Community Trust Bancorp - 10-Q quarterly report FY

WASHINGTON, D.C. 20549

FORM 10-Q

Commission file number 0-11129

(606) 432-1414

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.

Common stock - 12,268,604 shares outstanding at April 30, 2003

PART I - FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

The accompanying information has not been audited by independent public accountants; however, in the opinion of management such information reflects all adjustments necessary for a fair presentation of the results for the interim period. All such adjustments are of a normal and recurring nature.

The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Registrant's annual report on Form 10-K. Accordingly, the reader of the Form 10-Q should refer to the Registrant's Form 10-K for the year ended December 31, 2002 for further information in this regard.

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Income

Condensed Consolidated Statements of Cash Flows

Notes to Condensed Consolidated Financial Statements

Note 1 - Summary of Significant Accounting Policies

In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (which consist of normal recurring accruals) necessary, to present fairly the condensed consolidated financial position as of March 31, 2003, the results of operations for the three months ended March 31, 2003 and 2002, and the statements of cash flows for the three months ended March 31, 2003 and 2002. In accordance with accounting principles generally accepted in the United States of America for interim financial information, these statements do not include certain information and footnote disclosures required by accounting principles generally accepted in the United States of America for complete annual financial statements. Financial information as of December 31, 2002 has been derived from the audited consolidated financial statements of Community Trust Bancorp, Inc. (the "Corporation"). The results of operations for the three months ended March 31, 2003 and 2002 and the statements of cash flows for the three months ended March 31, 2003 and 2002 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2002, included in the Corporation's Annual Report on Form 10-K.

Principles of Consolidation - The unaudited condensed consolidated financial statements include the accounts of the Corporation and its separate and distinct, wholly owned subsidiaries Community Trust Bank, Inc.; Community Trust and Investment Company; CTBI Preferred Capital Trust; and CTBI Preferred Capital Trust II. All significant intercompany transactions have been eliminated in consolidation.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation--Transition and Disclosure. This statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years ending after December 15, 2002. Adoption of SFAS No. 148 did not have a material impact on the Corporation's financial statements. As permitted by SFAS No. 148, the Corporation will continue to apply the provisions of APB Opinion No. 25, Accounting for Stock-Based Compensation, for all employee stock option grants and has elected to disclose pro forma net income and earnings per share amounts as if the fair-value based method had been applied in measuring compensation costs.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of ARB No. 51, Consolidated Financial Statements, for certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. FIN 46 requires variable interest entities to be consolidated by the primary beneficiary which represents the enterprise that will absorb the majority of the variable interest entities expected losses if they occur, receive a majority of the variable interest entities' residual returns if they occur, or both. Qualifying special purpose entities are exempt from the consolidation requirements of FIN 46. FIN 46 is effective immediately for variable interest entities created after January 31, 2003 and for variable interest entities in which an ente rprise obtains an interest after that date. FIN 46 is effective in the first fiscal year or interim period beginning after June 15, 2003 for variable interest entities in which an enterprise holds a variable interest that was acquired before February 1, 2003, with earlier adoption permitted. The Corporation will adopt the provisions of FIN 46 no later than July 1, 2003. The adoption of FIN 46 will have no material impact on the Corporation's consolidated financial statements.

Note 2 - Business Combinations

During the third quarter of 2001, the Corporation acquired 75.28% of the outstanding shares of Citizens National Bank and Trust, 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 Community Trust Bank, Inc.

Note 3 - Securities

Securities are classified into held-to-maturity and available-for-sale categories. Held-to-maturity securities are those that the Corporation has the positive intent and ability to hold to maturity and are reported at amortized cost. Available-for-sale securities are those that 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 or losses included as a separate component of equity, net of tax.

The amortized cost and fair value of securities available-for-sale as of March 31, 2003 are summarized as follows:

The amortized cost and fair value of securities held-to-maturity as of March 31, 2003 are summarized as follows:

The amortized cost and fair value of securities available-for-sale as of December 31, 2002 are summarized as follows:

The amortized cost and fair value of securities held-to-maturity as of December 31, 2002 are summarized as follows:

Note 4 - Loans

Major classifications of loans are summarized as follows:

Note 5 - Borrowings

Short-term debt consists of the following:

On April 29, 2003, the Corporation entered into a revolving note agreement for a line of credit in the amount of $12 million, all of which is currently available to meet any future cash needs. The agreement will mature on April 28, 2004.

