,770
8.39
Less: Allowance for loan losses
(25,782
)
(26,162
(25,994
2,230,559
1,978,524
1,950,685
Nonearning assets:
Cash and due from banks
65,777
73,847
82,419
Premises and equipment, net
49,703
50,269
53,349
Other assets
98,656
92,740
96,268
Total assets
2,444,695
2,195,380
2,182,721
Interest bearing liabilities:
Deposits:
Savings and demand deposits
549,072
13,343
2.43
510,285
18,095
3.55
555,105
16,216
2.92
Time deposits
1,267,476
72,266
5.70
1,124,270
65,154
5.80
1,070,886
55,745
5.21
Federal funds purchased and securities sold under repurchase agreements
74,743
2,845
3.81
48,343
2,699
5.58
41,319
1,902
4.60
Other short-term borrowings
6,349
346
5.45
5,500
411
7.47
405
7.36
Advances from Federal Home Loan Bank
11,279
645
5.72
15,006
863
5.75
20,721
1,182
Trust preferred securities
34,500
3,105
9.00
Long-term debt
13,491
4,272
8.90
13,615
4,293
8.92
13,750
4,290
8.89
Total interest bearing liabilities
1,956,910
93,717
4.79
1,751,519
91,515
5.22
1,741,781
79,740
4.58
Noninterest bearing liabilities:
Demand deposits
277,748
251,643
256,374
Other liabilities
22,138
15,307
15,099
Total liabilities
2,256,796
2,018,469
2,013,254
Shareholders’ equity
187,899
176,911
169,467
Total liabilities and shareholders’ equity
Net interest income
85,100
86,343
86,030
Net interest spread
3.14
3.65
Benefit of interest free funding
0.63
0.68
0.56
Net interest margin
3.77
4.33
4.37
(1) Interest includes fees on loans of $3,313, $2,807, and $3,051 in 2001, 2000, and 1999, respectively.
(2) Loan balances include principal balances on nonaccrual loans.
(3) Tax exempt income on securities and loans is reported on a fully taxable equivalent basis using a 35% rate.
4
Net Interest Differential
The following table illustrates the approximate effect of volume and rate changes on net interest differentials between 2001 and 2000 and also between 2000 and 1999.
Total Change
Change Due to
2001/2000
Volume
Rate
2000/1999
Interest income
Loans
(4,536
7,611
(12,147
15,568
10,011
5,557
U.S. Treasury and federal agencies
2,918
3,525
(607
(2,647
(3,081
434
Tax exempt state and political subdivisions
(68
24
(92
(39
(70
31
(1,135
(862
(273
(314
(368
54
3,782
5,074
(1,292
(486
(1,316
830
(2
(1
6
Total interest income
959
15,371
(14,412
12,088
5,180
6,908
Interest expense
(4,752
1,291
(6,043
1,879
(1,386
3,265
7,112
8,180
(1,068
9,409
2,875
6,534
146
1,178
(1,032
797
354
443
(65
57
(122
0
(218
(213
(5
(319
(329
10
(21
(13
(8
(12
15
Total interest expense
2,202
10,480
(8,278
11,775
1,502
10,273
(1,243
4,891
(6,134
313
3,678
(3,365
For purposes of the above table, changes which are due to both rate and 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.
Investment Portfolio
The maturity distribution and weighted average interest rates of securities at December 31, 2001 are as follows:
Estimated Maturity at December 31, 2001
Amortized
Within 1 Year
1-5 Years
5-10 Years
After 10 Years
Total Fair Value
Cost
Amount
Yield
Available-for-sale
U.S. Treasury
3,036
6,894
6.02
20,301
3.06
0.00
30,231
4.04
30,620
U.S. government agencies and corporations
36,632
3.89
73,555
6.23
132,859
6.12
10,575
5.65
253,621
5.81
250,506
State and municipal obligations
3,389
6.64
26,735
6.76
11,140
5.04
41,265
6.29
40,812
9,553
6.40
4,513
6.65
28,052
5.20
42,117
5.32
42,280
Total
49,220
4.52
88,351
6.25
179,895
5.87
49,766
5.26
367,233
5.66
364,218
5
Total Amortized Cost
Fair Value
Held-to-maturity
2,086
5.94
23,500
5.84
11,000
6.09
23,000
6.34
59,585
6.08
60,747
5,528
7.19
12,201
7.39
5,165
7.53
845
23,739
24,341
7,614
6.85
35,702
6.37
16,165
6.55
23,845
6.43
83,324
6.47
85,088
Total securities
56,835
4.83
124,052
196,060
5.92
73,610
5.64
450,557
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 that exceeded 10% of the shareholders’ equity of the Corporation at December 31, 2001.
Securities
The book values of securities available-for-sale and securities held-to-maturity as of December 31, 2001 and 2000 are presented in note 4 to the consolidated financial statements.
The book value of securities at December 31, 1999 is presented below:
Available-for-Sale
Held-to-Maturity
U.S. Treasury and government agencies
50,321
12,499
State and political subdivisions
25,551
32,123
U.S. agency and mortgage-backed pass through certificates
128,959
12,153
Collateralized mortgage obligations
38,443
3,532
Other debt securities
20,934
Total debt securities
264,208
60,307
Equity securities
6,073
270,281
Loan Portfolio
1998
1997
Commercial:
Secured by real estate
510,070
469,646
406,330
329,611
310,092
Other
280,222
303,141
293,659
279,406
260,808
Total commercial
790,292
772,787
699,989
609,017
570,900
Real estate construction
98,441
93,191
98,990
87,625
85,825
Real estate mortgage
425,198
435,110
397,168
399,035
407,893
Consumer
390,311
386,504
415,935
400,893
361,927
Equipment lease financing
6,830
6,933
7,398
5,816
1,884
Total loans
1,711,072
1,694,525
1,619,480
1,502,386
1,428,429
Percent of total year-end loans
29.81
27.71
25.09
21.94
21.71
16.38
17.89
18.13
18.60
18.26
46.19
45.60
43.22
40.54
39.97
5.50
6.11
5.83
6.01
24.85
25.68
24.53
26.56
28.55
22.81
26.68
25.34
0.40
0.41
0.46
0.39
0.13
100.00
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 of principal are due in the periods indicated. Also, the amounts are classified according to sensitivity to changes in interest rates (fixed, variable).
Maturity at December 31, 2001
Within One Year
After One but Within Five Years
After Five Years
Commercial
237,894
268,926
283,472
50,664
29,144
18,633
288,558
298,070
302,105
888,733
Rate sensitivity:
Predetermined rate
65,865
101,762
46,174
213,801
Adjustable rate
222,693
196,308
255,931
674,932
Nonperforming Assets
Nonaccrual loans
30,496
22,731
14,861
14,930
12,058
Restructured loans
518
338
390
202
629
90 days or more past due and still accruing interest
2,640
3,000
3,237
5,635
8,863
Total nonperforming loans
33,654
26,069
18,488
20,767
21,550
Foreclosed properties
1,982
4,339
2,193
1,769
1,949
Total nonperforming assets
35,636
30,408
20,681
22,536
23,499
Nonperforming assets to total loans plus foreclosed properties
2.08
1.79
1.28
1.50
1.64
Allowance to nonperforming loans
70.27
99.30
135.77
125.63
94.97
Nonaccrual, past due, and restructured loans
As a % of Loan Balances by Category
Restructured Loans
Accruing Loans Past Due 90 Days or More
Balances
December 31, 2001
Commercial loans-real estate secured
13,967
2.37
349
0.06
801
0.14
588,578
Commercial loans-other
7,030
2.45
169
358
0.12
287,052
Consumer loans-real estate secured
9,397
2.11
892
0.20
445,131
Consumer loans-other
102
0.03
589
0.15
1.78
December 31, 2000
7,646
1.39
463
0.08
548,133
7,322
2.36
66
0.02
310,074
7,589
1.69
1,550
0.34
449,814
174
0.05
921
0.24
1.34
0.18
In 2001, gross interest income that would have been recorded on nonaccrual loans had the loans been current in accordance with their original terms amounted to $2.6 million. Interest income actually recorded and included in net income for the period was $0.85 million, leaving $1.75 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.
8
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 to the best of their knowledge that no additional potential problem loans exist which would result in disclosure pursuant to Item III.C.2.
Foreign Outstandings
Loan Concentrations
The Corporation has no concentration of loans exceeding 10% of total loans at December 31, 2001.
9
Analysis of the Allowance for Loan Losses
Allowance for loan losses, beginning of year
25,886
25,102
26,089
20,465
18,825
Loans charged off:
Commercial, secured by real estate
3,527
1,316
612
844
676
Commercial, other
2,406
1,480
1,219
1,496
1,042
1,061
1,006
1,585
872
695
8,452
9,645
11,888
12,603
9,840
Total charge-offs
15,446
13,447
15,304
15,815
12,253
Recoveries of loans previously charged off:
130
352
432
158
116
224
228
469
248
454
76
123
195
99
94
3,593
4,311
4,116
3,860
2,653
Total recoveries
4,023
5,014
5,212
4,365
3,317
Net charge-offs:
3,397
964
180
686
560
2,182
1,252
750
1,248
588
985
883
1,390
773
601
4,859
5,333
7,772
8,743
7,187
Total net charge-offs
11,423
8,433
10,092
11,450
8,936
Allowances of acquired banks
1,066
Allowance of sold bank
(578
Provisions charged against operations
9,185
9,217
9,105
16,008
11,154
Balance, end of year
23,648
Allocation of allowance, end of year:
4,816
4,131
2,454
2,777
3,502
2,293
2,284
1,773
2,354
2,945
32
115
87
1,404
942
396
546
7,737
8,689
12,313
10,234
3,575
56
52
45
49
21
Unallocated
7,276
9,756
7,940
10,193
9,761
Average loans outstanding, net of unearned interest
1,468,776
1,350,471
Loans outstanding at end of year, net of unearned interest
Net charge-offs to average loan type:
0.59
0.22
0.70
0.25
0.23
0.21
0.29
0.16
1.22
1.91
2.25
2.22
0.65
0.51
0.78
0.66
Other ratios:
Allowance to net loans, end of year
1.38
1.53
1.55
1.74
1.43
Provision for loan losses to average loans
0.52
0.55
0.58
1.09
0.83
The allowance for loan 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 provision may be required.
Average Deposits and Other Borrowed Funds
Noninterest bearing deposits
NOW accounts
19,353
128,265
260,703
Money market accounts
379,372
237,792
136,898
Savings accounts
150,347
144,228
157,504
Certificates of deposit of $100,000 or more
389,556
329,948
300,011
Certificates of deposit < $100,000 and other time deposits
877,920
794,322
770,875
Total deposits
2,094,296
1,886,198
1,882,365
Other borrowed funds:
Total other borrowed funds
140,362
116,964
115,790
Total deposits and other borrowed funds
2,234,658
2,003,160
1,998,154
Maturities of time deposits of $100,000 or more outstanding at December 31, 2001 are summarized as follows:
Certificates of Deposit
Other Time Deposits
Three months or less
145,057
5,280
150,337
Over three through six months
77,340
2,638
79,978
Over six through twelve months
121,603
7,997
129,600
Over twelve through sixty months
41,724
8,445
50,169
385,724
24,360
410,084
Item 2. Properties
The Corporation’s main office is located at 346 North Mayo Trail, Pikeville, Kentucky 41501, which is owned by the Bank. Following is a schedule of properties owned and leased by the Corporation and its subsidiaries as of December 31, 2001:
Location
Owned
Leased
Banking locations:
Community Trust Bank, National Association
* Pikeville Market (lease land to 2 owned locations)
10 locations in Pike County, Kentucky
Floyd/Knott Market
1 location in Floyd County, Kentucky and 1 location in Knott County, Kentucky
Tug Valley Market
1 location in Pike County, Kentucky and 1 location in Mingo County, West Virginia
Whitesburg Market (own land to 1 leased office)
5 locations in Letcher County, Kentucky
* Lexington Market
4 locations in Fayette County, Kentucky
Winchester Market
3 locations in Clark County, Kentucky
Richmond Market
5 locations in Madison County, Kentucky
Mt. Sterling Market
2 locations in Montgomery County, Kentucky
* Versailles Market
2 locations in Woodford County, Kentucky, 1 location in Franklin County, Kentucky, and 1 location in Mercer County, Kentucky
* Ashland Market
4 locations in Boyd County, Kentucky and 1 location in Greenup County, Kentucky
Flemingsburg Market
4 locations in Fleming County, Kentucky
Hamlin Market
2 locations in Lincoln County, West Virginia and 1 location in Wayne County, West Virginia
Summersville Market
1 location in Nicholas County, West Virginia
* Middlesboro Market (lease land to 1 owned location)
3 locations in Bell County, Kentucky
Williamsburg Market
2 locations in Whitley County, Kentucky and 2 locations in Laurel County, Kentucky
Campbellsville Market
2 locations in Taylor County, Kentucky, 2 locations in Pulaski County, Kentucky, 1 location in Adair County, Kentucky, 1 location in Green County, Kentucky, 1 location in Russell County, Kentucky, and 1 location in Marion County, Kentucky
Mt. Vernon Market
2 locations in Rockcastle County, Kentucky
Citizens National Bank & Trust, Hazard (lease land to 4 owned locations)
7 locations in Perry County, Kentucky
Total banking locations
18
74
12
Operational locations:
Pikeville (Pike County, Kentucky)
Lexington (Fayette County, Kentucky)
Total operational locations
Other:
Ashland (Boyd County, Kentucky)
Williamsburg (Whitley County, Kentucky)
Total locations
58
20
78
*Trust Company of Kentucky, National Association has leased offices in the main office locations in these markets.
See notes 7 and 14 to the consolidated financial statements included herein for the year ended December 31, 2001, 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 2001.
Executive Officers of the Registrant
Set forth below are the executive officers of the Corporation at December 31, 2001, their positions with the Corporation and the year in which they first became an executive officer or director.
Name and Age (1)
Positions and Offices Currently Held
Date First Became Director or Executive Officer
Present Principal Occupation
Jean R. Hale; 55
President, CEO, and Director
1992
Vice Chairman, President and CEO
Ronald M. Holt; 54
Executive Vice President
1996
(2)
President and CEO of Trust Company of Kentucky, N.A.
Mark A. Gooch; 43
Executive Vice President and Treasurer
(3)
President and CEO of Community Trust Bank, N.A.
William Hickman III; 51
Executive Vice President and Secretary
(4)
Executive Vice President/Staff Attorney of Community Trust Bank, N.A.
Michael S. Wasson; 50
(5)
Central Kentucky Region President of Community Trust Bank, N.A.
James B. Draughn; 42
(6)
Executive Vice President/Operations of Community Trust Bank, N.A.
(1) The ages listed for the Corporation executive officers are as of February 28, 2002.
(2) Mr. Holt served as Executive Vice President and Trust Manager of Bank One Kentucky Corporation from 1990 to 1995 at which time he joined the Corporation.
(3) Mr. Gooch served as President and CEO of First Security Bank and Trust Company, from 1993 to 1997 at which time First Security Bank and Trust Company merged into Community Trust Bank, N.A.
(4) Mr. Hickman served as legal counsel for the Corporation from 1980 to 1994. From 1994 until he rejoined the Corporation in December 1997 he engaged in the practice of law in Pikeville, Kentucky.
(5) Mr. Wasson was employed by Mercantile Bancorporation for 16 years prior to joining the Corporation in 2000. Mr. Wasson served as President of Mercantile Bank of Western Missouri, President of Mercantile Bank of Southern Illinois, and most recently as Chief Operating Officer of Mercantile Bank Midwest.
(6) Mr. Draughn served as Technology Manager for the Corporation for seven years, most recently as Senior Vice President/Technology, prior to being promoted to Executive Vice President/Operations.
