UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ------- EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1999 OR 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 (I.R.S. Employer incorporation or organization) Identification No.) 346 NORTH MAYO TRAIL PIKEVILLE, KENTUCKY 41501 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (606) 432-1414 Securities registered pursuant to Section 12 (b) of the Act: NONE Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK, $5.00 PAR VALUE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of voting stock held by non-affiliates of the registrant as of February 29, 2000 was $208,169,000. The number of shares outstanding of the Registrant's Common Stock as of February 29, 2000 was 11,028,823. 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 Document Form 10-K -------- --------- (1) Proxy statement for the annual meeting Part III of shareholders to be held April 25, 2000 2 PART I ITEM 1. BUSINESS Community Trust Bancorp, Inc. (the "Corporation") is a bank holding company registered with the Board of Governors of the Federal Reserve System pursuant to section 5 (a) of the Bank Holding Company Act of 1956, as amended. The Corporation was incorporated August 12, 1980, under the laws of the Commonwealth of Kentucky for the purpose of becoming a bank holding company. On July 1, 1981, pursuant to a Merger Agreement dated May 30, 1981, the merger of Pikeville National Bank and Trust Company ("PNB") as a subsidiary of the Corporation was consummated, whereby PNB became a wholly-owned subsidiary of the Corporation through an exchange of one share of common stock of PNB for two shares of common stock of the Corporation. Prior to the date the merger became effective, the Corporation conducted no active business operations. Since the merger, the business of the Corporation has been to act as a holding company for affiliate financial institutions. The Corporation currently owns all the capital stock of one commercial bank, one thrift and one trust company, serving small and mid-sized communities in eastern, central, south central Kentucky, and southern West Virginia. The commercial bank is Community Trust Bank, NA, Pikeville. The Corporation's thrift is Community Trust Bank, FSB, Campbellsville. The trust company, Trust Company of Kentucky, NA, Lexington, purchased the trust operations of its subsidiary banks and has additional offices in Pikeville, Ashland, Middlesboro and Louisville, Kentucky. The trust subsidiary commenced business operations on January 1, 1994. At December 31, 1999, the Corporation had total consolidated assets of $2.2 billion and total consolidated deposits of $1.9 billion, making it one of the larger bank holding companies headquartered in the Commonwealth of Kentucky. Effective January 1, 1997, the Corporation changed its name from Pikeville National Corporation to Community Trust Bancorp, Inc., changed the name of its lead bank from Pikeville National Bank and Trust Company to Community Trust Bank, National Association (the "Bank") and merged seven of its other commercial bank subsidiaries into the Bank. The Corporation's thrift and trust subsidiaries, Community Trust Bank, FSB and Trust Company of Kentucky, NA, remain subsidiaries of the Corporation. On June 26, 1998, the Corporation's wholly owned subsidiary, Community Trust Bank of West Virginia, NA, purchased seven Banc One Corporation branches with deposits totaling $216 million. On December 31, 1998 Community Trust Bank of West Virginia, NA merged into Community Trust Bank, NA. Also in 1998, Community Trust Bank, NA purchased five branch offices from PNC Bank, NA with deposits totaling $195 million. The Corporation sold its subsidiary Commercial Bank, West Liberty, Kentucky ("West Liberty") on July 1, 1997 for $10.2 million creating a gain on sale of $3 million. West Liberty had $76 million in assets, constituting 4% of the Corporation's total consolidated assets. Consistent with the Corporation's strategic plan, the funds generated by the sale of West Liberty provided the Corporation with the opportunity to expand existing markets and enter into new markets through internal expansion and acquisitions. 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 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 3 market funds and other financial and non-financial companies which may offer products functionally equivalent to those offered by the Corporation's subsidiaries. Many of these providers offer services within and outside the market areas served by the Corporation's subsidiaries. The Corporation's subsidiaries strive to offer competitively priced products along with quality customer service to build banking relationships in the communities they serve. Since July 1989, banking legislation in Kentucky places no limits on the number of banks or bank holding companies that a bank holding company may acquire. Interstate acquisitions are allowed where reciprocity exists between the laws of Kentucky and the home state of the bank holding company to be acquired. Bank holding companies continue to be limited to control of less than 15% of deposits held by banks in the states where they do business (exclusive of inter-bank and foreign deposits). The recently adopted Gramm-Leach-Bliley Act of 1999 (the "Gramm Act") has expanded the permissible activities of a bank holding company. The Gramm Act allows qualifying bank holding companies to elect to be treated as financial holding companies. A financial holding company may engage in activities that are financial in nature or are incidental or complementary to financial activities. The Gramm Act also eliminated restrictions imposed by the Glass-Steagall Financial Services Law, adopted in the 1930s, which prevented banking, insurance and securities firms from fully entering each other's business. While it is uncertain what the impact of this legislation will be, it is likely to result in further consolidation in the financial services industry. In addition, removal of these restrictions will likely increase the number of entities providing banking services and thereby create additional competition. In the current 2000 session, the Kentucky legislature is considering legislation that would permit statewide bank branching. While it is unclear at this time what form the final state legislation, if any, will take and what the impact on the Corporation would be, statewide branching, like the recent federal legislation, can be expected to increase geographic expansion and growth opportunities for banks. No material portion of the business of the Corporation is seasonal. The business of the Corporation is not dependent upon any one customer or a few customers, and the loss of any one or a few customers would not have a materially adverse affect on the Corporation. No operations in foreign countries are engaged in by the Corporation. EMPLOYEES As of December 31, 1999, the Corporation and its subsidiaries had 830 full-time equivalent employees. Employees are provided with a variety of employee benefits. A retirement plan, employee stock ownership plan, group life, hospitalization, major medical insurance and annual management and employee incentive compensation plans are available to eligible personnel. SUPERVISION AND REGULATION The Corporation, as a registered bank holding company, is restricted to those activities permissible under the Bank Holding Company Act of 1956, as amended, and is subject to actions of the Board of Governors of the Federal Reserve System thereunder. It is required to file an annual report with the Federal Reserve Board and is subject to an annual examination by the Board. The Bank is a national bank subsidiary subject to federal banking law and to regulation and periodic examinations by the Comptroller of the Currency under the National Bank Act and to the restrictions, including dividend restrictions, thereunder. The Bank is also a member of the Federal Reserve System and is subject to certain restrictions imposed by and to examination and supervision under, the Federal Reserve Act. The Corporation's thrift subsidiary, Community Trust Bank, FSB, is regulated and examined by the Office of Thrift Supervision. The trust company subsidiary, Trust Company of Kentucky, NA, is regulated by the Federal Reserve Board and the Office of the Comptroller of the Currency. 4 Deposits of the Corporation's subsidiary banks are insured by the Federal Deposit Insurance Corporation, which subjects the 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 Information provided herein by the Corporation contains and from time to time the Corporation may disseminate materials and make statements which may contain "forward-looking" information, as that term is defined by the Private Securities Litigation Reform Act of 1995 (the "Act"). These cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act. The Corporation cautions investors that any forward-looking statements made by the Corporation are not guarantees of future performance and that actual results may differ materially from those in the forward-looking statements as a result of various factors, including but not limited to, the following: (1) the increase or decrease of interest rates as a whole (2) the condition of the national and local economies of the communities served, including unemployment rates (3) the ability of the company to improve operating efficiency through consolidation of service and economies of scale and (4) any regulatory or law changes which may affect the operating environment of the Corporation or any of its affiliates. 5 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 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average (in thousands) Balances Interest Rate Balances Interest Rate Balances Interest Rate - ----------------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Loans, net of unearned (1)(2)(3) $ 1,557,703 $140,412 9.01% $ 1,468,776 $ 138,286 9.42% $ 1,350,471 $ 130,805 9.69% Securities U. S. Treasuries and agencies 226,543 13,371 5.90 201,267 11,883 5.90 211,706 13,372 6.32 State & political subdivisions (3) 61,144 4,541 7.43 51,452 3,894 7.57 52,653 4,082 7.75 Other securities 70,996 4,549 6.41 52,854 3,337 6.31 50,704 3,284 6.48 Federal funds sold 60,134 2,890 4.81 97,272 5,111 5.25 18,035 993 5.51 Interest bearing deposits 159 7 4.40 277 8 2.89 609 28 4.60 - ------------------------------------------------------------------------------------------------------------------------------------ Total earning assets $ 1,976,679 $165,770 8.39% $ 1,871,898 $ 162,519 8.68% $ 1,684,178 $ 152,564 9.06% Less: Allowance for loan losses (25,994) (23,075) (19,338) - ----------------------------------------------------------------------------------------------------------------------------------- 1,950,685 1,848,823 1,664,840 NON-EARNING ASSETS Cash and due from banks 82,419 67,758 53,772 Premises and equipment, net 53,349 50,922 45,868 Other assets 96,268 71,176 50,728 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 2,182,721 $ 2,038,679 $ 1,815,208 =================================================================================================================================== INTEREST BEARING LIABILITIES Deposits Savings and demand deposits $ 555,105 $ 16,216 2.92% $ 465,773 $ 15,369 3.30% $ 396,362 $ 12,557 3.17% Time deposits 1,070,886 55,745 5.21 969,354 55,220 5.70 874,818 49,633 5.67 Federal funds purchased and securities sold under repurchase agreements 41,319 1,902 4.60 42,180 2,132 5.05 35,029 1,818 5.19 Other short-term borrowings 0 0 0.00 0 0 0.00 0 0 0.00 Advances from Federal Home Loan Bank 20,721 1,182 5.70 113,559 6,500 5.72 106,572 6,224 5.84 Long-term debt 53,750 4,695 8.73 53,395 4,765 8.92 43,482 3,844 8.84 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest bearing liabilities $ 1,741,781 $ 79,740 4.58% $1,644,261 $ 83,986 5.11% $ 1,456,263 $ 74,076 5.09% - ------------------------------------------------------------------------------------------------------------------------------------ NONINTEREST BEARING LIABILITIES Demand deposits $ 256,374 $ 215,674 $ 186,521 Other liabilities 15,099 16,056 17,571 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 2,013,254 1,875,991 1,660,355 Shareholders' equity 169,467 162,689 154,853 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 2,182,721 $ 2,038,680 $ 1,815,208 =================================================================================================================================== Net interest income $ 86,030 $ 78,533 $ 78,488 =================================================================================================================================== Net interest spread 3.81% 3.57% 3.97% ==================================================================================================================================== Benefit of interest free funding 0.56% 0.64% 0.69% ==================================================================================================================================== Net interest margin 4.37% 4.21% 4.66% ==================================================================================================================================== (1) Interest includes fees on loans of $3,051, $3,685 and $3,945 in 1999, 1998 and 1997, 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. 