UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K


ý

x 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the fiscal year ended December 31, 2002

2003

Or

o 

Or

o

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 incorporation or organization)

IRS Employer Identification No.

346 North Mayo Trail
Pikeville, Kentucky

41501

(address of principal executive offices)

41501
(Zip Code)

(606) 432-1414

(Registrant’s telephone number)

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)

(606) 432-1414

(Registrant’s telephone number)

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.

Yesýü

Noo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o


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

Yesýü

Noo

Based upon the closing price of the Common Shares of the Registrant on the NASDAQ National Market, the aggregate market value of voting stock held by non-affiliates of the Registrant as of February 28, 200329, 2004 was $310,659,018.56.$391,220,534. The number of shares outstanding of the Registrant’s Common Stock as of February 28, 200329, 2004 was 12,288,727.13,485,713. For the purpose of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates.



DOCUMENTS INCORPORATED BY REFERENCE


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


Document

Form 10-K

(1) Proxy statement for the annual meeting of shareholders to be held April 29, 2003

27, 2004

Part III


 


PART I


Item 1. Business


Community Trust Bancorp, Inc. (the “Corporation”"Corporation") is a bank holding company registered with the Board of Governors of the Federal Reserve System pursuant to Section 5(a) of the Bank Holding Company Act of 1956, as amended. The Corporation was incorporated August 12, 1980, under the laws of the Commonwealth of Kentucky for the purpose of becoming a bank holding company. At December 31, 2002,2003, the Corporation owned all the capital stock of one commercial bank and one trust company, serving small and mid-sized communities in eastern, northeast, central, and south central Kentucky and southern West Virginia. The commercial bank is Community Trust Bank, Inc., Pikeville, Kentucky (the “Bank”"Bank"). The trust company, Community Trust and Investment Company, Lexington, Kentucky (the “Trust Company”"Trust Company"), has offices in Lexington, Pikeville, Ashland, Middlesboro, and Versailles, Kentucky. The Trust Company commenced businessbusines s operations on January 1, 1994. At December 31, 2002,2003, the Corporation had total consolidated assets of $2.5 billion and total consolidated deposits of $2.1 billion, making it the largest bank holding company headquartered in the Commonwealth of Kentucky.


On January 26, 2001, the Bank acquired the deposits, loans, and fixed assets of The Bank of Mt.Vernon, Inc. The offices acquired from The Bank of Mt. Vernon, Inc. are located in Mt. Vernon, Somerset, Richmond, and Berea, Kentucky. The offices acquired had deposits totaling $109.3 million and loans totaling $79 million. The purchase price paid by the Bank for the offices was a 9.5% premium on the non-brokered deposits as of the closing date plus approximately $1.6 million for fixed assets, $12.6 million for investment securities, and $1.0 million for the cash held at the acquired branches of The Bank of Mt. Vernon.

Vernon, Inc.


During the third quarter 2001, the Corporation acquired 75.28% of the outstanding shares of Citizens National Bank and Trust of Hazard, Kentucky (“Citizens”("Citizens"), independently valued at that time at $15.1 million, in lieu of a debt owed to the Corporation by a Citizens’ shareholder. On January 3, 2002, the Corporation acquired the remaining 24.72% of Citizens for $4.9 million. Citizens had total assets of $138.5 million and equity capital of $19.4 million as of December 31, 2001. On March 15, 2002, Citizens was merged into the Bank.


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


Through its subsidiaries, the Corporation engages in a wide range of commercial and personal banking and trust activities, which include accepting time and demand deposits; making secured and unsecured loans to corporations, individuals and others; providing cash management services to corporate and individual customers; issuing letters of credit; renting safe deposit boxes,boxes; and providing funds transfer services. The lending activities of the Bank include making commercial, construction, mortgage, and personal loans. Also available are lease-financing, lines of credit, revolving lines of credit, term loans, and other specialized loans including asset-based financing. The corporate subsidiaries act as trustees of personal trusts, as executors of estates, as trustees for employee benefit trusts, as registrars, transfer agents, and paying agents for bond and stock issues, as depositories for securities, and as providers of discountfull service brokerage services.

operations.

1


COMPETITION

The Corporation’s subsidiaries face substantial competition for deposit, credit, and trust relationships, as well as other sources of funding in the communities they serve. Competing providers include state banks, national banks, thrifts, and trust companies, insurance companies, mortgage banking operations, credit unions, finance companies, brokerage companies, and other financial and non-financial companies which may offer products functionally equivalent to those offered by the Corporation’s subsidiaries. Many of these providers offer services within and outside the market areas served by the Corporation’s subsidiaries. The Corporation’s subsidiaries strive to offer competitively priced products along with quality customer service to build customer relationships in the communities they serve.


Since July 1989, banking legislation in Kentucky places no limits on the number of banks or bank holding companies that a bank holding company may acquire. Interstate acquisitions are allowed where reciprocity exists between the laws of Kentucky and the home state of the bank or bank holding company to be acquired. Bank holding companies continue to be limited to control of less than 15% of deposits held by banks in the states where they do business (exclusive of inter-bank and foreign deposits).


The Gramm-Leach-Bliley Act of 1999 (the “Gramm Act”"Gramm Act") has expanded the permissible activities of a bank holding company. The Gramm Act allows qualifying bank holding companies to elect to be treated as financial holding companies. A financial holding company may engage in activities that are financial in nature or are incidental or complementary to financial activities. The Gramm Act also eliminated restrictions imposed by the Glass-Steagall Financial Services Law, adopted in the 1930s, which prevented banking, insurance, and securities firms from fully entering each other’s business. This legislation has resulted in further consolidation in the financial services industry. In addition, removal of these restrictions has increased the number of entities providing banking services and thereby created additional competition.

In the 2000 session, the Kentucky legislature enacted legislation that permits statewide bank branching.  Statewide branching has increased geographic expansion and growth opportunities for banks.


No material portion of the business of the Corporation is seasonal. The business of the Corporation is not dependent upon any one customer or a few customers, and the loss of any one or a few customers would not have a material adverse effect on the Corporation. However, a certain portion of the Corporation’s debtors is economically dependent on the coal industry (seeSee note 1816 to the consolidated financial statements).

statements for additional information regarding concentrations of credit.


The Corporation engages in no operations in foreign countries.


EMPLOYEES

As


   As of December 31, 2002,2003, the Corporation and its subsidiaries had 874901 full-time equivalent employees. Employees are provided with a variety of employee benefits. A retirement plan, an employee stock ownership plan, group life hospitalization,insurance, major medical insurance, a cafeteria plan, and annual management and employee incentive compensation plans are available to eligible personnel.

SUPERVISION AND REGULATION


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


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

2


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

Institutions and the Federal Reserve.


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


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


    The Corporation’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on the Corporation’s website atwww.ctbi.comas soon as reasonably practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission. The Corporation’s Code of Business Conduct and Ethics is also available on the Corporation’s website. Copies of the Corporation’s annual report will be made available free of charge upon written request.

CAUTIONARY STATEMENT


Certain of the statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The Corporation’s actual results may differ materially from those included in the forward-looking statements. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may"believe," "expect," "anticipate," "intend," "estimate," "may increase,” “may" "may fluctuate,”" and similar expressions or future or conditional verbs such as “will,” “should,” “would,”"will," "should," "would," and “could.”"could." These forward-looking statements involve risks and uncertainties including, but not limited to, economic conditions, portfolio growth, the credit performance of the portfolios, including bankruptcies, and seasonal factors; changes in general economic conditions including the performance of financial markets, the performance of coal and coal related industries, prevailing inflation and interest rates, realizedrealize d gains from sales of investments, gains from asset sales, and losses on commercial lending activities; results of various investment activities; the effects of competitors’ pricing policies, of changes in laws and regulations on competition and of demographic changes on target market populations’ savings and financial planning needs; industry changes in information technology systems on which we are highly dependent; failure of acquisitions to produce revenue enhancements or cost savings at levels or within the time frames originally anticipated or unforeseen integration difficulties; the adoption by the Corporation of an FFIEC policy that provides guidance on the reporting of delinquent consumer loans and the timing of associated credit charge-offs for financial institution subsidiaries; and the resolution of legal proceedings and related matters. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation, and state regulators, whose policies and regulations could affect the Corporation’s results. These statements are representative only on the date hereof, and the Corporation undertakes no obligation to update any forward-looking statements made.

 

3


SELECTED STATISTICAL INFORMATION


The following tables set forth certain statistical information relating to the Corporation and its subsidiaries on a consolidated basis and should be read together with the consolidated financial statements of the Corporation.


Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates


 

 

2002

 

2001

 

2000

 

(in thousands)

 

Average
Balances

 

Interest

 

Average
Rate

 

Average
Balances

 

Interest

 

Average
Rate

 

Average
Balances

 

Interest

 

Average
Rate

 

Earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, net of unearned income (1)(2)(3)

 

$

1,660,912

 

$

121,130

 

7.29

%

$

1,748,241

 

$

150,669

 

8.62

%

$

1,665,349

 

$

155,822

 

9.36

%

Loans held for sale (4)

 

5,696

 

771

 

13.54

%

1,651

 

775

 

46.94

%

713

 

158

 

22.16

%

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and agencies

 

324,375

 

17,238

 

5.31

%

236,493

 

13,642

 

5.77

%

175,838

 

10,724

 

6.10

%

Tax exempt state and political subdivisions (3)

 

57,049

 

4,160

 

7.29

%

60,545

 

4,423

 

7.31

%

60,221

 

4,502

 

7.48

%

Other securities

 

130,869

 

3,661

 

2.80

%

51,336

 

3,111

 

6.06

%

65,333

 

4,235

 

6.48

%

Federal funds sold

 

89,559

 

1,485

 

1.66

%

157,858

 

6,186

 

3.92

%

37,000

 

2,404

 

6.50

%

Interest bearing deposits

 

119

 

2

 

1.68

%

217

 

11

 

5.07

%

232

 

13

 

5.60

%

Total earning assets

 

2,268,579

 

148,447

 

6.54

%

2,256,341

 

178,817

 

7.93

%

2,004,686

 

177,858

 

8.87

%

Allowance for loan losses

 

(24,520

)

 

 

 

 

(25,782

)

 

 

 

 

(26,162

)

 

 

 

 

 

 

2,244,059

 

 

 

 

 

2,230,559

 

 

 

 

 

1,978,524

 

 

 

 

 

Nonearning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

68,231

 

 

 

 

 

65,777

 

 

 

 

 

73,847

 

 

 

 

 

Premises and equipment, net

 

50,658

 

 

 

 

 

49,703

 

 

 

 

 

50,269

 

 

 

 

 

Other assets

 

104,521

 

 

 

 

 

98,656

 

 

 

 

 

92,740

 

 

 

 

 

Total assets

 

$

 2,467,469

 

 

 

 

 

$

 2,444,695

 

 

 

 

 

$

 2,195,380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings and demand deposits

 

$

631,055

 

$

9,007

 

1.43

%

$

549,072

 

$

13,343

 

2.43

%

$

510,285

 

$

18,095

 

3.55

%

Time deposits

 

1,164,457

 

41,104

 

3.53

%

1,267,476

 

72,266

 

5.70

%

1,124,270

 

65,154

 

5.80

%

Federal funds purchased and securities sold under repurchase agreements

 

70,275

 

1,400

 

1.99

%

74,743

 

2,845

 

3.81

%

48,343

 

2,699

 

5.58

%

Other short-term borrowings

 

679

 

33

 

4.86

%

6,349

 

346

 

5.45

%

5,500

 

411

 

7.47

%

Advances from Federal Home Loan Bank

 

7,381

 

418

 

5.66

%

11,279

 

645

 

5.72

%

15,006

 

863

 

5.75

%

Trust preferred securities

 

57,377

 

4,996

 

8.71

%

34,500

 

3,105

 

9.00

%

34,500

 

3,105

 

9.00

%

Long-term debt

 

3,002

 

335

 

11.16

%

13,491

 

1,167

 

8.65

%

13,615

 

1,188

 

8.73

%

Total interest bearing liabilities

 

1,934,226

 

57,293

 

2.96

%

1,956,910

 

93,717

 

4.79

%

1,751,519

 

91,515

 

5.22

%

Noninterest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

315,202

 

 

 

 

 

277,748

 

 

 

 

 

251,643

 

 

 

 

 

Other liabilities

 

15,479

 

 

 

 

 

22,138

 

 

 

 

 

15,307

 

 

 

 

 

Total liabilities

 

2,264,907

 

 

 

 

 

2,256,796

 

 

 

 

 

2,018,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

202,562

 

 

 

 

 

187,899

 

 

 

 

 

176,911

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

 2,467,469

 

 

 

 

 

$

 2,444,695

 

 

 

 

 

$

 2,195,380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

 91,154

 

 

 

 

 

$

 85,100

 

 

 

 

 

$

 86,343

 

 

 

Net interest spread

 

 

 

 

 

3.58

%

 

 

 

 

3.14

%

 

 

 

 

3.65

%

Benefit of interest free funding

 

 

 

 

 

0.44

%

 

 

 

 

0.63

%

 

 

 

 

0.68

%

Net interest margin

 

 

 

 

 

4.02

%

 

 

 

 

3.77

%

 

 

 

 

4.33

%

  

2003

 

 2002

 2001

 
  
(in thousands)
  
Average Balances

 

 

Interest

 

 

Average Rate

 

 

Average Balances

 

 

Interest

 

 

Average Rate

 

 

Average Balances

 

 

Interest

 

 

Average Rate
 
Earning assets:                            
Loans, net of unearned income (1)(2)(3) $1,658,289 $108,827  6.56%$1,660,912 $121,130  7.29%$1,748,241 $150,669  8.62%
Loans held for sale (4)  5,456  460  8.43  5,696  771  13.54  1,651  775  46.94 
Securities:                            
U.S. Treasury and agencies  284,980  12,378  4.34  324,375  17,238  5.31  236,493  13,642  5.77 
Tax exempt state and political
subdivisions (3)
  50,419  3,408  6.76  57,049  4,160  7.29  60,545  4,423  7.31 
Other securities  226,505  4,289  1.89  130,869  3,661  2.80  51,336  3,111  6.06 
Federal funds sold  66,499  746  1.12  89,559  1,485  1.66  157,858  6,186  3.92 
Interest bearing deposits  103  1  0.97  119  2  1.68  217  11  5.07 
Total earning assets  2,292,251 $130,109  5.68% 2,268,579 $148,447  6.54% 2,256,341 $178,817  7.93%
Allowance for loan losses  (23,966)       (24,520)       (25,782)      
   2,268,285        2,244,059        2,230,559       
Nonearning assets:                            
Cash and due from banks  69,111        68,231        65,777       
Premises and equipment, net  49,956        50,658        49,703       
Other assets  104,934        104,521        98,656       
Total assets $2,492,286       $2,467,469       $2,444,695       
Interest bearing liabilities:                            
Deposits:                            
Savings and demand deposits $631,424 $6,309  1.00%$631,055 $9,007  1.43%$549,072 $13,343  2.43%
Time deposits  1,139,419  30,901  2.71  1,164,457  41,104  3.53  1,267,476  72,266  5.70 
Federal funds purchased and securities sold under repurchase agreements  83,270  1,108  1.33  70,275  1,400  1.99  74,743  2,845  3.81 
Other short-term borrowings  262  24  9.16  679  33  4.86  6,349  346  5.45 
Advances from Federal Home Loan Bank  4,123  230  5.58  7,381  418  5.66  11,279  645  5.72 
Long-term debt  60,304  5,323  8.83  60,379  5,331  8.83  47,991  4,272  8.90 
Total interest bearing liabilities  1,918,802 $43,895  2.29% 1,934,226 $57,293  2.96% 1,956,910 $93,717  4.79%
Noninterest bearing liabilities:                            
Demand deposits  338,909        315,202        277,748       
Other liabilities  19,489        15,479        22,138       
Total liabilities  2,277,200        2,264,907        2,256,796       
                             
Shareholders’ equity  215,086        202,562        187,899       
Total liabilities and shareholders’ equity $2,492,286       $2,467,469       $2,444,695       
                             
Net interest income    $86,214       $91,154       $85,100    
Net interest spread        3.39%       3.58%       3.14%
Benefit of interest free funding        0.37%       0.44%       0.63%
Net interest margin        3.76%       4.02%       3.77%

(1) Interest includes fees on loans of $3,267, $3,069, and $2,761 in 2003, 2002, and $2,743 in 2002, 2001, and 2000, respectively.

(2) Loan balances include principal balances on nonaccrual loans.

(3) Tax exempt income on securities and loans is reported on a fully taxable equivalent basis using a 35% rate.

(4) Interest on loans held for sale includes fees of $241 $552, and $64$552 in 2002 and 2001, and 2000, respectively.

Beginning in January 2003, fees related to loans held for sale are included in noninterest income.

4


Net Interest Differential


The following table illustrates the approximate effect of volume and rate changes on net interest differentials between 20022003 and 20012002 and also between 20012002 and 2000.

 

 

Total
Change

 

Change Due to

 

Total
Change

 

Change Due to

 

(in thousands)

 

2002/2001

 

Volume

 

Rate

 

2001/2000

 

Volume

 

Rate

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

(29,539

)

$

(6,967

)

$

(22,572

)

$

(5,153

)

$

7,519

 

$

(12,672

)

Loans held for sale

 

(4

)

852

 

(856

)

617

 

92

 

525

 

U.S. Treasury and federal agencies

 

3,596

 

4,740

 

(1,144

)

2,918

 

3,525

 

(607

)

Tax exempt state and political subdivisions

 

(264

)

(248

)

(16

)

(79

)

25

 

(104

)

Other securities

 

551

 

2,893

 

(2,342

)

(1,124

)

(863

)

(262

)

Federal funds sold

 

(4,701

)

(2,014

)

(2,687

)

3,782

 

5,074

 

(1,292

)

Interest bearing deposits

 

(9

)

(4

)

(5

)

(2

)

(1

)

(1

)

Total interest income

 

(30,370

)

(748

)

(29,622

)

959

 

15,371

 

(14,412

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings and demand deposits

 

(4,336

)

1,774

 

(6,110

)

(4,752

)

1,291

 

(6,043

)

Time deposits

 

(31,162

)

(5,480

)

(25,682

)

7,112

 

8,180

 

(1,068

)

Federal funds purchased and securities sold under repurchase agreements

 

(1,445

)

(161

)

(1,284

)

146

 

1,178

 

(1,032

)

Other short-term borrowings

 

(313

)

(279

)

(34

)

(65

)

57

 

(122

)

Advances from Federal Home Loan Bank

 

(227

)

(221

)

(6

)

(218

)

(213

)

(5

)

Trust preferred securities

 

1,891

 

1,995

 

(104

)

0

 

0

 

0

 

Long-term debt

 

(832

)

(1,097

)

265

 

(21

)

(13

)

(8

)

Total interest expense

 

(36,424

)

(3,469

)

(32,955

)

2,202

 

10,480

 

(8,278

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

6,054

 

$

2,721

 

$

3,333

 

$

(1,243

)

$

4,891

 

$

(6,134

)

2001.