All federal funds purchased and the majority of securities sold under agreements to repurchase mature and reprice daily. The average rates paid for federal funds purchased and repurchase agreements on March 31, 2003 were 1.31% and 1.69%, respectively.

Long-term debt consists of the following:

Note 6 - 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 obligated trust preferred securities as of March 31, 2003.

Note 7 - Stock-Based Compensation

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. All options granted have a maximum term of ten years. Options granted as management retention options vest after five years and all others vest ratably over four years.

As required under the provisions of SFAS 148, the following table discloses the pro forma net income and pro forma basic and diluted earnings per share had the fair value method been applied to all stock awards for the three months ended March 31, 2003 and 2002.

Item 2. Management's Discussion and Analysis of Financial Condition

and Results of Operations

Overview

Community Trust Bancorp, Inc. (the "Corporation") is a bank holding company headquartered in Pikeville, Kentucky. At March 31, 2003, the Corporation owned one commercial bank and one trust company. Through its subsidiaries, the Corporation has seventy-four banking locations in eastern, northeast, central, and south central Kentucky and southern West Virginia. The banking locations are segmented into eighteen markets within four regions. The Corporation had total assets of $2.5 billion and total shareholders' equity of $211.1 million as of March 31, 2003. The Corporation's common stock is listed on NASDAQ under the symbol CTBI. Current market participants are FTN Financial First Tennessee Securities Corp., Nashville, Tennessee; Ferris, Baker Watts Incorporated, Baltimore, Maryland; Goldman, Sachs & Co., New York, New York; Howe Barnes Investments, Inc., Chicago, Illinois; J.J.B. Hilliard, W.L. Lyons, Inc., Louisville, Kentucky; Keefe, Bruyette & Woods, Inc., New York, New Yo rk; Merrill Lynch & Co., Inc., New York, New York; Morgan Stanley & Co., Inc., New York, New York; and Sandler O'Neill & Partners, New York, New York.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our consolidated financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements.

We believe 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.

We have identified the following critical accounting policies:

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, collateral value, and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. Any loan greater than 90 days past due must be well secured and in the process of collection to continue accruing interest. Cash payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured. Loans are not reclassified as accruing until principal and interest payments are brought current and future payments appear reasonably certain.

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 the customer's 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. Consumer installment and residential mortgage loans are not individually risk graded. Allowance allocations are provided for these pools of loans based upon an eight-quarter moving average historical loss rate for each of these categories of loans. For other commercial loans that are not individually evaluated, an allowance allocation is dete rmined by applying an eight-quarter moving average historical loss rate for this group of loans.

An unallocated portion of the allowance is also determined in recognition of the inherent inability to precisely determine the loss potential in any particular loan or pool of loans. The factors considered by management in determining this amount of inherent risk include delinquency trends, current economic conditions and trends, strength of the supervision and administration of the loan portfolio, level of nonperforming loans, trend in loan losses, recovery rates associated with previously charged-off loans, concentrations within commercial credits, problem loan identification strengths and weaknesses, collateral evaluation strengths and weaknesses, and level of financial statement exceptions. These factors are reviewed quarterly and weighted as deemed appropriate by management. The total of these weighted factors is then applied against the total loan portfolio and the allowance is adjusted accordingly.

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.

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses, if any, are recognized in a separate valuation allowance for loans held for sale by charges to income.

Securities are classified as held-to-maturity or available-for-sale on the date of purchase. Only those securities classified as held-to-maturity, and which management has the intent and ability to hold to maturity, are reported at amortized cost. Available-for-sale securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in accumulated other comprehensive income. The fair value of a security is determined based on quoted market prices. If quoted market prices are not available, fair value is determined based on quoted prices of similar instruments. Realized securities gains or losses would be reported within noninterest income in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. Held-to-maturity and available-for-sale securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances o f each individual investment such as the length of time the fair value has been below cost, the expectation for that security's performance, the credit worthiness of the issuer and the Corporation's ability to hold the security to maturity. A decline in value that is considered to be other-than-temporary would be recorded as a loss within noninterest income in the Consolidated Statements of Income.