6 NET INTEREST DIFFERENTIAL The following table illustrates the approximate effect on net interest differentials of volume and rate changes between 1999 and 1998 and also between 1998 and 1997. Total Change Change Due to Total Change Change Due To ------------ ------------- ------------ ------------- (in thousands) 1999/1998 Volume Rate 1998/1997 Volume Rate - -------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans $ 2,126 $ 8,164 $ (6,038) $ 7,481 $ 11,216 $ (3,734) U. S. Treasury and federal agencies 1,488 1,491 (4) (1,489) (641) (849) Tax exempt state and political subdivisions 647 721 (75) (188) (93) (96) Other securities 1,212 1,160 51 53 136 (85) Federal funds sold (2,221) (1,815) (405) 4,118 4,166 (47) Interest bearing deposits (1) (4) 3 (20) (12) (7) - -------------------------------------------------------------------------------------------------------------------------------- Total interest income 3,251 9,717 (6,468) 9,955 14,772 (4,818) INTEREST EXPENSE Savings and demand deposits 847 2,736 (1,889) 2,812 2,273 539 Time deposits 525 5,510 (4,985) 5,587 5,385 203 Federal funds purchased and securities sold under repurchase agreements (230) (43) (187) 314 362 (48) Advances from Federal Home Loan Bank (5,318) (5,296) (22) 276 402 (126) Long-term debt (70) 32 (102) 921 884 36 - ------------------------------------------------------------------------------------------------------------------------------- Total interest expense (4,246) 2,939 (7,185) 9,910 9,306 604 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 7,497 $ 6,778 $ 717 $ 45 $ 5,466 $ (5,422) ================================================================================================================================ For purposes of the above table, changes which are not solely due to rate or volume are allocated based on a percentage basis, using the absolute values of rate and volume variance as a basis for percentages. Income is stated at a fully taxable equivalent basis, assuming a 35% tax rate. INVESTMENT PORTFOLIO The maturity distribution and weighted average interest rates of securities at December 31, 1999 are as follows: Estimated Maturity at December 31, 1999 Total Amortized Within 1 year 1-5 years 5-10 years After 10 years Fair Value Cost (in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount - ------------------------------------------------------------------------------------------------------------------------------------ Available-for-sale U. S. Treasury $ 5,503 5.27% $ 10,516 6.21% $ 0 0.00% $ 0 0.00% $ 16,019 5.89% $ 16,019 U. S. government agencies and corporations 34,340 5.80 113,991 6.23 14,641 6.11 289 8.35 163,261 6.13 166,162 State and municipal obligations 0 0.00 1,090 7.14 18,686 6.60 5,775 6.75 25,551 0.00 26,941 Other securities 16,395 16.26 25,208 6.07 381 6.51 23,466 6.96 65,450 6.32 66,171 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 56,238 8.79% $ 150,805 6.21% $33,708 6.39% $ 29,530 6.94% $270,281 5.58% $ 275,293 - ------------------------------------------------------------------------------------------------------------------------------------ Total Fair Within 1 year 1-5 years 5-10 years After 10 years Amortized CostValue (in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount - ------------------------------------------------------------------------------------------------------------------------------------ Held-to-maturity U. S. government agencies and corporations $ 4,295 5.62% $ 19,858 4.93% $ 499 4.89% $ 0 0.00% $ 24,652 5.05% $ 22,741 State and municipal obligations 3,997 7.45 18,134 6.93 4,840 9.21 5,152 8.84 32,123 7.65 32,554 Other securities 0 0.00 3,532 6.15 0 0.00 0 0.00 3,532 6.15 3,467 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 8,292 6.50% $ 41,524 5.91% $ 5,339 8.81% $ 5,152 8.84% $ 60,307 6.50% $ 58,762 - ------------------------------------------------------------------------------------------------------------------------------------ Total Securities $ 64,530 8.50% $ 192,329 6.14% $39,047 6.72% $ 34,682 7.22% $330,588 5.75% ========================================================================================================================== 7 The calculations of the weighted average interest rates for each maturity category are based on yield weighted by the respective costs of the securities. The weighted average rates on state and political subdivisions are computed on a taxable equivalent basis using a 35% tax rate. For purposes of the above presentation, maturities of mortgage-backed pass through certificates and collateralized mortgage obligations are based on estimated maturities. Excluding those holdings of the investment portfolio in U.S. Treasury securities and other agencies of the U.S. Government, there were no securities of any one issuer which exceeded 10% of the shareholders' equity of the Corporation at December 31, 1999. SECURITIES The book value of securities available-for-sale and securities held-to-maturity as of December 31, 1999 and 1998 are presented in footnote 4. The book value of securities at December 31, 1997 is presented below: (in thousands) Available-for-sale Held-to-maturity - ---------------------------------------------------------------------------------------------------------- U. S. Treasury and government agencies $ 35,563 $ 19,962 State and political subdivisions 5,197 46,296 U. S. agency mortgage-backed pass through certificates 86,185 42,316 Collateralized mortgage obligations 17,671 7,357 Other debt securities 2,168 - - ---------------------------------------------------------------------------------------------------------- Total debt securities 146,784 115,931 Equity securities 18,827 - - ---------------------------------------------------------------------------------------------------------- Total securities $ 165,611 $ 115,931 ========================================================================================================== LOAN PORTFOLIO December 31 - ---------------------------------------------------------------------------------------------------------------------- (in thousands) 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- Commercial: Secured by real estate $ 406,330 $ 329,611 $ 310,092 $ 270,315 $ 258,541 Other 293,659 279,406 260,808 234,793 192,127 - ---------------------------------------------------------------------------------------------------------------------- Total commercial 699,989 609,017 570,900 505,108 450,668 - ---------------------------------------------------------------------------------------------------------------------- Real estate construction 98,990 87,625 85,825 79,069 51,539 Real estate mortgage 397,168 399,035 407,893 411,067 398,288 Consumer 415,935 400,893 361,927 310,582 208,662 Equipment lease financing 7,398 5,816 1,884 3,797 5,911 - ---------------------------------------------------------------------------------------------------------------------- Total loans $ 1,619,480 $ 1,502,386 $ 1,428,429 $ 1,309,623 $ 1,115,068 ====================================================================================================================== Percent of total year-end loans Commercial: Secured by real estate 25.09% 21.94% 21.71% 20.64% 23.19% Other 18.13 18.60 18.26 17.93 17.23 - ---------------------------------------------------------------------------------------------------------------------- Total commercial 43.22 40.54 39.97 38.57 40.42 Real estate construction 6.11 5.83 6.01 6.04 4.62 Real estate mortgage 24.53 26.56 28.56 31.39 35.72 Consumer 25.68 26.68 25.34 23.72 18.71 Equipment lease financing 0.46 0.39 0.13 0.29 0.53 - ---------------------------------------------------------------------------------------------------------------------- Total loans 100.00% 100.00% 100.00% 100.00% 100.00% ====================================================================================================================== The total loans above are net of unearned income. 8 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, 1999 - -------------------------------------------------------------------------------------------------------------- After one Within but within After (in thousands) one year five years five years Total - -------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $ 175,452 $ 281,466 $ 243,071 $ 699,989 Real estate- construction 44,522 20,539 33,929 98,990 - -------------------------------------------------------------------------------------------------------------- $ 219,974 $ 302,005 $ 277,000 $ 798,979 ============================================================================================================== Rate sensitivity Predetermined rate $ 63,019 $ 151,351 $ 76,766 $ 291,136 Adjustable rate 156,955 150,654 200,234 507,843 - -------------------------------------------------------------------------------------------------------------- $ 219,974 $ 302,005 $ 277,000 $ 798,979 ============================================================================================================== NONPERFORMING ASSETS December 31 - ------------------------------------------------------------------------------------------------------------ (in thousands) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Nonaccrual loans $14,861 $ 14,930 $ 12,058 $10,156 $ 9,433 Restructured loans 390 202 629 630 918 90 days or past due and still accruing interest 3,237 5,635 8,863 5,800 3,947 - ------------------------------------------------------------------------------------------------------------ Total nonperforming loans 18,488 20,767 21,550 16,586 14,298 Foreclosed properties 2,193 1,769 1,949 1,059 1,927 - ------------------------------------------------------------------------------------------------------------ Total nonperforming assets $20,681 $22,536 $23,499 $17,645 $16,225 ============================================================================================================ Nonperforming assets to total loans plus foreclosed properties 1.28% 1.50% 1.64% 1.35% 1.45% Allowance to nonperforming loans 135.77% 125.63% 94.97% 113.50% 112.47% Nonaccrual, past due and restructured loans As a % of As a % of Accruing loans As a % of Nonaccrual loan balances Restructured loan balances past due 90 loan balances (in thousands) loans by category loans by category days or more by category Balances - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1999 Commercial loans-real estate secured $ 5,887 1.21% $ 390 0.08% $ 271 0.06% $ 487,318 Commercial loans- other 3,518 1.17 - - 546 0.18 301,057 Consumer loans- real estate secured 5,098 1.23 - - 1,305 0.31 415,170 Consumer loans- other 358 0.09 - - 1,115 0.27 415,935 - ------------------------------------------------------------------------------------------------------------------------------------ Total $14,861 0.92% $ 390 0.02% $ 3,237 0.20% $ 1,619,480 ==================================================================================================================================== December 31, 1998 Commercial loans- real estate secured $ 5,294 1.61% $ 202 0.06% $ 680 0.21% $ 329,611 Commercial loans- other 4,458 1.56 - - 708 0.25 285,222 Consumer loans- real estate secured 4,771 0.98 - - 2,077 0.43 486,660 Consumer loans- other 407 0.10 - - 2,170 0.54 400,893 - ------------------------------------------------------------------------------------------------------------------------------------ Total $14,930 0.99% $ 202 0.01% $ 5,635 0.38% $ 1,502,386 ==================================================================================================================================== The allowance for loan losses balance is maintained by management at a level considered adequate to cover anticipated losses that are based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time. 9 In 1999, gross interest income that would have been recorded on nonaccrual loans had the loans been current in accordance with their original terms amounted to $1.3 million. Interest income actually recorded and included in net income for the period was $0.3 million, leaving $1.0 million of interest income not recognized during the period. Discussion of the Nonaccrual Policy The accrual of interest income on loans is discontinued when the collection of interest and principal in full is not expected. When interest accruals are discontinued, interest income accrued in the current period is reversed. Any loans past due 90 days or more must be well secured and in the process of collection to continue accruing interest. Potential Problem Loans When management has serious doubts as to the ability of borrowers to comply with repayment terms, the loans are placed on nonaccrual status. Management, therefore, believes that no additional potential problem loans exist which would result in disclosure pursuant to Item III.C.2. Foreign Outstandings None Loan Concentrations The Corporation has no concentration of loans exceeding 10% of total loans which is not otherwise disclosed at December 31, 1999. Other Interest-Bearing Assets The Corporation has no other interest-bearing assets that would be required to be disclosed under Item III.C.1 or 2, if such assets were loans, other than $0.3 million held as other real estate owned, included above in foreclosed properties. 10 ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES (in thousands) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Allowance for loan losses, beginning of year $ 26,089 $ 20,465 $ 18,825 $ 16,082 $ 12,978 Loans charged off: Commercial, secured by real estate 612 844 676 378 1,278 Commercial, other 1,219 1,496 1,042 1,136 1,646 Real Estate Mortgage 1,585 872 695 880 514 Consumer loans 11,888 12,603 9,840 4,594 2,594 - ------------------------------------------------------------------------------------------------------------------ Total charge-offs 15,304 15,815 12,253 6,988 6,032 Recoveries of loans previously charged off: Commercial, secured by real estate 432 158 116 174 159 Commercial, other 469 248 454 609 331 Real Estate Mortgage 195 99 94 312 44 Consumer loans 4,116 3,860 2,653 1,351 740 - ------------------------------------------------------------------------------------------------------------------ Total recoveries 5,212 4,365 3,317 2,446 1,274 Net charge-offs: Commercial, secured by real estate 180 686 560 204 1,119 Commercial, other 750 1,248 588 527 1,315 Real Estate Mortgage 1,390 773 601 568 470 Consumer loans 7,772 8,743 7,187 3,243 1,854 - ------------------------------------------------------------------------------------------------------------------ Total net charge-offs 10,092 11,450 8,936 4,542 4,758 Allowance of acquired banks - 1,066 - - 2,004 Allowance of sold bank - - (578) - - Provisions charged against operations 9,105 16,008 11,154 7,285 5,858 - ------------------------------------------------------------------------------------------------------------------ Balance, end of year $ 25,102 $ 26,089 $ 20,465 $ 18,825 $ 16,082 ================================================================================================================== Allocation of allowance, end of year Commercial, secured by real estate $ 2,454 $ 2,777 $ 3,502 $ 3,304 $ 3,095 Commercial, other 1,773 2,354 2,945 2,870 2,300 Real Estate Construction 115 87 115 152 135 Real Estate Mortgage 463 396 546 790 1,044 Consumer 12,313 10,234 3,575 2,248 1,574 Equipment lease financing 45 49 21 46 71 Unallocated 7,939 10,192 9,761 9,414 7,863 - ------------------------------------------------------------------------------------------------------------------ Balance, end of year $ 25,102 $ 26,089 $ 20,465 $ 18,825 $ 16,082 ================================================================================================================== Average loans outstanding, net of unearned interest $ 1,557,703 $ 1,468,776 $1,350,471 $1,215,243 $1,021,637 Loans outstanding at end of year, net of unearned interest $ 1,619,480 $ 1,502,386 $1,428,429 $1,309,623 $1,115,068 Net charge-offs to average loan type Commercial, secured by real estate 0.05% 0.22% 0.20% 0.08% 0.39% Commercial, other 0.25% 0.46% 0.23% 0.24% 0.66% Real Estate Mortgage 0.29% 0.16% 0.12% 0.12% 0.13% Consumer loans 1.91% 2.25% 2.22% 1.27% 1.02% Total 0.65% 0.78% 0.66% 0.37% 0.47% Other ratios Allowance to net loans, end of year 1.55% 1.74% 1.43% 1.44% 1.44% Provision for loan losses to average loans 0.58% 1.09% 0.83% 0.60% 0.57% Management uses an internal analysis to determine the adequacy of the loan loss reserve and charges to the provision for loan losses. This analysis is based on net charge-off experience for prior years, current delinquency levels and risk factors based on the local economy and relative experience of the lending staff. This analysis is completed quarterly and forms the basis for allocation of the loan loss reserve and what charges to provision may be required. 