14
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
Three Months Ended
December 31
September 30
June 30
March 31
(in thousands except per share amounts)
21,952
20,363
19,992
20,811
Net interest income, taxable equivalent basis
22,437
20,848
20,487
21,328
Provision for loan losses
2,840
2,428
1,842
2,075
Noninterest income
6,161
5,511
6,831
5,271
Noninterest expense
16,666
15,692
16,249
16,331
Net income
5,844
5,272
5,914
5,242
Per common share:
Basic earnings per share
0.45
Diluted earnings per share
Dividends declared
Common stock price:
High
24.50
28.50
17.00
Low
20.86
20.79
15.63
15.00
Last trade
23.75
23.90
24.00
15.88
Selected ratios:
Return on average assets, annualized
0.91
0.86
0.97
0.90
Return on average common equity, annualized
12.08
11.10
12.74
11.49
Net interest margin, annualized
3.80
3.69
3.96
20,851
21,042
21,224
21,117
21,392
21,589
21,731
21,631
2,580
2,487
1,700
2,450
5,446
4,812
4,616
4,652
15,231
15,338
15,510
15,848
5,754
5,664
5,809
5,119
0.49
0.48
0.42
0.19
15.69
16.75
18.50
19.77
13.94
14.13
13.13
15.80
14.88
15.56
17.69
18.00
1.03
1.08
0.95
12.73
12.75
13.20
11.82
4.15
4.28
4.45
There were approximately 1,668 holders of outstanding common shares of the Corporation at February 28, 2002.
Dividends
The annual dividend was increased from $0.75 per share to $0.81 per share during 2001. A 10% stock dividend distributed on April 14, 2000 resulted in the restatement of the first quarter 2000 cash dividend of $0.20 per share to $0.18 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 banks to the Corporation, see note 19 to the consolidated financial statements included herein for the year ended December 31, 2001.
Item 6. Selected Financial Data 1997-2001
Year Ended December 31
176,835
175,749
163,516
160,570
150,588
83,986
74,076
83,118
84,234
83,776
76,584
76,512
23,774
19,526
21,026
19,466
18,442
64,938
61,927
64,388
62,166
59,892
Income before income taxes and extraordinary gain
32,769
32,616
31,309
17,876
23,908
Extraordinary gain, net of tax
3,085
Income before income taxes
26,993
Income taxes
10,497
10,270
9,464
3,907
7,924
22,272
22,346
21,845
13,969
19,069
Earnings per share
1.93
1.87
1.15
1.31
Cash dividends declared—
0.81
0.75
0.72
0.61
as a % of net income
41.97
40.11
40.10
57.77
46.54
Book value, end of year
16.77
15.55
14.19
13.54
12.98
Market price, end of year
23.750
14.880
18.182
19.418
25.723
Market value to book value, end of year
1.42x
0.96x
1.28x
1.43x
1.98x
Price/earnings ratio, end of year
12.31x
7.96x
10.15x
16.90x
19.58x
Cash dividend yield, end of year
3.41
3.95
3.42
2.38
At year-end:
2,503,905
2,264,395
2,176,090
2,248,039
1,852,667
13,444
13,560
13,674
13,823
18,963
191,606
181,904
172,419
164,795
158,019
Averages:
Assets
2,038,680
1,837,874
Deposits
1,886,196
1,882,364
1,650,801
1,459,551
Earning assets
1,871,898
1,702,290
1,406,041
162,689
159,036
Profitability ratios:
Return on average assets
1.02
1.00
0.69
1.05
Return on average equity
11.85
12.63
12.89
8.59
12.31
16
Capital ratios:
Equity to assets, end of year
7.65
8.03
7.92
7.33
8.53
Average equity to average assets
7.69
8.06
7.76
7.98
Risk based capital ratios:
Leverage ratio
6.44
7.29
7.09
7.75
Tier 1 Capital
9.11
9.26
8.50
9.97
Total Capital
10.32
10.51
10.17
9.75
11.23
Other significant ratios:
Allowance to nonperforming loans, end of year
Nonperforming assets to loans and foreclosed properties, end of year
4.21
4.66
Other statistics:
Average common shares outstanding
11,517
11,947
12,170
12,176
12,171
Number of full-time equivalent employees, end of year
795
818
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Community Trust Bancorp, Inc. reported net earnings of $22.3 million for 2001, flat with 2000 earnings and up from $21.8 million for 1999. Earnings per share for 2001 were $1.93 compared to $1.87 per share for 2000 and $1.79 per share for 1999.
Earnings for 2001 reflected a decrease in net interest income while noninterest income was positively impacted by an increase in service charges on deposit accounts, gains on sales of loans, and securities gains. Noninterest expense increased from prior year due to the acquisitions of The Bank of Mt. Vernon branches and Citizens National Bank & Trust, Hazard, Kentucky. The loan loss provision remained materially even with a slight $32 thousand decrease year over year. The Corporation’s return on average assets for 2001 was 0.91% as compared to 1.02% and 1.00% in 2000 and 1999, respectively, and the return on average equity for 2001 was 11.85% as compared to 12.63% and 12.89% for 2000 and 1999, respectively.
Total assets as of December 31, 2001 were $2.50 billion as compared to total assets of $2.26 billion on December 31, 2000. Total loans as of December 31, 2001 were $1.71 billion compared to $1.69 billion as of December 31, 2000, an increase of 0.98%. Total deposits increased 10.9% from $1.94 billion at December 31, 2000 to $2.16 billion at December 31, 2001.
Acquisitions
During 2001, the Corporation continued its strategic plan of expansion of its business through acquisitions within targeted markets. On January 26, 2001, Community Trust Bank, N.A. acquired certain deposits, loans, and fixed assets of The Bank of Mt. Vernon, Inc. The offices acquired from The Bank of Mt. Vernon, Inc. are located in Mt. Vernon, Somerset, Richmond, and Berea, Kentucky. The offices acquired had deposits totaling $109.3 million and loans totaling $79 million. 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 acquired branches of The Bank of Mt. Vernon.
17
During the third quarter of 2001, the Corporation acquired 75.28% of the outstanding shares of Citizens National Bank & Trust, Hazard, Kentucky valued at $15.1 million in lieu of a debt owed to the Corporation by a Citizens’ shareholder. On January 3, 2002, the Corporation acquired the remaining 24.72% of Citizens National for $4.9 million becoming the sole shareholder. On March 15, 2002, Citizens National was merged into the Corporation’s lead bank, Community Trust Bank, National Association. On December 31, 2001, Citizens National had total assets of $138.5 million and equity capital of $19.4 million. The addition of the Hazard market, including Perry and surrounding counties, is consistent with the Corporation’s expansion plans to add banking locations within contiguous markets to gain in-market synergies and efficiencies of operation.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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 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 financial statements.
We believe 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 note 1 to the consolidated financial statements. We have identified the following critical accounting policy:
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 adequacy of the allowance is reviewed quarterly by management using a methodology that includes several key factors. The Corporation utilizes an internal risk grading system for commercial credits, and those larger commercial credits identified through this grading system as having weaknesses are individually reviewed for their ability and potential to repay their loans. The borrower’s cash flow, adequacy of collateral held for the loan, and other options available to the Corporation including legal avenues are all evaluated. Based upon this individual credit evaluation, a specific allocation to the allowance may be made for the loan.
For other commercial loans that are not individually evaluated, an allowance allocation is determined by applying a three-year moving average historical loss rate for this group of loans. Consumer installment and residential mortgage loans are not individually risk graded. Allowance
allocations are provided for these pools of loans based upon a three-year moving average historical loss rate for each of these categories of loans.
A portion of the allowance that is not allocated to any particular loan type is maintained in recognition of the inherent inability to precisely determine the loss potential in any particular loan or pool of loans. Among the factors used by management in determining the unallocated portion of the allowance are current economic conditions, trends in the Corporation’s loan portfolio delinquency, losses and recoveries, level of underperforming and nonperforming loans, and concentrations of loans in any one industry. These factors are reviewed quarterly and adjusted as deemed appropriate by management. Management also considers the overall growth of the loan portfolio. Adjustment of these factors could result in an adjustment to results of operations.
The Corporation has not substantively changed any aspect of its overall approach in the determination of the allowance for loan losses. There have been no material changes in assumptions or estimation techniques as compared to prior years that impacted the determination of the current year allowance.
Effect of Accounting Change
Effective January 1, 2002, the Corporation adopted Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and other Intangible Assets. Upon adoption, the Corporation ceased amortizing goodwill of approximately $59.5 million arising from previous purchase transactions. This will reduce amortization expense on an annual basis beginning in 2002 by $3.1 million and increase earnings on an annual basis beginning in 2002 by $2.3 million. Goodwill will continue to be evaluated for impairment in accordance with SFAS No. 142. The Corporation believes its past branch acquisitions meet the provisions of SFAS No. 142 which requires that goodwill not be amortized but be evaluated for impairment.
Results of Operations
2001 Compared to 2000
Net income for 2001 was relatively flat with 2000 at $22.3 million. Basic earnings per share for 2001 were $1.93 compared to $1.87 per share for 2000. The average shares outstanding in 2001 and 2000 were 11.517 million and 11.947 million, respectively.
Net interest income for 2001 decreased compared to 2000 from $84.2 million in 2000 to $83.1 million in 2001. Noninterest income increased 21.8% from $19.5 million in 2000 to $23.8 million in 2001 while noninterest expense increased 4.9% from $61.9 million in 2000 to $64.9 million in 2001. (See separate discussions of noninterest income and noninterest expense below.)
Return on average assets decreased from 1.02% in 2000 to 0.91% in 2001, and return on average equity decreased from 12.63% in 2000 to 11.85% in 2001.
Net Interest Income:
Although a decline in the Corporation’s net interest margin was anticipated as the economy began to weaken during 2000 and interest rates began to decline in January 2001, the magnitude of the decrease in interest rates was not anticipated. The Corporation’s net interest margin was negatively impacted by the repricing of assets quicker than liabilities through the first eight months of 2001. The Corporation was seeing some relief on its margin during September 2001 when the national disaster of September 11, 2001 prompted an additional lowering of interest rates by the Federal Open Market Committee. The 475 basis point decline in market interest rates during 2001 resulted in a 56 basis point decline in our net interest margin from 4.33% for the year ended December 31, 2000 to 3.77% for the year ended December 31, 2001. For further information, see the table titled “Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates” in the Selected Statistical Information.
19
The Corporation’s average earning assets increased from $2 billion in 2000 to $2.26 billion in 2001. Average interest bearing liabilities also increased during the period, from $1.75 billion in 2000 to $1.96 billion in 2001. Average interest bearing liabilities as a percentage of average earning assets decreased from 87.4% in 2000 to 86.7% in 2001.
The taxable equivalent yield on average earning assets decreased from 8.87% in 2000 to 7.93% in 2001. The cost of average interest bearing liabilities also decreased during the same period from 5.22% to 4.79%. The yield on interest bearing assets has been impacted by the change in the earning asset mix as well as by the decrease in market rates in 2001. Loans accounted for 83.1% of all earning assets in 2000 while loans accounted for 77.6% of earning assets in 2001. Loans accounted for 74.8% of total assets as of December 31, 2000 compared to 68.3% as of December 31, 2001.
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 on December 31, 2000 was 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 2001, our positive gap position could have a negative impact on the net interest margin. During 2001, as liabilities matured, our depositors elected to shorten the term of their deposits and consequently by December 31, 2001 our balance sheet had become negatively gapped. With our current balance sheet structure, as rates stabilize and our short-term deposits reprice, we have the opportunity to further reduce our cost of funds. As our term deposits mature, they will reprice lower than their current rates resulting in an increase in our net interest margin. The risk to the Corporation is that the rate increases anticipated in 2002 will occur sooner than in the expected May to July timeframe, resulting in deposits repricing at higher than current market rates. It is anticipated that even if rates increase sooner than expected, our average cost of funds will still be lower than in 2001 but at a higher cost than in the current interest rate environment.
Provision for Loan Losses and Allowance for Loan Losses:
The provision for loan losses that was added to the allowance remained relatively flat at $9.2 million from 2000 to 2001. This provision represents a charge against current earnings in order to maintain the allowance at an appropriate level. Loan losses, net of recoveries, as a percentage of average loans outstanding increased from 0.51% in 2000 to 0.65% in 2001 as net loan losses increased by $3 million in 2001 to $11.4 million. As was discussed in our June 30, 2001 and September 30, 2001 earnings releases, $2.25 million of the increase in net loan losses is the result of the Bank’s recognition of the loss on one large commercial credit for which a specific allocation of loss allowance had been established.
The allowance declined from 1.53% of total loans at December 31, 2000 to 1.38% at December 31, 2001. The decline in the allowance as a percentage of total loans is primarily the result of the addition of $124 million in loans from the Mt. Vernon and Hazard acquisitions to the Corporation’s loan portfolio which did not require a corresponding addition to the Corporation’s loan loss allowance (an impact to the allowance ratio of 11 basis points) and the one large commercial loan loss mentioned above for which a specific allocation of the allowance had previously been made.
Nonperforming loans, which are mainly commercial credits, increased from 1.54% of total loans at December 31, 2000 to 1.97% at December 31, 2001. The increase was primarily due to a few commercial real estate loans with problems unrelated to the economy of the markets where they are located.
The adequacy of the allowance is reviewed quarterly by management using a methodology that includes several key factors. The Corporation utilizes an internal risk grading system for commercial credits, and those larger commercial credits identified through this grading system as having weaknesses are individually reviewed for their ability and potential to repay their loans. The borrower’s cash flow, adequacy of collateral held for the loan, and other options available to the Corporation including legal
avenues are all evaluated. Based upon this individual credit evaluation, a specific allocation to the allowance may be made for the loan.
For other commercial loans that are not individually evaluated, an allowance allocation is determined by applying a three-year moving average historical loss rate for this group of loans. Consumer installment and residential mortgage loans are not individually risk graded. Allowance allocations are provided for these pools of loans based upon a three-year moving average historical loss rate for each of these categories of loans.
Allowances on individual loans and historical loss rates are reviewed quarterly. Factors which management consider in the analysis include the effects of the national and local economies, trends in the nature and volume of loans (delinquencies, charge-offs, nonaccrual and problem loans), changes in the internal lending policies and credit standards, collection practices, and examination results from bank regulatory agencies and the Corporation’s internal credit examiners.
Noninterest Income:
Noninterest income increased 21.8% from $19.5 million in 2000 to $23.8 million in 2001, due to an increase in service charges on deposit accounts, gains on sales of loans, and securities gains. Service charges on deposit related products generated $11.1 million for the year, as compared to $9.7 million for the previous year. Factors impacting the increase in service charges on deposits were: (1) increasing the overdraft fee by 25% in the first quarter of 2001 and (2) increasing our deposit base by $109.3 million in January with the acquisition of the branches of The Bank of Mt. Vernon and by $120.1 million in October with the acquisition of Citizens National. The gains on sales of loans increased from $0.9 million in 2000 to $2.6 million in 2001, a result of a 322% increase in the dollar volume of residential mortgage loans sold in 2001 compared to 2000. This increase in volume was primarily the result of refinancing existing mortgages as customers took advantage of historically low mortgage interest rates. Securities gains increased from $59 thousand in 2000 to $775 thousand in 2001. Other noninterest income increased from $6.3 million in 2000 to $6.8 million in 2001. Trust income remained flat from 2000 to 2001 at $2.5 million.
Noninterest Expense:
Noninterest expense for the year ended December 31, 2001 was $64.9 million, a 4.9% increase from the $61.9 million for the year ended December 31, 2000. The increase in noninterest expense is primarily attributable to the operating expenses associated with the addition of the five banking offices acquired from The Bank of Mt. Vernon, Inc. on January 26, 2001 and the addition of a controlling interest in the Citizens National Bank & Trust, Hazard, Kentucky on October 11, 2001. The additional expenses are also reflected in our efficiency ratio which increased 154 basis points from 58.53% at year-end 2000 to 60.07 at year-end 2001. The deposit to FTE (full-time equivalent) ratio decreased from $2.45 million to $2.44 million year over year. Salaries and employee benefits increased from $29.7 million in 2000 to $31.1 million in 2001. Occupancy expense increased from $5.1 million in 2000 to $5.3 million in 2001
while equipment expense decreased from $3.9 million to $3.6 million, respectively. Data processing costs increased from $3.7 million in 2000 to $4.0 million in 2001, and stationery and printing costs increased from $1.2 million in 2000 to $1.4 million in 2001. Taxes other than payroll, property, and income, which consists mainly of franchise taxes on the equity and deposits of the Corporation, increased from $2.1 million in 2000 to $2.2 million in 2001. FDIC insurance expense increased from $376 thousand in 2000 to $395 thousand in 2001. Other categories of noninterest expense increased from $15.9 million in 2000 to $17.0 million in 2001.
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 average shares outstanding at December 31, 2000 and December 31, 1999 were 11.947 and 12.170, 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.
The Corporation 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 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. For further information, see the table titled “Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates” in the Selected Statistical 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 74.8% of total assets as of December 31, 2000 compared to 74.4% as of December 31, 1999.
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.
22
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 1.14% of total loans at December 31, 1999 to 1.54% at December 31, 2000. As a result, an additional $2.2 million loss allowance was allocated for 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.
Allowance 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 allowance allocation. The ALLL is then adjusted for overall characteristics of the current loan portfolio, such as delinquency trends, level of nonperforming 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 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.
The Corporation 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 $2.26 million to $2.45 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 $17.9 million in 1999 to $16.3 million in 2000.
23
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, 2001, the Corporation had approximately $228.7 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. These sources of funds are subject to certain conditions. 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 2001, the Corporation continued its stock repurchase program which continues to be accretive to shareholder value. Through this program, the Corporation repurchased 334,742, 521,460, and 76,348 shares during 2001, 2000, and 1999, 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 executive and 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 determined by measuring the anticipated change in net interest income over a twelve-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, 2001:
Change in Interest Rates (basis points)
Percentage Change in Net Income (12 Months)
+200
(9.00
)%
-200
11.52
The following table shows the Corporation’s estimated earnings sensitivity profile as of December 31, 2000:
13.7
(10.1
Given an immediate and sustained 200 basis point increase in the yield curve used in the simulation model, it is estimated that net income for the Corporation would decrease by 9.00% over one year. A 200 basis point immediate and sustained decrease in interest rates would increase net income by 11.52% 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 2001 and 2000, $119.8 million and $28.8 million, respectively, of fixed rate residential mortgages were sold. In addition in 2000, certain primarily short-term, fixed rate 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 $181.9 million at December 31, 2000 to $191.6 million at December 31, 2001. The primary source of capital of the Corporation is retained earnings. Cash dividends were $0.81 per share for 2001 and $0.75 per share for 2000.
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, 2001 were 6.44%, 9.11%, and 10.32%, respectively. Community Trust Bancorp, Inc. and all banking affiliates met the criteria for “well capitalized” at December 31, 2001.
On February 1, 2002, the Corporation issued an additional $25 million of trust preferred securities through an issuance by CTBI Preferred Capital Trust II, a wholly owned subsidiary grantor trust. The trust preferred securities bear interest at an annual rate of 8.25%, have a redemption date of March 31, 2007, and mature on March 31, 2032. Proceeds of $8 million from this offering were used to pay off a revolving line of credit with Bank One, N.A.; $12.4 million was used for payment of the redemption of senior notes on February 25, 2002. It is anticipated that the issuance of the trust preferred securities will increase the Tier 1 risk based capital ratio, total risk based capital ratio, and leverage ratio by 132 basis points, 131 basis points, and 97 basis points, respectively.
As of December 31, 2001, 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, Changing Prices and Local Economic Conditions
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 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
25
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.
Our success is dependent on the general economic conditions of the communities we serve. Unlike larger banks that are more geographically diversified, we provide financial and banking services primarily to eastern, central, and south central Kentucky and southern West Virginia. The economies of a majority of these markets are dependent to a significant extent on the coal industry and coal related industries. The economic conditions in these areas have a significant impact on loan demand, the ability of borrowers to repay these loans, and the value of the collateral securing these loans. A significant decline in general economic conditions, and in particular the coal industry, will affect these local economic conditions and will negatively affect the financial results of our banking operations. Factors influencing general conditions include inflation, recession, unemployment, and other factors beyond our control.
Contractual Obligations and Commitments
As disclosed in the notes to the consolidated financial statements, the Corporation has certain obligations and commitments to make future payments under contracts. At December 31, 2001, the aggregate contractual obligations and commitments are:
Payments Due by Period
Contractual Obligations:
1 Year
2-5 Years
After 5 Years
Annual rental commitments under leases
11,329
1,164
4,325
5,840
24,773
17,769
Amount of Commitment — Expiration by Period
Other Commitments:
Standby letters of credit
17,415
16,022
1,393
Commitments to extend credit
274,633
175,765
21,971
76,897
292,048
191,787
23,364
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Corporation currently does not engage in any derivative or hedging activity. Analysis of the Corporation’s interest rate sensitivity can be found above.
26
Item 8. Financial Statements
Consolidated Balance Sheets
(dollars in thousands)
Assets:
96,173
72,725
113,623
96,990
Securities available-for-sale at fair value (amortized cost of $364,218 and $236,252, respectively)
236,620
Securities held-to-maturity at amortized cost (fair value of $85,088 and $47,053, respectively)
48,976
Allowance for loan losses
(23,648
(25,886
Net loans
1,687,424
1,668,639
51,101
49,029
Excess of cost over net assets acquired (net of accumulated amortization of $18,796 and $15,096, respectively)
64,534
56,320
40,493
35,096
Liabilities and shareholders’ equity:
Noninterest bearing
320,437
254,642
Interest bearing
1,835,335
1,689,274
2,155,772
1,943,916
Federal funds purchased and other short-term borrowings
82,584
58,951
9,525
13,326
16,474
18,238
2,312,299
2,082,491
Shareholders’ equity:
Preferred stock, 300,000 shares authorized and unissued
Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2001 - 11,425,770; 2000 - 11,700,895
57,129
58,352
Capital surplus
51,122
54,892
Retained earnings
81,395
68,421
Accumulated other comprehensive income, net of tax
1,960
239
Total shareholders’ equity
See notes to consolidated financial statements.
27
Consolidated Statements of Income
(in thousands except per share data)
Interest income:
Interest and fees on loans
151,001
155,447
139,747
Interest and dividends on securities
Taxable
16,753
14,960
17,920
Tax exempt
2,885
2,926
2,952
Other, including interest on fed funds sold
6,196
2,416
2,897
Interest expense:
Interest on deposits
85,609
83,248
71,961
Interest on federal funds purchased and other short-term borrowings
3,191
3,110
2,307
Interest on advances from Federal Home Loan Bank
Interest on long-term debt
4,294
Provision for loan and lease losses
Net interest income after provision for loan losses
73,933
75,017
74,671
Noninterest income:
Service charges on deposit accounts
11,086
9,671
9,581
Gains on sales of loans, net
2,554
1,651
Trust income
2,520
2,523
2,411
Securities gains, net
775
59
6,839
6,331
7,383
Total noninterest income
Noninterest expense:
Salaries and employee benefits
31,093
29,686
30,453
Occupancy, net
5,291
5,148
4,934
Equipment
3,878
4,773
Data processing
3,973
3,658
3,515
Stationery, printing, and office supplies
1,364
1,226
1,556
Taxes other than payroll, property, and income
2,231
2,069
1,250
FDIC insurance
395
376
297
16,998
15,886
17,610
Total noninterest expense
28
Consolidated Statements of Changes in Shareholders’ Equity
Common Stock
Capital Surplus
Retained Earnings
Accumulated Other Comprehensive Income (Loss), Net of Tax
(in thousands except per share and share amounts)
Balance, January 1, 1999
50,325
28,057
84,827
1,586
Other comprehensive income, net of tax:
Net change in unrealized appreciation on securities available-for-sale, net of tax of ($2,532)
(4,710
Comprehensive income
17,135
Cash dividends declared ($0.72 per share)
(8,769
To record 10% common stock dividend
5,029
17,853
(22,882
Issuance of 44,587 shares of common stock
204
555
759
Purchase of 76,348 shares of common stock
(342
(1,159
(1,501
Balance, December 31, 1999
55,216
45,306
75,021
(3,124
Net change in unrealized appreciation on securities available-for-sale, net of tax of $1,811
3,363
25,709
Cash dividends declared ($0.75 per share)
(9,100
5,532
14,314
(19,846
Issuance of 41,060 shares of common stock
201
498
699
Purchase of 521,460 shares of common stock
(2,597
(5,226
(7,823
Balance, December 31, 2000
Net change in unrealized appreciation on securities available-for-sale, net of tax of $927
1,721
23,993
Cash dividends declared ($0.81 per share)
(9,297
Issuance of 90,118 shares of common stock
451
1,004
1,455
Purchase of 334,742 shares of common stock
(1,674
(4,775
(6,449
Balance, December 31, 2001
See notes to consolidated financial statements
29
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
7,451
7,095
7,654
Change in net deferred tax asset, net
1,465
545
(47
Provision for loan and other real estate losses
9,514
9,442
9,279
(775
(59
Gains on sale of mortgage loans held for sale
(2,554
(688
(1,651
Gains on sale of other loans
(254
Gains or losses on sale of assets, net
(345
(201
Proceeds from sale of mortgage loans held for sale
119,775
28,847
77,054
Amortization (accretion) of securities premiums, net
(291
252
Change in mortgage loans held for sale, net
(534
250
4,709
Changes in:
(1,764
5,706
7,524
(10,505
(609
(3,681
Net cash provided by operating activities
144,056
72,528
122,939
Cash flows from investing activities:
Securities available-for-sale (AFS):
Proceeds from sales
26,827
14,043
Proceeds from prepayments and maturities
117,166
79,114
79,900
Purchase of AFS securities
(270,908
(54,282
(56,535
Securities held-to-maturity (HTM):
16,057
11,688
Purchase of HTM securities
(50,390
(390
Proceeds from sale of loans
6,554
Change in loans, net
(147,726
(122,762
(209,906
Purchase of premises, equipment, and other real estate
(6,403
(1,737
(1,845
Proceeds from sale of premises and equipment
564
967
70
Proceeds from sale of other real estate
5,470
2,064
2,407
Assets acquired net of cash
(11,913
Net cash (used in) investing activities
(321,256
(64,741
(162,909
Cash flows from financing activities:
Change in deposits, net
211,856
66,582
(43,807
Change in federal funds purchased and other short-term borrowings, net
23,633
7,825
2,221
103
Payments on advances from Federal Home Loan Bank
(3,801
(3,701
(34,472
Payments on long-term debt
(116
(114
(149
Issuance of common stock
Repurchase of common stock
Dividends paid
Net cash provided by (used in) financing activities
217,281
54,471
(85,706
Net increase (decrease) in cash and cash equivalents
40,081
62,258
(125,676
Cash and cash equivalents at beginning of year
169,715
107,457
233,133
Cash and cash equivalents at end of year
209,796
30
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.