The Corporation evaluates total goodwill for impairment, based upon Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets and SFAS No. 147, Acquisitions of Certain Financial Institutions, using fair value techniques including multiples of price/equity. Goodwill is evaluated for impairment on an annual basis.

Dividends

The following schedule shows the quarterly cash dividends paid for the past six quarters:

Income Statement Review

The Corporation's net income for the three months ended March 31, 2003 was $7.0 million or $0.57 basic earnings per share. This exceeds by $0.07 per share, or 14%, the $6.3 million or $0.50 basic earnings per share earned during the same period in 2002. First quarter 2003 earnings were positively impacted by $0.6 million or $0.05 per share due to gains on the sale of securities.

The Corporation had average shares outstanding of 12.3 million and 12.6 million for the three months ended March 31, 2003 and 2002, respectively. The following table sets forth on an annualized basis the return on average assets and return on average shareholders' equity for the three-month periods ended March 31, 2003 and 2002:

Net Interest Income

Our net interest margin of 3.74% is a 28 basis point or 7.0% decrease from the 4.02% for the quarter ended March 31, 2002 and a 14 basis point or 3.6% decrease from the 3.88% for the quarter ended December 31, 2002. Management expects continuing pressure on its net interest margin during this period of historically low interest rates. Interest income decreased $5.8 million or 15% for the quarter ending March 31, 2003 as compared to the same period in 2002, and interest expense decreased $3.9 million or 24%.

The following table summarizes the annualized net interest spread and net interest margin for the three months ended March 31, 2003 and 2002.

Provision for Loan Losses

The analysis of the changes in the allowance for loan losses and selected ratios is set forth below:

Net charge-offs for the quarter ended March 31, 2003 were $1.8 million, an annualized rate of 0.45% of average loans, compared to the $2.9 million or 0.69% of average loans for the same period in 2002. Our reserve for losses on loans as a percentage of total loans outstanding at 1.42% increased slightly from the 1.40% at prior year. The increase in reserve for losses on loans is reflective of currently weak economic conditions.

Noninterest Income

Noninterest income for the quarter ended March 31, 2003 of $8.5 million was a 52.8% increase from the $5.6 million earned during the same period in 2002. The increase in noninterest income from prior year is primarily the result of increased deposit service charge revenue due to the implementation of our Overdraft Honor program, increased gains on sales of residential real estate loans due to increased refinancing activity, and increased gains on sales of securities. While the increase in residential real estate loan refinancing activity, due to the low interest rate environment, resulted in higher noninterest income from the gains on sales of loans, noninterest income was negatively impacted by a charge to our valuation reserve for capitalized mortgage servicing rights of $0.4 million for the quarter ended March 31, 2003 compared to $0.2 million for the quarter ended March 31, 2002.

Noninterest Expense

Noninterest expense for the first quarter 2003 increased 6.5% from $16.5 million for the first quarter 2002 to $17.6 million for the first quarter 2003. The increase in noninterest expense from prior year was primarily attributable to an increase in personnel expense due to the filling of budgeted key positions within the Company and annual merit increases in employee salaries.

Balance Sheet Review

The Corporation's assets remained relatively flat at $2.5 billion on March 31, 2003 compared to December 31, 2002. The Corporation's largest liability, deposits, remained relatively flat to prior quarter at $2.1 billion. Noninterest bearing deposits decreased 3.8% and interest bearing deposits remained relatively flat. The Corporation continues to have a high level of liquidity due to the weak loan demand and low yielding investment options. With limited investment opportunity and high liquidity, the Corporation has continued its policy of pricing interest-bearing deposits at the mid-range of its competitors to manage its net interest margin. The Corporation anticipates that it will continue to experience pressure on its net interest margin until economic conditions improve.

Loans

The loan portfolio remained relatively flat to December 31, 2002 at $1.6 billion. The Corporation's balance sheet reflects the state of the U.S. economy during the past year with weak commercial loan demand and continuing high levels of residential mortgage loan refinancing due to record low interest rates.