11 AVERAGE DEPOSITS AND OTHER BORROWED FUNDS (in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- DEPOSITS: Non-interest bearing deposits $ 256,374 $ 215,674 $ 186,521 NOW accounts 260,703 218,908 182,688 Money market deposits 136,898 105,328 75,835 Savings 157,504 141,537 137,839 Certificates of deposit Greater Than $100,000 300,011 272,645 253,372 Certificates of deposit Less Than $100,000 and other time deposits 770,874 696,708 621,447 - -------------------------------------------------------------------------------------------------------------------------------- Total Deposits 1,882,364 1,650,800 1,457,702 OTHER BORROWED FUNDS: Federal funds purchased and securities sold under repurchase agreements 41,319 42,180 35,029 Other short-term borrowings - - - Advances from Federal Home Loan Bank 20,721 113,559 106,572 Long-term debt 53,750 53,395 43,782 - -------------------------------------------------------------------------------------------------------------------------------- Total Other Borrowed Funds 115,790 209,134 185,383 - -------------------------------------------------------------------------------------------------------------------------------- Total Deposits and Other Borrowed Funds $ 1,998,154 $ 1,859,934 $ 1,643,085 ================================================================================================================================ Maturities of time deposits of $100,000 or more outstanding at December 31, 1999 are summarized as follows: Certificates Time (in thousands) of Deposit Deposits Total - ------------------------------------------------------------------------------------------------------- 3 months or less $ 88,249 $ 4,177 $ 92,426 Over 3 through 6 months 58,869 4,040 62,909 Over 6 through 12 months 119,313 4,684 123,997 Over 12 through 60 months 42,968 8,899 51,867 OVER 60 MONTHS - 156 156 - ------------------------------------------------------------------------------------------------------- $ 309,399 $ 21,956 $ 331,355 ======================================================================================================= SHORT-TERM BORROWINGS The Corporation did not have any category of short-term borrowings for which the average balance outstanding during the reported periods was 30% or more of shareholders' equity at the end of the reported periods. ITEM 2. PROPERTIES The Corporation's and the Bank's main office is located at 208 North Mayo Trail, Pikeville, Kentucky, 41501 which is owned by the Bank. The Bank is divided into sixteen operational markets and two loan production offices: Pike Market, Floyd/Knott Market, Tug Valley Market, Whitesburg Market, Lexington Market, Harrodsburg Market, Winchester Market, Richmond Market, Mount Sterling Market, Versailles Market, Ashland Market, Flemingsburg Market, Hamlin Market, Summersville Market, Middlesboro Market, Williamsburg Market, Charleston LPO, and Louisville LPO. The Bank also has one operational center located in Pikeville, Kentucky. The Bank presently has ten branch offices in the Pike Market in addition to its main office. The Bank owns six of these branch banking offices and leases the remaining four branch offices including the in-store branch located in a WalMart superstore. The Floyd/Knott Market has two branch offices. The Bank owns the two branch offices. 12 The Tug Valley Market has three branch offices. The Bank owns two branch offices and leases one branch office. The Whitesburg Market currently has five branch offices. The Bank owns three of these branch offices and leases two branch offices, one of which is leased under an obligation accounted for as a capital lease. The Lexington Market has six branch offices. Four of these branches are in-store branches, which are located in Winn Dixie supermarkets and in WalMart. The Bank owns one branch office and leases the other five branch offices. The Harrodsburg Market has one branch office. The Bank owns the one branch office. The Winchester Market has three branch locations. The Bank owns one of the branch locations and leases two branch locations of which one is the in-store branch located in a WalMart site. The Richmond Market has three branch locations. The Bank owns two of the branch locations, including the land adjacent to one of the branch offices for a drive up window and leases one branch location which is the in-store branch located in a WalMart site. The Mount Sterling Market has three branch offices, of which one is an in-store branch located in a WalMart superstore. The Bank owns two of the branch offices and leases the in-store site, the land for its ATM site, and the land adjacent to one of its branch offices for parking and a drive up window. The Versailles Market has three branch locations. The Bank owns one of these branch offices and leases two branch offices including the in-store branch located in a WalMart site. The Ashland Market has five branch offices. The Bank owns all five of these branch offices. In the Ashland Market there are also two other properties, which are leased, the 16th Street Properties which is sub-leased, and the Old Meade Station Branch property for which the Bank also receives tenant income. In addition to these two properties, the Bank receives income from office space leased to tenants which is located in one of the branch offices as well as the Arcade, which adjoins the same branch office. Of the office space in the Arcade a portion is used for Bank premises. The Flemingsburg Market has four branch offices. The Bank owns all of these branch offices and also owns real property located in this Market which is leased to outside parties. The Hamlin Market has four branch locations. The Bank owns three of the branch offices and leases one branch office. The Summersville Market has one branch office. The Bank owns the one branch office. The Middlesboro Market has three branch locations. The Bank owns two of the branch offices and leases one branch office. The Williamsburg Market has three branch offices. The Bank owns all three of the branch offices. The two loan production offices lease office space in Charleston, WV and Louisville, KY. The Operation Center is located in Pikeville, KY and the Bank owns the building. Community Trust Bank, FSB's (CTBFSB) main office is located in Campbellsville, Kentucky. The CTBFSB has a branch office in each of the following locations: Campbellsville, Columbia, Greensburg, Edmonton, Somerset, Lebanon, and Jamestown, Kentucky. Community Trust Bank, FSB, owns all of its branch offices. 13 Trust Company of Kentucky, NA's main office is located in Lexington, Kentucky. The Lexington and Louisville offices are leased from outside parties. Trust Company of Kentucky, NA also has leased offices in the Bank's main office, Middlesboro Market's main office, and Ashland Market's main office. See notes 7 and 13 to consolidated financial statements included herein for the year ended December 31, 1999, for additional information relating to commitments and amounts invested in premises and equipment. ITEM 3. LEGAL PROCEEDINGS The Banks and certain 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, resulting from them will not materially affect the Corporation's consolidated financial position. 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 1999. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the executive officers of the Corporation at December 31, 1999, their positions with the Corporation and the year in which they first became an executive officer or director. POSITIONS AND DATE FIRST OFFICES BECAME DIRECTOR PRESENT CURRENTLY OR EXECUTIVE PRINCIPAL NAME AND AGE (1) HELD OFFICER OCCUPATION - ---------------- ---- ------- ---------- Burlin Coleman; 70 Chairman of 1980 Chairman Board and of Board Director Jean R. Hale; 53 President, 1992 President and CEO and CEO Director Ronald M. Holt; 52 Executive Vice 1996 (2) President and CEO President of Trust Company of Kentucky, NA Mark Gooch; 41 Executive Vice 1997 (3) President and CEO President and of CTB,NA Treasurer John Shropshire; 51 Executive Vice 1997 (4) Executive Vice President President 14 William Hickman; 49 Executive Vice 1998 (5) Executive Vice President and President Secretary Jim Richardson; 49 Executive Vice 1999 (6) President and CEO President Community Trust Bank, FSB (1) The ages listed for the Corporation executive officers are as of February 29, 2000. (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, NA. (4) Mr. Shropshire served as President and CEO of Bowling Green Bank & Trust Co. from 1993 to 1995 at which time he became President and CEO of Farmers-Deposit Bank, a subsidiary of the Corporation prior to consolidation on January 1, 1997. Mr. Shropshire resigned from the Corporation on February 18, 2000. (5) 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. (6) Mr. Richardson has served as President and CEO of Community Trust Bank, FSB since 1996. From 1994 to 1996 he was Vice President - Commercial Lender of Community Trust Bank, FSB. 15 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. Robinson Salomon Smith Barney, Atlanta, Georgia; Morgan, Keegan and Company, Memphis, Tennessee; J.J.B. Hilliard, W.L. Lyons, Inc., Louisville, Kentucky; Herzog, Heine, Geduld, Inc., New York, New York; J.C. Bradford & Co., Louisville, Kentucky; and Keefe, Bruyette & Woods, Inc., New York, New York are primary market makers. QUARTERLY FINANCIAL DATA (in thousands except per share amounts) Three Months Ended December 31 September 30 June 30 March 31 - ------------------------------------------------------------------------------------------------------------------ 1999 Net interest income $ 21,382 $ 21,141 $ 20,974 $ 20,278 Net interest income, taxable equivalent basis 21,937 21,704 21,548 20,843 Provision for loan losses 2,200 2,200 2,671 2,034 Noninterest income 5,328 5,530 5,170 4,995 Noninterest expense 16,590 16,319 15,650 15,826 Net income 5,674 5,638 5,432 5,100 Per common share: Basic earnings per share $ 0.51 $ 0.51 $ 0.49 $ 0.46 Diluted earnings per share 0.51 0.50 0.49 0.46 Dividends declared 0.20 0.20 0.20 0.19 Common stock price: High $ 23.00 $ 23.50 $ 24.38 $ 23.64 Low 19.75 19.56 21.00 20.57 Last trade 20.00 21.69 23.38 21.00 Selected ratios: Return on average assets, annualized 1.03% 1.03% 0.99% 0.95% Return on average common equity, annualized 13.08% 13.14% 12.96% 12.35% Net interest margin, annualized 4.43% 4.41% 4.37% 4.27% 1998 Net interest income $ 19,905 $ 19,312 $ 18,777 $ 18,590 Net interest income, taxable equivalent basis 20,433 19,809 19,232 19,058 Provision for loan losses 1,290 8,160 4,053 2,505 Noninterest income 4,897 4,716 5,817 4,035 Noninterest expense 16,348 17,457 14,302 14,056 Net income 4,862 704 4,240 4,164 Per common share: Basic earnings per share $ 0.44 $ 0.06 $ 0.38 $ 0.38 Diluted earnings per share 0.44 0.06 0.38 0.38 Dividends declared 0.19 0.18 0.18 0.18 Common stock price: High $ 24.09 $ 30.23 $ 30.63 $ 29.55 Low 19.32 20.91 26.59 25.91 Last trade 21.36 23.86 30.23 29.09 Selected ratios: Return on average assets, annualized 0.85% 0.13% 0.90% 0.91% Return on average common equity, annualized 11.77% 1.69% 10.52% 10.53% Net interest margin, annualized 3.92% 4.02% 4.43% 4.52% There were approximately 3,600 holders of outstanding common shares of the Corporation at February 29, 2000. 16 DIVIDENDS Due to a 10% stock dividend declared on April 15, 1999, the 1998 cash dividend has been restated from $0.81 per share to $0.73 per share. The restated 1999 annual cash dividend was $0.79 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 subsidiary banks to the Corporation, see Note 18 to the consolidated financial statements included herein for the year ended December 31, 1999. 