Total Change

Change Due to

Total Change

Change Due to

(in thousands)
  
2003/2002
  
Volume
  
Rate
  
2002/2001
  
Volume
  
Rate
 
 
Interest income  
 
  
 
  
 
  
 
  
 
  
 
 
Loans $(12,303)$(192)$(12,111)$(29,539)$(6,967)$(22,572)
Loans held for sale  (311) (34) (277) (4) 852  (856)
U.S. Treasury and federal agencies  (4,860) (2,246) (2,614) 3,596  4,740  (1,144)
Tax exempt state and political subdivisions  (752) (505) (247) (264) (248) (16)
Other securities  628  2,076  (1,448) 551  2,893  (2,342)
Federal funds sold  (739) (437) (302) (4,701) (2,014) (2,687)
Interest bearing deposits  (1) 0  (1) (9) (4) (5)
Total interest income  (18,338) (1,338) (17,000) (30,370) (748) (29,622)
   
 
  
 
  
 
  
 
  
 
  
 
 
Interest expense  
 
  
 
  
 
  
 
  
 
  
 
 
Savings and demand deposits  (2,698) 5  (2,703) (4,336) 1,774  (6,110)
Time deposits  (10,203) (901) (9,302) (31,162) (5,480) (25,682)
Federal funds purchased and securities sold under repurchase agreements  (292) 228  (520) (1,445) (161) (1,284)
Other short-term borrowings  (9) (13) 4  (313) (279) (34)
Advances from Federal Home Loan Bank  (188) (187) (1) (227) (221) (6)
Long-term debt  (8) 28  (36) 1,059  898  161 
Total interest expense  (13,398) (840) (12,558) (36,424) (3,469) (32,955)
Net interest income $(4,940)$(498)$(4,442)$6,054 $2,721 $3,333 
For purposes of the above table, changes which are due to both rate and volume are allocated based on a percentage basis, using the absolute values of rate and volume variance as a basis for percentages. Income is stated at a fully taxable equivalent basis, assuming a 35% tax rate.


Investment Portfolio


The maturity distribution and weighted average interest rates of securities at December 31, 20022003 are as follows:

 

 

Estimated Maturity at December 31, 2002

 

 

 

Within 1 Year

 

1-5 Years

 

5-10 Years

 

After 10 Years

 

Total Fair Value

 

Amortized
Cost

 

(in thousands)

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

2,059

 

6.07

%

$

4,879

 

6.00

%

$

22,200

 

3.06

%

$

0

 

0.00

%

$

29,138

 

3.76

%

$

27,550

 

U.S. government agencies and corporations

 

56,027

 

2.55

%

119,738

 

5.59

%

46,566

 

5.95

%

1,143

 

5.92

%

223,474

 

4.91

%

215,833

 

State and municipal obligations

 

221

 

7.30

%

7,268

 

6.66

%

25,596

 

6.94

%

156,263

 

1.69

%

189,348

 

1.40

%

186,984

 

Other securities

 

5,394

 

6.71

%

16,685

 

4.07

%

0

 

0.00

%

63,300

 

2.91

%

85,379

 

3.31

%

85,564

 

Total

 

$

63,701

 

3.03

%

$

148,570

 

5.49

%

$

94,362

 

5.54

%

$

220,706

 

2.06

%

$

527,339

 

3.33

%

$

515,931

 

5



 

 

Estimated Maturity at December 31, 2002

 

 

 

Within 1 Year

 

1-5 Years

 

5-10 Years

 

After 10 Years

 

Total
Amortized Cost

 

Fair Value

 

(in thousands)

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies and corporations

 

$

17,000

 

6.78

%

$

4,500

 

6.21

%

$

15,818

 

6.27

%

$

0

 

0.00

%

$

37,318

 

6.50

%

$

38,370

 

State and municipal obligations

 

6,074

 

7.54

%

5,072

 

7.53

%

2,779

 

8.26

%

0

 

0.00

%

13,925

 

7.68

%

14,303

 

Total

 

$

23,074

 

6.98

%

$

9,572

 

6.91

%

$

18,597

 

6.57

%

$

0

 

0.00

%

$

51,243

 

6.82

%

$

52,673

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities

 

$

86,775

 

4.08

%

$

158,142

 

5.57

%

$

112,959

 

5.71

%

$

220,706

 

2.06

%

$

578,582

 

3.64

%

 

 

  
Estimated Maturity at December 31, 2003
  
  
Within 1 Year
1-5 Years
5-10 Years
After 10 Years
Total Fair Value
Amortized Cost
(in thousands)
 
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Available-for-sale                                  
U.S. Treasury $0  0.00%$1,605  5.99%$0  0.00%$0  0.00%$1,605  5.99%$1,510 
U.S. government agencies and corporations  38,844  2.39  101,990  5.29  75,615  4.04  0  0.00  216,449  4.33  212,891 
State and municipal obligations  364  7.34  13,634  6.63  35,251  6.49  42,823  1.52  92,072  3.70  89,107 
Other securities  12,441  4.38  21,684  4.65  0  0.00  77,604  2.19  111,729  2.89  110,896 
Total $51,649  2.90%$138,913  5.33%$110,866  4.82%$120,427  1.95%$421,855  3.82%$414,404 

  
Estimated Maturity at December 31, 2003
  
  
Within 1 Year
1-5 Years
5-10 Years
After 10 Years
Total
Amortized Cost
Fair Value
(in thousands)
 
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Held-to-maturity                                  
U.S. government agencies and corporations $4,000  6.00%$74,771  3.72%$5,000  6.37%$0  0.00%$83,771  3.99%$83,158 
State and municipal obligations  1,650  8.21  1,683  6.78  393  6.61  0  0.00  3,726  7.40  3,903 
Total $5,650  6.65%$76,454  3.79%$5,393  6.39%$0  0.00%$87,497  4.13%$87,061 
   
Total securities $57,299  3.27%$215,367  4.78%$116,259  4.89%$120,427  1.95%$509,352  3.87%   
   
The calculations of the weighted average interest rates for each maturity category are based upon yield weighted by the respective costs of the securities. The weighted average rates on state and political subdivisions are computed on a taxable equivalent basis using a 35% tax rate. For purposes of the above presentation, maturities of mortgage-backed pass through certificates and collateralized mortgage obligations are based on estimated maturities.


Excluding those holdings of the investment portfolio in U.S. Treasury securities and other agencies of the U.S. Government, thethere were no securities issued byof any one issuer that exceeded 10% of the shareholders’ equity of the Corporation at December 31, 2002 are as follows:

(in thousands)
Issuer

 

Amortized
Cost

 

Fair
Value

 

Yield

 

Utah State Board of Regents

 

$

21,000

 

$

21,067

 

1.50

%

2003.


Securities

The book values of securities available-for-sale and securities held-to-maturity as of December 31, 20022003 and 20012002 are presented in note 43 to the consolidated financial statements.


The book value of securities at December 31, 20002001 is presented below:


(in thousands)
  
Available-for-Sale

 

 

Held-to-Maturity
 
U.S. Treasury and government agencies $51,347 $57,499 
State and political subdivisions  41,265  23,739 
U.S. agency and mortgage-backed pass through certificates  232,505  2,086 
Collateralized mortgage obligations  9,901  0 
Other debt securities  26,343  0 
Total debt securities  361,361  83,324 
Equity securities  5,872  0 
Total securities $367,233 $83,324 

(in thousands)

 

Available-for-
Sale

 

Held-to-
Maturity

 

U.S. Treasury and government agencies

 

$

28,917

 

$

11,499

 

State and political subdivisions

 

34,037

 

27,653

 

U.S. agency and mortgage-backed pass through certificates

 

116,829

 

6,545

 

Collateralized mortgage obligations

 

15,103

 

3,279

 

Other debt securities

 

35,327

 

0

 

Total debt securities

 

230,213

 

48,976

 

Equity securities

 

6,407

 

0

 

Total securities

 

$

236,620

 

$

48,976

 

6


Loan Portfolio

(in thousands)
 
2003
2002
2001
2000
1999
Commercial:  
 
  
 
  
 
  
 
  
 
 
Construction $67,147 $66,797 $78,508 $78,487 $80,988 
Secured by real estate  583,924  509,856  496,790  469,646  406,330 
Other  256,837  280,492  293,502  303,141  293,659 
Total commercial  907,908  857,145  868,800  851,274  780,977 
   