Nonperforming loans decreased 27.9% from prior year, but increased 12.4% from prior quarter. Nonperforming loans on March 31, 2003 were $25.6 million compared to $22.7 million at December 31, 2002 and $35.4 million at March 31, 2002. The significant decrease in nonperforming loans compared to the same period last year is attributable to the Company's continuing focus on asset quality during this weak period in the economy. The increase in nonperforming loans from prior quarter is primarily the result of the bankruptcy of one commercial borrower. Specific reserves are established for all large loans where a loss may occur; therefore, no significant losses are anticipated except for those loans with specific reserve allocations.

Foreclosed properties on March 31, 2003 were $3.7 million, an increase from the $2.8 million at December 31, 2002 and the $2.2 million reported at March 31, 2002. The increase is primarily comprised of 1-4 family residential real estate.

The allowance for loan losses as a percentage of total loans outstanding as of March 31, 2003 remained flat to prior quarter at 1.42%. The allowance for loan losses as a percentage of nonperforming loans was 90.0% at March 31, 2003 and 102.3% at December 31, 2002.

The following table summarizes the Corporation's nonperforming loans as of March 31, 2003 and December 31, 2002.

Allowance for Loan Losses

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. For further discussion of the allowance for loan losses, see the Critical Accounting Policies and Estimates section of Item 2.

Securities

The Corporation uses its securities held-to-maturity for production of income and to manage cash flow needs through expected maturities. The Corporation uses its securities available-for-sale for income and balance sheet liquidity management. The fair value of securities available-for-sale decreased from $527.3 million as of December 31, 2002 to $516.9 million at March 31, 2003. Securities held-to-maturity declined from $51.2 million to $43.3 million during the same period. Total securities as a percentage of total assets were 23.3% as of December 31, 2002 and 22.7% as of March 31, 2003.

Liquidity and Capital Resources

The Corporation's liquidity objectives are to ensure that funds are available for the subsidiary bank to meet deposit withdrawals and credit demands without unduly penalizing profitability, and to ensure that funding is available for the Corporation to meet ongoing cash needs while maximizing profitability. The Corporation continues to identify ways to provide for liquidity on both a current and long-term basis. The subsidiary bank relies mainly on core deposits, certificates of deposits of $100,000 or more, repayment of principal and interest on loans and securities and federal funds sold and purchased to create long-term liquidity. The subsidiary bank also relies on the sale of securities under repurchase agreements, securities available-for-sale and Federal Home Loan Bank borrowings.

Due to the nature of the markets served by the subsidiary bank, management believes that the majority of its certificates of deposit of $100,000 or more are no more volatile than its core deposits. During periods of interest rate volatility, these deposit balances have remained stable as a percentage of total deposits. In addition, an arrangement has been made with a correspondent bank for the purchase of federal funds on an unsecured basis, up to $20 million, if necessary, to meet the Corporation's liquidity needs.

The Corporation owns $516.9 million of securities valued at estimated fair value that are designated as available-for-sale and available to meet liquidity needs on a continuing basis. The Corporation also relies on Federal Home Loan Bank advances for both liquidity and management of its asset/liability position. Federal Home Loan Bank advances decreased from $5.6 million at December 31, 2002 to $4.7 million at March 31, 2003.

The Corporation generally relies upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash for its investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, use of short-term borrowing facilities such as federal funds purchased and securities sold under repurchase agreements, and issuance of long-term debt. The Corporation currently has a $12 million revolving line of credit, all of which is currently available to meet any future cash needs. The Corporation's primary investing activities include purchases of securities and loan originations.

During the first quarter of 2003, the Corporation continued its stock repurchase program acquiring 96,267 shares of the Corporation's stock. The Corporation's stock repurchase program began in December 1998 with the authorization to acquire up to 500,000 shares and was increased by an additional 1,000,000 shares in July 2000. The Corporation issued a press release May 13, 2003 announcing its intention to repurchase up to 1,000,000 additional shares. The Corporation's stock repurchase program continues to be accretive to shareholder value. As of March 31, 2003, a total of 1,444,046 shares have been repurchased through this program.

