Community Trust Bancorp - 10-K annual report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-K

Commission file number 0-11129

COMMUNITY TRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)

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.

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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.

Based upon the closing price of the Common Shares of the Registrant on the NASDAQ National Market, the aggregate market value of voting stock held by non-affiliates of the Registrant as of February 28, 2003 was $310,659,018.56.  The number of shares outstanding of the Registrant’s Common Stock as of February 28, 2003 was 12,288,727.  For the purpose of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference into the Form 10-K part indicated:

PART I

Item 1.  Business

Community Trust Bancorp, Inc. (the “Corporation”) is a bank holding company registered with the Board of Governors of the Federal Reserve System pursuant to Section 5(a) of the Bank Holding Company Act of 1956, as amended.  The Corporation was incorporated August 12, 1980, under the laws of the Commonwealth of Kentucky for the purpose of becoming a bank holding company.  At December 31, 2002, the Corporation owned all the capital stock of one commercial bank and one trust company, serving small and mid-sized communities in eastern, northeast, central, and south central Kentucky and southern West Virginia.  The commercial bank is Community Trust Bank, Inc., Pikeville, Kentucky (the “Bank”).  The trust company, Community Trust and Investment Company, Lexington, Kentucky (the “Trust Company”), has offices in Lexington, Pikeville, Ashland, Middlesboro, and Versailles, Kentucky.  The Trust Company commenced business operations on January 1, 1994.  At December 31, 2002, the Corporation had total consolidated assets of $2.5 billion and total consolidated deposits of $2.1 billion, making it the largest bank holding company headquartered in the Commonwealth of Kentucky.

On January 26, 2001, the 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 the Bank 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 (“Citizens”), 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 for $4.9 million.  Citizens had total assets of $138.5 million and equity capital of $19.4 million as of December 31, 2001.  On March 15, 2002, Citizens was merged into the Bank.

Effective January 1, 2003, the Bank and the Trust Company converted their charters to state charters from national associations.  The Bank remained a member of the Federal Reserve System following conversion.  Following its conversion, the Trust Company changed its name from Trust Company of Kentucky, National Association to Community Trust and Investment Company in order to identify more closely the Trust Company with the Bank.  While the Corporation believes that the conversions resulted in some reduction in expenses, the conversions did not result in any changes in the management or operations of the Bank or the Trust Company.

Through its subsidiaries, the Corporation engages in a wide range of commercial and personal banking and trust 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 Bank include making commercial, construction, mortgage, and personal loans.  Also available are lease-financing, lines of credit, revolving lines of credit, term loans, and other specialized loans including asset-based financing.  The 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, as depositories for securities, and as providers of discount brokerage services.

1

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 state banks, national banks, thrifts and trust companies, insurance companies, mortgage banking operations, credit unions, finance companies, brokerage companies, 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.

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 is economically dependent on the coal industry (see note 18 to the consolidated financial statements).

The Corporation engages in no operations in foreign countries.

EMPLOYEES

As of December 31, 2002, the Corporation and its subsidiaries had 874 full-time equivalent employees.  Employees are provided with a variety of employee benefits.  A retirement plan, employee stock ownership plan, group life, hospitalization, major medical insurance, and annual management and employee incentive compensation plans are available to eligible personnel.

SUPERVISION AND REGULATION

The Corporation, as a registered bank holding company, is restricted to those activities permissible under the Bank Holding Company Act of 1956, as amended, and is subject to actions of the Board of Governors of the Federal Reserve System thereunder.  It is required to file an annual report with the Federal Reserve Board and is subject to an annual examination by the Board.

The Bank is a state-chartered bank subject to state and federal banking laws and regulations and to periodic examination by the Kentucky Department of Financial Institutions and to the restrictions, including dividend restrictions, thereunder.  The Bank is also a member of the Federal Reserve System

2

and is subject to certain restrictions imposed by and to examination and supervision under the Federal Reserve Act.  The Trust Company is also regulated by the Kentucky Department of Financial Institutions.