 
  
 
  
 
  
 
  
 
 
Real estate construction  32,495  23,311  19,932  14,704  18,002 
Real estate mortgage  413,939  377,109  423,953  434,397  396,674 
Consumer  368,578  366,493  390,311  386,504  415,935 
Equipment lease financing  13,340  10,549  6,830  6,933  7,398 
Total loans $1,736,260 $1,634,607 $1,709,826 $1,693,812 $1,618,986 
   
 
  
 
  
 
  
 
  
 
 
Percent of total year-end loans  
 
  
 
  
 
  
 
  
 
 
Commercial:  
 
  
 
  
 
  
 
  
 
 
Construction  3.87% 4.08% 4.59% 4.63% 5.00%
Secured by real estate  33.63  31.19  29.06  27.73  25.10 
Other  14.79  17.16  17.17  17.89  18.14 
Total commercial  52.29  52.43  50.82  50.25  48.24 
   
 
  
 
  
 
  
 
  
 
 
Real estate construction  1.87  1.43  1.16  0.87  1.11 
Real estate mortgage  23.84  23.07  24.80  25.65  24.50 
Consumer  21.23  22.42  22.82  22.82  25.69 
Equipment lease financing  0.77  0.65  0.40  0.41  0.46 
Total loans  100.00% 100.00% 100.00% 100.00% 100.00%

(in thousands)

 

2002

 

2001

 

2000

 

1999

 

1998

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

$

66,797

 

$

78,508

 

$

78,487

 

$

80,988

 

$

74,023

 

Secured by real estate

 

509,856

 

496,790

 

469,646

 

406,330

 

329,611

 

Other

 

280,492

 

293,502

 

303,141

 

293,659

 

279,406

 

Total commercial

 

857,145

 

868,800

 

851,274

 

780,977

 

683,040

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate construction

 

23,311

 

19,932

 

14,704

 

18,002

 

13,602

 

Real estate mortgage

 

377,109

 

423,953

 

434,397

 

396,674

 

395,483

 

Consumer

 

366,493

 

390,311

 

386,504

 

415,935

 

400,893

 

Equipment lease financing

 

10,549

 

6,830

 

6,933

 

7,398

 

5,816

 

Total loans

 

$

1,634,607

 

$

1,709,826

 

$

1,693,812

 

$

1,618,986

 

$

1,498,834

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of total year-end loans

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

4.08

%

4.59

%

4.63

%

5.00

%

4.94

%

Secured by real estate

 

31.19

 

29.06

 

27.73

 

25.10

 

21.99

 

Other

 

17.16

 

17.17

 

17.89

 

18.14

 

18.64

 

Total commercial

 

52.43

 

50.82

 

50.25

 

48.24

 

45.57

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate construction

 

1.43

 

1.16

 

0.87

 

1.11

 

0.91

 

Real estate mortgage

 

23.07

 

24.80

 

25.65

 

24.50

 

26.39

 

Consumer

 

22.42

 

22.82

 

22.82

 

25.69

 

26.74

 

Equipment lease financing

 

0.65

 

0.40

 

0.41

 

0.46

 

0.39

 

Total loans

 

100.00

%

100.00

%

100.00

%

100.00

%

100.00

%

The total loans above are net of unearned income.


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

  
Maturity at December 31, 2003
  
(in thousands)
  
Within One Year

 

 

After One but Within Five Years

 

 

After Five Years

 

 

Total
 
Commercial and consumer real estate construction $200,957 $291,914 $347,890 $840,761 
Other commercial  63,032  14,761  21,849  99,642 
  $263,989 $306,675 $369,739 $940,403 
   
 
  
 
  
 
  
 
 
Rate sensitivity:  
 
  
 
  
 
  
 
 
Predetermined rate $68,168 $58,602 $20,587 $147,357 
Adjustable rate  195,821  248,073  349,152  793,046 
  $263,989 $306,675 $369,739 $940,403 

 

 

Maturity at December 31, 2002

 

(in thousands)

 

Within One
Year

 

After One
but Within
Five Years

 

After Five
Years

 

Total

 

Commercial and consumer real estate construction

 

$

50,245

 

$

24,068

 

$

15,795

 

$

90,108

 

Other commercial

 

205,390

 

266,392

 

318,566

 

790,348

 

 

 

$

255,635

 

$

290,460

 

$

334,361

 

$

880,456

 

 

 

 

 

 

 

 

 

 

 

Rate sensitivity:

 

 

 

 

 

 

 

 

 

Predetermined rate

 

$

57,854

 

$

74,046

 

$

45,417

 

$

177,317

 

Adjustable rate

 

197,781

 

216,414

 

288,944

 

703,139

 

 

 

$

255,635

 

$

290,460

 

$

334,361

 

$

880,456

 

7


Nonperforming Assets

(in thousands)
 
2003
2002
2001
2000
1999
Nonaccrual loans $9,705 $19,649 $30,496 $22,731 $14,861 
Restructured loans  1,726  276  518  338  390 
90 days or more past due and still accruing interest  5,463  2,814  2,640  3,000  3,237 
Total nonperforming loans  16,894  22,739  33,654  26,069  18,488 
   
 
  
 
  
 
  
 
  
 
 
Foreclosed properties  6,566  2,761  1,982  4,339  2,193 
Total nonperforming assets $23,460 $25,500 $35,636 $30,408 $20,681 
   
 
  
 
  
 
  
 
  
 
 
Nonperforming assets to total loans and foreclosed properties  1.35% 1.56% 2.08% 1.79% 1.28%
Allowance to nonperforming loans  145.93  102.34  70.27  99.30  135.77 

(in thousands)

 

2002

 

2001

 

2000

 

1999

 

1998

 

Nonaccrual loans

 

$

19,649

 

$

30,496

 

$

22,731

 

$

14,861

 

$

14,930

 

Restructured loans

 

276

 

518

 

338

 

390

 

202

 

90 days or more past due and still accruing interest

 

2,814

 

2,640

 

3,000

 

3,237

 

5,635

 

Total nonperforming loans

 

22,739

 

33,654

 

26,069

 

18,488

 

20,767

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreclosed properties

 

2,761

 

1,982

 

4,339

 

2,193

 

1,769

 

Total nonperforming assets

 

$

25,500

 

$

35,636

 

$

30,408

 

$

20,681

 

$

22,536

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming assets to total loans and foreclosed properties

 

1.56

%

2.08

%

1.79

%

1.28

%

1.50

%

Allowance to nonperforming loans

 

102.34

%

70.27

%

99.30

%

135.77

%

125.63

%

Nonaccrual, past due,Past Due, and restructured loansRestructured Loans

(in thousands)

 

Nonaccrual
loans

 

As a% of
Loan
Balances by
Category

 

Restructured
Loans

 

As a% of
Loan
Balances by
Category

 

Accruing
Loans Past
Due 90 Days
or More

 

As a % of
Loan
Balances by
Category

 

Balances

 

December 31, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial construction

 

$

891

 

1.33

%

$

0

 

0.00

%

$

0

 

0.00

%

$

66,797

 

Commercial secured by real estate

 

11,467

 

2.25

 

276

 

0.05

 

591

 

0.12

 

509,856

 

Commercial other

 

2,167

 

0.77

 

0

 

0.00

 

344

 

0.12

 

280,492

 

Consumer real estate construction

 

0

 

0.00

 

0

 

0.00

 

0

 

0.00

 

23,311

 

Consumer real estate secured

 

5,040

 

1.34

 

0

 

0.00

 

1,143

 

0.30

 

377,109

 

Consumer other

 

84

 

0.02

 

0

 

0.00

 

736

 

0.20

 

366,493

 

Equipment lease financing

 

0

 

0.00

 

0

 

0.00

 

0

 

0.00

 

10,549

 

Total

 

$

19,649

 

1.20

%

$

276

 

0.02

%

$

2,814

 

0.17

%

$

1,634,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial construction

 

$

3,595

 

4.58

%

$

0

 

0.00

%

$

77

 

0.10

%

$

78,508

 

Commercial secured by real estate

 

11,892

 

2.39

 

349

 

0.07

 

877

 

0.18

 

496,790

 

Commercial other

 

7,030

 

2.40

 

169

 

0.06

 

336

 

0.11

 

293,502

 

Consumer real estate construction

 

0

 

0.00

 

0

 

0.00

 

101

 

0.51

 

19,932

 

Consumer real estate secured

 

7,877

 

1.86

 

0

 

0.00

 

660

 

0.16

 

423,953

 

Consumer other

 

102

 

0.03

 

0

 

0.00

 

589

 

0.15

 

390,311

 

Equipment lease financing

 

0

 

0.00

 

0

 

0.00

 

0

 

0.00

 

6,830

 

Total

 

$

30,496

 

1.78

%

$

518

 

0.03

%

$

2,640

 

0.15

%

$

1,709,826

 


(in thousands)
  
Nonaccrual loans

 

 

As a % of Loan Balances by Category

 

 

Restructured Loans

 

 

As a % of Loan Balances by Category

 

 

Accruing Loans Past Due 90 Days or More

 

 

As a % of Loan Balances by Category

 

 