17 ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data 1995-1999 (in thousands except per share amounts) Year Ended December 31 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Interest income $ 163,516 $ 160,570 $ 150,588 $ 144,447 $ 131,026 Interest expense 79,740 83,986 74,076 69,092 64,992 - ----------------------------------------------------------------------------------------------------------------------- Net interest income 83,776 76,584 76,512 75,355 66,034 Provision for loan losses 9,105 16,008 11,154 7,285 5,858 Noninterest income 21,026 19,466 18,442 14,439 11,116 Noninterest expense 64,388 62,166 59,892 55,243 55,871 - ----------------------------------------------------------------------------------------------------------------------- Income before income taxes and extraordinary gain 31,309 17,876 23,908 27,266 15,421 Income taxes 9,464 3,907 7,924 8,471 4,608 Income before extraordinary gain 21,845 13,969 15,984 18,795 10,813 Extraordinary gain, net of tax - - 3,085 - - - ----------------------------------------------------------------------------------------------------------------------- Net income $ 21,845 $ 13,969 $ 19,069 $ 18,795 $ 10,813 ======================================================================================================================= Per common share: Earnings per share $ 1.97 $ 1.26 $ 1.45 $ 1.70 $ 1.00 Cash Dividends Declared - 0.79 0.73 0.67 0.60 0.55 As a percentage of net income 40.10% 57.77% 46.54% 35.29% 54.55% Book value, end of year 15.61 14.89 14.27 13.10 12.12 Market price, end of year 20.00 21.36 28.30 20.25 15.91 Market value to book value, end of year 1.28x 1.43x 1.98x 1.55x 1.31x Price/earnings ratio, end of year 10.15x 16.90x 19.58x 11.91x 15.91x Cash dividend yield, end of year 3.95% 3.42% 2.38% 2.96% 3.43% At year end: Total assets $ 2,176,090 $ 2,248,039 $1,852,667 $ 1,840,025 $ 1,730,170 Long-term debt 53,674 53,823 53,463 19,136 27,873 Shareholders' equity 172,419 164,795 158,019 144,754 133,795 Averages: Assets $ 2,182,721 $ 2,038,680 $1,837,874 $ 1,762,009 $ 1,630,922 Deposits 1,882,364 1,650,800 1,459,551 1,467,794 1,359,947 Earning assets 1,976,679 1,871,899 1,702,290 1,632,532 1,508,539 Loans 1,557,703 1,468,776 1,406,041 1,215,243 1,021,637 Shareholders' equity 169,467 162,689 159,036 138,925 130,780 Profitability ratios: Return on average assets 1.00% 0.69% 1.05% 1.07% 0.66% Return on average common equity 12.89% 8.59% 12.31% 13.53% 8.27% Capital ratios: Equity to assets, end of year 7.92% 7.33% 8.53% 7.97% 7.73% Average equity to average assets 7.76% 7.98% 8.65% 7.88% 8.02% Risk-based capital ratios Leverage ratio 7.09% 6.09% 7.75% 7.05% 6.44% Tier I Capital 8.92% 8.50% 9.97% 9.71% 10.24% Total Capital 10.17% 9.75% 11.23% 10.96% 11.51% Other significant ratios: Allowance to net loans, end of year 1.55% 1.74% 1.45% 1.44% 1.44% Allowance to nonperforming loans, end of year 138.71% 130.31% 94.97% 113.50% 119.99% Nonperforming assets to loans and foreclosed properties, end of year 1.12% 1.33% 1.64% 1.35% 1.37% Net interest margin 4.37% 4.21% 4.66% 4.76% 4.54% Other statistics: Average common shares outstanding 11,064 11,069 11,065 11,041 10,823 Number of full-time equivalent employees, end of year 830 818 795 792 757 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Community Trust Bancorp, Inc. ("the Corporation") reported record net earnings of $21.8 million for 1999, compared to $14.0 million for 1998 and $19.1 million for 1997. Earnings for 1997 include an extraordinary gain (net of tax) of $3.1 million received from a settlement with a former software vendor. Earnings per share for 1999 were $1.97 compared to $1.26 per share for 1998 and $1.73 per share for 1997. Earnings for 1999 reflected increases in the categories of net interest income and noninterest income, reflecting the Corporation's growth; noninterest expense likewise increased from the previous year, fueled by the acquisition of twelve new branches in late 1998. The loan loss provision decreased $6.9 million year over year. The Corporation's return on average assets for 1999 was 1.00% as compared to 0.69% and 1.05% in 1998 and 1997, respectively, and the return on average equity for 1999 was 12.89% as compared to 8.59% and 12.31% for 1998 and 1997, respectively. Total assets as of December 31, 1999 were $2.18 billion as compared to total assets of $2.25 billion on December 31, 1998. Total loans as of December 31, 1999 were $1.62 billion compared to $1.50 billion as of December 31, 1998, an increase of 7.8%. Total deposits decreased from $1.92 billion at December 31, 1998 to $1.88 billion at December 31, 1999. On January 31, 2000, the Corporation entered into a revolving line of credit with Bank One Corporation in the amount of $21.0 million. On the same day, $5.5 million was drawn against this line to pay off the existing balance under the $17.5 million revolving line of credit with Firstar Bank. The new line through Bank One Corporation is priced off of the current LIBOR rate at the time of the draw request and repayment terms may vary from 30 days to 180 days, at the election of the Corporation at the time of the draw. In January 2000 shareholders were notified that they would receive a 10% stock dividend for shares held as of March 20. This stock dividend will be paid in April 2000, in addition to the quarterly cash dividend. ACQUISITIONS On June 26, 1998, the Corporation resumed its strategic policy of diversification through acquisition. Community Trust Bancorp, Inc.'s wholly owned subsidiary, Community Trust Bank of West Virginia, National Association (CTBWV, which was later merged into the Corporation's lead bank, Community Trust Bank, NA), purchased sixteen Banc One Corporation branches located in West Virginia with approximately $569 million in deposits on June 26, 1998. CTBWV paid a 9.7% premium on these deposits. In concurrent transactions, CTBWV sold three of these branches with deposits totaling $151 million to Premier Financial Bancorp, Inc. of Georgetown, Kentucky receiving a 9.7% premium; four branches with deposits totaling $122 million to Peoples Banking and Trust Corporation of Marietta, Ohio receiving a 10.7% premium; and two branches with deposits totaling $80 million to United Bankshares of Charles Town, West Virginia receiving an 11.7% premium. The additional 1% premium paid by Peoples Banking and Trust Corporation and the additional 2% premium paid by United Bankshares was divided evenly between CTBWV and Premier Financial Bancorp, Inc. as part of a prior agreement. CTBWV retained seven branches with deposits totaling $216 million. The funds used to capitalize the newly chartered CTBWV were provided from the sale of Trust Preferred Securities that occurred in April 1997 and the sale of an affiliate bank in July 1997. The facilities that were purchased will continue to operate as banking offices. This acquisition will assist in growth of the Corporation outside of Kentucky and provide a new customer base for generating additional revenues. On September 18, 1998, Community Trust Bancorp, Inc. and PNC Bank Corp. announced that their banking subsidiaries, Community Trust Bank, N.A. and PNC Bank, N.A., closed Community Trust Bank's purchase of five branches from PNC with total deposits of approximately $195.0 million. These branches are located in Richmond, Winchester and Harrodsburg, all located in central Kentucky. No acquisitions were made during 1999. RESULTS OF OPERATIONS 1999 Compared to 1998 Net income for 1999 was $21.8 million compared to $14.0 million for 1998. Basic earnings per share for 1999 were $1.97 compared to $1.26 per share for 1998. Net interest income for 1999 increased 9.4% as compared to 1998, rising from $76.6 million in 1998 to $83.8 million in 1999. Noninterest income increased 8.0% from $19.5 million in 1998 to $21.0 million in 1999 while 19 noninterest expense increased 3.6% from $62.2 million in 1998 to $64.4 million in 1998. (See separate discussions of noninterest income and noninterest expense below.) Return on average assets increased from 0.69% in 1998 to 1.00% in 1999, and return on average equity increased from 8.59% in 1998 to 12.89% in 1999. Net Interest Income The Corporation's net interest margin increased from 4.21% at the end of 1998 to 4.37% at the end of 1999 as a result of the increase in loans outstanding, the management of deposit cost, and the increase in yield on loans as a result of recent market changes. See the table on page 6 titled "Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates" for further information. The Corporation's average earning assets increased from $1.87 billion in 1998 to $1.98 billion in 1999. Average interest bearing liabilities also increased during the period, from $1.64 billion in 1998 to $1.74 billion in 1999. Average interest bearing liabilities as a percentage of average earning assets remained fairly stable, moving from 87.8% in 1998 to 88.1% in 1999. The taxable equivalent yield on average earning assets decreased from 8.68% in 1998 to 8.39% in 1999. The cost of average interest bearing liabilities also decreased from 5.11% to 4.58% during the same period. The yield on interest bearing assets has been impacted by the change in the earning asset mix as well as by the decline in market rates. Loans accounted for 78.5% of all earning assets in 1998 while loans accounted for 78.8% of earning assets in 1999. Loans accounted for 74.4% of total assets as of December 31, 1999 compared to 66.8% as of December 31, 1998. The Corporation acquired twelve new branches during 1998 through a purchase of assets and assumption of liabilities, affecting deposit growth and to a lessor degree, loan growth. The two acquisitions resulted in a net cash flow to the Corporation of approximately $345.0 million. The additional cash flow will be available to fund new loan growth but was temporarily invested in financial assets which are generally lower in yield than traditional loans. Provision for loan losses The provision for loan losses decreased from $16.0 million in 1998 to $9.1 million in 1999. In September,1998, CTBI took a special charge of $7.3 million to clean up problems in the Indirect Loan Portfolio. Six million ($6.0 million) of this charge was booked as additional Provison for Loan Losses. The indirect portfolio had been a continuing problem and this special provision allowed management to expedite the resolution of this issue. The remaining $1.3 million was recorded as a write down of the retained interest in the 1997 securitization of indirect auto loans. Charge-offs, net of recoveries, as a percentage of average loans outstanding decreased from 0.78% in 1998 to 0.65% in 1999 as gross charge-offs decreased and recoveries increased for 1999. The allowance for loan losses decreased slightly from $26.1 million at December 31, 1998 to $25.1 million at December 31, 1999. The Corporation does not believe there are currently any trends, events or uncertainties that are reasonably likely to have a material effect on the volume of its non-performing loans. Noninterest income Noninterest income increased 8.0% from $19.5 million in 1998 to $21.0 million in 1999. Service charges on deposit-related products generated $9.6 million for the year, an increase of $1.7 million over the previous year. This was fueled by the acquisition of approximately $411 million in deposits during 1998 and by increasing our collection rates on service charges assessed. Trust income increased from $2.0 million in 1998 to $2.4 million in 1999 as trust assets under management increased during the year. Gains on sale of residential mortgage loans decreased from $2.1 million in 1998 to $1.7 million in 1999. Other noninterest income decreased marginally from $7.5 million in 1998 to $7.4 million in 1998. Securities gains and losses were not a significant factor in either 1998 or 1999, as the Corporation incurred net securities gains of $12,000 in 1998 and neither a gain nor loss in 1999. Noninterest expense Noninterest expense increased from $62.2 million in 1998 to $64.4 million in 1999. This increase is primarily the result of additional operating expenses from the 1998 acquistion of the twelve new branches discussed above. Although noninterest expense has increased due to the twelve new branches, there was a decrease in the efficiency ratio from 63.44% at December 31, 1998 to 60.14% at December 31, 1999. The deposit to FTE ratio increased from $1.75 million to $1.96 million year over year. Salaries and employee benefits increased from $28.7 million in 1998 to $30.5 million in 20 1999. Occupancy and equipment expense likewise increased from $4.5 million in 1998 to $4.9 million in 1999 and $4.0 million in 1998 to $4.8 million in 1999, respectively. Data processing costs increased from $3.3 million in 1998 to $3.5 million in 1999 and stationery and printing costs decreased from $1.8 million in 1998 to $1.6 million in 1999. Taxes other than payroll, property and income, which consists mainly of Kentucky Franchise taxes on the equity and deposits of the affiliate banks, decreased from $2.1 million in 1998 to $1.3 million in 1999. Other categories of noninterest expense remained relatively flat from $17.7 million in 1998 to $17.9 million in 1999. 1998 Compared to 1997 Net income for 1998 was $14.0 million compared to $19.1 million for 1997. Basic earnings per share for 1998 were $1.26 compared to $1.73 per share for 1997. Earnings for 1997 include a $3.1 million or $0.28 per share extraordinary gain (net of tax). Net interest income for 1998 was relatively flat, increasing 0.1% as compared to 1997, rising from $76.5 million in 1997 to $76.6 million in 1998. Noninterest income increased 5.6% from $18.4 million in 1997 to $19.5 million in 1998 while noninterest expense increased 3.8% from $59.9 million in 1997 to $62.2 million in 1997. (See separate discussions of noninterest income and noninterest expense below.) Return on average assets decreased from 1.05% including the extraordinary item in 1997 to 0.69% in 1998, and return on average equity decreased from 12.31% including the extraordinary item in 1997 to 8.59% in 1998. Net Interest Income During the third quarter of 1997 the Corporation began recording certain loan fees as noninterest revenue which, until then, were classified as interest income. As a result, net interest income for 1998 ended only marginally higher at $76.6 million, up 0.1% from 1997. The Corporation's net interest margin declined from 4.66% at the end of 1997 to 4.21% at the end of 1998, also a reflection of the change in classification of certain loan-related fee income as well as the effect of the decrease in the loans to deposits ratio from 92.6% at December 31, 1997 to 88.97% on December 31, 1998. The Corporation's average earning assets increased from $1.68 billion in 1997 to $1.87 billion in 1998. Average interest bearing liabilities also increased during the period, from $1.46 billion in 1997 to $1.64 billion in 1998. Average interest bearing liabilities as a percentage of average earning assets remained fairly stable, moving from 86.5% in 1997 to 87.8% in 1998. The taxable equivalent yield on average earning assets decreased from 9.06% in 1997 to 8.68% in 1998. The cost of average interest bearing liabilities remained relatively flat changing from 5.09% to 5.11% during the same period. The yield on interest bearing assets has been impacted by the change in the earning asset mix as well as by the decline in market rates. Loans accounted for 78.5% of earnings assets in 1998 compared to 80.2% in 1997. Loans accounted for 66.8% of total assets as of December 31, 1998 compared to 77.1% as of December 31, 1997. The Corporation acquired twelve new branches during 1998 through a purchase of assets and assumption of liabilities, affecting deposit growth and to a lessor degree, loan growth. The two acquisitions resulted in a net cash flow to the Corporation of approximately $345.0 million. Provision for loan losses The provision for loan losses increased from $11.2 million in 1997 to $16.0 million in 1998. In September,1998, CTBI took a special charge of $7.3 million to clean up problems in the Indirect Loan Portfolio. Six million ($6.0 million) of this charge was booked as additional Provison for Loan Losses. The indirect portfolio had been a continuing problem and this special provision will allow management to expedite the resolution of this issue. The remaining $1.3 million was recorded as a write down of the retained interest in the 1997 securitization of indirect auto loans. Charge-offs, net of recoveries, as a percentage of average loans outstanding increased from 0.66 in 1997 to 0.78% in 1998 as gross charge-offs and recoveries both increased for 1998. The allowance for loan losses increased significantly, rising from $20.5 million at December 31, 1997 to $26.1 million at December 31, 1998. The Corporation does not believe there are currently any trends, events or uncertainties that are reasonably likely to have a material effect on the volume of its non-performing loans. 21 Noninterest income Noninterest income increased 5.4% from $18.4 million in 1997 to $19.4 million in 1998. Service charges on deposit-related products generated $7.9 million for the year, an increase of $1.0 million over the previous year. This was fueled by the acquisition of approximately $411 million in deposits during 1998 and by increasing our collection rates on service charges assessed. Trust income increased from $1.8 million in 1997 to $2.0 million in 1998 as trust assets under management increased during the year. Gains on sale of residential mortgage loans increased from $1.1 million in 1997 to $2.1 million in 1998, due to lower interest rates creating an increase in mortgage loan refinancings. Other noninterest income decreased from $8.6 million in 1997 to $7.5 million in 1997, largely due to the gain of $3.1 million on the sale of the Corporation's affiliate in West Liberty, which was completed in July 1997. Securities gains and losses were not a significant factor in either 1998 or 1997, as the Corporation incurred net securities gains of $12,000 in 1998 and $47,000 in 1997. Noninterest expense Noninterest expense increased from $59.9 million in 1997 to $62.2 million in 1998. This increase was primarily the result of additional operating expenses from the 1998 acquistion of the twelve new branches discussed above. Salaries and employee benefits increased from $28.5 million in 1997 to $28.7 million in 1998. Occupancy expense likewise increased from $4.2 million in 1997 to $4.5 million in 1998, while equipment costs were relatively flat at $4.0 million in 1998 and 1997. Data processing costs increased from $3.1 million in 1996 to $3.3 million in 1997 and stationery and printing costs remained at $1.8 million in 1998 and 1997. Taxes other than payroll, property and income, which consists mainly of Kentucky Franchise taxes on the equity and deposits of the affiliate banks, remained stationary at $2.1 million in both 1997 and 1998. Other categories of noninterest expense increased as a result of the $1.3 million write down of the securitization retained interest discussed above. DISCLOSURES REGARDING YEAR 2000 Community Trust Bancorp, Inc.'s project to address "Year 2000" readiness, which relates to the recognition of dates beyond 1999, has been successful to date. The project was to address the problem related to software programs and hardware systems that addressed dates in a two-digit format, which would not properly process beyond the year 1999. The costs associated with the Year 2000 project were $600,000 in 1998 and $886,000 in 1999. Community Trust Bancorp, Inc. utilized internal staff for the management and implementation of its Year 2000 Compliance Program, as a result it did not incur any material costs with outside contractors. Subsequently, it did not incur a material increase in operating costs. LIQUIDITY The Corporation's objectives are to ensure that funds are available at the subsidiary bank and thrift to meet deposit withdrawals and credit demands without unduly penalizing profitability, and to ensure that funding is available for the Parent Corporation to meet its ongoing cash needs while maximizing profitability. The Corporation continues to identify ways to provide for liquidity on both a current and long-term basis. On a long-term basis, the subsidiary bank and thrift rely mainly on core deposits, certificates of deposit of $100,000 or more, repayment of principal and interest on loans and securities, as well as federal funds sold and purchased. The subsidiary bank and thrift also rely on the sale of securities under repurchase agreements, securities available-for-sale and Federal Home Loan Bank borrowings. Deposits decreased marginally from $1.92 billion at December 31, 1998 to $1.88 billion at December 31, 1999. In order to fund new loan growth in the second half of 1999 and to compensate for the loss of deposit funding, the Company decreased its federal funds sold position by $127 million in 1999. The lack of deposit funding has not affected the Company's ability to fund loans or service its debt obligations. Due to the nature of the markets served by the banking regions, management believes that the majority of its certificates of deposit of $100,000 or more are no more volatile than its core deposits. During the periods of low interest rates, these deposit balances remained stable as a percentage of total deposits. In addition, the Corporation is able to borrow funds with several correspondent banks, to meet the Corporation's liquidity needs. The Corporation owns $270 million of securities designated as available-for-sale and valued at market which are 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 $51.4 million at December 31, 1998 to $16.9 million at December 31, 1999. 22 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 the issuance of long-term debt. The Corporation has $15.5 million of a $21.0 million credit line available beyond 2000, in the form of a revolving line of credit (see Note 10- Long-term Debt). The Corporation's primary investing activities include purchases of investment securities and loan originations. 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 the use of static and dynamic gap models at the one year interval. 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 uses the Sendero system to monitor its interest rate risk. The Corporation desires an interest sensitivity gap of not more than fifteen percent of total assets at the one year interval. The Company's static interest rate gap position as of December 31, 1999 is presented below: INTEREST RATE SENSITIVITY ANALYSIS December 31, 1999 0-3 3-12 Total Over (in thousands) Months Months 1 Year 1 Year Total - ----------------------------------------------------------------------------------------------------------------------- Interest earning assets Securities and deposits $ 53,988 $ 64,816 $ 118,804 $ 219,858 $ 338,662 Loans less nonaccrual 540,795 462,497 1,003,292 601,327 1,604,619 - ----------------------------------------------------------------------------------------------------------------------- Total earning assets $ 594,783 $ 527,313 $ 1,122,096 $ 821,185 $ 1,943,281 Interest bearing liabilities NOW, money market and savings accounts $ 53,415 $ 160,245 $ 213,660 $ 321,024 $ 534,684 Time deposits 408,995 482,137 891,132 189,638 1,080,770 Federal funds purchased and other short- term borrowings 38,872 3,911 42,783 2,844 45,627 Advances from FHLB 926 2,803 3,729 13,195 16,924 Long-term debt 6,845 60 6,905 46,769 53,674 - ----------------------------------------------------------------------------------------------------------------------- Total interest bearing Liabilities $ 509,053 $ 649,156 $ 1,158,209 $ 573,470 $ 1,731,679 - ----------------------------------------------------------------------------------------------------------------------- Interest sensitivity gap For the period $ 85,730 $ (121,843) $ (36,113) $ 247,715 $ 211,602 Cumulative 85,730 (36,113) (36,113) 211,602 211,602 Cumulative as a percent of earning assets 4.41% (1.86)% (1.86)% 10.89% 10.89% CAPITAL RESOURCES Total shareholders' equity increased from $164.8 million at December 31, 1998 to $172.4 million at December 31, 1999. The primary source of capital of the Corporation is retained earnings. Cash dividends were $0.79 per share for 1999 and $0.73 per share for 1998. 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 23 Corporation's ratios as of December 31, 1999 were 7.09%, 8.92% and 10.17%, respectively. Community Trust Bancorp, Inc. and all banking affiliates met the criteria for "well capitalized" at December 31, 1999. As of December 31, 1999, management is not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material adverse impact on the Corporation's liquidity, capital resources, or operations. IMPACT OF INFLATION AND CHANGING PRICES The majority of the Corporation's assets and liabilities are monetary in nature. Therefore, the Corporation differs greatly from most commercial and industrial companies that have significant investments 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 sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company currently does not engage in any derivative or hedging activity. Analysis of the Company's interest rate sensitivity can be found on page 23. 24 ITEM 8. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (in thousands except share amounts) December 31 1999 1998 - ------------------------------------------------------------------------------------------------------- ASSETS Cash and balances due from banks $ 99,773 $ 98,133 Federal funds sold 7,684 135,000 Securities available-for-sale 270,281 301,052 Securities held-to-maturity (fair value of $58,762 and $83,184, respectively) 60,307 83,359 Loans 1,619,480 1,502,386 Allowance for loan losses (25,102) (26,089) - -------------------------------------------------------------------------------------------------------- Net loans 1,594,378 1,476,297 Premises and equipment, net 52,052 54,796 Excess of cost over net assets acquired (net of accumulated amortization of $12,187 and $9,559, respectively) 59,433 62,497 Other assets 32,182 36,905 - ------------------------------------------------------------------------------------------------------- Total Assets $ 2,176,090 $ 2,248,039 ======================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing $ 261,880 $ 281,302 Interest bearing 1,615,454 1,639,839 - ------------------------------------------------------------------------------------------------------- Total deposits 1,877,334 1,921,141 Federal funds purchased and other short-term borrowings 45,626 43,405 Other liabilities 10,113 13,491 Advances from Federal Home Loan Bank 16,924 51,384 Long-term debt 53,674 53,823 - ------------------------------------------------------------------------------------------------------- Total Liabilities 2,003,671 2,083,244 Shareholders' equity: Preferred stock, 300,000 shares authorized and unissued Common stock, $5 par value, shares authorized 25,000,000; shares outstanding, 1999 - 11,043,201; 1998 - 10,064,968 55,216 50,325 Capital surplus 45,306 28,057 Retained earnings 75,021 84,827 Accumulated other comprehensive income, net of tax (3,124) 1,586 - ------------------------------------------------------------------------------------------------------- Total shareholders' equity 172,419 164,795 - ------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 2,176,090 $ 2,248,039 ======================================================================================================= The accompanying notes are an integral part of these statements. 25 CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share amounts) Year Ended December 31 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $ 139,747 $ 137,700 $ 130,256 Interest and dividends on securities - Taxable 17,920 15,220 16,770 Tax exempt 2,952 2,531 2,541 Other 2,897 5,119 1,021 - ----------------------------------------------------------------------------------------------------------------------- Total interest income 163,516 160,570 150,588 INTEREST EXPENSE: Interest on deposits 71,961 70,589 62,189 Interest on federal funds purchased and other short-term borrowings 1,902 2,132 1,819 Interest on advances from Federal Home Loan Bank 1,182 6,500 6,224 Interest on long-term debt 4,695 4,765 3,844 - ----------------------------------------------------------------------------------------------------------------------- Total interest expense 79,740 83,986 74,076 - ----------------------------------------------------------------------------------------------------------------------- Net interest income 83,776 76,584 76,512 Provision for loan losses 9,105 16,008 11,154 - ----------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 74,671 60,576 65,358 NONINTEREST INCOME: Service charges on deposit accounts 9,581 7,875 6,866 Gains on sale of loans, net 1,651 2,108 1,108 Trust income 2,411 2,000 1,841 Securities gains (losses), net - 12 47 Other 7,383 7,471 8,580 - ----------------------------------------------------------------------------------------------------------------------- Total noninterest income 21,026 19,466 18,442 NONINTEREST EXPENSE: Salaries and employee benefits 30,453 28,749 28,528 Occupancy, net 4,934 4,529 4,204 Equipment 4,773 3,979 4,007 Data processing 3,515 3,251 3,074 Stationery, printing and office supplies 1,556 1,790 1,765 Taxes other than payroll, property and income 1,250 2,137 2,116 FDIC insurance 297 282 254 Other 17,610 17,449 15,944 - ----------------------------------------------------------------------------------------------------------------------- Total noninterest expense 64,388 62,166 59,892 - ----------------------------------------------------------------------------------------------------------------------- Income before income taxes and extraordinary gain 31,309 17,876 23,908 Income taxes 9,464 3,907 7,924 - ----------------------------------------------------------------------------------------------------------------------- Income before extraordinary gain 21,845 13,969 15,984 Extraordinary gain, net of tax - - 3,085 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 21,845 $ 13,969 $ 19,069 ======================================================================================================================= Basic earnings per share before extraordinary gain $ 1.97 $ 1.26 $ 1.45 Basic earnings per share extraordinary gain - - 0.28 Basic earnings per share after extraordinary gain 1.97 1.26 1.73 Diluted earnings per share before extraordinary gain 1.97 1.25 1.44 Diluted earnings per share extraordinary gain - - 0.27 Diluted earnings per share after extraordinary gain 1.97 1.25 1.71 ======================================================================================================================= Average shares outstanding 11,064 11,069 11,065 ======================================================================================================================= The accompanying notes are an integral part of these statements. 26 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Accumulated Other Comprehensive Common Capital Retained Income, (in thousands except per share and share amounts) Stock Surplus Earnings Net of Tax Total - -------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1997 $ 45,644 $ 27,915 $ 71,976 $ (781) $ 144,754 Cash dividends declared ($.67 per share) (7,446) (7,446) Issuance of 21,767 shares common stock 99 152 251 To record stock dividend of 10% common stock 4,569 (4,573) (4) Net income for 1997 19,069 19,069 Other comprehensive income, net of tax: Net change in unrealized appreciation/(depreciation) on securities available-for- sale, net of tax of $751 1,395 1,395 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income 20,464 - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 50,312 28,067 79,026 614 158,019 Cash dividends declared ($.73 per share) (8,168) (8,168) Issuance of 5,751 shares common stock 26 73 99 Purchase of stock (13) (83) (96) Net income for 1998 13,969 13,969 Other comprehensive income, net of tax: Net change in unrealized appreciation/(depreciation) on securities available-for-sale, net of tax of $523 972 972 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income 14,941 - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 50,325 28,057 84,827 1,586 164,795 Cash dividends declared ($.79 per share) (8,769) (8,769) Issuance of 40,534 shares common stock 204 555 759 To record stock dividend of 10% common stock 5,029 17,853 (22,882) 0 Purchase of stock (342) (1,159) (1,501) Net income for 1999 21,845 21,845 Other comprehensive income, net of tax: Net change in unrealized appreciation/(depreciation) on securities available-for-sale, net of tax of $(2,532) (4,710) (4,710) - --------------------------------------------------------------------------------------------------------------------------------- Comprehensive income 17,135 - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 $ 55,216 $ 45,306 $ 75,021 $(3,124) $ 172,419 ================================================================================================================================ The accompanying notes are an integral part of these statements. 27 CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 21,845 $ 13,969 $ 19,069 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,654 5,747 4,777 Provision for loan and other real estate losses 9,279 16,123 11,179 Securities (gains) losses, net - (12) (119) Gains on sale of loans, net (1,651) (2,108) (1,108) Net amortization of securities premiums 454 381 364 Changes in: Other assets 9,377 1,818 (8,371) Other liabilities (1,522) (5,817) 843 Loans held for sale 4,709 (531) 78,671 - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 50,145 29,570 105,305 Cash flows from investing activities: Proceeds from: Sale of securities available-for-sale - 2,426 44,913 Maturity of securities available-for-sale 79,900 59,078 44,742 Maturity of securities held-to-maturity 9,942 8,673 16,125 Principal payments of mortgage-backed securities 13,058 23,780 6,508 Purchase of: Securities available-for-sale (56,525) (195,322) (23,688) Securities held-to-maturity - - - Mortgage-backed securities (10) - (1,000) Net increase in loans (132,852) (18,194) (205,957) Net increase in premises and equipment (1,775) (6,050) (5,128) - ------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (88,262) (125,609) (123,485) Cash flows from financing activities: Net change in deposits (43,807) 46,799 (15,819) Net change in federal funds purchased and other short-term borrowings 2,221 (17,492) 13,364 Advances from Federal Home Loan Bank 12 31,000 120,012 Repayments of advances from Federal Home Loan Bank (34,472) (81,443) (129,154) Proceeds from long-term debt 0 5,500 34,500 Payments on long-term debt (149) (5,140) (173) Issuance and repurchase of common stock, net (742) 3 247 Dividends paid (10,622) (8,118) (7,277) - ------------------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by financing activities (87,559) (28,891) 15,700 Net decrease in cash and cash equivalents (125,676) (124,930) (2,480) Cash and cash equivalents at beginning of year 233,133 61,404 63,884 Cash and cash equivalents of acquired banks - 296,659 - - ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 107,457 $ 233,133 $ 61,404 ======================================================================================================================= The accompanying notes are an integral part of these statements. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES BASIS OF PRESENTATION - The consolidated financial statements include Community Trust Bancorp, Inc. (the "Corporation") and all its subsidiaries, including its principal subsidiary, Community Trust Bank, NA. Material 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. 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 southern 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. Cash flows are reported net for customer loan transactions, deposit transactions, and other short-term borrowings. 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. 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 provision for loan losses charged to operating expenses is an amount sufficient to maintain the allowance for loan losses at an adequate level to absorb inherent losses in the loan portfolio based on management's best estimate, using such considerations as the current condition and volume of the loan portfolio, economic conditions within the service area, review of specific problem loans, and any other known factors influencing loan collectibility. 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 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 over fifteen to twenty-five 29 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 - The Company adopted the Financial Accounting Standards Board Statement No. 128, EARNINGS PER SHARE, effective December 31, 1997. Statement 128 replaces the previous calculations of "primary" and "fully diluted" earnings per share (EPS) with "basic" and "diluted" EPS, respectively. Basic EPS is calculated by dividing net income available to common shareholders by the weighted-average number of common shares outstanding. The most significant change from the former method is that the effect of stock options is no longer included in the calculation of basic EPS. 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. The most significant change is that the treasury stock method is now applied using the AVERAGE MARKET PRICE for the period rather than the higher of the average market price or the ending market price. The Company has restated all prior period EPS calculations to conform with Statement 128. (See Note 21 - Earnings Per Share.) RECLASSIFICATION - Certain reclassifications have been made in the prior financial statements to conform to current classifications. 2. BUSINESS COMBINATIONS On June 26, 1998 the Corporation chartered a new national association to operate as a national bank in the state of West Virginia. This new wholly owned subsidiary, Community Trust Bank of West Virginia, National Association (CTBWV), purchased sixteen Banc One Corporation branches located in West Virginia with approximately $569 million in deposits. CTBWV paid a 9.7% premium on these deposits. In concurrent transactions, CTBWV sold three of these branches with deposits totaling $151 million to Premier Financial Bancorp, Inc. of Georgetown, Kentucky receiving a 9.7% premium; four branches with deposits totaling $122 million to Peoples Banking and Trust Company of Marietta, Ohio receiving a 10.7% premium; and two branches with deposits totaling $80 million to United Bankshares of Charles Town, West Virginia receiving 11.7% premium. The additional 1% premium paid by Peoples Banking and Trust Company and the additional 2% premium paid by United Bankshares was divided evenly between CTBWV and Premier Financial Bancorp, Inc. as part of a prior agreement. CTBWV retained seven branches with deposits totaling $216 million. The funds used to purchase these branches were provided from the sale of Trust Preferred Securities that occurred in April 1997 and the sale of an affiliate bank in July 1997. The facilities that were purchased will continue to operate as banking offices. On September 18, 1998 Community Trust Bank, NA purchased five branches from PNC Bank, NA with total deposits of $195 million. These branches are located in Richmond, Winchester and Harrodsburg, Kentucky. On December 31, 1998 Community Trust Bank of West Virginia, NA merged into Community Trust Bank, NA. 3. CASH AND DUE FROM BANKS Included in cash and due from banks are noninterest bearing deposits that are held at the Federal Reserve or maintained in vault cash in accordance with regulatory reserve requirements. The balance requirement was $44.8 million at December 31, 1999 and $39.1 million at December 31, 1998. Cash paid during the years ended 1999, 1998 and 1997 for interest was $80.0 million, $83.6 and $73.6 million, respectively. Cash paid during the same periods for income taxes was $9.6 million, $3.4 million and $11.6 million, respectively. 30 4. SECURITIES Amortized cost and fair value of securities at December 31, 1999 are as follows: Gross Gross Available-for-sale Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------- U.S. Treasury and government agencies $ 50,554 $ 49 $ (282) $ 50,321 States and political subdivisions 26,941 11 (1,401) 25,551 U.S. agency mortgage-backed pass through certificates 131,626 151 (2,818) 128,959 Collateralized mortgage obligations 38,961 - (518) 38,443 Other debt securities 2,113 - (51) 2,062 - ----------------------------------------------------------------------------------------------------------------------- Total debt securities 250,195 211 (5,070) 245,336 Marketable equity securities 25,098 39 (192) 24,945 - ----------------------------------------------------------------------------------------------------------------------- $ 275,293 $ 250 $ (5,262) $ 270,281 ======================================================================================================================= Gross Gross Held-to-maturity Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------- U.S. Treasury and government agencies $ 12,499 $ - $ (1,778) $ 10,721 States and political subdivisions 32,123 504 (72) 32,555 U.S. agency mortgage-backed pass through certificates 12,153 - (133) 12,020 Collateralized mortgage obligations 3,532 - (66) 3,466 - ----------------------------------------------------------------------------------------------------------------------- $ 60,307 $ 504 $ (2,049) $ 58,762 ======================================================================================================================= Amortized cost and fair value of securities at December 31, 1998 are as follows: Gross Gross Available-for-sale Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------- U.S. Treasury and government agencies $ 87,597 $ 885 $ (7) $ 88,475 States and political subdivisions 17,518 274 (16) 17,776 U. S. agency mortgage-backed pass through certificates 134,030 948 (194) 134,784 Collateralized mortgage obligations 37,140 183 (44) 37,279 Other debt securities 2,156 - (6) 2,150 - ----------------------------------------------------------------------------------------------------------------------- Total debt securities 278,441 2,290 (267) 280,464 Marketable equity securities 20,457 131 - 20,588 - ----------------------------------------------------------------------------------------------------------------------- $ 298,898 $ 2,421 $ (267) $ 301,052 ======================================================================================================================= Gross Gross Held-to-maturity Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------- U.S. Treasury and government agencies $ 12,984 $ 21 $ (1,639) $ 11,366 States and political subdivisions 41,442 1,436 - 42,878 U.S. agency mortgage-backed pass through certificates 23,883 42 (22) 23,903 Collateralized mortgage obligations 5,050 - (13) 5,037 - ----------------------------------------------------------------------------------------------------------------------- $ 83,359 $ 1,499 $ (1,674) $ 83,184 ======================================================================================================================= 31 The amortized cost and fair value of securities at December 31, 1999, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Available-for-sale Held-to-maturity - ----------------------------------------------------------------------------------------------------------------------- Amortized Fair Amortized Fair (in thousands) Cost Value Cost Value - ----------------------------------------------------------------------------------------------------------------------- Due in one year or less $ 31,001 $ 30,927 $ 4,997 $ 5,012 Due after one through five years 20,645 20,485 29,134 27,484 Due after five through ten years 19,663 18,685 5,339 5,482 Due after ten years 6,186 5,775 5,152 5,297 Mortgage-backed pass through certificates and collateralized mortgage obligations 170,587 167,402 15,685 15,487 Other securities 2,113 2,062 - - - ----------------------------------------------------------------------------------------------------------------------- 250,195 245,336 60,307 58,762 Marketable equity securities 25,098 24,945 - - - ----------------------------------------------------------------------------------------------------------------------- $275,293 $ 270,281 $60,307 $ 58,762 ======================================================================================================================= There were no gains or losses realized on sales and calls in 1999 and gross gains of $12 thousand and $47 thousand were realized on sales and calls in 1998 and 1997, respectively. Securities in the amount of $200 million and $184 million at December 31, 1999 and 1998, 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: December 31 (in thousands) 1999 1998 - -------------------------------------------------------------------------------- Commercial, secured by real estate $ 406,330 $ 329,611 Commercial, other 293,659 279,406 Real estate - commercial construction 80,988 74,023 Real estate - residential construction 18,002 13,602 Real estate - consumer mortgage 397,168 399,035 Consumer 415,935 400,893 Equipment lease financing 7,398 5,816 - ------------------------------------------------------------------------------- $ 1,619,480 $ 1,502,386 =============================================================================== Included in loan balances are loans held for sale in the amount of $0.5 million and $3.6 million at December 31, 1999 and December 31, 1998, respectively. The amount of loans on a non-accruing income status was $14.9 million at both December 31, 1999 and December 31, 1998. Additional interest which would have been recorded during 1999, 1998 and 1997 if such loans had been accruing interest was approximately $1.3 million, $1.5 million, and $1.3 million, respectively. At December 31, 1999 and 1998, the recorded investment in impaired loans was $9.5 million and $13.1 million, respectively. Included in these amounts at December 31, 1999 and December 31, 1998, respectively are $1.4 million and $2.4 million of impaired loans for which specific reserves for loan losses are carried in the amounts of $0.4 million and $1.9 million. The average investment in impaired loans for 1999 and 1998 was $9.5 million and $13.1 million, respectively while interest income of $259 thousand and $294 thousand was recognized on cash payments of $259 thousand and $294 thousand. In the ordinary course of business, the Corporation's banking subsidiaries (Community Trust Bank, NA and Community Trust Bank, FSB) 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 32 collateral, as those prevailing at the same time for comparable transactions with other persons. The aggregate amount of such loans at January 1, 1999 was $32.5 million. During 1999, activity with respect to these loans included new loans of $17.4 million, repayments of $20.2 million, and a net increase of $2.6 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 $32.3 million at December 31, 1999. 6. ALLOWANCE FOR LOSSES Activity in the allowance for loan losses is as follows: (in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------- Balance, beginning of year $ 26,089 $ 20,465 $ 18,825 Balances of acquired banks - 1,066 - Provisions charged to operations 9,105 16,008 11,154 Recoveries 5,212 4,365 3,317 Charge-offs (15,304) (15,815) (12,253) Allowance of sold bank - - (578) - ---------------------------------------------------------------------------------------------------- Balance, end of year $ 25,102 $ 26,089 $ 20,465 =================================================================================================== Activity in the allowance for other real estate losses is as follows: (in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------- Balance, beginning of year $ 623 $ 638 $ 617 Provisions charged to operations 174 115 78 Charge-offs (167) (130) (19) Allowance of sold bank - - (38) - ---------------------------------------------------------------------------------------------------- Balance, end of year $ 630 $ 623 $ 638 =================================================================================================== Other real estate owned by the Corporation, net of reserves, at December 31, 1999 and 1998 was $2.9 million and $2.5 million, respectively. 7. PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: December 31 (in thousands) 1999 1998 - ------------------------------------------------------------------------------ Land and buildings $ 52,975 $ 53,877 Leasehold improvements 4,422 5,007 Furniture, fixtures and equipment 21,739 31,382 Construction in progress 7 619 - ------------------------------------------------------------------------------- $ 79,143 $ 90,885 Less accumulated depreciation and amortization (27,091) (36,089) - -------------------------------------------------------------------------------- $ 52,052 $ 54,796 =============================================================================== Depreciation and amortization of premises and equipment for 1999, 1998 and 1997 was $4.5 million, $3.9 million, and $3.8 million, respectively. 33 8. DEPOSITS Interest expense on deposits is categorized as follows: (in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------- Savings, NOW and money market accounts $ 16,216 $ 15,369 $ 12,557 Certificates of deposit of $100 thousand or more 16,188 16,011 14,726 Other time deposits 39,557 39,209 34,906 - --------------------------------------------------------------------------------------------------- $ 71,961 $ 70,589 $ 62,189 =================================================================================================== Time certificates of deposit outstanding in denominations of $100 thousand or more were $309 million and $291 million at December 31, 1999 and 1998, respectively. 9. ADVANCES FROM FEDERAL HOME LOAN BANK The advances from the Federal Home Loan Bank are due for repayment as follows: December 31 (in thousands) 1999 1998 - -------------------------------------------------------------------------------- Due in one year or less $ 3,697 $ 3,505 Due in one to five years 10,911 44,806 Due in five to ten years 1,686 2,419 Due after ten years 630 654 - ------------------------------------------------------------------------------- $ 16,924 $ 51,384 =============================================================================== These advances generally require monthly principal payments and are collateralized by Federal Home Loan Bank stock of $15.2 million and certain first mortgage loans totalling $25.4 million as of December 31, 1999. Fixed rates advances total $16.9 million and have interest rates ranging from 1.00% to 7.05%. There were no variable rate advances at year end. 34 10. LONG-TERM DEBT Long-term debt is categorized as follows: December 31 (in thousands) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Parent Company: Ten Year Senior Notes, 8.25% interest, due January 1, 2003 $ 12,230 $ 12,230 Revolving bank note, interest at prime minus 50 basis points, maximum borrowing of $17,500,000, expires January 31, 2000 5,500 5,500 Subsidiaries: Trust Preferred Securities 34,500 34,500 Other 1,444 1,593 - ----------------------------------------------------------------------------------------------------------------------- $ 53,674 $ 53,823 ======================================================================================================================= The Ten Year Senior Notes are redeemable, in whole or in part, at the option of the Corporation at any time on or after January 1, 1999, at a price beginning at 102% of par and decreasing annually until scheduled final maturity. In April 1997, CTBI Preferred Capital Trust ("CTBI Trust"), a trust created under the laws of the State of Delaware, issued $34.5 million of 9.0% cumulative trust preferred securities ("Preferred Securities"). The Corporation owns all of the beneficial interests represented by common securities ("Common Securities") of CTBI Trust, which exists for the sole purpose of issuing the Preferred Securities and Common Securities and investing the proceeds thereof in an equivalent amount of 9.0% Subordinated Debentures which were issued by the Corporation. The Subordinated Debentures will mature on March 31, 2027, and are unsecured obligations of the Corporation. The Subordinated Debentures are irrevocably and unconditionally guaranteed by the Corporation and are subordinate and junior in right of payment to all senior debt and other subordinated debt. There are no payments due for this debt in the next five years. The Corporation expects to refinance the revolving bank note on similar terms and amounts. 11. FEDERAL INCOME TAXES The components of the provision for income taxes, exclusive of tax effects of unrealized securities gains, are as follows: (in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------- Currently payable $ 9,511 $ 5,861 $ 9,079 Deferred (47) (1,954) (1,155) - --------------------------------------------------------------------------------------------------- $ 9,464 $ 3,907 $ 7,924 =================================================================================================== The components of the net deferred tax asset as of December 31 are as follows: (in thousands) 1999 1998 - --------------------------------------------------------------------------------------------------- Deferred Tax Assets Allowance for loan losses $ 8,785 $ 9,131 Accrued expenses 592 395 Deferred compensation 198 197 Other 2,247 1,465 - --------------------------------------------------------------------------------------------------- Total deferred tax assets $ 11,822 $11,188 Deferred Tax Liabilities Depreciation $ (3,692) $(3,692) FHLB stock dividends (1,943) (1,543) Other (1,098) (911) - ---------------------------------------------------------------------------------------------------- Total deferred tax liabilities $ (6,733) $(6,146) - ---------------------------------------------------------------------------------------------------- Net deferred tax asset $ 5,089 $ 5,042 =================================================================================================== 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. 35 A reconciliation between federal income tax at the statutory rate and income tax expense is as follows: (in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Tax at statutory rate $10,958 $ 6,256 $ 8,367 Tax-exempt interest (1,465) (1,270) (1,061) Other, net (29) (1,079) 618 - ------------------------------------------------------------------------------------------------------------------ $ 9,464 $ 3,907 $ 7,924 ================================================================================================================== In 1998, OTHER, NET includes the reversal of $1.5 million in tax accruals after substantial issues related to an examination of prior years were settled. 12. EMPLOYEE BENEFITS The Corporation has a KSOP plan covering substantially all employees. Half of the first 8% of wages contributed by an employee is matched and goes into the savings and retirement portion of the plan. Employees may contribute additional non-matched amounts up to maximum limits provided by IRS regulations, and the Corporation may at its discretion, contribute an additional percentage of covered employees' gross wages. The Corporation currently contributes 4% of covered employees gross wages to the employee stock ownership plan (ESOP) portion of the plan. The ESOP uses the contribution to acquire shares of the Corporation's common stock. The ESOP portion of the KSOP plan owned 264,094 shares of Corporation stock at December 31, 1999. The 401(k) portion of the KSOP plan owned 461,572 shares of Corporation stock at December 31, 1999. Substantially all shares owned by the KSOP were allocated to employees' accounts at December 31, 1999. 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 above, for 1999, 1998 and 1997 was $1.4 million, $1.4 million, and $1.3 million, respectively. 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 715,000 shares authorized, 598,585 of which were available at December 31, 1999 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 because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation", requires use of option valuation models that were not designed for use in valuing 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, 1999 and December 31, 1998 is summarized as follows: December 31, 1999 December 31, 1998 - --------------------------------------------------------------------------------------------------------------------------------- Weighted-Average Weighted-Average Options Exercise price Options Exercise price - --------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 12,100 $ 27.91 - $ - Granted 107,063 22.44 12,100 27.91 Exercised - - - - Forfeited/expired (2,748) 22.05 - - - --------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 116,415 $ 23.01 12,100 $ 27.91 ================================================================================================================================= Exercisable at end of year 1,387 $ 22.05 - $ - 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. 36 The Corporation's stock option activity for the 1989 Plan for the years ended December 31, 1999 and December 31, 1998 is summarized as follows: December 31,1999 December 31, 1998 - -------------------------------------------------------------------------------------------------------------------------------- Weighted-Average Weighted-Average Options Exercise price Options Exercise price - -------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 251,042 $18.57 314,345 $18.78 Granted - - 3,300 28.30 Exercised (17,923) 13.67 (3,596) 18.60 Forfeited/expired (32,112) 17.85 (63,007) 20.14 - -------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 201,007 $19.12 251,042 $18.57 ================================================================================================================================ Exercisable at end of year 40,221 $17.32 52,307 $15.89 The related information for both plans for the years ended December 31, 1999 and December 31, 1998 is summarized below: The weighted-average fair value of options granted during the years 1998 and 1999 was $8.22 and $2.05 per share, respectively. Exercise prices for options outstanding as of December 31, 1999 ranged from $8.82 to $28.51. The weighted-average remaining contractual life of these options is 8.2 years. 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 1999 and 1998, respectively: risk-free interest rates of 5.50% and 5.50%, dividend yields of 3.95% and 3.45%, volatility factors of the expected market price of the Corporation's common stock of .170 and .310 and a weighted average expected option life of 6.0 years. Because the effect of applying Statement 123's fair value method to the Corporation's stock options results in net income and earnings per share amounts that are not materially different from those reported in the consolidated statements of income, pro forma information has not been provided. 13. OPERATING LEASES Certain premises and equipment are leased under operating leases. Minimum rental payments are as follows: (IN THOUSANDS) --------------------------------------------------------- 2000 $ 1,047 2001 1,361 2002 1,166 2003 922 2004 719 THEREAFTER 3,252 - ----------------------------------------------------------- $ 8,467 =========================================================== Rental expense under operating leases was $0.9 million, $1.0 million, and $0.9 million in 1999, 1998 and 1997, respectively. 14. FAIR 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. 37 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 deposit 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 the 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, 1999 and 1998 and is not considered significant. 