<PAGE>
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, 1998
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, 1999 was $235,581,000. The number of shares
outstanding of the Registrant's Common Stock as of February 28, 1999 was
10,064,968. For the purpose of the foregoing calculation only, all directors
and executive officers of the Registrant have been deemed affiliates.
<PAGE>
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 27, 1999
<PAGE>
PART I
ITEM 1. BUSINESS
Community Trust Bancorp, Inc. (the "Corporation") is a bank holding
company registered with the Board of Governors of the Federal Reserve System
pursuant to section 5 (a) of the Bank Holding Company Act of 1956, as amended.
The Corporation was incorporated August 12, 1980, under the laws of the
Commonwealth of Kentucky for the purpose of becoming a bank holding company. On
July 1, 1981, pursuant to a Merger Agreement dated May 30, 1981, the merger of
Pikeville National Bank and Trust Company ("PNB") as a subsidiary of the
Corporation was consummated, whereby PNB became a wholly-owned subsidiary of the
Corporation through an exchange of one share of common stock of PNB for two
shares of common stock of the Corporation. Prior to the date the merger became
effective, the Corporation conducted no active business operations. Since the
merger, the business of the Corporation has been to act as a holding company for
affiliate financial institutions. The Corporation currently owns all the capital
stock of one commercial bank, one thrift and one trust company, serving small
and mid-sized communities in eastern, central, south central Kentucky, and West
Virginia. The commercial bank is Community Trust Bank, NA, Pikeville. The
Corporation's thrift is Community Trust Bank, FSB, Campbellsville. The trust
company, Trust Company of Kentucky, NA, Lexington, purchased the trust
operations of its subsidiary banks and has additional offices in Pikeville,
Ashland, Middlesboro and Louisville, Kentucky. The trust subsidiary commenced
business operations on January 1, 1994. At December 31, 1998, the Corporation
had total consolidated assets of $2.2 billion and total consolidated deposits of
$1.9 billion, making it one of the larger bank holding companies headquartered
in the Commonwealth of Kentucky.
Effective January 1, 1997, the Corporation changed its name from
Pikeville National Corporation to Community Trust Bancorp, Inc., changed the
name of its lead bank from Pikeville National Bank and Trust Company to
Community Trust Bank, National Association (the "Bank") and merged seven of its
other commercial bank subsidiaries into the Bank. The Corporation's thrift and
trust subsidiaries, Community Trust Bank, FSB and Trust Company of Kentucky, NA,
remain subsidiaries of the Corporation and will continue to operate as
independent entities.
On June 26, 1998 the Corporation's wholly owned subsidiary, Community
Trust Bank of West Virginia, NA, purchased seven Banc One Corporation branches
with deposits totalling $216 million. On December 31, 1998 Community Trust Bank
of West Virginia, NA merged into Community Trust Bank, NA. Also in 1998,
Community Trust Bank, NA purchased five branch offices from PNC Bank, NA with
deposits totalling $195 million.
The Corporation sold its subsidiary Commercial Bank, West Liberty,
Kentucky ("West Liberty") on July 1, 1997 for $10.2 million creating a gain on
sale of $3 million. West Liberty had $76 million in assets, constituting 4% of
the Corporation's total consolidated assets. Consistent with the Corporation's
strategic plan, the funds generated by the sale of West Liberty provided the
Corporation with the opportunity to expand existing markets and enter into new
markets through internal expansion and acquisitions.
Through its subsidiaries, the Corporation engages in a wide range of
commercial and personal banking activities, which include accepting time and
demand deposits; making secured and unsecured loans to corporations, individuals
and others; providing cash management services to corporate and individual
customers; issuing letters of credit; renting safe deposit boxes and providing
funds transfer services. The lending activities of the Corporation's
subsidiaries include making commercial, construction, mortgage and personal
loans. Also available are lease financing, lines of credit, revolving credits,
term loans and other specialized loans including asset-based financing. Various
corporate subsidiaries act as trustees of personal trusts, as executors of
estates, as trustees for employee benefit trusts, as registrars, transfer agents
and paying agents for bond and stock issues and as depositories for securities.
COMPETITION
The Corporation's subsidiaries face substantial competition for deposit,
credit and trust relationships, as well as other sources of funding in the
communities they serve. Competing providers include other national and state
banks, thrifts and trust companies, insurance companies, mortgage banking
operations, credit unions, finance companies,
3
<PAGE>
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.
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).
Laws and regulations are considered from time to time that could
significantly impact the Corporation's business, including proposals which, if
adopted, would result in fundamental changes in the financial services industry.
Recently, the Financial Services Act of 1999 was introduced in Congress. The
Financial Services Act of 1999 would, among other things, repeal the bank
holding company prohibitions on insurance underwriting, expand permissible
nonbanking activities for bank holding companies from those "closely related to
banking" to those that are "financial in nature" and repeal the prohibitions on
banks affiliating with securities firms. While the Corporation is unable to
predict whether any such laws or regulations will be adopted, the Corporation
believes that any such new laws or regulations are likely to lead to increased
consolidation and competition within the financial services industry.
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, 1998, the Corporation and its subsidiaries had 818
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 bank 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.
4
<PAGE>
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.
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
<PAGE>
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
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------------
Average Average Average Average
(in thousands) Balances Interest Rate Balances Interest Rate
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans, net of unearned (1) (2) (3) $ 1,468,777 $ 138,286 9.42% $ 1,350,471 $ 130,805 9.69%
Securities
U. S. Treasuries and agencies 201,267 11,883 5.90 211,706 13,372 6.32
State & political subdivisions (3) 51,452 3,894 7.57 52,653 4,082 7.75
Other securities 52,854 3,337 6.31 50,704 3,284 6.48
Federal funds sold 97,272 5,111 5.25 18,035 993 5.51
Interest bearing deposits 277 8 2.89 609 28 4.60
- ----------------------------------------------------------------------------------------------------------------
Total earning assets $ 1,871,899 $ 162,519 8.68% $ 1,684,178 $ 152,564 9.06%
Less:
ALLOWANCE FOR LOAN LOSSES (23,075) (19,338)
- ----------------------------------------------------------------------------------------------------------------
1,848,824 1,664,840
NON-EARNING ASSETS
Cash and due from banks 67,758 53,772
Premises and equipment, net 50,922 45,868
Other assets 71,176 50,728
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 2,038,680 $ 1,815,208
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Deposits
Savings and demand deposits $ 465,773 $ 15,369 3.30% $ 396,362 $ 12,557 3.17%
Time deposits 969,354 55,220 5.70 874,818 49,633 5.67
Federal funds purchased and securities
sold under repurchase agreements 42,180 2,132 5.05 35,029 1,818 5.19
Other short-term borrowings 0 0 0.00 0 0 0.00
Advances from Federal Home
Loan Bank 113,559 6,500 5.72 106,572 6,224 5.84
Long-term debt 53,395 4,765 8.92 43,482 3,844 8.84
- ----------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $ 1,644,261 $ 83,986 5.11% $ 1,456,263 $ 74,076 5.09%
- ----------------------------------------------------------------------------------------------------------------
NONINTEREST BEARING LIABILITIES
Demand deposits $ 215,674 $ 186,521
Other liabilities 16,056 17,571
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 1,875,991 1,660,355
Shareholders' equity 162,689 154,853
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 2,038,680 $ 1,815,208
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Net interest income $ 78,533 $ 78,488
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Net interest spread 3.57% 3.97%
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Benefit of interest free funding 0.64% 0.69%
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Net interest margin 4.21% 4.66%
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
1996
- ----------------------------------------------------------------------------
Average Average
(in thousands) Balances Interest Rate
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
EARNING ASSETS
Loans, net of unearned (1) (2) (3) $ 1,215,243 $ 119,370 9.82%
Securities
U. S. Treasuries and agencies 277,641 17,641 6.35
State & political subdivisions (3) 57,652 4,568 7.92
Other securities 72,610 4,655 6.41
Federal funds sold 8,490 483 5.69
Interest bearing deposits 896 56 6.25
- ----------------------------------------------------------------------------
Total earning assets $ 1,632,532 $ 146,773 8.99%
Less:
ALLOWANCE FOR LOAN LOSSES (17,637)
- ----------------------------------------------------------------------------
1,614,895
NON-EARNING ASSETS
Cash and due from banks 54,120
Premises and equipment, net 46,460
Other assets 46,534
- ----------------------------------------------------------------------------
Total assets $ 1,762,009
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Deposits
Savings and demand deposits $ 422,158 $ 12,722 3.01%
Time deposits 861,566 47,854 5.55
Federal funds purchased and securities
sold under repurchase agreements 25,363 1,258 4.96
Other short-term borrowings 17 1 5.88
Advances from Federal Home
Loan Bank 90,666 5,356 5.91
Long-term debt 22,795 1,901 8.34
- ----------------------------------------------------------------------------
Total interest bearing liabilities $ 1,422,565 $ 69,092 4.86%
- ----------------------------------------------------------------------------
NONINTEREST BEARING LIABILITIES
Demand deposits $ 184,071
Other liabilities 16,448
- ----------------------------------------------------------------------------
Total liabilities 1,623,084
Shareholders' equity 138,925
- ----------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 1,762,009
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Net interest income $ 77,681
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Net interest spread 4.13%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Benefit of interest free funding 0.63%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Net interest margin 4.76%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
(1) Interest includes fees on loans of $3,685, $3,945 and $4,289 in 1998, 1997
and 1996, 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
<PAGE>
NET INTEREST DIFFERENTIAL
The following table illustrates the approximate effect on net interest
differentials of volume and rate changes between 1998 and 1997 and also between
1997 and 1996.
<TABLE>
<CAPTION>
Total Change Change Due to Total Change Change Due To
------------ ------------------ ------------ -------------------
(in thousands) 1998/1997 Volume Rate 1997/1996 Volume Rate
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 7,481 $ 11,216 $ (3,734) $ 11,435 $ 13,119 $ (1,684)
U. S. Treasury and federal agencies (1,489) (641) (849) (4,269) (4,166) (103)
Tax exempt state and political subdivisions (188) (93) (96) (486) (390) (96)
Other securities 53 136 (85) (1,371) (1,419) 48
Federal funds sold 4,118 4,166 (47) 510 526 (16)
Interest bearing deposits (20) (12) (7) (28) (15) (13)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income 9,955 14,772 (4,818) 5,791 7,655 (1,864)
INTEREST EXPENSE
Savings and demand deposits 2,812 2,273 539 (165) (799) 634
Time deposits 5,587 5,385 203 1,778 743 1,035
Federal funds purchased and securities
sold under repurchase agreements 314 362 (48) 562 499 63
Other short-term borrowings 0 0 0 (2) (1) (1)
Advances from Federal Home Loan Bank 276 402 (126) 868 930 (62)
Long-term debt 921 884 36 1,943 1,822 121
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 9,910 9,306 604 4,984 3,194 1,790
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 45 $ 5,466 $ (5,422) $ 807 $ 4,461 $ (3,654)
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1998 is as follows:
<TABLE>
<CAPTION>
Estimated Maturity at December 31, 1998
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
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale
U. S. Treasury $ 22,038 5.53% $ 16,523 5.98% $ 0 0.00% $ 0 0.00% $ 38,561 5.68% $ 38,051
U. S. government agencies
and corporations 22,984 6.04 146,262 6.18 15,208 5.96 243 9.12 184,698 6.15 183,595
State and municipal obligations 0 0.00 722 6.74 9,024 6.74 8,030 6.62 17,776 0.00 17,517
Other securities 8,411 24.01 33,641 5.98 431 6.51 17,535 7.01 60,017 6.39 59,735
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 53,433 8.66% $ 197,148 6.12% $ 24,663 6.26% $ 25,808 6.91% $301,052 5.77% $298,898
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
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
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity
U. S. government agencies
and corporations $ 15,007 0.00% $ 21,365 4.74% $ 499 4.25% $ 0 0.00% $ 36,867 2.81% $ 35,269
State and municipal obligations 7,174 7.09 18,027 6.91 10,287 8.11 5,907 8.84 41,442 7.52 42,878
Other securities 894 5.97 4,151 6.03 0 0.00 0 0.00 5,050 6.02 5,037
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 23,075 2.44% $ 43,543 5.76% $ 10,786 7.93% $ 5,907 8.84% $ 83,359 5.34% $ 83,184
- -----------------------------------------------------------------------------------------------------------------------------------
Total Securities $ 76,508 6.78% $ 240,691 6.06% $35,449 6.77% $ 31,715 7.27% $384,411 5.68%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
The calculations of the weighted average interest rates for each maturity
category are based on yield weighted by the respective costs of the securities.
The weighted average rates on state and political subdivisions are computed on a
taxable equivalent basis using a 35% tax rate. For purposes of the above
presentation, maturities of mortgage-backed pass through certificates and
collateralized mortgage obligations are based on estimated maturities.
Excluding those holdings of the investment portfolio in U.S. Treasury
securities and other agencies of the U.S. Government, there were no securities
of any one issuer which exceeded 10% of the shareholders' equity of the
Corporation at December 31, 1998.
SECURITIES
The book value of securities available-for-sale and securities
held-to-maturity as of December 31, 1998 and 1997 are presented in footnote 4.
The book value of securities at December 31, 1996 is presented below:
<TABLE>
<CAPTION>
(in thousands) Available-for-sale Held-to-maturity
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
U. S. Treasury and government agencies $ 49,541 $ 23,841
State and political subdivisions - 50,380
U. S. agency mortgage-backed pass through certificates 76,440 48,172
Collateralized mortgage obligations 66,136 15,340
Other debt securities 2,393 -
- ----------------------------------------------------------------------------------------------------
Total debt securities 194,510 137,733
Equity securities 36,423 -
- ----------------------------------------------------------------------------------------------------
Total securities $ 230,933 $ 137,733
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
LOAN PORTFOLIO
<TABLE>
<CAPTION>
December 31
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial:
Secured by real estate $ 329,611 $ 310,092 $ 270,315 $ 258,541 $ 235,611
Other 279,406 260,808 234,793 192,127 183,533
- ----------------------------------------------------------------------------------------------------------------------
Total commercial 609,017 570,900 505,108 450,668 419,144
- ----------------------------------------------------------------------------------------------------------------------
Real estate construction 87,625 85,825 79,069 51,539 45,308
Real estate mortgage 399,035 407,893 411,067 398,288 290,998
Consumer 400,893 361,927 310,582 208,662 143,085
Equipment lease financing 5,816 1,884 3,797 5,911 7,919
- ----------------------------------------------------------------------------------------------------------------------
Total loans $ 1,502,386 $ 1,428,429 $ 1,309,623 $ 1,115,068 $ 906,454
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Percent of total year-end loans Commercial:
Secured by real estate 21.94% 21.71% 20.64% 23.19% 25.99%
Other 18.60 18.26 17.93 17.23 20.25
- ----------------------------------------------------------------------------------------------------------------------
Total commercial 40.54 39.97 38.57 40.42 46.24
Real estate construction 5.83 6.01 6.04 4.62 5.00
Real estate mortgage 26.56 28.56 31.39 35.72 32.10
Consumer 26.68 25.34 23.72 18.71 15.78
Equipment lease financing 0.39 0.13 0.29 0.53 0.87
- ----------------------------------------------------------------------------------------------------------------------
Total loans 100.00% 100.00% 100.00% 100.00% 100.00%
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The total loans above are net of unearned income.
8
<PAGE>
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).
<TABLE>
<CAPTION>
Maturity at December 31, 1998
- --------------------------------------------------------------------------------------------------------------
After one
Within but within After
(in thousands) one year five years five years total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 200,441 $ 181,274 $ 227,302 $ 609,017
Real estate- construction 39,249 18,817 29,559 87,625
- --------------------------------------------------------------------------------------------------------------
$ 239,690 $ 200,091 $ 256,861 $ 696,642
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Rate sensitivity
Predetermined rate $ 75,248 $ 83,457 $ 71,437 $ 230,142
Adjustable rate 164,442 116,634 185,424 466,500
- --------------------------------------------------------------------------------------------------------------
$ 239,690 $ 200,091 $ 256,861 $ 696,642
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
December 31
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $14,930 $ 12,058 $ 10,156 $9,433 $ 8,829
Restructured loans 202 629 630 918 -
90 days or past due and still accruing interest 5,635 8,863 5,800 3,947 3,401
- ---------------------------------------------------------------------------------------------------------------
Total nonperforming loans 20,767 21,550 16,586 14,298 12,230
Foreclosed properties 1,769 1,949 1,059 1,927 4,320
- ---------------------------------------------------------------------------------------------------------------
Total nonperforming assets $22,536 $23,499 $17,645 $16,225 $16,550
===============================================================================================================
Nonperforming assets to total loans
plus foreclosed properties 1.50% 1.64% 1.35% 1.45% 1.83%
Allowance to nonperforming loans 125.63 94.97 113.50 112.47 106.12
</TABLE>
Nonaccrual, past due and restructured loans
<TABLE>
<CAPTION>
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
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998
Commercial loans-real estate secured $ 5,294 1.61% $ 202 0.06% $ 680 0.21% $ 329,611
Commercial loans- other 4,458 1.56 - - 708 0.25 285,222
Consumer loans- real estate secured 4,771 0.98 - - 2,077 0.43 486,660
Consumer loans- other 407 0.10 - - 2,170 0.54 400,893
- ------------------------------------------------------------------------------------------------------------------------------------
Total $14,930 0.99% $ 202 0.01% $5,635 0.38% $1,502,386
====================================================================================================================================
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
- ------------------------------------------------------------------------------------------------------------------------------------
Total $12,058 0.84% $ 629 0.04% $8,863 0.62% $1,428,429
====================================================================================================================================
</TABLE>
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
<PAGE>
In 1998, gross interest income that would have been recorded on
nonaccrual loans had the loans been current in accordance with their original
terms amounted to $1.5 million. Interest income actually recorded and included
in net income for the period was $0.3 million, leaving $1.2 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, 1998.
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
<PAGE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning of year $ 20,465 $ 18,825 $ 16,082 $ 12,978 $ 13,346
Loans charged off:
Commercial, secured by real estate 844 676 378 1,278 1,442
Commercial, other 1,496 1,042 1,136 1,646 3,902
Real Estate Mortgage 872 695 880 514 407
Consumer loans 12,603 9,840 4,594 2,594 1,786
- ----------------------------------------------------------------------------------------------------------------
Total charge-offs 15,815 12,253 6,988 6,032 7,537
Recoveries of loans previously charged off:
Commercial, secured by real estate 158 116 174 159 12
Commercial, other 248 454 609 331 395
Real Estate Mortgage 99 94 312 44 66
Consumer loans 3,860 2,653 1,351 740 630
- ----------------------------------------------------------------------------------------------------------------
Total recoveries 4,365 3,317 2,446 1,274 1,103
Net charge-offs:
Commercial, secured by real estate 686 560 204 1,119 1,430
Commercial, other 1,248 588 527 1,315 3,507
Real Estate Mortgage 773 601 568 470 341
Consumer loans 8,743 7,187 3,243 1,854 1,156
- ----------------------------------------------------------------------------------------------------------------
Total net charge-offs 11,450 8,936 4,542 4,758 6,434
Allowance of acquired banks 1,066 - - 2,004 -
Allowance of sold bank - (578) - - -
Provisions charged against operations 16,008 11,154 7,285 5,858 6,066
- ----------------------------------------------------------------------------------------------------------------
Balance, end of year $ 26,089 $ 20,465 $ 18,825 $ 16,082 $ 12,978
================================================================================================================
Allocation of allowance, end of year
Commercial, secured by real estate $ 2,777 $ 3,502 $ 3,304 $ 3,095 $ 3,649
Commercial, other 2,354 2,945 2,870 2,300 2,349
Real Estate Construction 87 115 152 135 93
Real Estate Mortgage 396 546 790 1,044 905
Consumer 10,234 3,575 2,248 1,574 1,291
Equipment lease financing 49 21 46 71 108
UNALLOCATED 10,192 9,761 9,414 7,863 4,583
- ----------------------------------------------------------------------------------------------------------------
Balance, end of year $ 26,089 $ 20,465 $ 18,825 $ 16,082 $ 12,978
================================================================================================================
Average loans outstanding, net of
unearned interest $1,468,776 $1,350,471 $1,215,243 $1,021,637 $872,045
Loans outstanding at end of year, net of
unearned interest $1,502,386 $1,428,429 $1,309,623 $1,115,068 $906,454
Net charge-offs to average loan type
Commercial, secured by real estate 0.22% 0.20% 0.08% 0.39% 0.60%
Commercial, other 0.46% 0.23% 0.24% 0.66% 0.94%
Real Estate Mortgage 0.16% 0.12% 0.12% 0.13% 0.13%
Consumer loans 2.25% 2.22% 1.27% 1.02% 0.78%
Total 0.78% 0.66% 0.37% 0.47% 0.74%
Other ratios
Allowance to net loans, end of year 1.74% 1.43% 1.44% 1.44% 1.43%
Provision for loan losses to average loans 1.09% 0.83% 0.60% 0.57% 0.70%
</TABLE>
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.
12
<PAGE>
AVERAGE DEPOSITS AND OTHER BORROWED FUNDS
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEPOSITS:
Non-interest bearing deposits $ 215,674 $ 186,521 $ 184,071
NOW accounts 218,908 182,688 170,410
Money market deposits 105,328 75,835 94,653
Savings 141,537 137,839 157,094
Certificates of deposit > $100,000 272,645 253,372 265,005
Certificates of deposit < $100,000
and other time deposits 696,708 621,447 596,560
- ----------------------------------------------------------------------------------------------------
Total Deposits 1,650,800 1,457,702 1,467,793
OTHER BORROWED FUNDS:
Federal funds purchased
and securities sold under
repurchase agreements 42,180 35,029 25,363
Other short-term borrowings - - 17
Advances from Federal Home
Loan Bank 113,559 106,572 90,666
Long-term debt 53,395 43,782 22,795
- ----------------------------------------------------------------------------------------------------
Total Other Borrowed Funds 209,134 185,383 138,841
- ----------------------------------------------------------------------------------------------------
Total Deposits and Other
Borrowed Funds $ 1,859,934 $ 1,643,085 $ 1,606,634
====================================================================================================
</TABLE>
Maturities of time deposits of $100,000 or more outstanding at December 31, 1998
are summarized as follows:
<TABLE>
<CAPTION>
Certificates Time
(in thousands) of deposit Deposits Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3 months or less $ 74,564 $ 2,076 $ 76,640
Over 3 through 6 months 63,142 4,002 67,144
Over 6 through 12 months 100,173 7,699 107,872
Over 12 through 60 months 52,123 10,091 62,214
Over 60 months 1,026 - 1,026
- ----------------------------------------------------------------------------------------------------
$ 291,028 $ 23,868 $ 314,896
====================================================================================================
</TABLE>
SHORT-TERM BORROWINGS
The Corporation did not have any category of short-term borrowings for
which the average balance outstanding during the reported periods was 30% or
more of shareholders' equity at the end of the reported periods.
ITEM 2. PROPERTIES
The Corporation's and the Bank's main offices are located at 208 North
Mayo Trail, Pikeville, Kentucky, 41501 which is owned by the Bank.
The Bank is divided into fifteen operational regions: Pikeville Region,
Lexington Region, Whitesburg Region, Mount Sterling Region, Williamsburg Region,
Flemingsburg Region, Ashland Region, Versailles Region, Middlesboro Region,
Harrodsburg Region, Winchester Region, Richmond Region, Williamson Region,
Summersville Region and Hamlin 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 six branch offices. Four of these branches are
in-store branches which are located in Winn Dixie supermarkets and in WalMart.
The Bank owns one branch office and leases the other five branch offices.
12
<PAGE>
The Whitesburg Region currently has five branch offices. The Bank owns
three of these branch offices and leases two branch offices, one of which is
leased under an obligation accounted for as a capital lease.
The 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 three branch locations. The Bank owns one of
these branch offices and leases two branch offices including the in-store branch
located in a WalMart site.
The Middlesboro Region has four branch locations. Of the four branch
offices, three are owned and one is leased by The Bank.
The Harrodsburg Region has one branch office. The Bank owns the one branch
office.
The Winchester Region has three branch locations. The Bank owns one of the
branch locations and leases two branch locations, one of which is the in-store
branch located in a WalMart site.
The Richmond Region has two branch locations. The Bank owns both of the
branch locations.
The Williamson Region has two branch locations. The Bank owns both of the
branch locations.
The Summersville Region has one branch office. The Bank owns the one
branch office.
The Hamlin Region has four branch locations. The Bank owns three branch
offices and leases one.
Community Trust Bank, FSB's (CTBFSB) main office is located in
Campbellsville, Kentucky. CTBFSB has a branch office in each of the following
locations: Campbellsville, Columbia, Greensburg, Edmonton, Somerset (2), Lebanon
and Jamestown, Kentucky. Community Trust Bank, FSB, owns all of its locations
with the exception of the Lending Annex located next to the main office, and its
supermarket branches located in Somerset and Lebanon. 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 office,
Middlesboro Region's main office, Ashland Region's main office and Community
Trust Bank, FSB's main office.
13
<PAGE>
See notes 7 and 13 to consolidated financial statements included herein
for the year ended December 31, 1998, 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 Banks and certain officers are named defendants in legal actions
arising from normal business activities. Management, after consultation with
legal counsel, believes these actions are without merit or that the ultimate
liability, if any, resulting from them will not materially affect the
Corporation's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through
solicitation of proxies or otherwise, during the fourth quarter of 1998.
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.
<TABLE>
<CAPTION>
POSITIONS AND DATE FIRST
OFFICES BECAME DIRECTOR PRESENT
CURRENTLY OR EXECUTIVE PRINCIPAL
NAME AND AGE (1) HELD OFFICER OCCUPATION
- ---------------- ---- ------- ----------
<S> <C> <C> <C>
Burlin Coleman; 69 Chairman of 1980 Chairman
Board, President, of Board,
CEO & Director President & CEO
Jean R. Hale; 52 Executive Vice 1992 President &
President , CEO of CTB, NA
Secretary &
Director
Ronald M. Holt; 51 Executive Vice 1996 (2) President and CEO
President of Trust Company
of Kentucky, NA
Mark Gooch; 40 Executive Vice 1997 (3) Executive Vice
President President
John Shropshire; 50 Executive Vice 1997 (4) Executive Vice
President President
William Hickman; 48 Executive Vice 1998 (5) Executive Vice
President President
</TABLE>
(1) The ages listed for the Corporation executive officers are as of
February 28, 1999.
14
<PAGE>
(2) Mr. Holt served as Executive Vice President and Trust Manager of Bank One
Kentucky Corporation from 1990 to 1995 at which time he joined the
Corporation.
(3) Mr. Gooch served as President and CEO of First Security Bank and Trust
Company, from 1993 to 1997 at which time First Security Bank and Trust
Company merged into Community Trust Bank, NA.
(4) Mr. Shropshire served as President and CEO of Bowling Green Bank & Trust
Co. from 1993 to 1995 at which time he became President and CEO of
Farmers-Deposit Bank, a subsidiary of the Corporation prior to
consolidation on January 1, 1997.
(5) Mr. Hickman served as legal counsel for the Corporation from 1980 to
1994. From 1994 till he rejoined the Corporation in December 1997 he
engaged in the practice of law in Pikeville, Kentucky.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Corporation's common stock is listed on The NASDAQ-Stock Market's
National Market under the symbol CTBI. Robinson Salomon Smith Barney, Atlanta,
Georgia; Morgan, Keegan and Company, Memphis, Tennessee; J.J.B. Hilliard, W.L.
Lyons, Inc., Louisville, Kentucky; Herzog, Heine, Geduld, Inc., New York, New
York; J.C. Bradford & Co., Louisville, Kentucky; and Keefe, Bruyette & Woods,
Inc., New York, New York are primary market makers.
QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands except per share amounts)
Three Months Ended December 31 September 30 June 30 March 31
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Net interest income $ 19,905 $ 19,312 $ 18,777 $ 18,590
Net interest income, taxable equivalent basis 20,433 19,809 19,232 19,058
Provision for loan losses 1,290 8,160 4,053 2,505
Noninterest income 4,897 4,716 5,818 4,035
Noninterest expense 16,348 17,457 14,304 14,056
Net income 4,862 704 4,241 4,164
Per common share:
Basic earnings per share before extraordinary gain $ 0.48 $ 0.07 $ 0.42 $ 0.41
Basic earnings per share extraordinary gain 0.00 0.00 0.00 0.00
Basic earnings per share after extraordinary gain 0.48 0.07 0.42 0.41
Diluted earnings per share before extraordinary gain 0.48 0.07 0.42 0.41
Diluted earnings per share extraordinary gain 0.00 0.00 0.00 0.00
Diluted earnings per share after extraordinary gain 0.48 0.07 0.42 0.41
Dividends declared 0.21 0.20 0.20 0.20
Common stock price:
High $ 26.50 $ 33.25 $ 33.69 $ 32.50
Low 21.25 23.00 29.25 28.50
Last trade 23.50 26.25 33.25 32.00
Selected ratios:
Return on average assets, annualized 0.85% 0.13% 0.90% 0.91%
Return on average common equity, annualized 11.77% 1.69% 10.52% 10.53%
Net interest margin, annualized 3.92% 4.02% 4.42% 4.50%
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
16
<PAGE>
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%
</TABLE>
There were approximately 3,600 holders of outstanding common shares of the
Corporation at February 28, 1998.
DIVIDENDS
The annual dividend was increased from $0.74 per share to $0.81 per
share during 1998. The Corporation has adopted a conservative policy of cash
dividends with periodic stock dividends. Dividends are typically paid on a
quarterly basis. Future dividends are subject to the discretion of the
Corporation's Board of Directors, cash needs, general business conditions,
dividends from the subsidiaries and applicable governmental regulations and
policies. For information concerning restrictions on dividends from subsidiary
banks to the Corporation, see Note 18 to the consolidated financial statements
included herein for the year ended December 31, 1998.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA 1994-1998
<TABLE>
<CAPTION>
(in thousands except per share amounts)
Year Ended December 31 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 160,570 $ 150,588 $ 144,447 $ 131,026 $ 106,560
Interest Expense 83,986 74,076 69,092 64,992 47,370
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 76,584 76,512 75,355 66,034 59,190
Provision for loan losses 16,008 11,154 7,285 5,858 6,066
Noninterest income 19,466 18,442 14,439 11,116 9,653
Noninterest Expense 62,166 59,892 55,243 55,871 52,287
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary gain 17,876 23,908 27,266 15,421 10,490
Income taxes 3,907 7,924 8,471 4,608 2,278
Income before extraordinary gain 13,969 15,984 18,795 10,813 8,212
Extraordinary gain, net of tax - 3,085 - - -
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 13,969 $ 19,069 $ 18,795 $ 10,813 $ 8,212
=======================================================================================================================
Per common share:
Earnings per share $ 1.39 $ 1.90 $ 1.87 $ 1.10 $ 0.87
Cash Dividends Declared - 0.81 0.74 0.66 0.60 0.57
As a percentage of net income 58.27% 46.54% 35.29% 54.55% 65.52%
Book value, end of year 16.37 15.70 14.41 13.33 12.34
Market price, end of year 23.50 31.13 22.27 17.50 23.86
Market value to book value, end of year 1.44x 1.98x 1.55x 1.31x 1.93x
Price/earnings ratio, end of year 16.9x 19.6x 11.9x 15.9x 27.4x
Cash dividend yield, end of year 3.45% 2.38% 2.96% 3.43% 2.39%
At year end:
Total assets $ 2,248,039 $ 1,852,667 $1,815,660 $ 1,730,170 $ 1,499,434
Long-term debt 53,823 53,463 19,136 27,873 24,944
Shareholders' equity 164,795 158,019 144,754 133,795 116,636
Averages:
Assets $ 2,038,680 $ 1,815,208 $1,762,009 $ 1,630,922 $ 1,470,630
Deposits 1,650,800 1,457,701 1,467,794 1,359,947 1,216,544
Earning assets 1,871,899 1,684,178 1,632,532 1,508,539 1,365,750
Loans 1,468,776 1,350,471 1,215,243 1,021,637 872,045
Shareholders' equity 162,689 154,853 138,925 130,780 116,165
Profitability ratios:
Return on average assets 0.69% 1.05% 1.07% 0.66% 0.56%
Return on average common equity 8.59% 12.31% 13.53% 8.27% 7.07%
Capital ratios:
Equity to assets, end of year 7.33% 8.53% 7.97% 7.73% 7.78%
Average equity to average assets 7.98% 8.65% 7.88% 8.02% 7.90%
Risk-based capital ratios
Leverage ratio 6.09% 7.75% 7.05% 6.44% 7.19%
Tier I Capital 8.50% 9.97% 9.71% 10.24% 11.08%
Total Capital 9.75% 11.23% 10.96% 11.51% 12.33%
Other significant ratios:
Allowance to net loans, end of year 1.74% 1.43% 1.44% 1.44% 1.43%
Allowance to nonperforming loans, end of year 130.31% 94.97% 113.50% 119.99% 106.12%
Nonperforming assets to loans and
foreclosed properties, end of year 1.33% 1.64% 1.35% 1.37% 1.83%
Net interest margin 4.21% 4.66% 4.76% 4.54% 4.51%
Other statistics:
Average common shares outstanding 10,063 10,059 10,038 9,839 9,445
Number of full-time equivalent employees,
end of year 818 795 792 757 655
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Community Trust Bancorp, Inc. ("the Company")reported net earnings of
$14.0 million for 1998, compared to $19.1 million for 1997 and $18.8 million for
1996. Earnings for 1997 include an extraordinary gain (net of tax) of $3.1
million received from a settlement with a former software vendor. Earnings per
share for 1998 were $1.39 compared to $1.90 per share for 1997 and $1.87 per
share for 1996.
Earnings for 1998 reflected increases in the categories of net interest
income and noninterest income, reflecting the Company's growth; noninterest
expense likewise increased from the previous year, fueled by the acquisition of
twelve new branches and certain special charges taken in September 1998. These
charges included $0.9 million primarily for the consolidation of operations and
staff reduction costs, $6.0 million for additional loan loss provision; and a
$1.3 million writedown of the retained interest from the 1997 securitization of
auto loans; net of a $1.5 million income tax accrual reversal. The loan loss
addition and retained interest writedown related to continuing problems in the
indirect auto financing operation and the decision to restructure the dealer
profile and resolve problem loans in a more aggressive manner. The Company's
return on average assets for 1998 was 0.69% as compared to 1.05% and 1.07% in
1997 and 1996, respectively, and the return on average equity for 1998 was
08.59% as compared to 12.31% and 13.53% for 1997 and 1996, respectively.
Total assets as of December 31, 1998 were $2.25 billion, an increase of
21.3% as compared to total assets of $1.85 billion on December 31, 1997. The
Company's total assets were impacted by the purchase of assets and the
assumption of certain liabilities of seven branches in West Virginia from Banc
One Corporation with loans totalling $10.0 million and deposits totalling $216.0
million and five branches from PNC Corporation with loans totalling $50.0
million and deposits totalling $195.0 million. Total loans as of December 31,
1998 were $1.50 billion compared to $1.43 billion as of December 31, 1997, an
increase of 5.2%. Total deposits increased 31.1% from $1.47 billion at December
31, 1997 to $1.92 billion at December 31, 1998 primarily as a result of the
assumption of liabilities relative to the branch acquisitions discussed above.
In January 1999 shareholders were notified that they would receive a
10% stock dividend for shares held as of March 15. This stock dividend will be
paid in April 1999, in addition to the quarterly cash dividend.
ACQUISITIONS
After making no acquisitions during the years 1996 and 1997, on
June 26, 1998 the Company resumed its strategic policy of diversification
through acquisition.