Balances
 
December 31, 2003
                      
Commercial construction $84  0.13%$0  0.00%$0  0.00%$67,147 
Commercial secured by real estate  4,165  0.71  637  0.11  1,824  0.31  583,924 
Commercial other  2,269  0.88  1,089  0.42  1,076  0.42  256,837 
Consumer real estate construction  134  0.41  0  0.00  0  0.00  32,495 
Consumer real estate secured  3,013  0.73  0  0.00  1,984  0.48  413,939 
Consumer other  40  0.01  0  0.00  579  0.16  368,578 
Equipment lease financing  0  0.00  0  0.00  0  0.00  13,340 
 
Total $9,705  0.56%$1,726  0.10%$5,463  0.31%$1,736,260 
December 31, 2002
                      
Commercial construction $891  1.33%$0  0.00%$0  0.00%$66,797 
Commercial secured by real estate  11,467  2.25  276  0.05  591  0.12  509,856 
Commercial other  2,167  0.77  0  0.00  344  0.12  280,492 
Consumer real estate construction  0  0.00  0  0.00  0  0.00  23,311 
Consumer real estate secured  5,040  1.34  0  0.00  1,143  0.30  377,109 
Consumer other  84  0.02  0  0.00  736  0.20  366,493 
Equipment lease financing  0  0.00  0  0.00  0  0.00  10,549 
Total $19,649  1.20%$276  0.02%$2,814  0.17%$1,634,607 

In 2002,2003, gross interest income that would have been recorded on nonaccrual loans had the loans been current in accordance with their original terms amounted to $2.3$1.0 million. Interest income actually received and included in net income for the period was $0.2$0.1 million, leaving $2.1$0.9 million of interest income not recognized during the period.

8


Discussion of the Nonaccrual Policy

The accrual of interest income on loans is discontinued when the collection of interest and principal in full is not expected. When interest accruals are discontinued, interest income accrued in the current period is reversed and interest income accrued in prior periods is charged through the allowance for loan losses. Any loans past due 90 days or more must be well secured and in the process of collection to continue accruing interest.


Potential Problem Loans


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


Foreign Outstandings


None


Loan Concentrations


The Corporation had no concentration of loans exceeding 10% of total loans at December 31, 2002.2003. See note 1816 to the consolidated financial statements for further information.

9


Analysis of the Allowance for Loan Losses


(in thousands)
 
2003
2002
2001
2000
1999
Allowance for loan losses, beginning of year $23,271 $23,648 $25,886 $25,102 $26,089 
Loans charged off:                
Commercial construction  164  662  275  106  121 
Commercial secured by real estate  773  2,386  3,252  1,210  491 
Commercial other  4,085  3,393  2,406  1,480  1,219 
Real estate mortgage  957  1,098  1,061  1,006  1,585 
Consumer  5,725  6,598  8,452  9,645  11,888 
     
Total charge-offs  11,704  14,137  15,446  13,447  15,304 
                 
Recoveries of loans previously charged off:                
Commercial construction  32  0  25  4  5 
Commercial secured by real estate  243  156  105  348  427 
Commercial other  450  207  224  228  469 
Real estate mortgage  159  107  76  123  195 
Consumer  2,870  3,204  3,593  4,311  4,116 
Total recoveries  3,754  3,674  4,023  5,014  5,212 
                 
Net charge-offs:                
Commercial construction  132  662  250  102  116 
Commercial secured by real estate  530  2,230  3,147  862  64 
Commercial other  3,635  3,186  2,182  1,252  750 
Real estate mortgage  798  991  985  883  1,390 
Consumer  2,855  3,394  4,859  5,334  7,772 
Total net charge-offs  7,950  10,463  11,423  8,433  10,092 
                 
Provisions charged against operations  9,332  10,086  9,185  9,217  9,105 
Balance, end of year $24,653 $23,271 $23,648 $25,886 $25,102 
      
                
Allocation of allowance, end of year:                
Commercial construction $2,323 $305 $552 $499 $328 
Commercial secured by real estate  5,281  2,327  4,264  3,632  2,126 
Commercial other  608  1,280  2,293  2,284  1,773 
Real estate mortgage  76  810  1,404  942  463 
Real estate mortgage construction  971  50  66  32  115 
Consumer  2,833  3,390  7,737  8,689  12,313 
Equipment lease financing  121  48  56  52  45 
Unallocated  12,440  15,061  7,276  9,756  7,939 
Balance, end of year $24,653 $23,271 $23,648 $25,886 $25,102 
      
                 
Average loans outstanding, net of unearned interest $1,658,289 $1,660,912 $1,748,241 $1,665,349 $1,557,209 
Loans outstanding at end of year, net of unearned interest $1,736,260 $1,634,607 $1,709,826 $1,693,812 $1,618,986 
                 
Net charge-offs to average loan type:                
Commercial construction  0.19% 0.94% 0.32% 0.13% 0.15%
Commercial secured by real estate  0.10  0.44  0.63  0.19  0.02 
Commercial other  1.29  1.12  0.70  0.40  0.25 
Real estate mortgage  0.20  0.25  0.22  0.21  0.36 
Consumer  0.79  0.90  1.22  1.34  1.91 
     
Total  0.48% 0.63% 0.65% 0.51% 0.65%
                 
Other ratios:                
    Allowance to net loans, end of year  

 1.42

%
 

1.42 

% 

 

1.38 

% 

 

1.53 

% 

 

1.55 

% 

     Provision for loan losses to average loans

 

 

0.56 

 

 

0.61 

 

 

0.53 

 

 

0.55 

 

 

0.58 

 

(in thousands)

 

2002

 

2001

 

2000

 

1999

 

1998

 

Allowance for loan losses, beginning of year

 

$

23,648

 

$

25,886

 

$

25,102

 

$

26,089

 

$

20,465

 

Loans charged off:

 

 

 

 

 

 

 

 

 

 

 

Commercial construction

 

662

 

275

 

106

 

121

 

1

 

Commercial secured by real estate

 

2,386

 

3,252

 

1,210

 

491

 

843

 

Commercial other

 

3,393

 

2,406

 

1,480

 

1,219

 

1,496

 

Real estate mortgage

 

1,098

 

1,061

 

1,006

 

1,585

 

872

 

Consumer

 

6,598

 

8,452

 

9,645

 

11,888

 

12,603

 

Total charge-offs

 

14,137

 

15,446

 

13,447

 

15,304

 

15,815

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries of loans previously charged off:

 

 

 

 

 

 

 

 

 

 

 

Commercial construction

 

0

 

25

 

4

 

5

 

0

 

Commercial secured by real estate

 

156

 

105

 

348

 

427

 

158

 

Commercial other

 

207

 

224

 

228

 

469

 

248

 

Real estate mortgage

 

107

 

76

 

123

 

195

 

99

 

Consumer

 

3,204

 

3,593

 

4,311

 

4,116

 

3,860

 

Total recoveries

 

3,674

 

4,023

 

5,014

 

5,212

 

4,365

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs:

 

 

 

 

 

 

 

 

 

 

 

Commercial construction

 

662

 

250

 

102

 

116

 

1

 

Commercial secured by real estate

 

2,230

 

3,147

 

862

 

64

 

685

 

Commercial other

 

3,186

 

2,182

 

1,252

 

750

 

1,248

 

Real estate mortgage

 

991

 

985

 

883

 

1,390

 

773

 

Consumer

 

3,394

 

4,859

 

5,334

 

7,772

 

8,743

 

Total net charge-offs

 

10,463

 

11,423

 

8,433

 

10,092

 

11,450

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowances of acquired banks

 

0

 

0

 

0

 

0

 

1,066

 

Provisions charged against operations

 

10,086

 

9,185

 

9,217

 

9,105

 

16,008

 

Balance, end of year

 

$

23,271

 

$

23,648

 

$

25,886

 

$

25,102

 

$

26,089

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocation of allowance, end of year:

 

 

 

 

 

 

 

 

 

 

 

Commercial construction

 

$

305

 

$

552

 

$

499

 

$

328

 

$

398

 

Commercial secured by real estate

 

2,327

 

4,264

 

3,632

 

2,126

 

2,379

 

Commercial other

 

1,280

 

2,293

 

2,284

 

1,773

 

2,354

 

Real estate mortgage

 

810

 

1,404

 

942

 

463

 

396

 

Real estate mortgage construction

 

50

 

66

 

32

 

115

 

87

 

Consumer

 

3,390

 

7,737

 

8,689

 

12,313

 

10,234

 

Equipment lease financing

 

48

 

56

 

52

 

45

 

49

 

Unallocated

 

15,061

 

7,276

 

9,756

 

7,939

 

10,192

 

Balance, end of year

 

$

23,271

 

$

23,648

 

$

25,886

 

$

25,102

 

$

26,089

 

 

 

 

 

 

 

 

 

 

 

 

 

Average loans outstanding, net of unearned interest

 

$

1,660,912

 

$

1,748,241

 

$

1,665,349

 

$

1,557,209

 

$

1,465,224

 

Loans outstanding at end of year, net of unearned interest

 

$

1,634,607

 

$

1,709,826

 

$

1,693,812

 

$

1,618,986

 

$

1,498,834

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs to average loan type:

 

 

 

 

 

 

 

 

 

 

 

Commercial construction

 

0.94

%

0.32

%

0.13

%

0.15

%

0.00

%

Commercial secured by real estate

 

0.44

%

0.63

%

0.19

%

0.02

%

0.22

%

Commercial other

 

1.12

%

0.70

%

0.40

%

0.25

%

0.46

%

Real estate mortgage

 

0.25

%

0.22

%

0.21

%

0.36

%

0.19

%

Consumer

 

0.90

%

1.22

%

1.34

%

1.91

%

2.25

%

Total

 

0.63

%

0.65

%

0.51

%

0.65

%

0.78

%

 

 

 

 

 

 

 

 

 

 

 

 

Other ratios:

 

 

 

 

 

 

 

 

 

 

 

Allowance to net loans, end of year

 

1.42

%

1.38

%

1.53

%

1.55

%

1.74

%

Provision for loan losses to average loans

 

0.61

%

0.53

%

0.55

%

0.58

%

1.09

%

10


The allowance for loan losses balance is maintained by management at a level considered adequate to cover anticipated probable losses based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time. This analysis is completed quarterly and forms the basis for allocation of the loan loss reserve and what charges to the provision may be required. See note 1 to the consolidated financial statements for further information.

Average Deposits and Other Borrowed Funds

(in thousands)
 
2003
2002
2001
Deposits:          
Noninterest bearing deposits $338,909 $315,202 $277,748 
NOW accounts  15,852  19,617  19,353 
Money market accounts  403,314  416,078  379,372 
Savings accounts  212,258  195,360  150,347 
Certificates of deposit of $100,000 or more  361,037  363,480  389,556 
Certificates of deposit < $100,000 and other time deposits  778,382  800,977  877,920 
Total deposits  2,109,752  2,110,714  2,094,296 
           
Other borrowed funds:          
Federal funds purchased and securities sold under repurchase agreements  83,270  70,275  74,743 
Other short-term borrowings  262  679  6,349 
Advances from Federal Home Loan Bank  4,123  7,381  11,279 
Long-term debt  60,304  60,379  47,991 
Total other borrowed funds  147,959  138,714  140,362 
Total deposits and other borrowed funds $2,257,711 $2,249,428 $2,234,658 

(in thousands)

 

2002

 

2001

 

2000

 

Deposits:

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

315,202

 

$

277,748

 

$

251,643

 

NOW accounts

 

19,617

 

19,353

 

128,265

 

Money market accounts

 

416,078

 

379,372

 

237,792

 

Savings accounts

 

195,360

 

150,347

 

144,228

 

Certificates of deposit of $100,000 or more

 

363,480

 

389,556

 

329,948

 

Certificates of deposit < $100,000 and other time deposits

 

800,977

 

877,920

 

794,322

 

Total deposits

 

2,110,714

 

2,094,296

 

1,886,198

 

 

 

 

 

 

 

 

 

Other borrowed funds:

 

 

 

 

 

 

 

Federal funds purchased and securities sold under repurchase agreements

 

70,275

 

74,743

 

48,343

 

Other short-term borrowings

 

679

 

6,349

 

5,500

 

Advances from Federal Home Loan Bank

 

7,381

 

11,279

 

15,006

 

Trust preferred securities

 

57,377

 

34,500

 

34,500

 

Long-term debt

 

3,002

 

13,491

 

13,615

 

Total other borrowed funds

 

138,714

 

140,362

 

116,964

 

Total deposits and other borrowed funds

 

$

2,249,428

 

$

2,234,658

 

$

2,003,162

 

The maximum balance for federal funds purchased and repurchase agreements at any month-end during 20022003 occurred at February 28, 2002,November 30, 2003, with a month-end balance of $87.7$112.7 million.


Maturities and/or repricing of time deposits of $100,000 or more outstanding at December 31, 20022003 are summarized as follows:

(in thousands)
 
Certificates of Deposit
Other Time Deposits
Total
Three months or less $141,905 $5,289 $147,194 
Over three through six months  67,587  3,791  71,378 
Over six through twelve months  112,993  7,977  120,970 
Over twelve through sixty months  35,088  3,822  38,910 
Over sixty months  0  106  106 
  $357,573 $20,985 $378,558 

(in thousands)

 

Certificates of
Deposit

 

Other Time
Deposits

 

Total

 

Three months or less

 

$

125,086

 

$

7,410

 

$

132,496

 

Over three through six months

 

60,272

 

2,669

 

62,941

 

Over six through twelve months

 

128,726

 

8,200

 

136,926

 

Over twelve through sixty months

 

39,923

 

4,578

 

44,501

 

 

 

$

354,007

 

$

22,857

 

$

376,864

 

11


Item 2. Properties

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

Location

 

Owned

 

Leased

 

Total

 

Banking locations:

 

 

 

 

 

 

 

Community Trust Bank, Inc.

 

 

 

 

 

 

 

*

Pikeville Market (lease land to 2 owned locations)
10 locations in Pike County, Kentucky

 

8

 

2

 

10

 

 

Floyd/Knott Market
1 location in Floyd County, Kentucky and 1 location in Knott County, Kentucky

 

2

 

0

 

2

 

 

Tug Valley Market
1 location in Pike County, Kentucky and 1 location in Mingo County, West Virginia

 

1

 

1

 

2

 

 

Whitesburg Market (own land to 1 leased office)
5 locations in Letcher County, Kentucky

 

3

 

2

 

5

 

*

Lexington Market
4 locations in Fayette County, Kentucky

 

1

 

3

 

4

 

 

Winchester Market
3 locations in Clark County, Kentucky

 

1

 

2

 

3

 

 

Richmond Market
4 locations in Madison County, Kentucky

 

2

 

2

 

4

 

 

Mt. Sterling Market
2 locations in Montgomery County, Kentucky

 

2

 

0

 

2

 

*

Versailles Market
2 locations in Woodford County, Kentucky, 1 location in Franklin County, Kentucky, 1 location in Mercer County, Kentucky, and 1 location in Scott County, Kentucky

 

2

 

3

 

5

 

*

Ashland Market
4 locations in Boyd County, Kentucky and 1 location in Greenup County, Kentucky

 

5

 

0

 

5

 

 

Flemingsburg Market
4 locations in Fleming County, Kentucky

 

4

 

0

 

4

 

 

Hamlin Market
2 locations in Lincoln County, West Virginia and 1 location in Wayne County, West Virginia

 

3

 

0

 

3

 

 

Summersville Market
1 location in Nicholas County, West Virginia

 

1

 

0

 

1

 

*

Middlesboro Market (lease land to 1 owned location)
3 locations in Bell County, Kentucky

 

3

 

0

 

3

 

 

Williamsburg Market
2 locations in Whitley County, Kentucky and 2 locations in Laurel County, Kentucky

 

4

 

0

 

4

 

 

Campbellsville Market
2 locations in Taylor County, Kentucky, 2 locations in Pulaski County, Kentucky, 1 location in Adair County, Kentucky, 1 location in Green County, Kentucky, 1 location in Russell County, Kentucky, and 1 location in Marion County, Kentucky

 

6

 

2

 

8

 

 

Mt. Vernon Market
2 locations in Rockcastle County, Kentucky

 

2

 

0

 

2

 

 

Hazard Market
7 locations in Perry County, Kentucky

 

6

 

1

 

7

 

Total banking locations

 

56

 

18

 

74

 

 

 

 

 

 

 

 

 

Operational locations:

 

 

 

 

 

 

 

Community Trust Bank, Inc.

 

 

 

 

 

 

 

 

Pikeville (Pike County, Kentucky)

 

1

 

0

 

1

 

 

Lexington (Fayette County, Kentucky)

 

0

 

1

 

1

 

Total operational locations

 

1

 

1

 

2

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

Community Trust Bank, Inc.

 

 

 

 

 

 

 

 

Ashland (Boyd County, Kentucky)

 

0

 

1

 

1

 

 

Williamsburg (Whitley County, Kentucky)

 

1

 

0

 

1

 

 

 

 

1

 

1

 

2

 

 

 

 

 

 

 

 

 

 

Total locations

 

58

 

20

 

78

 

2003:


Location
Owned
Leased
Total
Banking locations:
   
Community Trust Bancorp, Inc.   
*Tug Valley Market101
  1 location in Mingo County, West Virginia   
*Hamlin Market303
  2 locations in Lincoln County, West Virginia and 1 location in Wayne County, West Virginia   
*Summersville Market101
  1 location in Nicholas County, West Virginia   
    
Community Trust Bank, Inc.   
lPikeville Market (lease land to 2 owned locations)8210
  10 locations in Pike County, Kentucky   
 Floyd/Knott Market202
  1 location in Floyd County, Kentucky and 1 location in Knott County, Kentucky   
 Tug Valley Market011
  1 location in Pike County, Kentucky   
 Whitesburg Market (own land to 1 leased office)325
  5 locations in Letcher County, Kentucky   
lLexington Market145
  5 locations in Fayette County, Kentucky   
 Winchester Market123
  3 locations in Clark County, Kentucky   
 Richmond Market224
  4 locations in Madison County, Kentucky   
 Mt. Sterling Market202
  2 locations in Montgomery County, Kentucky   
lVersailles Market235
  2 locations in Woodford County, Kentucky, 1 location in Franklin County, Kentucky, 1 location in Mercer County, Kentucky, and 1 location in Scott County, Kentucky   
lAshland Market505
  4 locations in Boyd County, Kentucky and 1 location in Greenup County, Kentucky   
 Flemingsburg Market404
  4 locations in Fleming County, Kentucky   
lMiddlesboro Market (lease land to 1 owned location)303
  3 locations in Bell County, Kentucky   
 Williamsburg Market404
  2 locations in Whitley County, Kentucky and 2 locations in Laurel County, Kentucky   
 Campbellsville Market628
  2 locations in Taylor County, Kentucky, 2 locations in Pulaski County, Kentucky, 1 location in Adair County, Kentucky, 1 location in Green County, Kentucky, 1 location in Russell County, Kentucky, and 1 location in Marion County, Kentucky   
 Mt. Vernon Market202
  2 locations in Rockcastle County, Kentucky   
 Hazard Market606
  6 locations in Perry County, Kentucky   
Total banking locations
561874
    
Operational locations:
   
Community Trust Bank, Inc.   
 Pikeville (Pike County, Kentucky)101
 Lexington (Fayette County, Kentucky)011
Total operational locations
112
    
Other:
   
Community Trust Bank, Inc.   
 Ashland (Boyd County, Kentucky)011
 Williamsburg (Whitley County, Kentucky)101
Total other locations
112
     
Total locations
582078
*Community Trust Bank, Inc. leases these branch locations.
lCommunity Trust and Investment Company has leased offices in the main office locations in these markets.

12



See notes 87 and 1513 to the consolidated financial statements included herein for the year ended December 31, 2002,2003, for additional information relating to lease commitments and amounts invested in premises and equipment.


Item 3. Legal Proceedings


The Corporation and its subsidiaries, and from time to time, its officers are named defendants in legal actions arising from normalordinary business activities. Management, after consultation with legal counsel, believes these actions are without merit or that the ultimate liability, if any, will not materially affect the Corporation’s consolidated financial position or results of operations.


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 2002.

13

2003.


Executive Officers of the Registrant


Set forth below are the executive officers of the Corporation at December 31, 2002,2003, their positions with the Corporation, and the year in which they first became an executive officer or director.


Name and Age(1)

 

Positions and Offices
Currently Held

 

Date First Became
Director or
Executive Officer

 

Principal Occupation

Jean R. Hale; 56

 

President, CEO, and Director

 

1992

 

 

Vice Chairman, President and CEO of Community Trust Bancorp, Inc.

 

 

 

 

 

 

 

 

Ronald M. Holt; 55

 

Executive Vice President

 

1996

(2)

 

President and CEO of Community Trust and Investment Company

 

 

 

 

 

 

 

 

Mark A. Gooch; 44

 

Executive Vice President and Treasurer

 

1997

 

 

President and CEO of Community Trust Bank, Inc.

 

 

 

 

 

 

 

 

William Hickman III; 52

 

Executive Vice President and Secretary

 

1998

(3)

 

Executive Vice President/Staff Attorney of Community Trust Bank, Inc.

 

 

 

 

 

 

 

 

Michael S. Wasson; 51

 

Executive Vice President

 

2000

(4)

 

Executive Vice President/Central Kentucky Region President of Community Trust Bank, Inc.

 

 

 

 

 

 

 

 

James B. Draughn; 43

 

Executive Vice President

 

2001

(5)

 

Executive Vice President/Operations of Community Trust Bank, Inc.

 

 

 

 

 

 

 

 

Kevin J. Stumbo; 42

 

Executive Vice President

 

2002

(6)

 

Executive Vice President/Controller of Community Trust Bank, Inc.

 

 

 

 

 

 

 

 

Ricky D. Sparkman; 40

 

Executive Vice President

 

2002

(7)

 

Executive Vice President/South Central Region President of Community Trust Bank, Inc.

 

 

 

 

 

 

 

 

Richard W. Newsom; 48

 

Executive Vice President

 

2002

(8)

 

Executive Vice President/Eastern Region President of Community Trust Bank, Inc.

 

 

 

 

 

 

 

 

James Gartner; 61

 

Executive Vice President

 

2002

(9)

 

Executive Vice President/Chief Credit Officer of Community Trust Bank, Inc.

 

 

 

 

 

 

 

 

Larry W. Jones; 56

 

Executive Vice President

 

2002

(10)

 

Executive Vice President/Northeast Region President of Community Trust Bank, Inc.

 
 
Name and Age(1)
 
Positions and Offices Currently Held
Date First Became
Director or
Executive Officer
 
Principal Occupation
Jean R. Hale; 57Vice Chairman, President and CEO1992 Vice Chairman, President and CEO of Community Trust Bancorp, Inc.
     
Mark A. Gooch; 45Executive Vice President and Treasurer1997 President and CEO of Community Trust Bank, Inc.
     
Tracy Little; 63Executive Vice President2003(2)President and CEO of Community Trust and Investment Company
     
William Hickman III; 53Executive Vice President and Secretary1998 Executive Vice President/Staff Attorney of Community Trust Bank, Inc.
     
Michael S. Wasson; 52Executive Vice President2000(3)Executive Vice President/ Central Kentucky Region President of Community Trust Bank, Inc.
     
James B. Draughn; 44Executive Vice President2001(4)Executive Vice President/Operations of Community Trust Bank, Inc.
     
Kevin J. Stumbo; 43Executive Vice President2002(5)Executive Vice President/ Controller of Community Trust Bank, Inc.
     
Ricky D. Sparkman; 41Executive Vice President2002(6)Executive Vice President/ South Central Region President of Community Trust Bank, Inc.
     
Richard W. Newsom; 49Executive Vice President2002(7)Executive Vice President/ Eastern Region President of Community Trust Bank, Inc.
     
James Gartner; 62Executive Vice President2002(8)Executive Vice President/ Chief Credit Officer of Community Trust Bank, Inc.
     
Larry W. Jones; 57Executive Vice President2002(9)Executive Vice President/ Northeast Region President of Community Trust Bank, Inc.

(1) The ages listed for the Corporation’sCorporation's executive officers are as of February 28, 2003.

14

29, 2004.

(2) Mr. Holt retired fromLittle began employment with the Corporation effective February 11,on August 4, 2003.

Prior to joining the Corporation, Mr. Little served for three years in Sarasota, Florida as Vice President of Fisher Investments, Inc., a $10 billion private investment firm headquartered in Woodside, California. For the two years prior, he served as Senior Vice President and Executive Officer in charge of the private client group of Provident Bank of Florida. Mr. Little has thirty-five years in the trust and banking business and has been the executive in charge of five different trust departments and trust companies.

(3) Mr. Hickman served as legal counsel for the Corporation from 1980 to 1994.  From 1994 until he rejoined the Corporation in December 1997 he engaged in the practice of law in Pikeville, Kentucky.

(4)Mr. Wasson was employed by Mercantile Bancorporation for 16 years prior to joining the Corporation in 2000. Mr. Wasson served as President of Mercantile Bank of Western Missouri, President of Mercantile Bank of Southern Illinois, and most recently as Chief Operating Officer of Mercantile Bank Midwest.

(5)

(4)Mr. Draughn served as Technology Manager for the Bank for seven years, most recently as Senior Vice President/Technology, prior to being promoted to Executive Vice President/Operations.

(6)

(5)Mr. Stumbo served as Senior Vice President/Controller for the Bank for five years prior to being promoted to Executive Vice President/Controller.

(7)(6)  Mr. Sparkman served as Vice President/Commercial Lending prior to being promoted to Market President in January 2000. In 2002, Mr. Sparkman was promoted to Executive Vice President and South Central Region President.

(8)(7) Mr. Newsom served as Senior Vice President of Consumer Lending for five years prior to being promoted to Executive Vice President and Eastern Region President of Community Trust Bank, Inc.

(9)(8) Mr. Gartner was employed for two years as Executive Vice President/Risk Management by Hamilton Bank, N.A., Miami, Florida, with assets of $1.2 billion prior to joining the Corporation. Prior to accepting his position at Hamilton Bank, Mr. Gartner was employed as Executive Vice President/Risk Manager, Chief Credit Officer, and Director at First National Bank of Nevada Holding Company. For two months in 1998, Mr. Gartner served as Executive Vice President/Merger Liaison Officer at Norwest Bank Arizona which purchased the Bank of Arizona and The Bank of New Mexico where Mr. Gartner served as Executive Vice President/Risk Management, Chief Credit Officer, and Director of the Bank of Arizona for the two years prior.

(10)(9)  Mr. Jones was employed by AmSouth Bancorp, a $35 billion financial services corporation, as District/City President for three years prior to joining the Corporation. Mr. Jones was employed by First American National Bank as Division Manager for north Mississippi for one year prior to its merger with AmSouth in 1999. For the twentythirty years prior, Mr. Jones was employed by Deposit Guaranty National Bank, formerly Security State Bank, prior to its merger with First American National Bank most recently as President/Community Bank.