1999 1998 Estimated Estimated Carrying Fair Carrying Fair December 31 (in thousands) Amount Value Amount Value - ----------------------------------------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 107,457 $ 107,457 $ 233,133 $ 233,133 Securities 330,588 329,043 384,411 384,236 Loans 1,619,480 1,609,138 1,502,386 1,521,170 Less: allowance for loan losses (25,102) - (26,089) - - ----------------------------------------------------------------------------------------------------------------------- $ 2,032,423 $ 2,045,638 $ 2,093,841 $ 2,138,539 ======================================================================================================================= Financial liabilities: Deposits $ 1,877,334 $ 1,887,837 $ 1,921,141 $ 1,930,181 Short-term borrowings 45,626 45,626 43,405 43,405 Advances from Federal Home Loan Bank 16,924 16,902 51,384 51,677 Long-term debt 53,674 55,385 53,823 53,823 - ----------------------------------------------------------------------------------------------------------------------- $ 1,993,558 $ 2,005,750 $ 2,069,753 $ 2,079,086 ======================================================================================================================= 15. Off-balance sheet transactions The Corporation's banking subsidiaries are a party to transactions with off-balance sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include standby letters of credit and commitments to extend credit in the form of unused lines of credit. The Corporation's banking 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 Banks had the following financial instruments, whose approximate contract amounts represent credit risk: (in thousands) 1999 1998 --------------------------------------------------------------------------- Standby letters of credit $ 15,400 $ 15,102 Commitments to extend credit 242,714 223,477 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. Fixed rate loan commitments at December 31, 1999 of $22.2 million have interest rates ranging predominately from 5.0% to 18.0% and are for terms up to 15 years. 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 Banks 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 are to extend credit at fixed rates. These credit commitments are based on prevailing rates, terms and conditions applicable to other loans being made at December 31, 1999. Collateral held varies but may include accounts receivable, inventory, property and equipment and income-producing properties. 38 16. CONCENTRATION OF CREDIT RISK The Corporation's banking subsidiaries grant commercial, residential and consumer related 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 these loan portfolios are diverse, a certain portion of our debtors are economically dependent upon the coal industry for their ability to repay. 17. COMMITMENTS AND CONTINGENCIES The Corporation and its banking subsidiaries, along with several of their officers, are named defendants in legal actions 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. 18. 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 2000, approximately $27.4 million plus any 2000 net profits can be paid by the Corporation's banking subsidiaries without prior regulatory approval. 39 19. 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 I Capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I Capital (as defined) to average assets (as defined). These measures also define banks and bank holding companies as "well-capitalized" which meet or exceed higher minimum amounts and ratios (also set forth in the table below.) Management believes, as of December 31, 1999, that the Corporation meets all capital adequacy requirements for which it is subject to be defined as well-capitalized. To be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions (in thousands) Amount Ratio Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 1999 Total Capital (to Risk Weighted Assets) $171,482 10.17% $134,903 8.00% $168,628 10.00% Tier I Capital (to Risk Weighted Assets) 150,354 8.92% 67,451 4.00% 101,177 6.00% Tier I Capital (to Average Assets) 150,354 7.09% 84,828 4.00% 106,036 5.00% AS OF DECEMBER 31, 1998 Total Capital (to Risk Weighted Assets) $154,882 9.75% $127,047 8.00% $158,809 10.00% Tier I Capital (to Risk Weighted Assets) 134,954 8.50% 63,523 4.00% 95,285 6.00% Tier I Capital (to Average Assets) 134,954 6.09% 88,654 4.00% 110,818 5.00% 40 20. PARENT COMPANY FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS December 31 (in thousands) 1999 1998 - ------------------------------------------------------------------------------------------ ASSETS Cash on deposit $ 1,717 $ 3,102 Securities available-for-sale 180 1,725 Investment in and advances to subsidiary banks 216,452 207,398 Excess of cost over net assets acquired (net of accumulated amortization) 5,773 6,173 Other assets 2,008 2,226 - ------------------------------------------------------------------------------------------ Total Assets $ 226,130 $220,624 ========================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Long-term debt $ 52,230 $ 52,230 Other liabilities 1,481 3,599 - ------------------------------------------------------------------------------------------ Total liabilities 53,711 55,829 Shareholders' equity 172,419 164,795 - ------------------------------------------------------------------------------------------ Total Liabilities and Shareholders' Equity $ 226,130 $220,624 ========================================================================================== CONDENSED STATEMENTS OF INCOME Year Ended December 31 (in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Income: Dividends from subsidiary banks $ 12,000 $ 4,372 $ 21,747 Other Income 236 1,812 4,073 - ----------------------------------------------------------------------------------------------------------------------- Total income 12,236 6,184 25,820 Expenses: Interest expense 4,569 4,616 3,710 Amortization expense 406 406 462 Other Expenses 1,005 726 1,354 - ----------------------------------------------------------------------------------------------------------------------- Total expenses 5,980 5,748 5,526 - ----------------------------------------------------------------------------------------------------------------------- Income before income taxes and equity in undistributed income of subsidiaries 6,256 436 20,294 Income tax benefit (1,871) (1,772) (224) - ------------------------------------------------------------------------------------------------------------------------ Income before equity in undistributed income of subsidiaries 8,127 2,208 20,518 Equity in undistributed income of subsidiaries 13,718 11,761 (1,449) - ------------------------------------------------------------------------------------------------------------------------ Net Income $ 21,845 $ 13,969 $ 19,069 ======================================================================================================================= 41 CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31 (in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net income $21,845 $ 13,969 $ 19,069 Adjustments to reconcile net income to net cash provided by operating activities: Amortization, net 406 406 462 Equity in undistributed earnings of subsidiaries (13,718) (11,761) 1,449 Change in other assets and liabilities, net (54) 3,674 6,816 - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 8,479 6,288 27,796 Cash Flows From Investing Activities: Change in securities available-for-sale 1,500 11,247 (7,908) Proceeds from sale of subsidiary - - 4,860 Investments in and advances to subsidiaries - (49,632) (8,959) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities 1,500 (38,385) (12,007) Cash Flows From Financing Activities: Dividends paid (10,622) (8,118) (7,277) Net proceeds from repurchase and issuance of common stock (742) 3 247 Net change in short-term borrowings - - (2,530) Repayment of long-term debt - (5,000) - Proceeds from long-term debt - 5,500 34,500 - ----------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (11,364) (7,615) 24,940 - ----------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (1,385) (39,712) 40,729 Cash and cash equivalents at beginning of year 3,102 42,814 2,085 - ----------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents At end of year $ 1,717 $ 3,102 $ 42,814 ======================================================================================================================= 42 21. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: YEAR ENDED DECEMBER 31 1999 1998 1997 ---------------------------------------------- (In thousands, except per share data) Numerator: Net income before extraordinary gain $ 21,845 $ 13,969 $ 15,984 Extraordinary gain - - 3,085 Net income after extraordinary gain $ 21,845 $ 13,969 $ 19,069 =========== ============ =========== Denominator: Basic earnings per share: Weighted average shares 11,063,708 11,069,059 11,064,719 Diluted earnings per share: Effect of dilutive securities - stock options 25,066 73,334 66,781 Adjusted weighted average shares 11,088,774 11,142,393 11,131,500 ========== ========== ========== Earnings per share: Basic earnings per share before extraordinary gain $ 1.97 $ 1.26 $ 1.45 Basic earnings per share extraordinary gain - - 0.28 Basic earnings per share after extraordinary gain 1.97 1.26 1.73 Diluted earnings per share before extraordinary gain 1.97 1.25 1.44 Diluted earnings per share extraordinary gain - - 0.27 Diluted earnings per share after extraordinary gain 1.97 1.25 1.71 43 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 generally accepted accounting principles 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 generally accepted accounting principles. 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. Ernst & Young LLP, independent public accountants, have been engaged to render an independent professional opinion on the Corporation's financial statements. Their audit is conducted in accordance with generally accepted auditing standards 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, 1999. Jean R. Hale President and Chief Executive Officer 44 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, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Community Trust Bancorp, Inc. and Subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Columbus, Ohio Ernst & Young LLP January 12, 2000 45 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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- See Index to consolidated Financial statements at Item 8 of this report. EXHIBIT NO. DESCRIPTION OF EXHIBITS 2.1 Agreement and Plan of Reorganization dated September 27, 1994 between Community Trust Bancorp, Inc. and Woodford Bancorp, Inc. (Incorporated by reference to registration statement no. 33-90448). 2.2 Amendment No. 1 to Agreement and Plan of Reorganization dated September 27, 1994 between Community Trust Bancorp, Inc. and Woodford Bancorp, Inc., as amended February 7, 1995 (Incorporated by reference to registration statement no. 33-90448). 2.3 Amendment No. 2 to Agreement and Plan of Reorganization dated September 27, 1994 between Community Trust Bancorp, Inc. and Woodford Bancorp, Inc., as amended March 2, 1995 (Incorporated by reference to registration statement no. 33-90448). 3.1 Articles of Incorporation and all amendments thereto (Incorporated by reference to registration statement no. 33-35138). 3.2 By-laws of the Corporations, as amended July 25,1995 (Incorporated by reference to registration statement no. 33-61891). 10.1 Pikeville National Corporation Savings and Employee Stock Ownership Plan (Commonly known as 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). 46 10.3 Community Trust Bancorp, Inc. 1998 Stock Option Plan (Incorporated by reference to registration statement no. 333-74217). 21 List of subsidiaries. 23 Consent of Ernst & Young LLP, Independent Auditors. 27 Financial Data Schedule. (b) Reports on Form 8-K required to be filed during the last quarter of 1999 None. (c) Exhibits The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules None. 47 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. COMMUNITY TRUST BANCORP, INC. March 10, 2000 By: Jean R. Hale ------------------------- Jean R. Hale President and Chief Executive Officer Kevin Stumbo ------------------------- Kevin Stumbo Chief Accounting Officer 48 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 Corporation and in the capacities and on the date indicated. Chairman of the Board and March 10, 2000 Burlin Coleman Director --------------------------------------------------- Burlin Coleman President, Chief Executive Officer and March 10, 2000 Jean R. Hale Director --------------------------------------------------- Jean R. Hale March 10, 2000 Charles J. Baird Director --------------------------------------------------- Charles J. Baird March 10, 2000 Nick A. Cooley Director --------------------------------------------------- Nick A. Cooley March 10, 2000 William A. Graham, Jr. Director --------------------------------------------------- William A. Graham, Jr. March 10, 2000 Steven L. Lawson Director --------------------------------------------------- Steven L. Lawson March 10, 2000 M. Lynn Parrish Director --------------------------------------------------- M. Lynn Parrish March 10, 2000 Director --------------------------------------------------- E. M. Rogers 49 COMMUNITY TRUST BANCORP, INC. AND SUBSIDIARIES INDEX TO EXHIBITS EXHIBIT NO. 2.1 Agreement and plan of reorganization dated September 27, 1994 between Community Trust Bancorp, Inc. and Woodford Bancorp, Inc., incorporated herein by reference. 2.2 Amendment No. 1 to Agreement and Plan of reorganization dated September 27, 1994 between Community Trust Bancorp, Inc. and Woodford Bancorp, Inc., as amended February 7, 1995 and incorporated herein by reference. 2.3 Amendment No. 2 to Agreement and Plan of reorganization dated September 27, 1994 between Community Trust Bancorp, Inc. and Woodford Bancorp, Inc., as amended March 2, 1995 and incorporated herein by reference. 3.1 Articles of Incorporation for the Corporation, incorporated herein by reference. 3.2 By-laws of the Corporation as amended through the date of this filing, incorporated herein by reference. 10.1 Pikeville National Corporation Savings and Employee Stock Ownership Plan (commonly known as Community Trust Bancorp, Inc. Savings and Employee Stock Ownership Plan), incorporated herein by reference. 10.2 Second restated Pikeville National Corporation 1989 Stock Option Plan (commonly known as Community Trust Bancorp, Inc. 1989 Stock Option Plan), incorporated herein by reference. 10.3 Community Trust Bancorp, Inc. 1998 Stock Option Plan, incorporated herein by reference. 21 List of subsidiaries. 23 Consent of Ernst & Young LLP, Independent Auditors. 27 Financial Data Schedule.