The adequacy of the allowance is reviewed quarterly by management using a methodology that includes several key factors. The Corporation utilizes an internal risk grading system for commercial credits, and those larger commercial credits identified through this grading system as having weaknesses are individually reviewed for their ability and potential to repay their loans. The borrower’s cash flow,
adequacy of collateral held for the loan, and other options available to the Corporation including legal avenues are all evaluated. Based upon this individual credit evaluation, a specific allocation to the allowance may be made for the loan.
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 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 SFAS No. 133, Accounting for Derivative Instruments and Certain Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative 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.
Business Combinations — The Corporation adopted SFAS No. 141, Business Combinations, effective July 1, 2001. This statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. Under the new accounting standard, all business combinations are to be accounted for using one method, the purchase method.
Goodwill and other Intangible Assets — Effective January 1, 2002, the Corporation adopted SFAS No. 142, Goodwill and other Intangible Assets. Upon adoption, the Corporation ceased amortizing goodwill of approximately $59.5 million arising from previous purchase transactions. This will reduce amortization expense on an annual basis beginning in 2002 by $3.1 million and increase earnings on an annual basis beginning in 2002 by $2.3 million. Goodwill will continue to be evaluated for impairment in accordance with SFAS No. 142.
Reclassification— Certain reclassifications have been made in the prior year financial statements to conform to current year classifications.
2. Business Combinations
On January 26, 2001, Community Trust Bank, N.A. acquired certain deposits, loans, and fixed assets of The Bank of Mt. Vernon, Inc. The offices acquired from The Bank of Mt. Vernon, Inc. are located in Mt. Vernon, Somerset, Richmond, and Berea, Kentucky. The offices acquired had deposits totaling $109.3 million and loans totaling $79 million. 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 acquired branches of The Bank of Mt. Vernon.
33
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 requirements were $26.1 million and $21.3 million at December 31, 2001 and 2000, 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 2001, 2000, and 1999 for interest was $97.1 million, $89.3 million, and $80.0 million, respectively. Cash paid during the same periods for income taxes was $9.4 million, $8.1 million and $9.6 million, respectively.
4. Securities
Amortized cost and fair value of securities at December 31, 2001 are as follows:
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
51,726
426
(805
51,347
594
(141
U.S. agency mortgage-backed pass through certificates
229,400
3,345
(240
232,505
9,654
9,901
26,258
85
26,343
357,850
4,698
(1,187
361,361
Marketable equity securities
6,368
(510
5,872
4,712
(1,697
57,499
1,146
58,645
608
(6
2,102
1,770
Amortized cost and fair value of securities at December 31, 2000 are as follows:
28,464
471
(18
28,917
States and political subdivisions
33,799
532
(294
34,037
117,085
457
(713
116,829
15,104
65
(66
15,103
35,352
(41
35,327
229,804
1,541
(1,132
230,213
6,448
(69
6,407
236,252
1,569
(1,201
34
11,499
(2,332
9,167
27,653
477
28,122
6,545
6,506
3,279
3,258
(2,400
47,053
The amortized cost and fair value of securities at December 31, 2001 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.
Due in one year or less
23,607
23,647
5,606
Due after one through five years
10,319
10,788
36,472
37,576
Due after five through ten years
47,698
47,036
38,393
38,924
Due after ten years
10,914
11,141
880
Mortgage-backed securities and collateralized mortgage obligations
239,054
242,406
Gross gains of $0.8 million were realized on sales and calls in 2001 and gross gains of $0.1 million were realized on sales and calls in 2000. No gains or losses on sales or calls were realized in 1999.
In 2001, the Corporation acquired 75.28% of the outstanding stock of Citizens National Bank and Trust, Hazard. At the time of acquisition, the Corporation elected under SFAS No. 115 to reclassify securities totaling $6,000,000 from held-to-maturity to available-for-sale. This election was made pursuant to the SFAS No. 115 exception allowing the Corporation to restructure the acquired portfolio to conform to the Corporation’s investment portfolio objectives.
Securities in the amount of $289 million and $225 million at December 31, 2001 and 2000, 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:
35
Included in loan balances are loans held for sale in the amount of $1.2 million and $0.7 million at December 31, 2001 and at December 31, 2000, respectively. The amount of loans on a non-accruing income status was $30.5 million and $22.7 million at December 31, 2001 and December 31, 2000, respectively. Additional interest which would have been recorded during 2001, 2000, and 1999 if such loans had been accruing interest was approximately $2.6 million, $2 million, and $1.3 million, respectively.
At December 31, 2001 and 2000, the recorded investment in impaired loans was $22.9 million and $15.6 million, respectively. Included in these amounts at December 31, 2001 and December 31, 2000, respectively are $8.1 million and $5.6 million of impaired loans for which specific reserves for loan losses are carried in the amounts of $3.2 million and $2.4 million. The average investment in impaired loans for 2001 and 2000 was $23.4 million and $15.6 million, respectively while interest income of $651 thousand and $176 thousand was recognized on cash payments of $906 thousand and $176 thousand.
In the ordinary course of business, the Corporation’s banking subsidiaries have made loans at prevailing interest rates and terms to directors and executive officers of the Corporation or its banking subsidiaries, 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, 2001 was $30.7 million. During 2001, activity with respect to these loans included new loans of $3.4 million, repayment of $1.3 million, and a net increase of $2.3 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 $35.1 million at December 31, 2001.
At December 31, 2001, 2000, and 1999, loans serviced for the benefit of others, not included in the detail above, totaled $274 million, $255 million, and $276 million, respectively.
6. Allowance for Losses
Activity in the allowance for loan losses is as follows:
Balance, beginning of year
Provision charged to operations
Recoveries
Charge-offs
(15,446
(13,447
(15,304
Activity in the allowance for other real estate losses is as follows:
630
623
329
229
(235
(173
(167
780
Other real estate owned by the Corporation, net of reserves, included in Other assets at December 31, 2001 and 2000 was $2.6 million and $5.4 million, respectively.
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7. Premises and Equipment
Premises and equipment are summarized as follows:
Land and buildings
58,670
52,440
Leasehold improvements
4,143
4,013
Furniture, fixtures, and equipment
27,149
21,903
Construction in progress
287
1,447
90,249
79,803
Less accumulated depreciation and amortization
(39,148
(30,774
Depreciation and amortization of premises and equipment for 2001, 2000, and 1999 was $3.8 million, $4 million, and $4.5 million, respectively.
8. Deposits
Major classifications of deposits are categorized as follows:
33,082
14,545
Money market deposits
391,075
350,535
Savings
177,153
134,919
367,494
Certificates of deposit less than $100,000 and other time deposits
848,301
821,781
Interest expense on deposits is categorized as follows:
Savings, NOW, and money market accounts
22,812
20,001
16,188
Other time deposits
49,454
45,152
39,557
9. Advances from Federal Home Loan Bank
The advances from the Federal Home Loan Bank are due for repayment as follows:
4,197
4,128
Due in one to five years
4,126
7,412
Due in five to ten years
1,156
1,733
46
53
These advances generally require monthly principal payments and are collateralized by Federal Home Loan Bank stock of $18 million and certain first mortgage loans totaling $12.9 million as of December 31, 2001. Fixed rate advances total $9.5 million at December 31, 2001 and have interest rates ranging from 1.00% to 7.05%. There were no variable rate advances at year-end.
37
10. Borrowings
Short-term debt is categorized as follows:
Parent Company:
Revolving line of credit, 4.18% interest due semiannually, $14 million with $6 million available to meet future cash needs
8,000
Subsidiaries:
Federal funds purchased
16,864
13,833
Securities sold under agreements to repurchase
57,720
39,618
Generally,federal funds purchased and securities sold under agreements to repurchase mature and reprice daily. The average rates paid for federal funds purchased and repurchase agreements as of December 31, 2001 were 1.79% and 2.28%, respectively.
Effective February 1, 2002, the Corporation paid off and closed the revolving line of credit with Bank One, N.A. using a portion of the proceeds of the CTBI Preferred Capital Trust II offering as detailed in note 11.
Long-term debt is categorized as follows:
Ten year senior notes, 8.25% interest, due January 1, 2003; interest payable semiannually; redeemable in whole or in part at the option of the Corporation at any time on or after January 1, 1999
12,230
Capital lease obligations, interest at lender’s prime rate, payable in quarterly principal and interest installments of $0.1 million, adjusted for prime rate changes through September 2004, secured by real property; the Bank has a purchase option in September 2004 for $0.9 million or a renewal option for five years
1,212
39
On February 25, 2002, the Corporation redeemed all of the $12.2 million in remaining principal amount of outstanding 8.25% senior notes due January 1, 2003, at a redemption price of 100.5% of the principal amount of the notes, plus accrued interest to the redemption date. The Corporation paid the redemption price with a portion of the proceeds of the CTBI Preferred Capital Trust II offering as detailed in note 11.
11. Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely the Junior Subordinated Debentures of the Corporation
The following table is a summary of the trust preferred securities as of December 31, 2001:
Issuance Trust
Issuance Date
Debentures Amount
Rate Amount
Rate Type
Maturity Date
Redemption Date
CTBI Preferred Capital Trust
3/31/97
Fixed
3/31/27
3/31/07
On February 1, 2002, the Corporation issued an additional $25 million of trust preferred securities through an issuance by CTBI Preferred Capital Trust II, a wholly owned subsidiary grantor trust. The
38
debentures, in the amount of $25.8 million, bear interest at an annual rate of 8.25%, have a redemption date of March 31, 2007, and mature on March 31, 2032. Proceeds of $8 million from this offering were used to pay off a revolving line of credit with Bank One, N.A.; $12.4 million was used for payment of the redemption of senior notes on February 25, 2002.
12. Federal Income Taxes
The components of the provision for income taxes, exclusive of tax effect of unrealized securities gains, are as follows:
Currently payable
9,032
9,725
9,511
Deferred
The components of the net deferred tax asset as of December 31 are as follows:
Deferred tax assets
8,277
9,060
Interest on nonperforming loans
1,820
1,295
1,142
1,264
Total deferred tax assets
11,239
11,619
Deferred tax liabilities
Depreciation
(3,746
(3,598
FHLB stock dividends
(2,712
(2,296
(1,702
(1,181
Total deferred tax liabilities
(8,160
(7,075
Net deferred tax asset
3,079
4,544
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.
Tax at statutory rate
11,469
11,415
10,958
Tax-exempt interest
(1,288
(1,372
(1,465
Other, net
316
227
(29
13. 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 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 KSOP plan owned 803,351 shares of Corporation stock at December 31, 2001. Substantially all shares owned by the KSOP were allocated to employees’ accounts
at December 31, 2001. 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 2001, 2000, and 1999 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, 504,091 of which were available at December 31, 2001 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, 2001, 2000, and 1999 is summarized as follows:
Options
Weighted Average Exercise Price
Outstanding at beginning of year
236,341
19.21
127,916
25.37
13,310
Granted
110,500
109,820
17.14
117,628
20.40
Exercised
(5,351
18.15
Forfeited/expired
(64,432
18.91
(3,022
20.05
Outstanding at end of year
277,058
18.40
20.92
Exercisable at end of year
20,539
5,081
20.08
1,526
The 1998 Stock Option Plan had options with the following remaining lives at December 31, 2001:
1998 Option Plan
Remaining Life
Outstanding Options
Weighted Average Price
Six years
25.38
Seven years
77,789
Eight years
85,709
Nine years
100,250
17.12
Total outstanding
Weighted average price
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.
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The Corporation’s stock option activity for the 1989 Plan for the years ended December 31, 2001, 2000, and 1999 is summarized as follows:
188,560
17.33
221,108
17.38
276,146
16.88
(47,858
14.28
(2,995
9.02
(19,715
12.43
(355
20.60
(29,553
18.41
(35,323
16.23
140,347
18.33
68,655
17.24
45,930
16.47
44,243
15.75
The 1989 Stock Option Plan had options with the following remaining lives at December 31, 2001:
1989 Option Plan
One year or less
3,993
16.28
Two years
25.92
Three years
4,499
16.48
Four years
40,311
15.54
Five years
83,549
19.16
3,630
25.72
The related information for the 1998 Plan for 2001, 2000, and 1999 is summarized below. No options were granted in 2001, 2000, or 1999 from the 1989 Plan.
The weighted average fair value of options granted during the years 2001, 2000, and 1999 was $3.58, $5.79, and $2.05 per share, respectively.
Had compensation cost for the Corporation’s stock options granted in 2001, 2000, and 1999 been determined under the fair value approach described in SFAS No. 123, Accounting for Stock-Based Compensation, the Corporation’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Years ended December 31
(in thousands, except per share amounts)
As reported
Pro forma
22,015
21,947
21,688
Basic net income per share
1.84
Diluted net income per share
1.92
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 2001, 2000, and 1999, respectively: risk-free interest rates of 4.95%, 6.87%, and 5.50%, dividend yields of 4.86%, 1.06%, and
41
3.95%, volatility factors of the expected market price of the Corporation’s common stock of 0.300, 0.300, and 0.170 and a weighted average expected option life of 5.0, 4.3, and 6.0 years.
14. Operating Leases
Certain premises and equipment are leased under operating leases. Minimum rental payments are as follows:
2002
2003
1,394
2004
1,400
2005
1,017
2006
514
Thereafter
Rental expense under operating leases was $0.7 million, $0.6 million, and $0.9 million in 2001, 2000, and 1999, respectively.
15. 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.
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, 2001 and 2000. Off-balance sheet loan commitments at December 31, 2001 and 2000 were $292,048,000 and $260,876,000, respectively.
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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.
Carrying Amount
Estimated Fair Value
Financial assets
Cash and cash equivalents
452,321
285,596
283,673
1,741,580
1,722,273
2,371,425
2,403,697
2,149,836
2,175,661
Financial liabilities
2,170,040
1,953,656
Short-term borrowings
9,277
13,250
35,121
14,229
14,181
2,295,825
2,311,251
2,064,253
2,074,538
16. Off-Balance Sheet Transactions
The Corporation’s banking subsidiaries are parties 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 subsidiaries use the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments and include these commitments and conditional obligations in their calculations as to the adequacy of their allowances for loan losses.
At December 31, the banking subsidiaries had the following financial instruments, whose approximate contract amounts represent credit risk:
17,217
243,659
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 banking subsidiaries evaluate 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, 2001 of $18.3 million have interest rates and terms ranging predominantly from 5.50% to 11.00% 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, 2001. Collateral held varies but may include accounts receivable, inventory, property, equipment, and income-producing properties.
43
17. Concentration of Credit Risk
The Corporation’s banking subsidiaries grant commercial, residential, and consumer loans to customers primarily located in Eastern Kentucky, Central Kentucky, and West Virginia. The banking subsidiaries are continuing to increase all components of their portfolio mix in a manner to reduce risk from changes in economic conditions. Although the loan portfolio is diverse, a certain portion of the Corporation’s debtors is economically dependent upon the coal industry for the ability to repay. Concentrations of credit are reviewed quarterly by management to ensure that internally established limits based on Tier 1 Capital plus the Allowance for Loan Losses are not exceeded. At December 31, 2001 and 2000, the Corporation’s concentration of coal mining and related support industries credits based on established limits was 33% and 42% of Tier 1 Capital plus the Allowance for Loan Losses, respectively. Floorplan credits at December 31, 2001 remained at 23% of Tier 1 plus the Allowance for Loan Losses from the prior year-end. These percentages are within the Corporation’s internally established limits regarding concentrations of credit.
18. Commitments and Contingencies
19. Limitation on Subsidiary Bank Dividends
The Corporation’s principal source of funds is dividends received from the subsidiary banks. Regulations limit the amount of dividends that may be paid by the Corporation’s banking subsidiaries without prior approval. During 2002, approximately $5.9 million plus any 2002 net profits can be paid by the Corporation’s banking subsidiaries without prior regulatory approval.
20. Regulatory Matters
The Corporation and its banking subsidiaries 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 1 Capital (as defined in the regulations) to risk weighted assets (as defined) and of Tier 1 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, 2001, the Corporation meets all capital adequacy requirements for which it is subject to be defined as well capitalized.
44
Actual
For Capital Adequacy Purposes
To Be Well Capitalized Under Prompt Corrective Action Provision
Ratio
As of December 31, 2001:
(to Risk Weighted Assets)
180,017
139,548
8.00
174,435
10.00
158,938
69,786
4.00
104,679
6.00
(to Average Assets)
98,719
123,399
5.00
As of December 31, 2000:
181,157
137,893
172,366
159,560
68,924
103,387
87,550
109,438
21. Parent Company Financial Statements
Condensed Balance Sheets
Cash on deposit
6,853
8,553
Securities available-for-sale
214
187
Investment in and advances to subsidiaries
240,685
223,632
Excess of cost over net assets acquired (net of accumulated amortization)
4,973
5,373
1,787
1,579
254,512
239,324
Short-term debt
46,730
8,176
5,190
62,906
57,420
Condensed Statements of Income
Income:
Dividends from subsidiary banks
28,200
17,800
12,000
Other income
55
236
Total income
28,214
17,855
12,236
Expenses:
4,508
4,571
4,569
Amortization expense
406
Other expenses
812
805
1,005
Total expenses
5,726
5,782
5,980
Income before income taxes and equity in undistributed income of subsidiaries
22,488
12,073
6,256
Applicable income taxes
(1,873
(1,865
(1,871
Income before equity in undistributed income of subsidiaries
24,361
13,938
8,127
Equity in undistributed income of subsidiaries
(2,089
8,408
13,718
Condensed Statements of Cash Flows
Amortization, net
(Gains) on sales of assets
Equity in undistributed earnings of subsidiaries
2,089
(8,408
(13,718
Change in other assets and liabilities, net
(1,413
3,848
(1,890
23,354
18,184
6,643
Payments to acquire subsidiary
(15,063
Repayment of investments in and advances to subsidiaries
1,800
4,700
Proceeds from sale of investment securities
1,500
Proceeds from sale of fixed asset
176
Net cash provided by (used in) investing activities
(13,263
4,876
Net (repurchase) of common stock
(4,994
(7,124
(759
Proceeds from short-term debt
2,500
Net cash used in financing activities
(11,791
(16,224
(9,528
(1,700
6,836
(1,385
1,717
3,102
22. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Numerator:
Denominator:
Basic earnings per share:
Weighted average shares
11,516,684
11,946,531
12,170,076
Diluted earnings per share:
Effect of dilutive securities — stock options
51,213
7,983
27,573
Adjusted weighted average shares
11,567,897
11,954,514
12,197,649
Earnings per share:
At December 31, 2001, 67,380 stock options at prices ranging from $20.66 to $25.92 and a weighted average price of $22.84 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. 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.
47
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, 2001.
March 29, 2002
/s/ Jean R. Hale
President and Chief Executive Officer
48
Report of Independent Auditors
To the Board of Directors and Shareholders
Community Trust Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Community Trust Bancorp, Inc. and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Corporation’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 year ended December 31, 1999 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 2001 and 2000 consolidated financial statements present fairly, in all material respects, the financial position of Community Trust Bancorp, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Louisville, Kentucky
/s/ Deloitte & Touche LLP
January 18, 2002
(except for Note 10, for which the date is February 25, 2002)
We have audited the accompanying consolidated financial statements of Community Trust Bancorp, Inc. and subsidiaries for the year ended December 31, 1999. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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 the year then ended, in conformity with accounting principles generally accepted in the United States.
Columbus, Ohio
/s/ Ernst & Young LLP
January 12, 2000
50
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
(a) The following documents are filed as a part of this report:
Financial Statements and Financial Statement Schedules
ExhibitNo.
Description of Exhibits
3.1
Articles of Incorporation and all amendments thereto (incorporated by reference to registration statement no. 33-35138)
3.2
By-laws of the Corporation, as amended July 25,1995 (incorporated by reference to registration statement no. 33-61891)
10.1
Community Trust Bancorp, Inc. Savings and Employee Stock Ownership Plan (incorporated by reference to registration statement no. 33-18961)
10.2
Second restated Pikeville National Corporation 1989 Stock Option Plan (commonly known as Community Trust Bancorp, Inc. 1989 Stock Option Plan) (incorporated by reference to registration statement no. 33-36165)
10.3
Community Trust Bancorp, Inc. 1998 Stock Option Plan (incorporated by reference to registration statement no. 333-74217)
10.4
Form of Severance Agreement between Community Trust Bancorp, Inc. and executive officers (currently in effect with respect to six executive officers)
51
10.5
Senior Management Incentive Compensation Plan (2002)
Letter of Ernst & Young, LLP regarding the change in certifying accountants (incorporated by reference to Form 8-K/A filed May 16, 2000)
List of subsidiaries
23.1
Consent of Deloitte & Touche LLP, Independent Auditors
23.2
Consent of Ernst & Young LLP, Independent Auditors
(b)
Reports on Form 8-K required to be filed during the last quarter of 2001
(c)
Exhibits
The response to this portion of Item 14 is submitted as a separate section of this report
(d)
Financial Statement Schedules
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.
By:
Jean R. Hale
Vice Chairman, President and
Chief Executive Officer
/s/ Kevin Stumbo
Kevin Stumbo
Chief Accounting Officer
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.
/s/ Burlin Coleman
Chairman of the Board and Director
Burlin Coleman
Vice Chairman, President, and Chief Executive Officer
/s/ Charles J. Baird
Director
Charles J. Baird
/s/ Nick A. Cooley
Nick A. Cooley
/s/ William A. Graham, Jr.
William A. Graham, Jr.
/s/ M. Lynn Parrish
M. Lynn Parrish
/s/ E. M. Rogers
E. M. Rogers
Community Trust Bancorp, Inc. and Subsidiaries
Index to Exhibits
Exhibit No.
Articles of Incorporation for the Corporation (incorporated herein by reference)
By-laws of the Corporation as amended through the date of this filing (incorporated herein by reference)
Community Trust Bancorp, Inc. Savings and Employee Stock Ownership Plan (incorporated herein by reference)
Second restated Pikeville National Corporation 1989 Stock Option Plan (commonly known as Community Trust Bancorp, Inc. 1989 Stock Option Plan) (incorporated herein by reference)
Community Trust Bancorp, Inc. 1998 Stock Option Plan (incorporated herein by reference)