Deposits of the Bank are insured by the Federal Deposit Insurance Corporation, which subjects banks to regulation and examination under the provisions of the Federal Deposit Insurance Act.

The operations of the Corporation and its subsidiaries also are affected by other banking legislation and policies and practices of various regulatory authorities.  Such legislation and policies include statutory maximum rates on some loans, reserve requirements, domestic monetary and fiscal policy, and limitations on the kinds of services that may be offered.

CAUTIONARY STATEMENT

Certain of the statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The Corporation’s actual results may differ materially from those included in the forward-looking statements. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may increase,” “may fluctuate,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” and “could.” These forward-looking statements involve risks and uncertainties including, but not limited to, economic conditions, portfolio growth, the credit performance of the portfolios, including bankruptcies, and seasonal factors; changes in general economic conditions including the performance of financial markets, the performance of coal and coal related industries, prevailing inflation and interest rates, realized gains from sales of investments, gains from asset sales, and losses on commercial lending activities; results of various investment activities; the effects of competitors’ pricing policies, of changes in laws and regulations on competition and of demographic changes on target market populations’ savings and financial planning needs; 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 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

(1) Interest includes fees on loans of $3,069, $2,761, and $2,743 in 2002, 2001, and 2000, 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) Interest on loans held for sale includes fees of $241, $552, and $64 in 2002, 2001, and 2000, respectively.

4

Net Interest Differential

The following table illustrates the approximate effect of volume and rate changes on net interest differentials between 2002 and 2001 and also between 2001 and 2000.

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, 2002 are as follows:

5

The calculations of the weighted average interest rates for each maturity category are based upon 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, the securities issued by one issuer that exceeded 10% of the shareholders’ equity of the Corporation at December 31, 2002 are as follows:

Securities

The book values of securities available-for-sale and securities held-to-maturity as of December 31, 2002 and 2001 are presented in note 4 to the consolidated financial statements.

The book value of securities at December 31, 2000 is presented below:

6

Loan Portfolio

The total loans above are net of unearned income.

The following table shows the amounts of loans (excluding residential mortgages of 1-4 family residences, consumer loans, and lease financing) which, based on the remaining scheduled repayments of principal are due in the periods indicated.  Also, the amounts are classified according to sensitivity to changes in interest rates (fixed, variable).

7

Nonperforming Assets

Nonaccrual, past due, and restructured loans

In 2002, gross interest income that would have been recorded on nonaccrual loans had the loans been current in accordance with their original terms amounted to $2.3 million.  Interest income actually received and included in net income for the period was $0.2 million, leaving $2.1 million of interest income not recognized during the period.

8

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 and interest income accrued in prior periods is charged through the allowance for loan losses.  Any loans past due 90 days or more must be well secured and in the process of collection to continue accruing interest.

Potential Problem Loans

Interest accrual is discontinued when management believes, after considering economic and business conditions, collateral value, and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful.  Any loan greater than 90 days past due must be well secured and in the process of collection to continue accruing interest.  Management, therefore, believes to the best of their knowledge that no additional potential problem loans exist that would result in disclosure pursuant to Item III.C.2.

Foreign Outstandings

None

Loan Concentrations

The Corporation had no concentration of loans exceeding 10% of total loans at December 31, 2002.  See note 18 to the consolidated financial statements for further information.

9

Analysis of the Allowance for Loan Losses

10

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 the provision may be required.  See note 1 to the consolidated financial statements for further information.

Average Deposits and Other Borrowed Funds

The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2002 occurred at February 28, 2002, with a month-end balance of $87.7 million.

Maturities and/or repricing of time deposits of $100,000 or more outstanding at December 31, 2002 are summarized as follows:

11

Item 2.  Properties

The Corporation’s main office, which is owned by the Bank, is located at 346 North Mayo Trail, Pikeville, Kentucky 41501.  Following is a schedule of properties owned and leased by the Corporation and its subsidiaries as of December 31, 2002: