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, 1997
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.)
208 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 28, 1998 was $294,328,000. The
number of shares outstanding of the Registrant's Common Stock as of
February 28, 1998 was 10,062,487. 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 28, 1998
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 and south
central Kentucky. 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, 1997, the Corporation had total consolidated
assets of $1.9 billion and total consolidated deposits of $1.5 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. As a
result of these transactions, the Bank has $1.6 billion in assets and
forty-two offices in twelve Kentucky counties. The Corporation's thrift
and trust subsidiaries, Community Trust Bank, FSB and Trust Company of
Kentucky, NA, remain subsidiaries of the Corporation and will continue to
operate as independent entities.
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 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.
3
Since July 1989, banking legislation in Kentucky places no limits on
the number of banks or bank holding companies which a bank holding company
may acquire. Interstate acquisitions are allowed where reciprocity exists
between the laws of Kentucky and the home state of the acquiring bank
holding company. Bank holding companies continue to be limited to control
of less than 15% of deposits held by banks in the state (exclusive of
inter-bank and foreign deposits).
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 effect on the Corporation.
No operations in foreign countries are engaged in by the Corporation.
EMPLOYEES
As of December 31, 1997, the Corporation and its subsidiaries had 795
full-time equivalent employees. Employees are provided with a variety of
employee benefits. A retirement plan, employee stock ownership plan,
group life, hospitalization, major medical insurance and an annual
management incentive compensation plan 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.
Deposits of the Corporation's subsidiary banks are insured by the
Federal Deposit Insurance Corporation Bank Insurance Fund, which subjects
the banks to regulation and examination under the provisions of the
Federal Deposit Insurance Act. Insofar as the Corporation's thrift
subsidiary is concerned, its deposits are insured by the Federal Deposit
Insurance Corporation Savings Association Insurance Fund.
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 which
may be offered.
4
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
1997 1996 1995
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Average Average Average Average Average Average
(in thousands) Balances Interest Rate Balances Interest Rate Balances Interest Rate
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EARNING ASSETS
Loans, net of unearned (1) (2) (3) $1,350,471 $130,805 9.69% $1,215,243 $119,370 9.82% $1,021,637 $101,511 9.94%
Securities
U. S. Treasuries and agencies 211,706 13,372 6.32 277,641 17,641 6.35 301,263 19,123 6.35
State & political subdivisions (3) 52,653 4,082 7.75 57,652 4,568 7.92 55,263 4,668 8.45
Other securities 50,704 3,284 6.48 72,610 4,655 6.41 78,510 5,011 6.38
Federal funds sold 18,035 993 5.51 8,490 483 5.69 50,398 3,057 6.07
Interest bearing deposits 609 28 4.60 896 56 6.25 1,469 112 7.62
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Total earning assets $1,684,178 $152,564 9.06% $1,632,532 $146,773 8.99% $1,508,540 $133,482 8.86%
Less:
Allowance for loan losses (19,338) (17,637) (15,336)
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1,664,840 1,614,895 1,493,204
NON-EARNING ASSETS
Cash and due from banks 53,772 54,120 50,846
Premises and equipment, net 45,868 46,460 43,725
Other assets 50,728 46,534 43,148
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Total assets $1,815,208 $1,762,009 $1,630,923
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INTEREST BEARING LIABILITIES
Deposits
Savings and demand deposits $ 396,362 $ 12,557 3.17% $ 422,158 $ 12,722 3.01% $ 386,956 $ 12,166 3.14%
Time deposits 874,818 49,633 5.67 861,566 47,854 5.55 804,884 44,507 5.53
Federal funds purchased and securities
sold under repurchase agreements 35,029 1,818 5.19 25,363 1,258 4.96 25,934 1,435 5.53
Other short-term borrowings 0 0 0.00 17 1 5.88 1,443 78 5.41
Advances from Federal Home
Loan Bank 106,572 6,224 5.84 90,666 5,356 5.91 71,917 4,506 6.27
Long-term debt 43,482 3,844 8.84 22,795 1,901 8.34 27,328 2,300 8.42
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Total interest bearing liabilities $1,456,263 $ 74,076 5.09% $1,422,565 $ 69,092 4.86% $1,318,462 $ 64,992 4.93%
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NONINTEREST BEARING LIABILITIES
Demand deposits 186,521 184,071 168,108
Other liabilities 17,571 16,448 13,573
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Total liabilities 1,660,355 1,623,084 1,500,143
Shareholders' equity 154,853 138,925 130,780
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Total liabilities and
shareholders' equity $1,815,208 $1,762,009 $1,630,923
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- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 78,488 $ 77,681 $ 68,490
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Net interest spread 3.97% 4.13% 3.93%
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Benefit of interest free funding 0.69% 0.63% 0.61%
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Net interest margin 4.66% 4.76% 4.54%
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(1)Interest includes fees on loans of $3,945, $4,289 and $3,203 in 1997, 1996 and 1995, 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 1997
and 1996 and also between 1996 and 1995.
Total Change Change Due to Total Change Change Due to
------------ --------------------- ------------ ---------------------
(in thousands) 1997/1996 Volume Rate 1996/1995 Volume Rate
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INTEREST INCOME
Loans $ 11,435 $ 13,119 $ (1,684) $ 17,859 $ 19,030 $ (1,171)
U. S. Treasury and federal agencies (4,269) (4,166) (103) (1,482) (1,482) 0
Tax exempt state and political subdivisions (486) (390) (96) (100) 197 (297)
Other securities (1,371) (1,419) 48 (356) (379) 23
Federal funds sold 510 526 (16) (2,574) (2,395) (179)
Interest bearing deposits (28) (15) (13) (56) (39) (17)
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Total interest income 5,791 7,655 (1,864) 13,291 14,932 (1,641)
INTEREST EXPENSE
Savings and demand deposits (165) (799) 634 556 1,075 (591)
Time deposits 1,778 743 1,035 3,347 3,146 201
Federal funds purchased and securities
sold under repurchase agreements 562 499 63 (177) (31) (146)
Other short-term borrowings (2) (1) (1) (77) (119) 42
Advances from Federal Home Loan Bank 868 930 (62) 850 1,120 (270)
Long-term debt 1,943 1,822 121 (399) (378) (21)
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Total interest expense 4,984 3,194 1,790 4,100 4,813 (713)
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Net interest income $ 807 $ 4,461 $ (3,654) $ 9,191 $ 10,119 $ (928)
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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, 1997 is as follows:
Estimated Maturity at December 31, 1997
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
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Available-for-sale
U. S. Treasury $ 6,073 7.85% $ 21,228 5.98% $ 0 0.00% $ 0 0.00% $ 27,301 6.40% $ 26,996
U. S. government agencies
and corporations 17,233 6.88 70,651 6.87 5,154 7.37 1,409 6.46 94,448 6.90 94,022
State and municipal obligations 15 7.57 0 0.00 3,224 7.24 1,958 7.62 5,197 7.38 5,055
Other securities 4,511 5.17 17,244 6.40 477 6.51 16,433 6.81 38,665 6.43 38,632
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Total $27,832 6.82% $109,123 6.63% $8,856 7.28% $19,800 6.86% $165,611 6.72% $164,704
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Total Fair
Within 1 year 1-5 years 5-10 years After 10 years Amortized Cost Value
(in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount
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Held-to-maturity
U. S. government agencies
and corporations $12,326 4.01% $ 38,456 6.06% $ 11,498 4.42% $ 0 0.00% $ 62,279 5.35% $ 60,349
State and municipal obligations 3,283 8.01 19,999 7.00 13,358 7.35 9,655 8.92 46,295 7.58 47,537
Other securities 0 0.00 7,357 5.88 0 0.00 0 0.00 7,357 5.88 7,264
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Total $15,609 4.85% $ 65,812 6.33% $ 24,856 6.00% $ 9,655 8.92% $115,931 6.27% $115,150
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Total Securities $43,441 6.11% $174,936 6.51% $ 33,712 6.33% $29,455 7.54% $281,542 6.54%
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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 shareholder's
equity of the Corporation at December 31, 1997.
SECURITIES
The book value of securities available-for-sale and securities held-to-
maturity as of December 31, 1997 and 1996 are presented in footnote 4.
The book value of securities at December 31, 1995 is presented below:
(in thousands) Available-for-sale Held-to-maturity
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U. S. Treasury and government agencies $ 81,122 $ 28,820
State and political subdivisions - 56,425
U. S. agency mortgage-backed pass through certificates 137,092 50,284
Collateralized mortgage obligations 25,448 13,200
Other debt securities 3,076 1,992
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Total debt securities 246,738 150,721
Equity securities 32,979 -
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Total securities $ 279,717 $ 150,721
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LOAN PORTFOLIO
December 31
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(in thousands) 1997 1996 1995 1994 1993
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Commercial:
Secured by real estate $ 310,092 $ 270,315 $ 258,541 $ 235,611 $ 210,514
Other 260,808 234,793 192,127 183,533 196,296
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Total commercial 570,900 505,108 450,668 419,144 406,810
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Real estate construction 85,825 79,069 51,539 45,308 34,241
Real estate mortgage 407,893 411,067 398,288 290,998 274,017
Consumer 361,927 310,582 208,662 143,085 128,995
Equipment lease financing 1,884 3,797 5,911 7,919 9,872
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Total loans $ 1,428,429 $ 1,309,623 $ 1,115,068 $ 906,454 $ 853,935
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Percent of total year-end loans
Commercial:
Secured by real estate 21.71% 20.64% 23.19% 25.99% 24.65%
Other 18.26 17.93 17.23 20.25 22.99
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Total commercial 39.97 38.57 40.42 46.24 47.64
Real estate construction 6.01 6.04 4.62 5.00 4.01
Real estate mortgage 28.56 31.39 35.72 32.10 32.09
Consumer 25.34 23.72 18.71 15.78 15.11
Equipment lease financing 0.13 0.29 0.53 0.87 1.16
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Total loans 100.00% 100.00% 100.00% 100.00% 100.00%
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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, 1997
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After one
Within but within After
(in thousands) one year five years five years Total
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Commercial, financial and agricultural $ 162,350 $ 192,183 $ 216,367 $ 570,900
Real estate- construction 28,216 31,611 25,998 85,825
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$ 190,566 $ 223,794 $ 242,365 $ 656,725
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Rate sensitivity
Predetermined rate $ 38,868 $ 87,538 $ 56,889 $ 183,295
Adjustable rate 151,698 136,256 185,476 473,430
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$ 190,566 $ 223,794 $ 242,365 $ 656,725
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NONPERFORMING ASSETS
December 31
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(in thousands) 1997 1996 1995 1994 1993
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Nonaccrual loans $12,058 $ 10,156 $ 9,433 $8,829 $ 11,186
Restructured loans 629 630 918 - -
90 days or past due and still accruing interest 8,863 5,800 3,947 3,401 3,637
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Total nonperforming loans 21,550 16,586 14,298 12,230 14,823
Foreclosed properties 1,949 1,059 1,927 4,320 3,635
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Total nonperforming assets $23,499 $17,645 $16,225 $16,550 $18,458
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Nonperforming assets to total loans
plus foreclosed properties 1.64% 1.35% 1.45% 1.83% 2.18%
Allowance to nonperforming loans 94.97 113.50 112.47 106.12 90.04
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
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December 31, 1997
Commercial loans-real estate secured $ 3,881 1.25% $ 629 0.20% $ 2,339 0.75% $ 310,092
Commercial loans- other 6,294 2.40 - - 878 0.33 262,692
Consumer loans- real estate secured 1,569 0.32 - - 3,857 0.78 493,718
Consumer loans- other 314 0.09 - - 1,789 0.49 361,927
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Total $12,058 0.84% $ 629 0.04% $ 8,863 0.62% $1,428,429
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December 31, 1996
Commercial loans- real estate secured $4,817 1.78% $ 409 0.15% $1,266 0.47% $ 270,315
Commercial loans- other 3,217 1.35% 221 0.09 1,398 0.59 238,590
Consumer loans- real estate secured 1,690 0.34% - - 2,225 0.45 490,136
Consumer loans- other 432 0.14% - - 911 0.29 310,582
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Total $10,156 0.78% $ 630 0.05% $5,800 0.44% $1,309,623
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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 1997, 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, 1997.
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) 1997 1996 1995 1994 1993
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Allowance for loan losses, beginning of year $ 18,825 $ 16,082 $ 12,978 $ 13,346 $ 13,736
Loans charged off:
Commercial, secured by real estate 676 378 1,278 1,442 1,538
Commercial, other 1,042 1,136 1,646 3,902 2,140
Real Estate Mortgage 695 880 514 407 598
Consumer loans 9,840 4,594 2,594 1,786 1,606
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Total charge-offs 12,253 6,988 6,032 7,537 5,882
Recoveries of loans previously charged off:
Commercial, secured by real estate 116 174 159 12 147
Commercial, other 454 609 331 395 333
Real Estate Mortgage 94 312 44 66 58
Consumer loans 2,653 1,351 740 630 512
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Total recoveries 3,317 2,446 1,274 1,103 1,050
Net charge-offs:
Commercial, secured by real estate 560 204 1,119 1,430 1,391
Commercial, other 588 527 1,315 3,507 1,807
Real Estate Mortgage 601 568 470 341 540
Consumer loans 7,187 3,243 1,854 1,156 1,094
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Total net charge-offs 8,936 4,542 4,758 6,434 4,832
Allowance of acquired banks 0 0 2,004 0 0
Allowance of sold bank (578) 0 0 0 0
Provisions charged against operations 11,154 7,285 5,858 6,066 4,442
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Balance, end of year $ 20,465 $ 18,825 $ 16,082 $ 12,978 $ 13,346
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Allocation of allowance, end of year
Commercial, secured by real estate $ 3,502 $ 3,304 $ 3,095 $ 3,649 $ 2,650
Commercial, other 2,945 2,870 2,300 2,349 1,921
Real Estate Construction 115 152 135 93 57
Real Estate Mortgage 546 790 1,044 905 1,659
Consumer 3,575 2,248 1,574 1,291 1,271
Equipment lease financing 21 46 71 108 91
Unallocated 9,761 9,414 7,863 4,583 5,697
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Balance, end of year $ 20,465 $ 18,825 $ 16,082 $ 12,978 $ 13,346
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Average loans outstanding, net of
unearned interest $1,350,471 $1,215,243 $1,021,637 $ 872,045 $849,202
Loans outstanding at end of year, net of
unearned interest $1,428,429 $1,309,623 $1,115,068 $ 906,454 $853,935
Net charge-offs to average loan type
Commercial, secured by real estate 0.20% 0.08% 0.39% 0.60% 0.59%
Commercial, other 0.23% 0.24% 0.66% 0.94% 0.96%
Real Estate Mortgage 0.12% 0.12% 0.13% 0.13% 0.18%
Consumer loans 2.22% 1.27% 1.02% 0.78% 0.62%
Total 0.66% 0.37% 0.47% 0.74% 0.57%
Other ratios
Allowance to net loans, end of year 1.43% 1.44% 1.44% 1.43% 1.56%
Provision for loan losses to average loans 0.83% 0.60% 0.57% 0.70% 0.82%
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) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
DEPOSITS:
Non-interest bearing deposits $ 186,521 $ 184,071 $ 168,108
NOW accounts 182,688 170,410 151,781
Money market deposits 75,835 94,653 82,733
Savings 137,839 157,094 152,442
Certificates of deposit GREATER THAN $100,000 253,372 265,005 242,081
Certificates of deposit LESS THAN $100,000
and other time deposits 621,447 596,560 562,803
- -----------------------------------------------------------------------------------------------
Total Deposits 1,457,702 1,467,793 1,359,948
OTHER BORROWED FUNDS:
Federal funds purchased
and securities sold under
repurchase agreements 35,029 25,363 25,934
Other short-term borrowings 0 17 1,443
Advances from Federal Home
Loan Bank 106,572 90,666 71,917
Long-term debt 43,782 22,795 27,328
- -----------------------------------------------------------------------------------------------
Total Other Borrowed Funds 185,383 138,841 126,622
- -----------------------------------------------------------------------------------------------
Total Deposits and Other
Borrowed Funds $ 1,643,085 $ 1,606,634 $ 1,486,570
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Maturities of time deposits of $100,000 or more outstanding at December
31, 1997 are summarized as follows:
Certificates Time
(in thousands) of Deposit Deposits Total
- -----------------------------------------------------------------------------------------------
3 months or less $ 70,246 $ 1,001 $ 71,247
Over 3 through 6 months 49,086 3,351 52,437
Over 6 through 12 months 72,589 4,431 77,020
Over 12 through 60 months 59,895 6,496 66,391
Over 60 months 927 0 927
- -----------------------------------------------------------------------------------------------
$ 252,743 $ 15,279 $ 268,022
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
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.
12
ITEM 2. PROPERTIES
The Corporation's and the Bank's main offices are located at 208 North
Mayo Trail, Pikeville, Kentucky, 41501 which is owned by the Bank.
The Bank is divided into nine operational regions: Pikeville Region,
Lexington Region, Whitesburg Region, Mount Sterling Region, Williamsburg
Region, Flemingsburg Region, Ashland Region, Versailles Region, and
Middlesboro Region.
The Bank presently has twelve branch offices in the Pikeville Region in
addition to its main office. The Bank owns six of these branch banking
offices and leases the remaining six branch offices including the in-store
branch located in a WalMart superstore.
The Lexington Region has four branch offices. Two of these branches
are in-store branches which are located in Winn Dixie supermarkets. The
Bank owns one branch office and leases the other three branch offices. At
this time there is another in-store branch under construction at a Stop
N Go convenience store which will also be leased.
The Whitesburg Region currently has six branch offices. The Bank owns
three of these branch offices and leases three branch offices, one of
which is leased under an obligation accounted for as a capital lease.
The Mount Sterling Region has three branch offices, one of which 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 Williamsburg Region has three branch offices. The Bank owns two of
these branches and leases one branch office.
The Flemingsburg Region has four branch offices. The Bank owns all of
these branch offices and also owns real property located in this Region
which is leased to outside parties.
The Ashland Region has five branch offices. The Bank owns three of
these branch offices and leases the remaining two. In the Ashland Region
there are also two other properties which are leased, the 16th Street
Properties which is sub-leased, and the Old Meade Station Branch property
from which The Bank also receives tenant income. In addition to these two
properties, The Bank receives income from office space leased to tenants
which is located in one of the branch offices as well as The Arcade which
adjoins the same branch office. A portion of the office space in The
Arcade is used for Bank premises.
The Versailles Region has two branch locations. The Bank owns one of
these branch offices and leases one branch office.
The Middlesboro Region has four branch locations. Of the four branch
offices, three are owned and one is leased by The Bank.
Community Trust Bank, FSB's main office is located in Campbellsville,
Kentucky. The Bank has a branch office in each of the following
locations: Campbellsville, Columbia, Greensburg, Edmonton, Somerset (2),
Lebanon, Jamestown, Frankfort, Winchester and Berea, Kentucky. Community
Trust Bank, FSB, owns all of its locations with the exception of the
Lending Annex located next to the main office, its supermarket branches
located in Somerset and Lebanon, and its WalMart in-store branches located
in Frankfort, Winchester and Berea. The building which is used by the
Community Trust Bank, FSB Somerset Branch contains additional office space
which is leased to outside parties.
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
13
office, Middlesboro Region's main office, Ashland Region's main office
and Community Trust Bank, FSB's main office.
See notes 7 and 14 to consolidated financial statements included herein
for the year ended December 31, 1997, for additional information relating
to commitments and amounts invested in premises and equipment. The
Corporation has $300,500 of investments in real property, all in other
real estate.
ITEM 3. LEGAL PROCEEDINGS
The Corporation's banking subsidiaries 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 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of the Corporation, 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; 68 Chairman of 1980 Chairman
Board, President of Board,
CEO & Director President & CEO
Brandt Mullins; 70 Vice Chairman 1980 Vice
of Board & Director Chairman
Jean R. Hale; 51 Executive Vice 1992 President &
President, CEO of Community
Secretary & Trust Bank, NA
Director
Richard M. Levy; 39 Executive Vice 1995 (2) Executive Vice
President, CFO President, CFO
& Treasurer & Treasurer
Ralph Weickel, 40 Executive Vice 1995 (3) Executive Vice
President, Sales President,
& Marketing Sales & Marketing
14
Ronald M. Holt; 50 Executive Vice 1996 (4) President and CEO
President, Trust of Trust Company
of Kentucky, NA
Mark Gooch; 39 Executive Vice 1997 (5) Executive Vice
President, Operations President,
Operations
John Shropshire, 49 Executive Vice 1997 (6) Executive Vice
President & Senior Lender President
& Senior Lender
(1) The ages listed for the Corporation's executive
officers are as of February 28, 1998.
(2) Mr. Levy resigned as Executive Vice President & CFO of the Corporation
effective February 2, 1998 to accept a position as Controller with
another financial institution.
(3) Mr. Weickel served as Vice President of the Corporation prior to
becoming an executive officer. Mr. Weickel served as Vice President,
Manager of Investments, for Boatmen's National Bank of Des Moines, NA,
from 1988 to 1994.
(4) 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.
(5) Mr. Gooch served as President and Chief Executive Officer of First
Security Bank & Trust Co., Whitesburg, Kentucky, a subsidiary of the
Corporation prior to consolidation on January 1, 1997,from 1993 to
1997.
(6) Mr. Shropshire served as President and Chief Executive Officer 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.
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 Humphrey Co., Inc.,
Atlanta, Georgia; Morgan, Keegan and Company, Memphis, Tennessee; J.J.B.
Hilliard, W.L. Lyons, Inc., Louisville, Kentucky; Bear, Stearns & Co.,
Inc., New York, New York; Herzog, Heine, Geduld, Inc., New York, New York;
and J.C. Bradford & Co., Louisville, Kentucky are primary market makers.
QUARTERLY FINANCIAL DATA
(in thousands except per share amounts)
Three Months Ended December 31 September 30 June 30 March 31
- --------------------------------------------------------------------------------------------------------
1997
Net interest income $ 18,608 $ 18,768 $ 19,428 $ 19,708
Net interest income, taxable equivalent basis 19,085 19,246 19,941 20,216
Provision for loan losses 3,636 4,069 1,731 1,718
Noninterest income 4,203 7,054 3,741 3,444
Noninterest expense 15,368 14,899 14,736 14,889
Net income 2,555 4,412 4,556 7,546
Per common share:
Basic earnings per share before extraordinary gain $ 0.25 $ 0.44 $ 0.45 $ 0.44
Basic earnings per share extraordinary gain 0.00 0.00 0.00 0.31
Basic earnings per share after extraordinary gain 0.25 0.44 0.45 0.75
Diluted earnings per share before extraordinary gain 0.25 0.44 0.45 0.44
Diluted earnings per share extraordinary gain 0.00 0.00 0.00 0.31
Diluted earnings per share after extraordinary gain 0.25 0.44 0.45 0.75
Dividends declared 0.20 0.18 0.18 0.18
Common stock price:
High $ 32.13 $ 28.50 $ 27.13 $ 25.11
Low 25.75 24.63 24.50 21.82
Last trade 31.13 26.25 26.75 23.30
Selected ratios:
Return on average assets, annualized 0.55% 0.99% 0.99% 1.68%
Return on average common equity, annualized 6.37% 11.05% 11.98% 20.45%
Net interest margin, annualized 4.45% 4.67% 4.68% 4.85%
1996
Net interest income $ 19,945 $ 19,123 $ 18,537 $ 17,751
Net interest income, taxable equivalent basis 20,490 19,703 19,141 18,347
Provision for loan losses 2,108 2,003 1,686 1,488
Noninterest income 3,822 3,696 3,662 3,259
Noninterest expense 14,427 13,700 13,639 13,477
Net income 4,949 4,906 4,737 4,203
Per common share:
Basic earnings per share before extraordinary gain $ 0.49 $ 0.49 $ 0.47 $ 0.42
Basic earnings per share extraordinary gain 0.00 0.00 0.00 0.00
Basic earnings per share after extraordinary gain 0.49 0.49 0.47 0.42
Diluted earnings per share before extraordinary gain 0.49 0.49 0.47 0.42
Diluted earnings per share extraordinary gain 0.00 0.00 0.00 0.00
Diluted earnings per share after extraordinary gain 0.49 0.49 0.47 0.42
Dividends declared 0.18 0.16 0.16 0.16
16
Common stock price:
High $ 23.64 $ 21.59 $ 21.59 $ 20.00
Low 18.41 18.86 18.18 16.82
Last trade 22.27 20.23 19.77 20.00
Selected ratios:
Return on average assets, annualized 1.10% 1.09% 1.09% 0.98%
Return on average common equity, annualized 13.69% 13.92% 13.98% 12.42%
Net interest margin, annualized 4.89% 4.73% 4.78% 4.62%
There were approximately 3,600 holders of outstanding common shares of
the Corporation at February 28, 1998.
DIVIDENDS
The annual dividend was increased from $0.66 per share to $0.74 per
share during 1997. 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 Corporations, see Note 18 to the
consolidated financial statements included herein for the year ended
December 31, 1997.
17
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data 1993-1997
- ---------------------------------
(in thousands except per share amounts)
Year Ended December 31 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Interest income $ 150,588 $ 144,447 $ 131,026 $ 106,560 $ 104,929
Interest expense 74,076 69,092 64,992 47,370 46,616
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 76,512 75,355 66,034 59,190 58,313
Provision for loan losses 11,154 7,285 5,858 6,066 4,442
Noninterest income 18,442 14,439 11,116 9,653 12,069
Noninterest expense 59,892 55,243 55,871 52,287 45,571
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary gain 23,908 27,266 15,421 10,490 20,369
Income taxes 7,924 8,471 4,608 2,278 5,533
Income before extraordinary gain 15,984 18,795 10,813 8,212 14,836
Extraordinary gain, net of tax 3,085 0 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 19,069 $ 18,795 $ 10,813 $ 8,212 $ 14,836
=============================================================================================================================
Per common share:
Earnings per share $ 1.90 $ 1.87 $ 1.10 $ 0.87 $ 1.69
Cash Dividends Declared - 0.74 0.66 0.60 0.57 0.51
As a percentage of net income 46.54% 35.29% 54.55% 65.52% 30.18%
Book value, end of year 15.70 14.41 13.33 12.34 12.22
Market price, end of year 31.13 22.27 17.50 23.86 26.66
Market value to book value, end of year 1.98x 1.55x 1.31x 1.93x 2.18x
Price/earnings ratio, end of year 19.6x 11.9x 15.9x 27.4x 15.8x
Cash dividend yield, end of year 2.38% 2.96% 3.43% 2.39% 1.91%
At year end:
Total assets $1,852,667 $1,815,660 $1,730,170 $1,499,434 $1,464,039
Long-term debt 53,463 19,136 27,873 24,944 35,277
Shareholders' equity 158,019 144,754 133,795 116,636 107,371
Averages:
Assets $1,815,208 $1,762,009 $1,630,922 $1,470,630 $1,415,441
Deposits 1,457,701 1,467,794 1,359,947 1,216,544 1,181,347
Earning assets 1,684,178 1,632,532 1,508,539 1,365,750 1,313,064
Loans 1,350,471 1,215,243 1,021,637 872,045 849,202
Shareholders' equity 154,853 138,925 130,780 116,165 102,445
Profitability ratios:
Return on average assets 1.05% 1.07% 0.66% 0.56% 1.05%
Return on average common equity 12.31% 13.53% 8.27% 7.07% 14.48%
Capital ratios:
Equity to assets, end of year 8.53% 7.97% 7.73% 7.78% 7.33%
Average equity to average assets 8.65% 7.88% 8.02% 7.90% 7.24%
Risk-based capital ratios
Leverage ratio 7.75% 7.05% 6.44% 7.19% 6.36%
Tier I Capital 9.97% 9.71% 10.24% 11.08% 10.10%
Total Capital 11.23% 10.96% 11.51% 12.33% 12.23%
Other significant ratios:
Allowance to net loans, end of year 1.43% 1.44% 1.44% 1.43% 1.56%
Allowance to nonperforming loans, end of year 94.97% 113.50% 119.99% 106.12% 90.04%
Nonperforming assets to loans and
foreclosed properties, end of year 1.64% 1.35% 1.37% 1.83% 2.18%
Net interest margin 4.66% 4.76% 4.54% 4.51% 4.60%
Other statistics:
Average common shares outstanding 10,059 10,038 9,839 9,445 8,781
Number of full-time equivalent employees,
end of year 795 792 757 655 699
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Corporation reported net earnings of $19.1 million for the year
ending December 31, 1997, compared to $18.8 million for 1996 and $10.8
million for 1995. Earnings for 1997 included an extraordinary gain (net
of tax) of $3.1 million received from the settlement with a former
software vendor. Earnings per share for 1997 were $1.90 compared to $1.87
per share for 1996 and $1.10 for 1995.
Earnings for 1997 increased 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 expansion of
new branches, advertising of the Corporation's new name, and a heavier
investment in training for the Corporation's employees. The noninterest
expense category which reflected the largest increase from the previous
year was the provision for loan loss, increasing from $7.3 million in 1996
to $11.2 million in 1997. Most of this increase was related to the
Corporation's funding of indirect consumer loans, which traditionally
experience higher yields and higher charge-offs than other loan. The
Corporation's return on average assets for 1997 was 1.05% as compared to
1.07% and 0.66% in 1996 and 1995, respectively, and the return on average
equity for 1997 was 12.31% as compared to 13.53% and 8.27% for 1996 and
1995, respectively.
Total assets as of December 31, 1997 were $1.85 billion, an increase
of 0.7% as compared to total assets of $1.84 billion as of December 31,
1996. The Corporation's total assets were impacted by the sale in July of
Commercial Bank, West Liberty, a wholly-owned subsidiary, which had
approximately $76 million in assets. Total loans as of December 31, 1997
were $1.43 billion compared to $1.31 billion as of December 31, 1996, an
increase of 9.2%. Total deposits decreased marginally from $1.48 billion
at December 31, 1996 to $1.47 billion at December 31, 1997.
In January 1997 shareholders were notified that they would receive a
10% stock dividend for shares held as of March 15, 1997. This stock
dividend, was paid in addition to the quarterly cash dividend, in April.
In June 1997 the Corporation successfully completed its first
securitization of approximately $80 million of indirect auto loans. The
Corporation retained the servicing rights on the sold loans, while using
the proceeds of the sale to fund loan growth.
ACQUISITIONS
While no acquisitions were completed during the year, in December
1997 the Corporation announced its intention to enter the West Virginia
market by acquiring seventeen branches from Bank One, West Virginia, NA
and Bank One, Wheeling-Stubenville, NA, subsidiaries of Banc One
Corporation ("Banc One"). Under the terms of the definitive agreement,
the Corporation will purchase seventeen branches that currently have
deposits totaling approximately $565 million. The purchase price will
include a 9.7% premium on the deposits plus book value for other assets
acquired, subject to adjustments as provided in the definitive agreement.
Concurrent with this agreement, the Corporation entered into an agreement
with Premier Financial Bancorp, Inc. of Georgetown, Kentucky to sell three
of the seventeen branches being acquired from Banc One. The three
branches being sold to Premier Financial Bancorp, Inc. have total deposits
of approximately $153 million.
During January 1998, the Corporation subsequently announced that it
had entered into a definitive agreement to sell seven additional branches
of the seventeen it will acquire from Banc One. Five of these seven
branches, having combined deposits of approximately $125 million, will be
purchased by Peoples Banking and Trust Company, a subsidiary of Peoples
Bancorp, Inc. of Marietta, Ohio. Two of the seven branches, having
combined deposits of approximately $67 million, will be purchased by
United National Bank, a subsidiary of United Bankshares, Inc. of
Parkersburg, West Virginia.
All of the above transactions are subject to regulatory approval.
Upon completion of these transactions, the Corporation will be retaining
seven of the original seventeen branches, totaling approximately $220
million in deposits. This acquisition will assist in the growth of the
Corporation outside of Kentucky and provide a new customer base for
generating additional revenues.
19
RESULTS OF OPERATIONS
1997 Compared to 1996
Net income for 1997 was $19.1 million compared to $18.8 million for
1996. Basic earnings per share for 1997 were $1.90 compared to $1.87 per
share for 1996. Earnings for 1997 include a $3.1 million, or $0.31 per
share, extraordinary gain (net of tax), a result of a settlement with a
former software vendor. Prior period earnings per share have been
restated for the 10% stock dividend paid in April 1997 and have also been
restated for the accounting under Statement of Financial Accounting
Standards No. 128, EARNINGS PER SHARE. See footnote 21 for further
explanation.
Net interest income for 1997 increased 1.5% as compared to 1996,
rising from $75.4 million in 1996 to $76.5 million in 1997. Noninterest
income increased 27.7% from $14.4 million in 1996 to $18.4 million in 1997
while noninterest expense increased 8.4% from $55.2 million in 1996 to
$59.9 million in 1997. (See separate discussions of noninterest income
and noninterest expense below.)
Return on average assets decreased from 1.07% in 1996 to 1.05% in
1997, including the extraordinary item, and return on average equity
decreased from 13.53% in 1996 to 12.31% in 1997.
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 1997
ended marginally higher at $76.5 million, up 1.5% from 1996. The
Corporation's net interest margin declined from 4.76% at the end of 1996
to 4.66% at the end of 1997, also a reflection of the change in
classification of certain loan-related fee income.
The Corporation's average earning assets increased from $1.63 billion
in 1996 to $1.68 billion in 1997. Average interest bearing liabilities
also increased during the period, from $1.42 billion in 1996 to $1.46
billion in 1997. Average interest bearing liabilities as a percentage of
average earning assets remained fairly stable, moving from 87.1% in 1996
to 86.47% in 1997.
The taxable equivalent yield on average interest earning assets
increased from 8.99% in 1996 to 9.06% in 1997. The cost of average
interest bearing liabilities likewise increased from 4.86% to 5.09% during
the same period. The yield on interest bearing assets has been favorably
impacted due to the Corporation's increase in consumer loans, which
traditionally experience higher yields than other loans.
Loans accounted for 77.1% of total assets as of December 31, 1997
compared to 71.2% as of December 31, 1996. Approximately $80 million of
indirect automobile loans were sold in 1997, which affected the
Corporation's ending loan balance for 1997. The servicing rights were
retained on these sold loans, and the resulting cash generated from this
loan sale was used for funding of new loans.
The Corporation invested in several new branches during 1997,
generating new loan and deposit growth. The interest costs associated
with opening new branches is generally higher than normal, in order to
gain market share. This factor, along with the traditional market
pressures from competitors, increased the Corporation's cost of interest
bearing liabilities from $71 million in 1996 to $74 million in 1997.
Provision for loan losses
The provision for loan losses increased from $7.3 million in 1996 to
$11.2 million in 1997. The majority of this increase was directly related
to the Corporation's investment in indirect consumer loans, which
generally experience higher yields and higher charge-offs than other
loans. In addition, the provision will increase during the normal course
of business as the respective loan portfolio balance increases, in order
to maintain the proper percentage of loan loss allowance to total loans.
Charge-offs, net of recoveries, as a percentage of average loans
outstanding increased from 0.37% in 1996 to 0.66% in 1997 as gross charge-
offs and recoveries both increased for 1997 in line with the increase in
average loans outstanding as compared to 1996. The allowance for loan
losses increased significantly, rising from $18.8 million at December 31,
1996 to $20.5 million at December 31, 1997. 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.
20
Noninterest income
Noninterest income increased 27.7% from $14.4 million in 1996 to
$18.4 million in 1997. Service charges on deposit-related products
generated $6.9 million for the year, an increase of $400 thousand over the
previous year. Trust income increased from $1.6 million in 1996 to $1.8
million in 1997 as the trust assets under management increased during the
year. Gains on sale of residential mortgage loans decreased from $1.7
million in 1996 to $1.1 million in 1997, due to a lower volume of loan
sales. Other noninterest income increased from $3.2 million in 1996 to
$6.9 million in 1997, largely due to the reclassification of loan-related
fees from interest income, and also due to an operating gain of $3 million
on the sale of the Corporation's subsidiary, Commercial Bank, West
Liberty, which was completed in July 1997. Securities gains and losses
were not a significant factor in either 1997 or 1996, as the Corporation
incurred net securities gains of $47,000 in 1997 and $88,000 in 1996.
Noninterest expense
Noninterest expense increased from $55.2 million in 1996 to $59.9
million in 1997. Salaries and employee benefits increased marginally from
$28.2 million in 1996 to $28.5 million in 1997. Occupancy expense
likewise increased from $4.0 million in 1996 to $4.2 million in 1997 and
equipment costs grew from $3.7 million in 1996 to $4.0 million in 1997.
Data processing costs increased from $2.6 million in 1996 to $3.1 million
in 1997 and stationery, printing and office supplies marginally increased
from $1.7 million in 1996 to $1.8 million in 1997. Marketing and
advertising increased from $2.1 million in 1996 to $2.9 million in 1997
while legal and professional fees increased from $2.6 million in 1996 to
$3.2 million in 1997. Repossession expense increased from $0.1 million in
1996 to $0.7 million in 1997. Meetings and training increased to $0.7
million in 1997 from $0.3 million in 1996. Telephone expense increased
from $1.2 million in 1996 to $1.4 million in 1997.
1996 Compared to 1995
Net income for 1996 was $18.8 million compared to $10.8 million for
1995. Basic earnings per share for 1996 was $1.87 per share compared to
$1.10 for 1995.
Net interest income grew from $66.0 million in 1995 to $75.4 million
in 1996. The increase in net interest income was due to a higher level of
average earning assets and rising interest rates during 1996. The yield
on interest earning assets increased and the cost of interest bearing
liabilities decreased during 1996 as compared to 1995. The taxable
equivalent yield on average interest earning assets increased from 8.86%
in 1995 to 8.99% in 1996. The cost of average interest bearing
liabilities decreased from 4.93% to 4.86% during the same period. As a
result of this the net interest margin increased from 4.54% in 1995 to
4.76% in 1996.
Noninterest income increased 29.73% from $11.1 million in 1995 to
$14.4 million in 1996. Service charges on deposit accounts, the largest
component, increased from $5.2 million in 1995 to $6.3 million in 1996.
During the same period, other noninterest income increased from $4.1
million to $4.7 million and trust income increased from $1.3 million to
$1.6 million. Net gains from the sale of residential mortgage loans
increased from $462 thousand in 1995 to $1.7 million in 1996, due to a
larger volume of loans sold. Securities gains and losses were minimal in
both periods, as the Corporation incurred net securities gains of $12
thousand in 1995 and $88 thousand in 1996.
Noninterest expense decreased from $55.9 million in 1995 to $55.2
million in 1996. A cost containment program implemented during 1996
successfully reduced many noninterest expenses. Salaries and benefits
increased from $24.6 million in 1995 to $28.2 million in 1996; occupancy
expense increased from $3.9 million to $4.0 million; data processing
decreased from $2.8 million to $2.6 million; stationery & printing costs
decreased from $1.9 million to $1.7 million and other taxes increased from
$2.0 million to $2.1 million.
DISCLOSURES REGARDING YEAR 2000
Many companies have undertaken major projects to address "Year 2000"
readiness, which relates to the recognition of dates beyond 1999. Many
software programs and hardware systems are in a two digit format which
will not process into the next century. The Corporation has already taken
steps necessary to ensure that the Corporation will be "Year 2000
compliant". Those steps include the following:
21
- - Assessment of the significant issues throughout the organization and
customer base, in order to be prepared for proper processing of
information.
- - Implementation of a Steering Committee and Project Team to oversee
the successful attainment of Year 2000 compliance.
- - Completion of an inventory of all hardware, software, systems, and
facilities to identify products which must be replaced, retired, or
renovated.
- - Contacting all respective third party providers of computer-related
services and have requested that they provide evidence to the
Corporation by June 1998 of their intention to be Year 2000
compliant.
- - Creation of a test environment to validate software, hardware, and
systems as new releases become available.
- - The Corporation's Board of Directors and Executive Management have
committed to providing the appropriate resources and workforce
necessary to ensure compliance with Year 2000.
Management anticipates that all internal hardware upgrades or
replacements will be completed by March 1999. The costs associated with
hardware and software upgrades will be approximately $450,000 in 1998 and
$1,400,000 in 1999. Management believes that these estimates are generous
and that these costs are not material to the financial condition of the
Corporation.
The Corporation's most significant exposure will be relying upon
third party vendors and processors and managing the relationship with
their product or service as the Corporation tests their Year 2000 Ready
products and services. The Corporation's primary third party data
processor, one of the country's leading suppliers of financial institution
data processing services, has already provided assurances that it will be
Year 2000 compliant prior to mid-year 1999.
As testing occurs throughout 1998, any vendors who cannot certify
their intentions to be Year 2000 compliant will be abandoned and new
vendors will be contacted. The Corporation anticipates completing Year
2000 issues by the middle of 1999.
LIQUIDITY
The Corporation's objectives are to ensure that funds are available
at the subsidiary banks to meet deposit withdrawals and credit demands
without unduly penalizing profitability, and to ensure that funding is
available for the parent Corporation to meet the 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 market regions 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
market regions also rely on the sale of securities under repurchase
agreements, securities available-for-sale and Federal Home Loan Bank
borrowings.
Deposits decreased marginally from $1.48 billion at December 31, 1996
to $1.47 billion at December 31, 1997. The sale of Commercial Bank, West
Liberty in July, 1997 reduced the Corporation's deposits by approximately
$70 million. By adjusting for this sale, the Corporation's deposits
increased by slightly over 4% from the previous year. Since loan demand
outpaced deposit growth, the Corporation increased its borrowings of
federal funds, Federal Home Loan Bank borrowings, and other short-term
borrowings. The Corporation's largest subsidiary, Community Trust Bank,
NA, also completed the securitization and sale of approximately $80
million of its auto loans during the second quarter of 1997 to provide
additional funding.
During April 1997 the Corporation raised $34.5 million of cash
through the issuance of 9.0% Cumulative Trust Preferred Securities. These
cash proceeds were applied to the Corporation's liquidity position to fund
new loans, new branches, and for future acquisitions. These securities
will mature in March, 2027.
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 $166 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
$111.0 million at December 31, 1996 to $101.8 million at December 31,
1997.
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 a $17.5 million credit
line available beyond 1998, in the form of a revolving line of credit (see
Note 9- 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 Corporation's static interest rate gap position as of December 31,
1997 is presented below:
INTEREST RATE SENSITIVITY ANALYSIS
December 31, 1997 0-3 3-12 Total Over
(in thousands) Months Months 1 Year 1 Year Total
- ---------------------------------------------------------------------------------------------------------
Interest earning assets
Securities and deposits $ 67,165 $ 58,686 $ 125,851 $ 156,484 $ 282,335
Loans 584,818 279,860 864,678 563,751 1,428,429
- ---------------------------------------------------------------------------------------------------------
Total earning assets $ 651,983 $ 338,546 $ 990,529 $ 720,235 $1,710,764
Interest bearing liabilities
NOW, money market and savings
accounts $ 257,083 $ 128,173 $ 385,256 $ - $ 385,256
Time deposits 234,608 412,088 646,696 239,697 886,393
Federal funds purchased
and other short-
term borrowings 48,670 9,129 57,799 150 57,949
Advances from FHLB 78,816 2,518 81,334 20,493 101,827
Long-term debt 1,482 66 1,548 51,915 53,463
- ---------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities $ 620,659 $ 551,974 $1,172,633 $ 312,255 $1,484,888
- ---------------------------------------------------------------------------------------------------------
Interest sensitivity gap
For the period $ 31,324 $(213,428) $ (182,104) $ 407,980 $ 225,876
Cumulative 31,324 (182,104) (182,104) 225,876 225,876
Cumulative as a percent
of earning assets 1.83% (10.64)% (10.64)% 13.20% 13.20%
CAPITAL RESOURCES
Total shareholders' equity increased from $144.8 million at December
31, 1996 to $158.0 million at December 31, 1997. The Corporation's
primary source of capital is retained earnings. Cash dividends were $0.74
per share for 1997 and $0.66 per share for 1996.
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 maintiain 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
23
10.0%. The Corporation's ratios as of December 31, 1997 were 7.75%, 9.97%
and 11.23%, respectively. The Corporation and all of its banking affiliates
met the criteria for "well capitalized" at December 31, 1997.
As of December 31, 1997, 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. At
December 31, 1997, the results of the Corporation's interest sensitivity
analysis indicated that net interest income would be relatively unchanged
by a 100 basis point increase or decrease in the federal funds rate
(assuming the change occurs evenly over the next year and that
corresponding changes in other market rates occur as forecasted). Net
interest income would be expected to increase 3.0% if rates increased 200
basis points and would be expected to decrease 3.6% if rates declined 200
basis points.
24
ITEM 8. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(in thousands except per share amounts)
December 31 1997 1996
- -----------------------------------------------------------------------------------------------
ASSETS
Cash and balances due from banks $ 61,404 $ 63,884
Federal funds sold - 24,365
Securities available-for-sale 165,611 229,952
Securities held-to-maturity (fair value of $115,150
and $150,315, respectively) 115,931 137,733
Loans 1,428,429 1,309,623
Allowance for loan losses (20,465) (18,825)
- -----------------------------------------------------------------------------------------------
Net loans 1,407,964 1,290,798
Premises and equipment, net 47,668 46,275
Excess of cost over net assets acquired (net of accumulated
amortization of $7,720 and $6,674, respectively) 17,746 19,822
Other assets 36,343 27,196
- -----------------------------------------------------------------------------------------------
Total Assets $ 1,852,667 $ 1,840,025
===============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 193,353 $ 200,222
Interest bearing 1,271,650 1,280,600
- -----------------------------------------------------------------------------------------------
Total deposits 1,465,003 1,480,822
Federal funds purchased and other short-term borrowings 57,949 68,950
Other liabilities 16,406 15,394
Advances from Federal Home Loan Bank 101,827 110,969
Long-term debt 53,463 19,136
- -----------------------------------------------------------------------------------------------
Total Liabilities 1,694,648 1,695,271
Shareholders' equity:
Preferred stock, 300,000 shares authorized and unissued
Common stock, $5 par value, shares authorized 25,000,000; shares
issued and outstanding, 1997 - 10,062,487; 1996 - 9,128,814 50,312 45,644
Capital surplus 28,067 27,915
Retained earnings 79,026 71,976
Net unrealized appreciation (depreciation) on securities available-
for-sale, net of tax 614 (781)
- -----------------------------------------------------------------------------------------------
Total Shareholders' Equity 158,019 144,754
- -----------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 1,852,667 $ 1,840,025
===============================================================================================
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 1997 1996 1995
- -----------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 130,256 $ 118,640 $ 100,686
Interest and dividends on securities -
Taxable 16,770 22,304 22,503
Tax exempt 2,541 2,964 4,668
Other 1,021 539 3,169
- -----------------------------------------------------------------------------------------------
Total interest income 150,588 144,447 131,026
INTEREST EXPENSE:
Interest on deposits 62,189 60,576 56,673
Interest on federal funds purchased and other
short-term borrowings 1,819 1,259 1,513
Interest on advances from Federal Home Loan Bank 6,224 5,356 4,506
Interest on long-term debt 3,844 1,901 2,300
- -----------------------------------------------------------------------------------------------
Total interest expense 74,076 69,092 64,992
- -----------------------------------------------------------------------------------------------
Net interest income 76,512 75,355 66,034
Provision for loan losses 11,154 7,285 5,858
- -----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 65,358 68,070 60,176
NONINTEREST INCOME:
Service charges on deposit accounts 6,866 6,282 5,224
Gains on sale of loans, net 1,108 1,735 462
Trust income 1,841 1,592 1,341
Securities gains (losses), net 47 88 12
Other 8,580 4,742 4,077
- -----------------------------------------------------------------------------------------------
Total noninterest income 18,442 14,439 11,116
NONINTEREST EXPENSE:
Salaries and employee benefits 28,528 28,229 24,639
Occupancy, net 4,204 3,992 3,934
Equipment 4,007 3,734 3,706
Data processing 3,074 2,644 2,808
Stationery, printing and office supplies 1,765 1,656 1,919
Taxes other than payroll, property and income 2,116 2,084 1,980
FDIC insurance 254 113 2,990
Other 15,944 12,791 13,895
- -----------------------------------------------------------------------------------------------
Total noninterest expense 59,892 55,243 55,871
- -----------------------------------------------------------------------------------------------
Income before income taxes and extraordinary gain 23,908 27,266 15,421
Income taxes 7,924 8,471 4,608
- -----------------------------------------------------------------------------------------------
Income before extraordinary gain 15,984 18,795 10,813
Extraordinary gain, net of tax 3,085 0 0
- -----------------------------------------------------------------------------------------------
Net income $ 19,069 $ 18,795 $ 10,813
===============================================================================================
Basic earnings per share before extraordinary gain $ 1.59 $ 1.87 $ 1.10
Basic earnings per share extraordinary gain 0.31 0.00 0.00
Basic earnings per share after extraordinary gain 1.90 1.87 1.10
Diluted earnings per share before extraordinary gain 1.58 1.87 1.10
Diluted earnings per share extraordinary gain 0.30 0.00 0.00
Diluted earnings per share after extraordinary gain 1.88 1.87 1.10
===============================================================================================
Average shares outstanding 10,059 10,038 9,839
===============================================================================================
The accompanying notes are an integral part of these statements.
26
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Net
Unrealized
Appreciation
(Depreciation)
on Securities
Common Capital Retained Available-for-Sale,
(in thousands except per share amounts) Stock Surplus Earnings Net of Tax Total
- ---------------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 $ 42,961 $ 20,788 $ 54,928 $ (2,041) $ 116,636
Net income for 1995 10,813 10,813
Cash dividends declared
($.66 per share) (5,807) (5,807)
Issuance of 29,574 shares
common stock 135 180 315
Issuance of 555,745 shares common
stock in conjunction with
acquisitions 2,526 6,915 9,441
Net change in unrealized
appreciation/depreciation
on securities available-for-
sale, net of tax of $944 2,397 2,397
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 45,622 27,883 59,934 356 133,795
Net income for 1996 18,795 18,795
Cash dividends declared
($.74 per share) (6,753) (6,753)
Issuance of 4,950 shares
common stock 22 32 54
Net change in unrealized
appreciation/(depreciation)
on securities available-for-sale,
net of tax of $739 (1,137) (1,137)
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 45,644 27,915 71,976 (781) 144,754
Net income for 1997 19,069 19,069
Cash dividends declared
($.74 per share) (7,446) (7,446)
Issuance of 19,788 shares
common stock 99 152 251
To record stock split of 10%
common stock 4,569 (4,573) (4)
Net change in unrealized
appreciation/(depreciation)
on securities available-for-sale,
net of tax of $906 1,395 1,395
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 50,312 $ 28,067 $ 79,026 $ 614 $ 158,019
===============================================================================================================
The accompanying notes are an integral part of these statements.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 (in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 19,069 $ 18,795 $ 10,813
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 4,777 4,877 3,874
Provision for loan and other real estate losses 11,179 7,364 6,273
Securities (gains) losses, net (119) (88) (12)
Gains on sale of loans, net (1,108) (1,735) (462)
Net amortization of securities premiums 364 548 532
Changes in:
Other assets (8,371) 674 (995)
Other liabilities 843 (1,837) 3,908
Loans held for sale 78,671 (68,641) (3,507)
- -----------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities 105,305 (40,043) 20,424
Cash flows from investing activities:
Payments to acquire net assets of subsidiaries - - (14,918)
Proceeds from:
Sale of securities available-for-sale 44,913 7,561 18,058
Maturity of securities available-for-sale 44,742 87,419 53,474
Maturity of securities held-to-maturity 16,125 13,930 32,709
Principal payments of mortgage-backed securities 6,508 3,433 135,518
Purchase of:
Securities available-for-sale (23,688) (47,224) (28,250)
Securities held-to-maturity - (4,669) (40,179)
Mortgage-backed securities (1,000) - (110,522)
Net change in loans (205,957) (130,074) (75,147)
Net change in premises and equipment (5,128) (3,130) (4,795)
Other - - 5,921
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities (123,485) (72,754) (28,131)
Cash flows from financing activities:
Net change in deposits (15,819) 13,379 50,175
Net change in federal funds purchased and
other short-term borrowings 13,364 24,202 (15,771)
Advances from Federal Home Loan Bank 120,012 61,364 1,595
Repayments of advances from Federal Home Loan Bank (129,154) (14,024) (16,783)
Proceeds from long-term debt 34,500 1,000 13,526
Payments on long-term debt (173) (9,737) (10,597)
Issuance and repurchase of common stock, net 247 54 315
Dividends paid (7,277) (6,569) (5,385)
- -----------------------------------------------------------------------------------------------
Net cash provided by financing activities 15,700 69,669 17,075
Net (decrease) increase in cash and cash equivalents (2,480) (43,128) 9,368
Cash and cash equivalents at beginning of year 63,884 107,012 80,098
Cash and cash equivalents of acquired banks - - 17,546
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 61,404 $ 63,884 $ 107,012
===============================================================================================
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.
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. The Corporation now 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 future loan losses based on management's best estimate of
loan losses, 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. For loss provisions and valuation allowances, the
amount provided is management's estimate of probable losses.
Impaired loans are measured at the present value of estimated future
cash flows of the loan using the loan rate or at the fair value of
collateral.
PREMISES AND EQUIPMENT - Premises, equipment and leasehold
improvements are stated at cost less accumulated depreciation and
amortization. Depreciation is computed primarily on the straight-line
method over the estimated useful lives or the shorter of the estimated
useful lives or terms of the related leases. Maintenance, repairs and
minor improvements are expensed as incurred.
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 years. Management reviews the earnings of the operations
acquired for evidence of impairment of the unamortized amount.
29
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 Corporation 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 still adjusts of 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 Corporation 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
While no acquisitions were completed during the year, in December
1997 the Corporation announced its intention to enter the West Virginia
market by acquiring seventeen branches from Bank One, West Virginia, NA
and Bank One, Wheeling-Stubenville, NA, subsidiaries of Banc One
Corporation ("Banc One"). Under the terms of the definitive agreement,
the Corporation will purchase seventeen branches that currently have
deposits totaling approximately $565 million. The purchase price will
include a 9.7% premium on the deposits plus approximately $4.5 million for
fixed assets, subject to adjustments as provided in the definitive
agreement. Concurrently with this agreement, the Corporation entered into
an agreement with Premier Financial Bancorp, Inc. of Georgetown, Kentucky
to sell three of the seventeen branches being acquired from Banc One. The
three branches being sold to Premier Financial Bancorp, Inc. have total
deposits of approximately $153 million.
During January 1998, the Corporation subsequently announced that it
had entered into a definitive agreement to sell seven additional branches
of the seventeen it will acquire from Banc One. Five of these seven
branches, having combined deposits of approximately $125 million, will be
purchased by Peoples Banking and Trust Company, a subsidiary of Peoples
Bancorp, Inc. of Marietta, Ohio. Two of the seven branches, having
combined deposits of approximately $67 million, will be purchased by
United National Bank, a subsidiary of United Bankshares, Inc. of
Parkerburg, West Virginia.
All of the above transactions are subject to regulatory approval.
Upon completion of these transactions, the Corporation will be retaining
seven of the original seventeen branches, totaling approximately $220
million in deposits. This acquisition will assist in growth of the
Corporation outside of Kentucky and provide a new customer base for
generating additional revenues.
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 $24.1 million at December 31, 1997, and $16.2 million at December 31,
1996. Cash paid during the years ended 1997, 1996 and 1995 for interest
was $73.6 million, $68.2 million and $64.2 million, respectively. Cash
paid during the same periods for income taxes was $11.6 million, $8.1
million and $2.9 million, respectively.
30
4. SECURITIES
Amortized cost and fair value of securities at December 31, 1997 are as
follows:
Gross Gross
Available-for-sale Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury and government agencies $ 35,275 $ 413 $ (125) $ 35,563
States and political subdivisions 5,055 144 (2) 5,197
U.S. agency mortgage-backed pass through certificates 85,743 716 (274) 86,185
Collateralized mortgage obligations 17,725 33 (87) 17,671
Other debt securities 2,196 - (28) 2,168
- ------------------------------------------------------------------------------------------------------------
Total debt securities 145,994 1,306 (516) 146,784
Marketable equity securities 18,711 116 0 18,827
- ------------------------------------------------------------------------------------------------------------
$ 164,705 $1,422 $ (516) $ 165,611
============================================================================================================
Gross Gross
Held-to-maturity Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury and government agencies $ 19,962 $ 25 $(1,917) $ 18,070
States and political subdivisions 46,296 1,245 (4) 47,537
U.S. agency mortgage-backed pass through certificates 42,316 138 (175) 42,279
Collateralized mortgage obligations 7,357 0 (93) 7,264
- ------------------------------------------------------------------------------------------------------------
$ 115,931 $1,408 $(2,189) $ 115,150
============================================================================================================
Amortized cost and fair value of securities at December 31, 1996 are as
follows:
Gross Gross
Available-for-sale Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury and government agencies $ 49,541 $ 449 $ (183) $ 49,807
States and political subdivisions 0 0 0 0
U. S. agency mortgage-backed pass through certificates 76,440 525 (675) 76,290
Collateralized mortgage obligations 66,136 326 (760) 65,702
Other debt securities 2,393 6 (80) 2,313
- ------------------------------------------------------------------------------------------------------------
Total debt securities 194,510 1,300 (1,698) 194,112
Marketable equity securities 36,423 10 (593) 35,840
- ------------------------------------------------------------------------------------------------------------
$ 230,933 $1,310 $(2,291) $ 229,952
============================================================================================================
Gross Gross
Held-to-maturity Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury and government agencies $ 23,841 $ 48 $(1,342) $ 22,547
States and political subdivisions 50,380 784 (714) 50,450
U.S. agency mortgage-backed pass through certificates 48,172 100 (980) 47,292
Collateralized mortgage obligations 15,340 13 (259) 15,094
- ------------------------------------------------------------------------------------------------------------
$ 137,733 $ 945 $(3,295) $ 135,383
============================================================================================================
31
The amortized cost and fair value of securities at December 31, 1997,
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 $ 13,296 $ 12,378 $ 11,858 $ 10,213
Due after one through five years 21,993 23,201 19,888 21,766
Due after five through ten years 3,138 3,224 24,857 23,400
Due after ten years 1,903 1,958 9,655 10,228
Mortgage-backed pass through certificates
and collateralized mortgage obligations 103,468 103,855 49,673 49,543
Other securities 2,196 2,168 - -
- --------------------------------------------------------------------------------------------------
145,994 146,784 115,931 115,150
Marketable equity securities 18,711 18,827 - -
- --------------------------------------------------------------------------------------------------
$164,705 $165,611 $115,931 $115,150
==================================================================================================
Gross gains of $552 thousand and gross losses of $504 thousand were
realized on sales and calls in 1997 and gross gains of $177 thousand and
gross losses of $89 thousand were realized on sales and calls in 1996.
During 1995, the Financial Accounting Standards Board issued
implementation guidance related to Statement No. 115 to allow for a one-
time transfer of securities from held-to-maturity to available-for-sale
without calling into question management's intent and ability to hold
securities to maturity. The Corporation transferred securities with an
amortized cost of $195.3 million from held-to-maturity to available-for-
sale to better manage its liquidity position as a result of this. This
transfer did not have a material impact on the Corporation's equity
position.
Securities in the amount of $174 million and $145 million at December
31, 1997 and 1996, 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) 1997 1996
- --------------------------------------------------------------------------------
Commercial, secured by real estate $ 310,092 $ 270,315
Commercial, other 260,808 234,793
Real estate - commercial construction 76,131 67,267
Real estate - residential construction 9,694 11,802
Real estate - consumer mortgage 407,893 411,067
Consumer 361,927 310,582
Equipment lease financing 1,884 3,797
- -------------------------------------------------------------------------------
$ 1,428,429 $ 1,309,623
===============================================================================
Included in loan balances are loans held for sale in the amount of $0.9
million and $78.4 million at December 31, 1997 and December 31, 1996,
respectively. The amount of loans on a non-accruing income status was
$12.1 million and $10.2 million at December 31, 1997 and 1996,
respectively. Additional interest which would have been recorded during
1997, 1996 and 1995 if such loans had been accruing interest was
approximately $1.3 million, $0.8 million, and $1.1 million, respectively.
In the ordinary course of business, the Corporation's banking
subsidiaries have made loans at prevailing interest rates and terms to
directors and executive officers of the Corporation or its banking
subsidiaries, including their associates (as defined by the Securities and
Exchange Commission). Management believes such loans were made on
substantially the same terms, including interest rate and collateral, as
those prevailing at the same time for comparable transactions with other
persons. The aggregate amount such loans at January 1, 1997 was $ 29.0
million. During 1997,
32
activity with respect to these loans included new loans of $6.0 million,
repayments of $0.7 million, and a net increase of $12.5 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 $21.8 million
at December 31, 1997.
At December 31, 1997 and 1996, the recorded investment in impaired
loans was $11 million and $8.4 million, respectively. Included in these
amounts at December 31, 1997 and December 31, 1996, respectively are $2.4
million and $3.3 million of impaired loans for which specific reserves for
loan losses are carried in the amounts of $1.6 million and $893 thousand.
The average investment in impaired loans for 1997 and 1996 was $11.1
million and $8.8 million, respectively while interest income of $258
thousand and $305 thousand was recognized on cash payments of $258
thousand and $305 thousand.
6. ALLOWANCE FOR LOSSES
Activity in the allowance for loan losses is as follows:
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Balance, beginning of year $ 18,825 $ 16,082 $ 12,978
Balances of acquired banks - - 2,004
Provisions charged to operations 11,154 7,285 5,858
Recoveries 3,317 2,446 1,274
Charge-offs (12,253) (6,988) (6,032)
Allowance of sold bank (578) - -
- -------------------------------------------------------------------------------
Balance, end of year $ 20,465 $ 18,825 $ 16,082
===============================================================================
Activity in the allowance for other real estate losses is as follows:
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Balance, beginning of year $ 617 $ 624 $ 1,852
Provisions charged to operations 78 79 415
Charge-offs (19) (86) (1,643)
Allowance of sold bank (38) - -
- -------------------------------------------------------------------------------
Balance, end of year $ 638 $ 617 $ 624
===============================================================================
Other real estate owned by the Corporation, net of reserves, at
December 31, 1997 and 1996 was $2.7 million and $1.8 million,
respectively.
7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31 (in thousands) 1997 1996
- -------------------------------------------------------------------------------
Land and buildings $ 46,558 $ 45,477
Leasehold improvements 4,224 3,702
Furniture, fixtures and equipment 26,662 26,375
Construction in progress 2,416 315
- -------------------------------------------------------------------------------
$ 79,860 $ 75,869
Less accumulated depreciation and
amortization (32,192) (29,594)
- -------------------------------------------------------------------------------
$ 47,668 $ 46,275
===============================================================================
Depreciation and amortization of premises and equipment for 1997, 1996
and 1995 was $3.8 million, $3.7 million, and $3.4 million, respectively.
33
8. DEPOSITS
Interest expense on deposits is categorized as follows:
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------
Savings, NOW and money market accounts $ 12,557 $ 12,721 $ 12,167
Certificates of deposit of $100 thousand
or more 14,726 15,531 14,148
Other time deposits 34,906 32,324 30,358
- ---------------------------------------------------------------------------------
$ 62,189 $ 60,576 $ 56,673
=================================================================================
Time certificates of deposit outstanding in denominations of $100
thousand or more were $253 million and $262 million at December 31, 1997
and 1996, respectively.
9. LONG-TERM DEBT
Long-term debt is categorized as follows:
December 31 (in thousands) 1997 1996
- -------------------------------------------------------------------------------
Parent Company:
Six Year Senior Notes, 7.375% interest,
due January 1, 1999 $ 5,000 $ 5,000
Ten Year Senior Notes, 8.25% interest,
due January 1, 2003 12,230 12,230
Trust Preferred Securities 34,500 -
Subsidiaries:
Other 1,733 1,906
- -------------------------------------------------------------------------------
$ 53,463 $ 19,136
===============================================================================
The Six and 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, 1997,
and January 1, 1999, respectively, at prices 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.
There remains a revolving bank note with a maximum amount available of
$17.5 million. At no time in 1997 was there an outstanding balance.
34
10. ADVANCES FROM FEDERAL HOME LOAN BANK
The advances from the Federal Home Loan Bank are due for repayment as
follows:
December 31 (in thousands) 1997 1996
- ------------------------------------------------------
Due in one year or less $ 31,443 $ 5,896
Due in one to five years 64,892 89,455
Due in five to ten years 4,668 14,517
Due after ten years 824 1,101
- ------------------------------------------------------
$ 101,827 $ 110,969
======================================================
These advances generally require monthly principal payments and are
collateralized by Federal Home Loan Bank stock of $13.2 million and $166.2
million of certain first mortgage loans as of December 31, 1997. Fixed
rates advances total $24.0 million and have interest rates ranging from
1.00% to 7.05%. Variable rate advances total $78.0 million with rates
immediately adjustable based on LIBOR.
11. FEDERAL INCOME TAXES
The components of the provision for income taxes are as follows:
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
Currently payable $ 8,548 $ 8,027 $ 4,641
Deferred (624) 444 219
Increase in valuation allowance - - (252)
- ----------------------------------------------------------------------------
$ 7,924 $ 8,471 $ 4,608
============================================================================
The components of the net deferred tax asset as of December 31 are as
follows:
(in thousands) 1997 1996
- -------------------------------------------------------------------------------
Deferred Tax Assets
Allowance for loan losses $ 6,357 $ 5,783
Allowance for other real estate losses 291 216
Net unrealized depreciation on securities
available-for-sale - 312
Accrued expenses 320 320
Deferred compensation 212 207
Other 965 965
- -------------------------------------------------------------------------------
Total deferred tax assets $ 8,145 $ 7,803
Deferred Tax Liabilities
Depreciation $ (3,423) $ (3,569)
Net unrealized appreciation on securities
available-for-sale (329) -
FHLB stock dividends (1,275) (949)
Other (854) (854)
- -------------------------------------------------------------------------------
Total deferred tax liabilities $ (5,881) $ (5,372)
Valuation allowance (764) (948)
- -------------------------------------------------------------------------------
Net deferred tax asset $ 1,500 $ 1,483
===============================================================================
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) 1997 1996 1995
- ----------------------------------------------------------------
Tax at statutory rate $ 8,367 $ 9,543 $ 5,398
Tax-exempt interest (1,061) (1,295) (1,349)
Other, net 618 223 559
- ----------------------------------------------------------------
$ 7,924 $ 8,471 $ 4,608
================================================================
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 owned 579,285 shares of Corporation stock at
December 31, 1997. Substantially all shares owned by the ESOP were
allocated to employees' accounts at December 31, 1997. 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 ESOP expense above, for
1997, 1996 and 1995 was $1.3 million, $1.2 million, and $1.1 million,
respectively.
The Corporation maintains an incentive stock option plan covering key
employees. Approximately 495,000 shares have been authorized under the
plan, 148,182 of which were available at December 31, 1997 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 and related information for the
periods ended December 31, 1997, and December 31, 1996, is summarized as
follows:
December 31, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------
Outstanding at beginning of period 255,333 $19.92 74,874 $17.20
Granted 140,085 23.24 189,188 18.99
Exercised (23,032) 13.18 (4,950) 9.81
Forfeited/Expired (86,618) 20.39 (3,779) 23.14
- ------------------------------------------------------------------------------------------------
Outstanding at end of period 285,768 $23.59 255,333 $18.58
================================================================================================
Exercisable at end of period 37,918 $16.33 51,908 $14.42
The weighted-average fair value of options granted during the years
1996 and 1997 was $5.07 and $5.26 per share, respectively. Exercise
prices for options outstanding as of December 31, 1997 ranged from $9.70
to $22.27. The weighted-average remaining contractual life of these
options is 9.0 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 1997 and 1996, respectively: risk-free
interest rates of 5.50% and 6.75%; dividend yields of 2.70% and 3.27%;
volatility factors of the expected market price of the Corporation's
common stock of .209 and .230 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.
36
13. OPERATING LEASES
Certain premises and equipment are leased under operating leases.