In conjunction with maintaining a satisfactory level of liquidity, management monitors the degree of interest rate risk assumed on the balance sheet. The Corporation monitors its interest rate risk by use of the static gap model and dynamic gap model at the one-year interval. The Corporation uses the Sendero system to monitor its interest rate risk. The static gap model monitors the difference in interest rate sensitive assets and interest rate sensitive liabilities as a percentage of total assets that mature within the specified time frame. The dynamic gap model goes further in that it assumes that interest rate sensitive assets and liabilities will be reinvested. The Corporation desires an interest sensitivity gap of not more than fifteen percent of total assets at the one-year interval.

The Corporation's principal source of funds used to pay dividends to shareholders and service long-term debt is the dividends it receives from the subsidiary bank. Various federal statutory provisions, in addition to regulatory policies and directives, limit the amount of dividends that subsidiary banks can pay without prior regulatory approval. These restrictions have had no major impact on the Corporation's dividend policy or its ability to service long-term debt, nor is it anticipated that they would have any major impact in the foreseeable future. During the remainder of 2003, approximately $14.4 million plus any remaining 2003 net profits can be paid by the Corporation's banking subsidiary without prior regulatory approval.

The primary source of capital for the Corporation is retained earnings. The Corporation paid cash dividends of $0.21 per share during the first three months of 2003 and $0.19 per share during the first three months of 2002. Basic earnings per share for the same periods were $0.57 and $0.50, respectively. The Corporation retained 63% of earnings for the first three months of 2003.

Under guidelines issued by banking regulators, the Corporation and its subsidiary bank are required to maintain a minimum Tier 1 risk-based capital ratio of 4% and a minimum total risk-based ratio of 8%. Risk-based capital ratios weight the relative risk factors of all assets and consider the risk associated with off-balance sheet items. The Corporation must also maintain a minimum Tier 1 leverage ratio of 4%. The Corporation's Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios were 8.33%, 11.06%, and 12.31%, respectively as of March 31, 2003.

As of March 31, 2003, management is not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or would be reasonably likely to have, a material adverse impact on the Corporation's liquidity, capital resources, or operations.

Impact of Inflation and Changing Prices

The majority of the Corporation's assets and liabilities are monetary in nature. Therefore, the Corporation differs greatly from most commercial and industrial companies that have significant investment in nonmonetary assets, such as fixed assets and inventories. However, inflation does have an important impact on the growth of assets in the banking industry and on the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other expenses, which tend to rise during periods of general inflation.

Management believes the most significant impact on financial and operating results is the Corporation's ability to react to changes in interest rates. Management seeks to maintain an essentially balanced position between interest rate sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations.

FORWARD-LOOKING STATEMENTS

Certain of the statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. 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 investme nts, 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 Depos it 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Corporation uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. Given a 200 basis point increase to the yield curve used in the simulation model, it is estimated net interest income for the Corporation would increase by 6.32 percent over one year and increase by 2.94 percent over two years. A 200 basis point decrease in the yield curve would decrease net interest income by an estimated 5.75 percent over one year and by 2.88 percent over two years. For further discussion of the Corporation's market risk, see the Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Market Risk included in the Annual Report on Form 10-K for the year ended December 31, 2002.

Item 4. Controls and Procedures

Within 90 days prior to the filing date of this report, the Corporation performed an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Principal Executive Officer and Principal Financial Officer, of the effectiveness and the design and operation of the Corporation's disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that the Corporation's disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation required to be included in the Corporation's periodic SEC filings. Since the date of the Corporation's most recent evaluation, there were no significant changes in the Corporation's internal controls or in other factors that could significantly affect these controls, including any corrective actions wit h regard to significant deficiencies and material weaknesses.

Disclosure controls and procedures are corporate controls and other procedures that are designed to ensure that information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.

PART II - OTHER INFORMATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Certification of Principal Executive Officer

I, Jean R. Hale, Vice Chairman, President, and Chief Executive Officer of the Corporation, certify that:

/s/ Jean R. Hale

Jean R. Hale

Vice Chairman, President and CEO

May 14, 2003

Certification of Principal Financial Officer

I, Kevin J. Stumbo, Executive Vice President/Controller of the Corporation, certify that:

/s/ Kevin J. Stumbo

Kevin J. Stumbo

Executive Vice President/Controller

May 14, 2003