Community Trust Bancorp, Inc.'s wholly owned subsidiary, Community
Trust Bank of West Virginia, National Association (CTBWV, which was later merged
into the Company's lead bank, Community Trust Bank, NA), purchased sixteen Banc
One Corporation branches located in West Virginia with approximately $569
million in deposits on June 26, 1998. CTBWV paid a 9.7% premium on these
deposits. In concurrent transactions, CTBWV sold three of these branches with
deposits totaling $151 million to Premier Financial Bancorp, Inc. of Georgetown,
Kentucky receiving a 9.7% premium; four branches with deposits totaling $122
million to Peoples Banking and Trust Company of Marietta, Ohio receiving a 10.7%
premium; and two branches with deposits totaling $80 million to United
Bankshares of Charles Town, West Virginia receiving an 11.7% premium. The
additional 1% premium paid by Peoples Banking and Trust Company and the
additional 2% premium paid by United Bankshares was divided evenly between CTBWV
and Premier Financial Bancorp, Inc. as part of a prior agreement.
CTBWV retained seven branches with deposits totaling $216 million. The
funds used to capitalize the newly chartered CTBWV were provided from the sale
of Trust Preferred Securities that occurred in April 1997 and the sale of an
affiliate bank in July 1997. The facilities that were purchased will continue to
operate as banking offices. This acquisition will assist in growth of the
Company outside of Kentucky and provide a new customer base for generating
additional revenues.
On September 18, 1998 Community Trust Bancorp, Inc. and PNC Bank Corp.
announced that their banking subsidiaries, Community Trust Bank, N.A. and PNC
Bank, N.A., closed Community Trust Bank's purchase of five branches from PNC
with total deposits of approximately $195.0 million. These branches are located
in Richmond, Winchester and Harrodsburg, all located in central Kentucky.
19
<PAGE>
RESULTS OF OPERATIONS
1998 Compared to 1997
Net income for 1998 was $14.0 million compared to $19.1 million for
1997. Basic earnings per share for 1998 were $1.39 compared to $1.90 per share
for 1997. Earnings for 1997 include a $3.1 million or $0.31 per share
extraordinary gain (net of tax).
Net interest income for 1998 was relatively flat, increasing 0.1% as
compared to 1997, rising from $76.5 million in 1997 to $76.6 million in 1998.
Noninterest income increased 5.6% from $18.4 million in 1997 to $19.5 million
in 1998 while noninterest expense increased 3.8% from $59.9 million in 1997
to $62.2 million in 1997. (See separate discussions of noninterest income and
noninterest expense below.)
Return on average assets decreased from 1.05% including the
extraordinary item in 1997 to 0.69% in 1998, and return on average equity
decreased from 12.31% including the extraordinary item in 1997 to 8.59% in 1998.
Net Interest Income
During the third quarter of 1997 the Company began recording certain
loan fees as noninterest revenue which, until then, were classified as interest
income. As a result, net interest income for 1998 ended only marginally higher
at $76.6 million, up 0.1% from 1997. The Company's net interest margin declined
from 4.66% at the end of 1997 to 4.21% at the end of 1998, also a reflection of
the change in classification of certain loan-related fee income as well as the
effect of the decrease in the loans to deposits ratio from 92.6% at December 31,
1997 to 88.97% on December 31, 1998.
The Company's average earning assets increased from $1.68 billion in 1997
to $1.87 billion in 1998. Average interest bearing liabilities also increased
during the period, from $1.46 billion in 1997 to $1.64 billion in 1998. Average
interest bearing liabilities as a percentage of average earning assets remained
fairly stable, moving from 86.5% in 1997 to 87.8% in 1998.
The taxable equivalent yield on average earning assets decreased from
9.06% in 1997 to 8.68% in 1998. The cost of average interest bearing liabilities
remained relatively flat changing from 5.09% to 5.11% during the same period.
The yield on interest bearing assets has been impacted by the change in the
earning asset mix as well as by the decline in market rates. Loans accounted for
80.2% of all earning assets in 1997 while loans accounted for 78.5% of earning
assets in 1998. Loans accounted for 66.8% of total assets as of December 31,
1998 compared to 77.1% as of December 31, 1997.
The Company acquired twelve new branches during 1998 through a purchase
of assets and assumption of liabilities, affecting deposit growth and to a
lessor degree, loan growth. The two acquisitions resulted in a net cash flow to
the Company of approximately $345.0 million. The additional cash flow will be
available to fund new loan growth but was temporarily invested in financial
assets which are generally lower in yield than traditional loans until such time
as the Company uses it to fund new loans.
Provision for loan losses
The provision for loan losses increased from $11.2 million in 1997 to
$16.0 million in 1998. In September,1998, CTBI took a special charge of $7.3
million to clean up problems in the Indirect Loan Portfolio. Six million ($6.0
million) of this charge was booked as additional Provison for Loan Losses. The
indirect portfolio has been a continuing problem and this special provision will
allow management to expedite the resolution of this issue. The remaining $1.3
million was recorded as a write down of the retained interest in the 1997
securitization of indirect auto loans.
Charge-offs, net of recoveries, as a percentage of average loans
outstanding increased from 0.66 in 1997 to 0.78% in 1998 as gross charge-offs
and recoveries both increased for 1998. The allowance for loan losses increased
significantly, rising from $20.5 million at December 31, 1997 to $26.1 million
at December 31, 1998. The Company 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
<PAGE>
Noninterest income
Noninterest income increased 5.4% from $18.4 million in 1997 to $19.4
million in 1998. Service charges on deposit-related products generated $7.9
million for the year, an increase of $1.0 million over the previous year. This
was fueled by the acquisition of approximately $411 million in deposits during
1998 and by increasing our collection rates on service charges assessed. Trust
income increased from $1.8 million in 1997 to $2.0 million in 1998 as trust
assets under management increased during the year. Gains on sale of residential
mortgage loans increased from $1.1 million in 1997 to $2.1 million in 1998, due
to lower interest rates creating an increase in mortgage loan refinancings.
Other noninterest income decreased from $8.6 million in 1997 to $7.5 million in
1997, largely due to the gain of $3.1 million on the sale of the Company's
affiliate in West Liberty, which was completed in July 1997. Securities gains
and losses were not a significant factor in either 1998 or 1997, as the Company
incurred net securities gains of $12,000 in 1998 and $47,000 in 1997.
Noninterest expense
Noninterest expense increased from $59.9 million in 1997 to $62.2
million in 1998. This increase is primarily the result of additional operating
expenses from the 1998 acquistion of the twelve new branches discussed above.
Salaries and employee benefits increased from $28.5 million in 1997 to $28.7
million in 1998. Occupancy expense likewise increased from $4.2 million in 1997
to $4.5 million in 1998, while equipment costs were relatively flat at $4.0
million in 1998 and 1997. Data processing costs increased from $3.1 million in
1996 to $3.3 million in 1997 and stationery and printing costs remained at $1.8
million in 1998 and 1997. Taxes other than payroll, property and income, which
consists mainly of Kentucky Franchise taxes on the equity and deposits of the
affiliate banks, remained stationary at $2.1 million in both 1997 and 1998.
Other categories of noninterest expense increased as a result of the $1.3
million write down of the securitization retained interest discussed above.
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).
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 Company 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 Company'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 Company'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 86.5% 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 was favorably impacted due to the
Company'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 Company's ending
21
<PAGE>
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 the
funding of new loans.
The Company 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 Company's cost of interest bearing liabilities from $69.1 million in 1996 to
$74.1 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
Company'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 Company does not believe there are currently any
trends, events or uncertainties that are reasonably likely to have a material
effect on the volume of its non-performing loans.
Noninterest income
Noninterest income increased 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 $600 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 $7.5
million in 1996 to $8.6 million in 1997, largely due to the reclassification of
loan-related fees from interest income, and also due to an operating gain on the
sale of the Company's affiliate in West Liberty, which was completed in July
1997. Securities gains and losses were not a significant factor in either 1997
or 1996, as the Company 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 and printing
costs marginally increased from $1.7 million in 1996 to $1.8 million in 1997.
Taxes other than payroll, property and income, which consists mainly of Kentucky
Franchise taxes on the equity of the affiliate banks, remained stationary at
$2.1 million in both 1996 and 1997. Other categories of noninterest expense
increased as a result of branch expansion and the normal course of business.
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 properly
process into the next century. Community Trust Bancorp, Inc. has already taken
the steps to be "Year 2000 compliant". Community Trust Bancorp, Inc. realized
the importance of Year 2000 readiness early and committed the people and
resources to prepare its systems for January 1, 2000 and beyond. Achieving Year
2000 readiness is the company's top technology priority. Early on we formed both
a Year 2000 Executive Steering Committee consisting of our top executives and
top management, along with a Year 2000 Working Team made up of employees from
each key business area. These company leaders have taken responsibility to
identify and repair instances where dates may not process correctly within their
area of operation and to test for interdependencies with clients, vendors and
other corporate units. We have identified and contacted the bank's significant
vendors to inquire about their own Year 2000
22
<PAGE>
readiness plans, and are tracking and monitoring their progress. To ensure
that all areas are covered, these efforts are coordinated and tracked
centrally by the Year 2000 Working Team and reported to the Year 2000
Executive Steering Committee and the Board of Directors on a regular basis.
AWARENESS - (COMPLETE) - We defined the Year 2000 problem and allocated the
appropriate resources necessary to perform our compliance work. We
established both a Year 2000 Executive Steering Committee and a Year 2000
Working Team and developed an overall strategy for our Year 2000 efforts that
encompasses in-house systems, service bureaus for systems that are
outsourced, vendors, auditors, customers, and suppliers.
ASSESSMENT PHASE - (COMPLETE) - We then assessed the size and complexity of
the problem and the magnitude of the effort necessary to address our Year
2000 issues. This phase identified all hardware, software, networks,
automated teller machines, and other processing platforms, along with
customer and vendor interdependencies affected by the Year 2000 date change.
We have completed an inventory of systems in the bank, prioritized those that
were identified, and made detailed plans to renovate and test modifications
to make them Year 2000 ready. Our assessment went well beyond information
systems and included environmental systems that are dependent on embedded
microchips, such as security systems, elevators, and vaults.
RENOVATION PHASE -(IN-PROCESS) - Strategies were developed for the code
enhancements, hardware renovation or replacements, software upgrades and
vendor certification, along with other associated changes. This work was
prioritized based on the information gathered during our assessment phase. A
millennium test site was developed to assure that testing of our hardware and
software could occur outside of our working environment before being
implemented on our production systems. Plans were made for on-going
communications and monitoring of our key vendors, third-party service
providers, and software providers throughout our Year 2000 project timeline.
The Planned date of completion is March 31, 1999.
VALIDATION PHASE - (IN-PROCESS) - Testing, while inherent in each phase,
plays a key role in the success of our entire Year 2000 project. This phase
includes testing of all incremental changes to hardware and software
components, along with interfaces and connections with other systems. Also,
validation from both internal and external users is required. During this
phase, monitoring and communications with our service and software vendors
will be maintained to assure these vendor efforts are tracked and their
progress closely monitored. Our core third party data processor, one of the
country's leading suppliers of financial institution data processing
services, has already installed Year 2000 upgrades to their data processing
systems. We have performed substantial off site testing of this upgrade and
have scheduled on-site testing for the first quarter of 1999.
IMPLEMENTATION PHASE - (IN-PROCESS) -Our data processing Systems will be
certified as Year 2000 compliant. For any system failing certification, the
business effect will be clearly assessed and the organization's Year 2000
contingency plans will be implemented. This phase will also ensure that any
new systems or subsequent changes to verified systems are compliant with Year
2000 requirements. We have completed testing and determined that all of our
major systems are Year 2000 ready. We have also verified that our systems
will recognize that 2000 is a leap year, and continue to work closely with
our client and vendor companies to verify that they also are prepared for the
century date change. In addition, we have drafted our "Business Resumption
Plan" which provides contingency plans for all identified Year 2000 issues.
The costs associated with the Year 2000 project were $600,000 in 1998
and are estimated to be $886,000 in 1999. Because Community Trust Bancorp, Inc.
is utilizing internal staff for the management and implementation of its Year
2000 Compliance program, it does not expect to incur any material costs with
outside contractors. Subsequently, it does not anticipate a material increase in
operating costs to be incurred.
The cost of the Year 2000 project and the date by which the Company
believes it will be Year 2000 compliant are based upon management's current
best estimates, which were derived based upon numerous assumptions of future
events, including availability of certain resources, third party modification
plans and other factors. Actual results could vary from those anticipated.
23
<PAGE>
LIQUIDITY
The Company's objectives are to ensure that funds are available at the
subsidiary bank and thrift to meet deposit withdrawals and credit demands
without unduly penalizing profitability, and to ensure that funding is
available for the parent company to meet it's ongoing cash needs while
maximizing profitability. The Company continues to identify ways to provide
for liquidity on both a current and long-term basis. On a long-term basis,
the subsidiary bank and thrift rely mainly on core deposits, certificates of
deposit of $100,000 or more, repayment of principal and interest on loans and
securities, as well as federal funds sold and purchased. The subsidiary bank
and thrift also rely on the sale of securities under repurchase agreements,
securities available-for-sale and Federal Home Loan Bank borrowings.
Deposits increased 31% from $1.47 billion at December 31, 1997 to
$1.92 billion at December 31, 1998. This increase was in large part due to
the acquisition of approximately $411 million in deposits through the
acquisition of seven branches in West Virginia and twelve branches in central
Kentucky. Taking advantage of this increase in liquidity, the Company
decreased its borrowings of federal funds, Federal Home Loan Bank borrowings,
and other short-term borrowings while establishing a federal funds sold
position of $135 million.
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 Company is able to borrow
funds with several correspondent banks, to meet the Company's liquidity needs.
The Company owns $301 million of securities designated as
available-for-sale and valued at market which are available to meet liquidity
needs on a continuing basis. The Company 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 $101.8 million at
December 31, 1997 to $51.4 million at December 31, 1998.
The Company 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 Company has $12.0 million of a $17.5 million credit line available
beyond 1999, in the form of a revolving line of credit (see Note 9- Long-term
Debt). The Company'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 Company 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
Company uses the Sendero system to monitor its interest rate risk. The
Company desires an interest sensitivity gap of not more than fifteen percent
of total assets at the one year interval.
24
<PAGE>
The Company's static interest rate gap position as of December 31, 1998 is
presented below:
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
December 31, 1998 0-3 3-12 Total Over
(in thousands) Months Months 1 Year 1 Year Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest earning assets
Securities and deposits $ 109,917 $ 25,375 $ 135,292 $ 308,236 $ 443,528
LOANS 627,142 190,493 817,635 744,393 1,562,028
- -----------------------------------------------------------------------------------------------------------------
Total earning assets $ 737,059 $ 215,868 $ 952,927 $1,052,629 $2,005,556
Interest bearing liabilities
NOW, money market and savings
accounts $ - $ 176,908 $ 176,908 $ 380,212 $ 557,119
Time deposits 276,247 635,372 911,619 244,784 1,156,403
Federal funds purchased
and other short-
term borrowings 52,925 1,159 54,084 290 54,374
Advances from FHLB 932 2,662 3,594 47,790 51,384
LONG-TERM DEBT 5,529 120 5,649 48,174 53,824
- -----------------------------------------------------------------------------------------------------------------
Total interest bearing
LIABILITIES $ 335,633 $ 816,221 $ 1,151,854 $ 721,250 $1,873,104
- -----------------------------------------------------------------------------------------------------------------
Interest sensitivity gap
For the period $ 401,426 $ (600,353) $ (198,927) $ 331,379 $ 132,452
Cumulative 401,426 (198,927) (198,927) 132,452 132,452
Cumulative as a percent
of earning assets 20.02% (9.92)% (9.92)% (9.92)% 6.60%
</TABLE>
CAPITAL RESOURCES
Total shareholders' equity increased from $158.0 million at December
31, 1997 to $164.8 million at December 31, 1998. The primary source of
capital of the Company is retained earnings. Cash dividends were $0.81 per
share for 1998 and $0.74 per share for 1997.
Regulatory guidelines require bank holding companies, commercial
banks, and savings banks to maintain certain minimum ratios and define
companies as "well capitalized" that sufficiently exceed the minimum ratios.
The banking regulators may alter minimum capital requirements as a result of
revising their internal policies and their ratings of individual
institutions. To be "well capitalized" banks and bank holding companies must
maintain a Tier 1 leverage ratio of no less than 5.0%, a Tier 1 risk based
ratio of no less than 6.0% and a total risk based ratio of no less than
10.0%. The Company's ratios as of December 31, 1998 were 6.09%, 8.50% and
9.75%, respectively. Community Trust Bancorp, Inc. meets the definition of
"adequately capitalized" and all banking affiliates met the criteria for
"well capitalized" at December 31, 1998.
As of December 31, 1998, 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 Company's liquidity, capital resources, or operations.
25
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The majority of the Company's assets and liabilities are monetary in
nature. Therefore, the Company 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 Company's ability to react to changes in interest
rates. Management seeks to maintain an essentially balanced position between
interest sensitive assets and liabilities in order to protect against the
effects of wide interest rate fluctuations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company currently does not engage in any derivative or hedging
activity. Discussion and analysis of the Company's interest rate sensitivity
can be found on page 25.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands except per share amounts)
December 31 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and balances due from banks $ 98,133 $ 61,404
Federal funds sold 135,000 -
Securities available-for-sale 301,052 165,611
Securities held-to-maturity (fair value of $83,184
and $115,150, respectively) 83,359 115,931
Loans 1,502,386 1,428,429
Allowance for loan losses (26,089) (20,465)
- ------------------------------------------------------------------------------------------
Net loans 1,476,297 1,407,964
Premises and equipment, net 54,796 47,668
Excess of cost over net assets acquired (net of accumulated
amortization of $9,559 and $6,578, respectively) 62,497 17,746
Other assets 36,905 36,343
- -----------------------------------------------------------------------------------------
Total Assets $ 2,248,039 $ 1,852,667
=========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 281,302 $ 193,353
Interest bearing 1,639,839 1,271,650
- -----------------------------------------------------------------------------------------
Total deposits 1,921,141 1,465,003
Federal funds purchased and other short-term borrowings 43,405 57,949
Other liabilities 13,491 16,406
Advances from Federal Home Loan Bank 51,384 101,827
Long-term debt 53,823 53,463
- -----------------------------------------------------------------------------------------
Total Liabilities 2,083,244 1,694,648
Shareholders' equity:
Preferred stock, 300,000 shares authorized and unissued
Common stock, $5 par value, shares authorized 25,000,000;
shares issued and outstanding, 1998 - 10,064,968;
1997 - 10,062,487 50,325 50,312
Capital surplus 28,057 28,067
Retained earnings 84,827 79,026
Accumulated other comprehensive income, net of tax 1,586 614
- -----------------------------------------------------------------------------------------
Total Shareholders' Equity 164,795 158,019
- -----------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 2,248,039 $ 1,852,667
=========================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(in thousands except per share amounts)
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 137,700 $ 130,256 $ 118,640
Interest and dividends on securities -
Taxable 15,220 16,770 22,304
Tax exempt 2,531 2,541 2,964
Other 5,119 1,021 539
- ----------------------------------------------------------------------------------------------------
Total interest income 160,570 150,588 144,447
INTEREST EXPENSE:
Interest on deposits 70,589 62,189 60,576
Interest on federal funds purchased and other
short-term borrowings 2,132 1,819 1,259
Interest on advances from Federal Home Loan Bank 6,500 6,224 5,356
Interest on long-term debt 4,765 3,844 1,901
- ----------------------------------------------------------------------------------------------------
Total interest expense 83,986 74,076 69,092
- ----------------------------------------------------------------------------------------------------
Net interest income 76,584 76,512 75,355
Provision for loan losses 16,008 11,154 7,285
- ----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 60,576 65,358 68,070
NONINTEREST INCOME:
Service charges on deposit accounts 7,875 6,866 6,282
Gains on sale of loans, net 2,108 1,108 1,735
Trust income 2,000 1,841 1,592
Securities gains (losses), net 12 47 88
Other 7,471 8,580 4,742
- ----------------------------------------------------------------------------------------------------
Total noninterest income 19,466 18,442 14,439
NONINTEREST EXPENSE:
Salaries and employee benefits 28,749 28,528 28,229
Occupancy, net 4,529 4,204 3,992
Equipment 3,979 4,007 3,734
Data processing 3,251 3,074 2,644
Stationery, printing and office supplies 1,790 1,765 1,656
Taxes other than payroll, property and income 2,137 2,116 2,084
FDIC insurance 282 254 113
Other 17,449 15,944 12,791
- ----------------------------------------------------------------------------------------------------
Total noninterest expense 62,166 59,892 55,243
- ----------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary gain 17,876 23,908 27,266
Income taxes 3,907 7,924 8,471
- ----------------------------------------------------------------------------------------------------
Income before extraordinary gain 13,969 15,984 18,795
Extraordinary gain, net of tax - 3,085 -
- ----------------------------------------------------------------------------------------------------
Net income $ 13,969 $ 19,069 $ 18,795
====================================================================================================
Basic earnings per share before extraordinary gain $ 1.39 $ 1.59 $ 1.87
Basic earnings per share extraordinary gain 0.00 0.31 0.00
Basic earnings per share after extraordinary gain 1.39 1.90 1.87
Diluted earnings per share before extraordinary gain 1.38 1.58 1.87
Diluted earnings per share extraordinary gain 0.00 0.30 0.00
Diluted earnings per share after extraordinary gain 1.38 1.88 1.87
====================================================================================================
Average shares outstanding 10,063 10,059 10,038
====================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Common Capital Retained Income,
(in thousands except per share amounts) Stock Surplus Earnings Net of Tax Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 45,622 $ 27,883 $ 59,934 $ 356 $ 133,795
Cash dividends declared
($.74 per share) (6,753) (6,753)
Issuance of 4,950 shares
common stock 22 32 54
Net income for 1996 18,795 18,795
Other comprehensive income,
net of tax:
Net change in unrealized
appreciation/(depreciation)
on securities available-for-
sale, net of tax of $739 (1,137) (1,137)
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 17,658
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 45,644 27,915 71,976 (781) 144,754
Cash dividends declared
($.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 income for 1997 19,069 19,069
Other comprehensive income,
net of tax:
Net change in unrealized
appreciation/(depreciation)
on securities available-for-sale,
net of tax of $906 1,395 1,395
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 20,464
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 50,312 28,067 79,026 614 158,019
Cash dividends declared
($.81 per share) (8,168) (8,168)
Issuance of 5,228 shares
common stock 26 73 99
Purchase of stock (13) (83) (96)
Net income for 1998 13,969 13,969
Other comprehensive income,
net of tax:
Net change in unrealized
appreciation/(depreciation)
on securities available-for-sale,
NET OF TAX OF $632 972 972
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 14,941
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 50,325 $28,057 $ 84,827 $ 1,586 $ 164,795
================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31 (in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 13,969 $ 19,069 $ 18,795
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 5,747 4,777 4,877
Provision for loan and other real estate losses 16,123 11,179 7,364
Securities (gains) losses, net (12) (119) (88)
Gains on sale of loans, net (2,108) (1,108) (1,735)
Net amortization of securities premiums 381 364 548
Changes in:
Other assets 1,818 (8,371) 674
Other liabilities (5,817) 843 (1,837)
Loans held for sale (531) 78,671 (68,641)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by
operating activities 29,570 105,305 (40,043)
Cash flows from investing activities:
Proceeds from:
Sale of securities available-for-sale 2,426 44,913 7,561
Maturity of securities available-for-sale 59,078 44,742 87,419
Maturity of securities held-to-maturity 8,673 16,125 13,930
Principal payments of mortgage-backed securities 23,780 6,508 3,433
Purchase of:
Securities available-for-sale (195,322) (23,688) (47,224)
Securities held-to-maturity -- -- (4,669)
Mortgage-backed securities -- (1,000) --
Net increase in loans (18,194) (205,957) (130,074)
Net increase in premises and equipment (6,050) (5,128) (3,130)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (125,609) (123,485) (72,754)
Cash flows from financing activities:
Net change in deposits 46,799 (15,819) 13,379
Net change in federal funds purchased and
other short-term borrowings (17,492) 13,364 24,202
Advances from Federal Home Loan Bank 31,000 120,012 61,364
Repayments of advances from Federal Home Loan Bank (81,443) (129,154) (14,024)
Proceeds from long-term debt 5,500 34,500 1,000
Payments on long-term debt (5,140) (173) (9,737)
Issuance and repurchase of common stock, net 3 247 54
Dividends paid (8,118) (7,277) (6,569)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (28,891) 15,700 69,669
Net (decrease) increase in cash and cash equivalents (124,930) (2,480) (43,128)
Cash and cash equivalents at beginning of year 61,404 63,884 107,012
Cash and cash equivalents of acquired banks 296,659 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 233,133 $ 61,404 $ 63,884
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include
Community Trust Bancorp, Inc. (the "Corporation") and all its subsidiaries,
including its principal subsidiary, Community Trust Bank, NA. Material
intercompany transactions and accounts have been eliminated in consolidation. In
preparing financial statements, management must make certain estimates and
assumptions. These estimates and assumptions affect the amounts reported for
assets, liabilities, revenues and expenses, as well as affecting the disclosures
provided. Future results could differ from the current estimates.
NATURE OF OPERATIONS - Substantially all assets, liabilities, revenues,
and expenses are related to banking operations, including lending, investing of
funds and obtaining of deposits and other financing. All of the Corporation's
business offices and the majority of its business are located in eastern and
central Kentucky and central and western West Virginia.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on
hand, amounts due from banks, interest-bearing deposits in other financial
institutions and federal funds sold. Generally, federal funds are sold for one
day periods. 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 classifies securities into held-to-maturity or
available-for-sale categories. Held-to-maturity securities are those which the
Corporation has the positive intent and ability to hold to maturity, and are
reported at amortized cost. Available-for-sale securities are those the
Corporation may decide to sell if needed for liquidity, asset-liability
management or other reasons. Available-for-sale securities are reported at fair
value, with unrealized gains and losses included as a separate component of
shareholders' equity, net of tax. If declines in fair value are not temporary,
the carrying value of the securities is written down to fair value as a realized
loss.
Gains or losses on disposition of securities are computed by specific
identification for all securities except for shares in mutual funds, which are
computed by average cost. Interest and dividend income, adjusted by amortization
of purchase premium or discount, is included in earnings.
LOANS - Loans are reported at the carrying value of unpaid principal
reduced by unearned interest and an allowance for loan losses. Income is
recorded on the level yield basis. Interest accrual is discontinued when
management believes, after considering economic and business conditions and
collection efforts, that the borrower's financial condition is such that
collection of interest is doubtful. Any loan greater than 90 days past due must
be well secured and in the process of collection to continue accruing interest.
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
The provision for loan losses charged to operating expenses is an
amount sufficient to maintain the allowance for loan losses at an adequate level
to absorb inherent losses in the loan portfolio based on management's best
estimate, using such considerations as the current condition and volume of the
loan portfolio, economic conditions within the service area, review of specific
problem loans, and any other known factors influencing loan collectibility.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Capital leases are included in
premises and equipment, at the capitalized amount less accumulated amortization.
Depreciation and amortization are computed primarily using the straight
line method. Estimated useful lives range up to 40 years for buildings, 2 to 10
years for furniture and equipment, and up to the lease term for leasehold
improvements. Capitalized leased assets are amortized on a straight line basis
over the lives of the respective leases.
OTHER REAL ESTATE - Real estate acquired by foreclosure is carried at
the lower of the investment in the property or its fair value. An allowance for
estimated losses on real estate is provided by a charge to operating expense
when a subsequent decline in value occurs. Operating expenses of such
properties, net of related income, and gains and losses on disposition are
included in other expenses.
31
<PAGE>
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.
INCOME TAXES - Income tax expense is based on the taxes due on the
consolidated tax return plus deferred taxes based on the expected future tax
consequences of temporary differences between carrying amounts and tax bases of
assets and liabilities, using enacted tax rates.
EARNINGS PER SHARE - The Company adopted the Financial Accounting
Standards Board Statement No. 128, EARNINGS PER SHARE, effective December 31,
1997. Statement 128 replaces the previous calculations of "primary" and "fully
diluted" earnings per share (EPS) with "basic" and "diluted" EPS, respectively.
Basic EPS is calculated by dividing net income available to common
shareholders by the weighted-average number of common shares outstanding. The
most significant change from the former method is that the effect of stock
options is no longer included in the calculation of basic EPS.
Diluted EPS adjusts 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 Company has restated all prior period EPS calculations to conform
with Statement 128. (See Note 21 - Earnings Per Share.)
COMPREHENSIVE INCOME - The Company adopted the Financial Accounting
Standards Board Statement No. 130, REPORTING COMPREHENSIVE INCOME, effective
December 31, 1998. Under a new accounting standard, comprehensive income is now
reported for all periods. Comprehensive income includes both net income and
other comprehensive income. Other comprehensive includes the change in
unrealized gains and losses on securities available-for-sale. Available-for-sale
securities are reported at fair value, with unrealized gains and losses included
as a separate component of accumulated other comprehensive income.
SEGMENT INFORMATION - The Company adopted the Financial Accounting
Standards Board Statement No. 131, OPERATING SEGMENT DATA, effective December
31, 1998. This new accounting standard requires the segmentation of the
Company's financial reporting as it is reported internally by management. The
Company currently does not segment its financial statements for internal
purposes as it is deemed to currently operate within the same economic and
regulatory environment.
RECLASSIFICATION - Certain reclassifications have been made in the
prior year financial statements to conform to current classifications.
2. BUSINESS COMBINATIONS
On June 26, 1998 the Corporation chartered a new national association
to operate as a national bank in the state of West Virginia. This new wholly
owned subsidiary, Community Trust Bank of West Virginia, National Association
(CTBWV), purchased sixteen Banc One Corporation branches located in West
Virginia with approximately $569 million in deposits. CTBWV paid a 9.7% premium
on these deposits. In concurrent transactions, CTBWV sold three of these
branches with deposits totaling $151 million to Premier Financial Bancorp, Inc.
of Georgetown, Kentucky receiving a 9.7% premium; four branches with deposits
totaling $122 million to Peoples Banking and Trust Company of Marietta, Ohio
receiving a 10.7% premium; and two branches with deposits totaling $80 million
to United Bankshares of Charles Town, West Virginia receiving 11.7% premium. The
additional 1% premium paid by Peoples Banking and Trust Company and the
additional 2% premium paid by United Bankshares was divided evenly between CTBWV
and Premier Financial Bancorp, Inc. as part of a prior agreement.
CTBWV retained seven branches with deposits totaling $216 million. The
funds used to capitalize the newly chartered CTBWV were provided from the sale
of Trust Preferred Securities that occurred in April 1997 and the sale of an
affiliate bank in July 1997. The facilities that were purchased will continue to
operate as banking offices. This acquisition will assist in growth of the
Company outside of Kentucky and provide a new customer base for generating
additional revenues.
32
<PAGE>
On September 18, 1998 Community Trust Bank, NA purchased five branches
from PNC Bank, NA with total deposits of $195 million. These branches are
located in Richmond, Winchester and Harrodsburg, Kentucky.
On December 31, 1998 Community Trust Bank of West Virginia, NA merged
into Community Trust Bank, NA. This merger will allow the Corporation to become
operationally more efficient.
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 $39.1 million at
December 31, 1998, and $24.1 million at December 31, 1997. Cash paid during the
years ended 1998, 1997 and 1996 for interest was $83.6 million, $73.6 million
and $68.2 million, respectively. Cash paid during the same periods for income
taxes was $3.4 million, $11.6 million and $8.1 million, respectively.
4. SECURITIES
Amortized cost and fair value of securities at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Available-for-sale Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies $ 87,597 $ 885 $ (7) $ 88,475
States and political subdivisions 17,518 274 (16) 17,776
U.S. agency mortgage-backed pass through certificat 134,030 948 (194) 134,784
Collateralized mortgage obligations 37,140 183 (44) 37,279
Other debt securities 2,156 -- (6) 2,150
- --------------------------------------------------------------------------------------------------
Total debt securities 278,441 2,290 (267) 280,464
MArketable equity securities 20,457 131 0 20,588
- --------------------------------------------------------------------------------------------------
$ 298,898 $ 2,421 $ (267) $ 301,052
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Held-to-maturity Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies $ 12,984 $ 21 $ (1,639) $ 11,366
States and political subdivisions 41,442 1,436 -- 42,878
U.S. agency mortgage-backed pass through certificates 23,883 42 (22) 23,903
COLLATERALIZED MORTGAGE OBLIGATIONS 5,050 -- (13) 5,037
- ---------------------------------------------------------------------------------------------------
$ 83,359 $ 1,499 $ (1,674) $ 83,184
===================================================================================================
</TABLE>
Amortized cost and fair value of securities at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Available-for-sale Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 -- 18,827
- ---------------------------------------------------------------------------------------------------------------
$ 164,705 $ 1,422 $ (516) $ 165,611
===============================================================================================================
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Held-to-maturity Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 -- (93) 7,264
- -------------------------------------------------------------------------------------------------------
$ 115,931 $ 1,408 $ (2,189) $ 115,150
=======================================================================================================
</TABLE>
The amortized cost and fair value of securities at December 31, 1998, 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.
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
- ------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
(in thousands) Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 36,996 $ 37,065 $ 7,222 $ 7,291
Due after one through five years 51,303 52,132 30,512 29,392
Due after five through ten years 8,835 9,024 10,785 11,242
Due after ten years 7,981 8,030 5,907 6,319
Mortgage-backed pass through certificates
and collateralized mortgage obligations 171,170 172,063 28,933 28,940
OTHER SECURITIES 2,156 2,150 - -
- ------------------------------------------------------------------------------------------------------------------
278,441 280,464 83,359 83,184
Marketable equity securities 20,457 20,588 - -
- ------------------------------------------------------------------------------------------------------------------
$298,898 $ 301,052 $83,359 $ 83,184
==================================================================================================================
</TABLE>
Gross gains of $12 thousand were realized on sales and calls in 1998
and gross gains of $552 thousand and gross losses of $504 thousand were realized
on sales and calls in 1997.
Securities in the amount of $184 million and $174 million at December 31,
1998 and 1997, 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:
<TABLE>
<CAPTION>
December 31 (in thousands) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Commercial, secured by real estate $ 329,611 $ 310,092
Commercial, other 279,406 260,808
Real estate - commercial construction 74,023 76,131
Real estate - residential construction 13,602 9,694
Real estate - consumer mortgage 399,035 407,893
Consumer 400,893 361,927
Equipment lease financing 5,816 1,884
- --------------------------------------------------------------------------
$ 1,502,386 $ 1,428,429
==========================================================================
</TABLE>
Included in loan balances are loans held for sale in the amount of $3.6
million and $0.9 million at December 31, 1998 and December 31, 1997,
respectively. The amount of loans on a non-accruing income status was $14.9
million and $12.1 million at December 31, 1998 and 1997, respectively.
Additional interest which would have been recorded during 1998, 1997 and 1996 if
such loans had been accruing interest was approximately $1.5 million, $1.3
million, and $0.8 million, respectively.
34
<PAGE>
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, 1998 was $ 21.8 million. During 1998, activity with respect to these
loans included new loans of $6.1 million, repayments of $1.6 million, and a net
increase of $6.2 million due to changes in the status of executive officers and
directors. As a result of these activities, the aggregate balance of these loans
was $32.5 million at December 31, 1998.
At December 31, 1998 and 1997, the recorded investment in impaired loans
was $13.1 million and $11 million, respectively. Included in these amounts at
December 31, 1998 and December 31, 1997, respectively are $2.4 million and $2.4
million of impaired loans for which specific reserves for loan losses are
carried in the amounts of $1.9 million and $1.6 million. The average investment
in impaired loans for 1998 and 1997 was $13.1 million and $11 million,
respectively while interest income of $294 thousand and $258 thousand was
recognized on cash payments of $294 thousand and $258 thousand.
6. ALLOWANCE FOR LOSSES
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 20,465 $ 18,825 $ 16,082
Balances of acquired banks 1,066 - -
Provisions charged to operations 16,008 11,154 7,285
Recoveries 4,365 3,317 2,446
Charge-offs (15,815) (12,253) (6,988)
Allowance of sold bank - (578) -
- ----------------------------------------------------------------------------------------------
Balance, end of year $ 26,089 $ 20,465 $ 18,825
==============================================================================================
</TABLE>
Activity in the allowance for other real estate losses is as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 638 $ 617 $ 624
Provisions charged to operations 115 78 79
Charge-offs (130) (19) (86)
ALLOWANCE OF SOLD BANK - (38) -
- ----------------------------------------------------------------------------------------------
Balance, end of year $ 623 $ 638 $ 617
==============================================================================================
</TABLE>
Other real estate owned by the Corporation, net of reserves, at December
31, 1998 and 1997 was $2.5 million and $2.7 million, respectively.
35
<PAGE>
7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31 (in thousands) 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Land and buildings $ 53,877 $ 46,558
Leasehold improvements 5,007 4,224
Furniture, fixtures and equipment 31,382 26,662
Construction in progress 619 2,416
- --------------------------------------------------------------------------
$ 90,885 $ 79,860
Less accumulated depreciation and
Amortization (36,089) (32,192)
- --------------------------------------------------------------------------
$ 54,796 $ 47,668
==========================================================================
</TABLE>
Depreciation and amortization of premises and equipment for 1998, 1997 and
1996 was $3.9 million, $3.8 million, and $3.7 million, respectively.
8. DEPOSITS
Interest expense on deposits is categorized as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Savings, NOW and money market accounts $ 15,369 $ 12,557 $ 12,721
Certificates of deposit of $100 thousand
or more 16,011 14,726 15,531
Other time deposits 39,209 34,906 32,324
- ----------------------------------------------------------------------------------------------
$ 70,589 $ 62,189 $ 60,576
==============================================================================================
</TABLE>
Time certificates of deposit outstanding in denominations of $100 thousand
or more were $291 million and $253 million at December 31, 1998 and 1997,
respectively.
9. LONG-TERM DEBT
Long-term debt is categorized as follows:
<TABLE>
<CAPTION>
December 31 (in thousands) 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Parent Company:
Six Year Senior Notes, 7.375% interest $ -- $ 5,000
Ten Year Senior Notes, 8.25% interest, due January 1, 2003 12,230 12,230
Trust Preferred Securities 34,500 34,500
Revolving bank note, interest at prime minus 50 basis points, maximum
borrowing of $17,500,000, expires
December 31, 2000 5,500 --
Subsidiaries:
Other 1,593 1,733
- -----------------------------------------------------------------------------------------
$53,823 $53,463
=========================================================================================
</TABLE>
The Ten Year Senior Notes are redeemable, in whole or in part, at the
option of the Corporation at any time on or after January 1, 1999, at a price
beginning at 102% of par and decreasing annually until scheduled final maturity.
36
<PAGE>
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.
10. ADVANCES FROM FEDERAL HOME LOAN BANK
The advances from the Federal Home Loan Bank are due for repayment as
follows:
<TABLE>
<CAPTION>
December 31 (in thousands) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 3,505 $ 31,443
Due in one to five years 44,806 64,892
Due in five to ten years 2,419 4,668
Due after ten years 654 824
- --------------------------------------------------------------------------
$ 51,384 $ 101,827
==========================================================================
</TABLE>
These advances generally require monthly principal payments and are
collateralized by Federal Home Loan Bank stock of $14.1 million and $77.1
million of certain first mortgage loans as of December 31, 1998. Fixed rates
advances total $20 million and have interest rates ranging from 1.00% to 7.05%.
Variable rate advances total $31 million with rates immediately adjustable based
on LIBOR.
11. FEDERAL INCOME TAXES
The components of the provision for income taxes, exclusive of tax
effects of unrealized securities gains, are as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable $ 5,327 $ 9,079 $ 8,027
Deferred (1,420) (1,155) 444
- -------------------------------------------------------------------------
$ 3,907 $ 7,924 $ 8,471
=========================================================================
</TABLE>
The components of the net deferred tax asset as of December 31 are as
follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets
Allowance for loan losses $ 9,131 $ 7,163
Allowance for other real estate losses -- 117
Accrued expenses 240 148
Deferred compensation 212 212
OTHER 599 583
- -------------------------------------------------------------------------------
Total deferred tax assets $ 10,182 $ 8,223
Deferred Tax Liabilities
Depreciation $ (3,692) $ (3,556)
FHLB stock dividends (1,543) (1,226)
Other (439) (353)
- -------------------------------------------------------------------------------
Total deferred tax liabilities $ (5,674) $ (5,135)
- -------------------------------------------------------------------------------
Net deferred tax asset $ 4,508 $ 3,088
===============================================================================
</TABLE>
37
<PAGE>
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.
A reconciliation between federal income tax at the statutory rate and
income tax expense is as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate $ 6,256 $ 8,367 $ 9,543
Tax-exempt interest (1,270) (1,061) (1,295)
Other, net (1,079) 618 223
- -------------------------------------------------------------------------------
$ 3,907 $ 7,924 $ 8,471
===============================================================================
</TABLE>
In 1998, OTHER, NET includes the reversal of $1,500 in tax accruals after
substantial issues related to an examination of prior years were settled.
12. EMPLOYEE BENEFITS
The Corporation has a KSOP plan covering substantially all employees.
Half of the first 8% of wages contributed by an employee is matched and goes
into the savings and retirement portion of the plan. Employees may contribute
additional non-matched amounts up to maximum limits provided by IRS regulations,
and the Corporation may at its discretion, contribute an additional percentage
of covered employees' gross wages.
The Corporation currently contributes 4% of covered employees gross wages
to the employee stock ownership plan (ESOP) portion of the plan. The ESOP uses
the contribution to acquire shares of the Corporation's common stock. The ESOP
portion of the KSOP plan owned 220,589 shares of Corporation stock at December
31, 1998. The 401(k) portion of the KSOP plan owned 399,559 shares of
Corporation stock at December 31, 1998. Substantially all shares owned by the
KSOP were allocated to employees' accounts at December 31, 1998. The market
price of the shares at the date of allocation is essentially the same as the
market price at the date of purchase.
The total retirement plan expense, including KSOP expense above, for
1998, 1997 and 1996 was $1.4 million, $1.3 million, and $1.2 million,
respectively.
The Corporation currently maintains two incentive stock option plans
covering key employees; however, only one plan is active. The new plan was
approved by the Board of Directors and the Shareholders in 1998. The new plan
has 650,000 shares authorized, 639,000 of which were available at December 31,
1998 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.
38
<PAGE>
The Corporation's stock option activity for the new plan ended December 31,
1998 is summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
- -------------------------------------------------------------------------------------
Weighted-Average
Options Exercise Price
- -------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at beginning of period - $ -
Granted 11,000 30.70
Exercised - -
Forfeited/Expired - -
- -------------------------------------------------------------------------------------
Outstanding at end of period 11,000 $ 30.70
=====================================================================================
Exercisable at end of period - $ -
</TABLE>
The old stock option plan doesn't have any options available for grant.
The maximum term is ten years. Options granted as management retention options
vest after five years, all other options vest ratably over four years.
The Corporation's stock option activity for the old plan and related
information for both plans for the period ended December 31, 1998 and December
31, 1997 is summarized as follows:
<TABLE>
<CAPTION>
December 31,1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 285,768 $20.66 255,333 $18.48
Granted 3,000 31.13 140,085 23.24
Exercised (3,269) 20.46 (23,032) 13.18
Forfeited/Expired (57,279) 22.15 (86,618) 20.39
- ---------------------------------------------------------------------------------------------------------
Outstanding at end of period 228,220 $20.43 285,768 $20.66
=========================================================================================================
Exercisable at end of period 47,552 $17.48 37,918 $16.33
</TABLE>
The weighted-average fair value of options granted during the years 1997
and 1998 was $5.26 and $8.22 per share, respectively. Exercise prices for
options outstanding as of December 31, 1998 ranged from $9.70 to $31.36. The
weighted-average remaining contractual life of these options is 8.0 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 1998 and 1997, respectively: risk-free interest
rates of 5.00% and 5.50%; dividend yields of 3.45% and 2.70%; volatility factors
of the expected market price of the Corporation's common stock of .310 and .209
and a weighted average expected option life of 6.0 years. Because the effect of
applying Statement 123's fair value method to the Corporation's stock options
results in net income and earnings per share amounts that are not materially
different from those reported in the consolidated statements of income, pro
forma information has not been provided.
13. OPERATING LEASES
Certain premises and equipment are leased under operating leases. Minimum
rental payments are as follows:
<TABLE>
<CAPTION>
(in thousands)
- -------------------------------------------------------------
<S> <C>
1999 $ 1,309
2000 1,140
2001 996
2002 788
2003 279
THEREAFTER 3,392
- -------------------------------------------------------------
$ 7,904
=============================================================
</TABLE>
Rental expense under operating leases was $1.0 million, $0.9 million, and
$0.8 million in 1998, 1997 and 1996, respectively.
39
<PAGE>
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, 1998 and 1997 and is not considered significant.
<TABLE>
<CAPTION>
1998 1997
Estimated Estimated
Carrying Fair Carrying Fair
December 31 (in thousands) Amount Value Amount Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 233,133 $ 233,133 $ 61,404 $ 61,404
Securities 384,411 384,236 281,542 280,761
Loans 1,502,386 1,521,170 1,428,429 1,452,692
Less: allowance for loan losses (26,089) -- (20,465) --
- ---------------------------------------------------------------------------------------------
$ 2,093,841 $ 2,138,539 $ 1,750,910 $ 1,794,857
=============================================================================================
Financial liabilities:
Deposits $ 1,921,141 $ 1,930,181 $ 1,465,003 $ 1,473,543
Short-term borrowings 43,405 43,405 57,949 47,719
Advances from Federal Home
Loan Bank 51,384 51,677 101,827 100,984
Long-term Debt 53,823 53,823 53,463 53,463
- ---------------------------------------------------------------------------------------------
$ 2,069,753 $ 2,079,086 $ 1,678,242 $ 1,675,709
=============================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Standby letters of credit $ 15,102 $ 14,822
Commitments to extend credit 223,477 182,306
</TABLE>
40
<PAGE>
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, 1998 of $12.5 million have
interest rates ranging predominately from 6.0% 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, 1998. Collateral held
varies but may include accounts receivable, inventory, property and equipment
and income-producing properties.
16. CONCENTRATION OF CREDIT RISK
The Corporation's banking subsidiaries grant commercial, residential
and consumer related loans to customers primarily located in Eastern Kentucky,
Central Kentucky and West Virginia. The banking subsidiaries are continuing to
increase all components of their portfolio mix in a manner to reduce risk from
changes in economic conditions. Although these loan portfolios are diverse, a
certain portion of our debtor's are economically dependent upon the coal
industry for their ability to repay.
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 1999,
approximately $14.5 million plus any 1999 net profits can be paid by the
Corporation's banking subsidiaries without prior regulatory approval.
41
<PAGE>
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, 1998, that the Corporation meets all capital adequacy
requirements for which it is subject to be defined as well-capitalized.
<TABLE>
<CAPTION>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
(in thousands) Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Total Capital
(to Risk Weighted Assets) $154,882 9.75% $127,047 8.00% $158,809 10.00%
Tier I Capital
(to Risk Weighted Assets) 134,954 8.50% 63,523 4.00% 95,285 6.00%
Tier I Capital
(to Average Assets) 134,954 6.09% 88,654 4.00% 110,818 5.00%
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 9.57% 72,800 4.00% 91,000 5.00%
</TABLE>
42
<PAGE>
20. PARENT COMPANY FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31 (in thousands) 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash on deposit $ 3,102 $ 42,814
Securities available-for-sale 1,725 13,246
Investment in and advances to subsidiary banks 207,398 144,983
Excess of cost over net assets acquired (net of
accumulated amortization) 6,173 6,572
OTHER ASSETS 2,226 5,001
- -------------------------------------------------------------------------------------
Total Assets $ 220,624 $212,616
=====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 52,230 $ 51,730
OTHER LIABILITIES 3,599 2,867
- -------------------------------------------------------------------------------------
Total liabilities 55,829 54,597
Shareholders' equity 164,795 158,019
- -------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 220,624 $212,616
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Year Ended December 31 (in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary banks $ 4,372 $ 21,747 $ 22,999
Other income 1,812 4,073 8,358
- ------------------------------------------------------------------------------
Total income 6,184 25,820 31,357
Expenses:
Interest expense 4,616 3,710 1,874
Amortization expense 406 462 474
Other expenses 726 1,354 12,519
- ------------------------------------------------------------------------------
Total expenses 5,748 5,526 14,867
- ------------------------------------------------------------------------------
Income before income taxes and equity
in undistributed income of subsidiaries 436 20,294 16,490
Income tax benefit (1,772) (224) (2,415)
- ------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiaries 2,208 20,518 18,905
Equity in undistributed income
of subsidiaries 11,761 (1,449) (110)
- ------------------------------------------------------------------------------
Net Income $ 13,969 $ 19,069 $ 18,795
==============================================================================
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31 (in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 13,969 $ 19,069 $ 18,795
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization, net 406 462 476
Equity in undistributed earnings of subsidiaries (11,761) 1,449 110
Change in other assets and liabilities, net 3,674 6,816 (4,936)
- ---------------------------------------------------------------------------------------
Net cash provided by operating activities 6,288 27,796 14,445
Cash Flows From Investing Activities:
Change in securities available-for-sale 11,247 (7,908) (481)
Proceeds from sale of subsidiary -- 4,860 --
Investments in and advances to subsidiaries (49,632) (8,959) (1,000)
- ---------------------------------------------------------------------------------------
Net cash used in investing activities (38,385) (12,007) (1,481)
Cash Flows From Financing Activities:
Dividends paid (8,118) (7,276) (6,569)
Net proceeds from issuance of common stock 3 247 54
Net change in short-term borrowings -- (2,531) --
Repayment of long-term debt (5,000) -- (8,700)
Proceeds from long-term debt 5,500 34,500 1,000
- ---------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (7,615) 24,940 (14,215)
- ---------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (39,712) 40,729 (1,251)
Cash and cash equivalents at beginning of year 42,814 2,085 3,336
- ---------------------------------------------------------------------------------------
Cash and Cash Equivalents At End of Year $ 3,102 $ 42,814 $ 2,085
=======================================================================================
</TABLE>
44
<PAGE>
21. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Numerator:
Net income before extraordinary gain $ 13,969 $ 15,984 $ 18,795
Extraordinary gain - 3,085 -
Net income after extraordinary gain $ 13,969 $ 19,069 $ 18,795
Denominator:
Basic earnings per share:
Weighted average shares 10,062,780 10,058,835 10,037,503
Diluted earnings per share:
Effect of dilutive securities - stock options 66,667 60,710 19,036
Adjusted weighted average shares 10,129,447 10,119,545 10,056,539
Earnings per share:
Basic earnings per share before
extraordinary gain $ 1.39 $ 1.59 $ 1.87
Basic earnings per share
extraordinary gain - 0.31 -
Basic earnings per share after
extraordinary gain 1.39 1.90 1.87
Diluted earnings per share before
extraordinary gain 1.38 1.58 1.87
Diluted earnings per share
extraordinary gain - 0.30 -
Diluted earnings per share after
extraordinary gain $ 1.38 $ 1.88 $ 1.87
</TABLE>
22. SPECIAL CHARGES
In September 1998, the Corporation announced initiatives to reduce
costs that included staff reductions, consolidation of operations and related
costs for redundant locations and equipment. A $900,000 charge was recorded in
conjunction with these actions. Approximately, $170,000 has been expended in
1998. Of the amounts expended in 1998, $148,000 was for staff reductions and
$22,000 was for consolidation of operations. Expected expenditures for 1999
include $630,000 for consolidation of operations and related costs for redundant
locations and equipment and $100,000 for additional costs related to staff
reductions.
45
<PAGE>
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, 1998.
Burlin Coleman
Chairman, President and Chief Executive Officer
46
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these Items other than the information set
forth above under Part I, "Executive Officers of Registrant", is omitted because
the Corporation is filing a definitive proxy statement pursuant to Regulation
14A not later than 120 days after the end of the fiscal year covered by this
report which includes the required information. The required information
contained in the Corporation's proxy statement is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
Financial Statements and Financial Statement Schedules- See Index to
consolidated Financial statements at Item 8 of this report.
Exhibit
No. Description of Exhibits
- -------- -----------------------
2.1 Agreement and Plan of Reorganization dated September 27, 1994 between
Community Trust Bancorp, Inc. and Woodford Bancorp, Inc. (Incorporated
by reference to registration statement no. 33-90448).
2.2 Amendment No. 1 to Agreement and Plan of Reorganization dated September
27, 1994 between Community Trust Bancorp, Inc. and Woodford Bancorp,
Inc., as amended February 7, 1995 (Incorporated by reference to
registration statement no. 33-90448).
2.3 Amendment No. 2 to Agreement and Plan of Reorganization dated September
27, 1994 between Community Trust Bancorp, Inc. and Woodford Bancorp,
Inc., as amended March 2, 1995 (Incorporated by reference to
registration statement no. 33-90448).
3.1 Articles of Incorporation and all amendments thereto (Incorporated by
reference to registration statement no. 33-35138).
3.2 By-laws of the Corporations, as amended July 25,1995 (Incorporated by
reference to registration statement no. 33-61891).
10.1 Pikeville National Corporation Savings and Employee Stock Ownership Plan
(Commonly known as Community Trust Bancorp, Inc. Savings and Employee
Stock Ownership Plan) (Incorporated by reference to registration
statement no. 33-18961).
10.2 Second restated Pikeville National Corporation 1989 Stock Option Plan
(Commonly known as Community Trust Bancorp, Inc. 1989 Stock Option Plan)
(Incorporated by reference to registration statement no. 33-36165).
47
<PAGE>
10.3 Community Trust Bancorp, Inc. 1998 Stock Option Plan (Incorporated by
reference to registration statement no. 333-74217).
21 List of subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
(b) Reports on Form 8-K required to be filed during the last quarter of 1998
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.
48
<PAGE>
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, 1999 By: /s/ Burlin Coleman
----------------------------------
Burlin Coleman
Chairman, President
Chief Executive Officer
/s/ Kevin Stumbo
----------------------------------
Kevin Stumbo
Chief Accounting Officer
49
<PAGE>
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.
March 12, 1999 /s/ Burlin Coleman Chairman of the Board,
------------------------------- President, Chief Executive
Burlin Coleman Officer and Director
March 12, 1999 /s/ Jean R. Hale Secretary & Director
-------------------------------
Jean R. Hale
March 12, 1999 /s/ Charles J. Baird Director
-------------------------------
Charles J. Baird
March 12, 1999 /s/ Nick A. Cooley Director
-------------------------------
Nick A. Cooley
March 12, 1999 /s/ William A. Graham, Jr. Director
-------------------------------
William A. Graham, Jr.
March 12, 1999 /s/ M. Lynn Parrish Director
-------------------------------
M. Lynn Parrish
March 12, 1999 /s/ E. M. Rogers Director
-------------------------------
E. M. Rogers
March 12, 1999 /s/ Steven L. Lawson Director
-------------------------------
Steven L. Lawson
50
<PAGE>
COMMUNITY TRUST BANCORP, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit No.
-----------
2.1 Agreement and plan of reorganization dated September 27, 1994
between Community Trust Bancorp, Inc. and Woodford Bancorp,
Inc., incorporated herein by reference.
2.2 Amendment No. 1 to Agreement and Plan of reorganization dated
September 27, 1994 between Community Trust Bancorp, Inc. and
Woodford Bancorp, Inc., as amended February 7, 1995 and
incorporated herein by reference.
2.3 Amendment No. 2 to Agreement and Plan of reorganization dated
September 27, 1994 between Community Trust Bancorp, Inc. and
Woodford Bancorp, Inc., as amended March 2, 1995 and
incorporated herein by reference.
3.1 Articles of Incorporation for the Corporation, incorporated
herein by reference.
3.2 By-laws of the Corporation as amended through the date of this
filing, incorporated herein by reference.
10.1 Pikeville National Corporation Savings and Employee Stock
Ownership Plan (commonly known as Community Trust Bancorp, Inc.
Savings and Employee Stock Ownership Plan), incorporated herein
by reference.
10.2 Second restated Pikeville National Corporation 1989 Stock Option
Plan (commonly known as Community Trust Bancorp, Inc. 1989 Stock
Option Plan), incorporated herein by reference.
10.3 Community Trust Bancorp, Inc. 1998 Stock Option Plan,
incorporated herein by reference.
21 List of subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
51
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
The Corporation has five subsidiaries as of January 1, 1999.
<TABLE>
<CAPTION>
Percent
Voting Stock
Jurisdiction of Shares Owned Held by
Organization by Corporation Corporation
------------ -------------- -----------
<S> <C> <C> <C>
Community Trust Bank, NA United States 285,000 Common 100%
Pikeville, Kentucky
Community Trust Bank, FSB United States 100 Common 100%
Campbellsville,
Kentucky
Trust Company of United States 500 Common 100%
Kentucky, NA
Ashland, Kentucky
Community Trust Funding Corp Delaware 100 Common 100%
CTBI Preferred Capital Trust Delaware 42,720 Common
Trust Securities 100%
</TABLE>
All shares of Community Trust Bank, FSB are pledged as collateral on the
bank note outstanding to Star Bank, Cincinnati, Ohio.
<PAGE>
Exhibit 23.1
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, 1998 and 1997 and the related
consolidated statements of income, changes of shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Community Trust Bancorp, Inc. and Subsidiaries at December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Columbus, Ohio Ernst & Young LLP
January 14, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-74217) of our report dated January 14, 1999, with respect
to the consolidated financial statements of Community Trust Bancorp, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31,
1998.
/s/ Ernst & Young LLP
Columbus, Ohio
March 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 97,487
<INT-BEARING-DEPOSITS> 646
<FED-FUNDS-SOLD> 135,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 301,052
<INVESTMENTS-CARRYING> 83,359
<INVESTMENTS-MARKET> 83,184
<LOANS> 1,502,386
<ALLOWANCE> 26,089
<TOTAL-ASSETS> 2,248,039
<DEPOSITS> 1,921,141
<SHORT-TERM> 43,405
<LIABILITIES-OTHER> 13,491
<LONG-TERM> 105,207
0
0
<COMMON> 50,325
<OTHER-SE> 114,470
<TOTAL-LIABILITIES-AND-EQUITY> 2,248,039
<INTEREST-LOAN> 137,700
<INTEREST-INVEST> 17,751
<INTEREST-OTHER> 5,119
<INTEREST-TOTAL> 160,570
<INTEREST-DEPOSIT> 70,589
<INTEREST-EXPENSE> 83,986
<INTEREST-INCOME-NET> 76,584
<LOAN-LOSSES> 16,008
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 62,166
<INCOME-PRETAX> 17,876
<INCOME-PRE-EXTRAORDINARY> 17,876
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,969
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.38
<YIELD-ACTUAL> 7,939
<LOANS-NON> 14,930
<LOANS-PAST> 5,635
<LOANS-TROUBLED> 202
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 20,465
<CHARGE-OFFS> 15,815
<RECOVERIES> 4,365
<ALLOWANCE-CLOSE> 26,089
<ALLOWANCE-DOMESTIC> 26,089
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 26,089
</TABLE>