Minimum rental payments are as follows:
(in thousands)
- -----------------------------------
1998 $1,177
1999 1,117
2000 998
2001 830
2002 748
Thereafter 3,650
- -----------------------------------
$8,520
===================================
Rental expense under operating leases was $0.9 million, $0.8 million,
and $1.2 million in 1997, 1996 and 1995, 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.
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 interest rate on the Corporation's long-term debt
is variable or approximates current market rates for similar instruments
and therefore the carrying amount approximates fair value.
Other Financial Instruments - The estimated fair value for other
financial instruments and off-balance sheet loan commitments approximates
cost at December 31, 1997 and 1996 and is not considered significant.
1997 1996
Estimated Estimated
Carrying Fair Carrying Fair
December 31 (in thousands) Amount Value Amount Value
- -------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 61,404 $ 61,404 $ 63,884 $ 63,884
Securities 281,542 280,761 367,685 365,335
Loans 1,428,429 1,452,692 1,309,623 1,323,615
Less: allowance for loan losses (20,465) (20,465) (18,825) (18,825)
- -------------------------------------------------------------------------------------------
$1,750,910 $1,774,392 $1,722,367 $1,734,009
===========================================================================================
Financial liabilities:
Deposits $1,465,003 $1,473,543 $1,480,822 $1,489,020
Short-term borrowings 57,949 47,719 44,584 44,584
Advances from Federal Home
Loan Bank 101,827 100,984 110,969 111,939
Long-term debt 53,463 53,463 19,136 19,136
- -------------------------------------------------------------------------------------------
$1,678,242 $1,675,709 $1,655,511 $1,664,679
===========================================================================================
37
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) 1997 1996
--------------------------------------------------------------
Standby letters of credit $ 14,822 $ 16,047
Commitments to extend credit 182,306 145,292
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, 1997 of $7.4 million have
interest rates ranging predominately from 6.4% to 18.0% and are for terms
up to 5 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, 1997. Collateral held varies but may
include accounts receivable, inventory, property and equipment and income-
producing properties.
16. CONCENTRATION OF CREDIT RISK
The Bank and the thrift grant commercial, residential, and consumer
related loans to customers primarily located in eastern and central
Kentucky. Although the Bank and the Thrift have diverse loan portfolios,
a certain portion of the debtor's ability to perform is somewhat dependent
upon the coal industry.
17. COMMITMENTS AND CONTINGENCIES
The Corporation and Bank, 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.
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 1998, approximately $1.7 million plus any 1998 net profits can be
paid by the Corporation's banking subsidiaries without prior regulatory
approval.
38
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, 1997, 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, 1997
Total Capital
(to Risk Weighted Assets) $191,733 13.69% $112,051 8.00% $140,063 10.00%
Tier I Capital
(to Risk Weighted Assets) 174,189 12.44% 56,025 4.00% 84,038 6.00%
Tier I Capital
(to Average Assets) 174,189 9.67% 72,800 4.00% 91,000 5.00%
AS OF DECEMBER 31, 1996
Total Capital
(to Risk Weighted Assets) $141,339 10.96% $103,152 8.00% $128,940 10.00%
Tier I Capital
(to Risk Weighted Assets) 125,188 9.71% 51,576 4.00% 77,364 6.00%
Tier I Capital
(to Average Assets) 125,188 7.05% 71,052 4.00% 88,815 5.00%
39
20. PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31 (in thousands) 1997 1996
- --------------------------------------------------------------------------------
ASSETS
Cash on deposit $ 42,814 $ 2,085
Securities available-for-sale 13,246 5,001
Investment in and advances to subsidiary banks 144,983 147,276
Excess of cost over net assets acquired (net of
accumulated amortization) 6,572 8,069
Other assets 5,001 6,205
- --------------------------------------------------------------------------------
Total Assets $ 212,616 $ 168,636
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 0 $ 2,531
Long-term debt 51,730 17,230
Other liabilities 2,867 4,120
- --------------------------------------------------------------------------------
Total liabilities 54,597 23,881
Shareholders' equity 158,019 144,755
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 212,616 $ 168,636
================================================================================
CONDENSED STATEMENTS OF INCOME
Year Ended December 31 (in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------
Income:
Dividends from subsidiary banks $ 21,747 $ 22,999 $ 21,038
Other income 4,073 8,358 3,771
- ------------------------------------------------------------------------------------
Total income 25,820 31,357 24,809
Expenses:
Interest expense 3,710 1,874 2,216
Amortization expense 462 474 467
Other expenses 1,354 12,519 10,206
- ------------------------------------------------------------------------------------
Total expenses 5,526 14,867 12,889
- ------------------------------------------------------------------------------------
Income before income taxes and equity
in undistributed income of subsidiaries 20,294 16,490 11,920
Income tax benefit (224) (2,415) (2,993)
- ------------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiaries 20,518 18,905 14,913
Equity in undistributed income
of subsidiaries (1,449) (110) (4,100)
- ------------------------------------------------------------------------------------
Net Income $ 19,069 $ 18,795 $ 10,813
====================================================================================
40
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31 (in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 19,069 $ 18,795 $ 10,813
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization, net 462 476 467
Equity in undistributed earnings of subsidiaries 1,449 110 4,100
Change in other assets and liabilities, net 6,816 (4,936) 1,282
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,796 14,445 16,662
Cash Flows From Investing Activities:
Change in securities available-for-sale (7,908) (481) (142)
Proceeds from sale of subsidiary 4,860 0 0
Investments in and advances to subsidiaries (8,959) (1,000) (14,918)
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities (12,007) (1,481) (15,060)
Cash Flows From Financing Activities:
Dividends paid (7,276) (6,569) (5,385)
Net proceeds from issuance of common stock 247 54 315
Net change in short-term borrowings (2,531) 0 422
Repayment of long-term debt 0 (8,700) (9,800)
Proceeds from long-term debt 34,500 1,000 13,500
- -----------------------------------------------------------------------------------------------
Net cash used in financing activities 24,940 (14,215) (948)
- -----------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents 40,729 (1,251) 654
Cash and cash equivalents at beginning of year 2,085 3,336 2,682
- -----------------------------------------------------------------------------------------------
Cash and Cash Equivalents At End of Year $ 42,814 $ 2,085 $ 3,336
===============================================================================================
41
21. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Year Ended December 31
1997 1996 1995
---------------------------------------
(In thousands, except per share data)
Numerator:
Net income before extraordinary gain $ 15,984 $ 18,795 $ 10,813
Extraordinary gain 3,085 - -
Net income after extraordinary gain $ 19,069 $ 18,795 $ 10,813
Denominator:
Basic earnings per share:
Weighted average shares 10,058,835 10,037,503 9,839,087
Diluted earnings per share:
Effect of dilutive securities - stock options 60,710 19,036 15,423
Adjusted weighted average shares 10,119,545 10,056,539 9,854,510
Earnings per share:
Basic earnings per share before
extraordinary gain $ 1.59 $ 1.87 $ 1.10
Basic earnings per share
extraordinary gain 0.31 - -
Basic earnings per share after
extraordinary gain 1.90 1.87 1.10
Diluted earnings per share before
extraordinary gain 1.58 1.87 1.10
Diluted earnings per share
extraordinary gain 0.30 - -
Diluted earnings per share after
extraordinary gain $ 1.88 $ 1.87 $ 1.10
42
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 irregularities may nonetheless occur.
Management believes that its system of internal accounting controls
provides reasonable assurance that errors or irregularities 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 structure and procedures over financial reporting using the
criteria described in "Internal Control-Integrated Framework" issued by
the Committee of Sponsoring Organization 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, 1997.
Burlin Coleman
Chairman, President and Chief Executive Officer
43
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, 1997 and 1996 and
the related consolidated statements of income, changes of shareholders'
equity, and cash flows for each of the two years in the period ended
December 31, 1997. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion
on these statements based on our audits.
We conducted our audit in accordance with general accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Community Trust Bancorp, Inc., and Subsidiaries at December
31, 1997 and 1996, and the consolidated results of their operations and
their cash flows for each of the two years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
Columbus, Ohio Ernst & Young LLP
January 15, 1998
44
Report of Independent Auditors
Board of Directors and Shareholders
Community Trust Bancorp, Inc.
Pikeville, Kentucky
We have audited the accompanying consolidated statements of income,
changes in shareholders' equity and cash flows of Community Trust Bancorp,
Inc. (formerly Pikeville National Corporation) for the year ended December
31, 1995. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the results of operations
and cash flows of Community Trust Bancorp, Inc. for the year ended
December 31, 1995, in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
South Bend, Indiana
January 13, 1996
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.
46
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
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).
21 List of subsidiaries.
27 Financial Data Schedule.
(b) Reports on Form 8-K required to be filed during the last
quarter of 1997
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 12, 1998 By: /s/ Burlin Coleman
----------------------------
Burlin Coleman
Chairman, President
Chief Executive 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,
President, Chief Executive Officer
March 6, 1998 Burlin Coleman and Director
---------------------------
Burlin Coleman
March 6, 1998 Brandt Mullins Vice Chairman & Director
---------------------------
Brandt Mullins
March 6, 1998 Jean R. Hale Secretary & Director
---------------------------
Jean R. Hale
March 6, 1998 Charles J. Baird Director
---------------------------
Charles J. Baird
March 6, 1998 Nick A. Cooley Director
---------------------------
Nick A. Cooley
March 6, 1998 William A. Graham, Jr. Director
---------------------------
William A. Graham, Jr.
March 6, 1998 M. Lynn Parrish Director
---------------------------
M. Lynn Parrish
March 6, 1998 E. M. Rogers Director
---------------------------
E. M. Rogers
March 6, 1998 Porter P. Welch Director
---------------------------
Porter P. Welch
49
COMMUNITY TRUST BANCORP, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit No.
- -----------
2.1 Agreement and plan of reorganization dated September 27, 1994 between
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.
21 List of subsidiaries.
50