15


PART II


Item 5. Market for the Registrant’s Common Equity and Related Shareholder Matters


The Corporation’s common stock is listed on The NASDAQ-Stock Market’s National Market under the symbol CTBI. Additional information required by this item is included in the Quarterly Financial Data below:


Quarterly Financial Data

(in thousands except per share amounts)
     
Three Months Ended
 
December 31
September 30
June 30
March 31
2003
  
 
  
 
  
 
  
 
 
Net interest income $22,297 $20,776 $21,018 $20,528 
Net interest income, taxable equivalent basis  22,689  21,162  21,437  20,926 
Provision for loan losses  2,115  2,085  3,585  1,547 
Noninterest income  8,148  10,093  9,585  8,546 
Noninterest expense  18,249  18,111  16,764  17,611 
Net income  7,553  7,281  7,064  6,993 
   
 
  
 
  
 
  
 
 
Per common share:  
 
  
 
  
 
  
 
 
Basic earnings per share $0.56 $0.54 $0.52 $0.52 
Diluted earnings per share  0.55  0.53  0.52  0.51 
Dividends declared  0.23  0.21  0.19  0.19 
   
 
  
 
  
 
  
 
 
Common stock price:  
 
  
 
  
 
  
 
 
High $33.73 $28.26 $27.27 $24.22 
Low  25.50  23.76  22.96  22.46 
Last trade  30.20  26.43  23.78  22.96 
   
 
  
 
  
 
  
 
 
Selected ratios:  
 
  
 
  
 
  
 
 
Return on average assets, annualized  1.20% 1.15% 1.14% 1.15%
Return on average common equity, annualized  13.61  13.45  13.27  13.38 
Net interest margin, annualized  3.93  3.62  3.75  3.74 
   
 
  
 
  
 
  
 
 
2002
  
 
  
 
  
 
  
 
 
Net interest income $21,677 $22,360 $22,783 $22,437 
Net interest income, taxable equivalent basis  22,125  22,853  23,253  22,923 
Provision for loan losses  1,670  2,530  3,145  2,741 
Noninterest income  8,205  8,687  5,442  5,594 
Noninterest expense  17,851  16,783  16,164  16,543 
Net income  6,968  7,933  6,377  6,322 
   
 
  
 
  
 
  
 
 
Per common share:  
 
  
 
  
 
  
 
 
Basic earnings per share $0.51 $0.58 $0.46 $0.46 
Diluted earnings per share  0.51  0.57  0.46  0.45 
Dividends declared  0.19  0.18  0.17  0.17 
   
 
  
 
  
 
  
 
 
Common stock price:  
 
  
 
  
 
  
 
 
High $27.27 $23.14 $24.36 $21.36 
Low  21.49  18.72  19.84  17.99 
Last trade  22.86  22.23  23.23  21.18 
   
 
  
 
  
 
  
 
 
Selected ratios:  
 
  
 
  
 
  
 
 
Return on average assets, annualized  1.12% 1.30% 1.04% 1.02%
Return on average common equity, annualized  13.31  15.32  12.81  13.00 
Net interest margin, annualized  3.88  4.06  4.11  4.02 

(in thousands except per share amounts)

Three Months Ended

 

December 31

 

September 30

 

June 30

 

March 31

 

2002

 

 

 

 

 

 

 

 

 

Net interest income

 

$

21,677

 

$

22,360

 

$

22,783

 

$

22,437

 

Net interest income, taxable equivalent basis

 

22,125

 

22,853

 

23,253

 

22,923

 

Provision for loan losses

 

1,670

 

2,530

 

3,145

 

2,741

 

Noninterest income

 

8,205

 

8,687

 

5,442

 

5,594

 

Noninterest expense

 

17,851

 

16,783

 

16,164

 

16,543

 

Net income

 

6,968

 

7,933

 

6,377

 

6,322

 

 

 

 

 

 

 

 

 

 

 

Per common share:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.56

 

$

0.64

 

$

0.51

 

$

0.50

 

Diluted earnings per share

 

0.56

 

0.63

 

0.50

 

0.50

 

Dividends declared

 

0.21

 

0.19

 

0.19

 

0.19

 

 

 

 

 

 

 

 

 

 

 

Common stock price:

 

 

 

 

 

 

 

 

 

High

 

$

30.00

 

$

25.46

 

$

26.79

 

$

23.50

 

Low

 

23.64

 

20.59

 

21.82

 

19.79

 

Last trade

 

25.14

 

24.46

 

25.56

 

23.30

 

 

 

 

 

 

 

 

 

 

 

Selected ratios:

 

 

 

 

 

 

 

 

 

Return on average assets, annualized

 

1.12

%

1.30

%

1.04

%

1.02

%

Return on average common equity, annualized

 

13.31

%

15.32

%

12.81

%

13.00

%

Net interest margin, annualized

 

3.88

%

4.06

%

4.11

%

4.02

%

 

 

 

 

 

 

 

 

 

 

2001

 

 

 

 

 

 

 

 

 

Net interest income

 

$

21,952

 

$

20,363

 

$

19,992

 

$

20,811

 

Net interest income, taxable equivalent basis

 

22,437

 

20,848

 

20,487

 

21,328

 

Provision for loan losses

 

2,840

 

2,428

 

1,842

 

2,075

 

Noninterest income

 

6,161

 

5,511

 

6,831

 

5,271

 

Noninterest expense

 

16,666

 

15,692

 

16,249

 

16,331

 

Net income

 

5,844

 

5,272

 

5,914

 

5,242

 

 

 

 

 

 

 

 

 

 

 

Per common share:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.47

 

$

0.42

 

$

0.46

 

$

0.41

 

Diluted earnings per share

 

0.46

 

0.42

 

0.46

 

0.41

 

Dividends declared

 

0.19

 

0.19

 

0.18

 

0.18

 

 

 

 

 

 

 

 

 

 

 

Common stock price:

 

 

 

 

 

 

 

 

 

High

 

$

22.27

 

$

22.27

 

$

25.91

 

$

15.46

 

Low

 

18.96

 

18.90

 

14.21

 

13.64

 

Last trade

 

21.59

 

21.73

 

21.82

 

14.43

 

 

 

 

 

 

 

 

 

 

 

Selected ratios:

 

 

 

 

 

 

 

 

 

Return on average assets, annualized

 

0.91

%

0.86

%

0.97

%

0.90

%

Return on average common equity, annualized

 

12.08

%

11.10

%

12.74

%

11.49

%

Net interest margin, annualized

 

3.80

%

3.69

%

3.65

%

3.96

%

There were approximately 1,6361,623 holders of outstanding common shares of the Corporation at February 28, 2003.

16

29, 2004.


Dividends


The annual dividend was increased from $0.74$0.71 per share to $0.78$0.82 per share during 2002.2003. A 10% stock dividend distributed on December 15, 20022003 resulted in the restatement of the 2003 cash dividend of $0.88 per share to $0.82 per share, the 2002 cash dividend of $0.84$0.78 per share to $0.78$0.71 per share, and the 2001 cash dividend of $0.81$0.74 per share to $0.74$0.67 per share, and the 2000share. The Corporation did not adjust its fourth quarter 2003 cash dividend with the stock dividend of $0.75 per shareDecember 15, 2003 electing to $0.68retain the payment at $0.23 per share. The Corporation has adopted a conservative policy of cash dividends, by maintaining a cash dividend ratio of less than 45%, 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 governmentalgov ernmental regulations and policies. For information concerning restrictions on dividends from the subsidiary bank to the Corporation, see note 2018 to the consolidated financial statements included herein for the year ended December 31, 2002.

2003.

Item 6. Selected Financial Data 1998-20021999-2003

(in thousands except per share amounts)
Year Ended December 31
 
2003
2002
2001
2000
1999
     
Interest income $128,514 $146,550 $176,835 $175,749 $163,516 
Interest expense  43,895  57,293  93,717  91,515  79,740 
      
Net interest income  84,619  89,257  83,118  84,234  83,776 
Provision for loan losses  9,332  10,086  9,185  9,217  9,105 
Noninterest income  36,372  27,928  23,774  19,526  21,026 
Noninterest expense  70,735  67,341  64,938  61,927  64,388 
      
Income before income taxes  40,924  39,758  32,769  32,616  31,309 
Income taxes  12,033  12,158  10,497  10,270  9,464 
Net income $28,891 $27,600 $22,272 $22,346 $21,845 
                 
Per common share:                
Basic earnings per share $2.14 $2.01 $1.60 $1.55 $1.48 
Cash dividends declared- $0.82 $0.71 $0.67 $0.62 $0.59 
as a % of net income  38.32% 35.32% 41.88% 40.00% 39.86%
Book value, end of year $16.45 $15.42 $13.86 $12.85 $11.73 
Market price, end of year $30.20 $22.86 $19.63 $12.29 $15.03 
Market value to book value, end of year  1.84 x 1.48 x 1.42 x 0.96 x 1.28 x
Price/earnings ratio, end of year  14.11 x 11.37 x 12.27 x 7.93 x 10.15 x
Cash dividend yield, end of year  2.72% 3.11% 3.41% 5.04% 3.93%
                 
At year-end:                
Total assets $2,474,039 $2,487,911 $2,503,905 $2,264,395 $2,176,090 
Long-term debt  59,500  60,604  47,944  48,060  48,174 
Shareholders’ equity  221,393  209,419  191,606  181,904  172,419 
                 
Averages:                
Assets $2,492,286 $2,467,469 $2,444,695 $2,195,380 $2,182,721 
Deposits  2,109,752  2,110,714  2,094,296  1,886,198  1,882,364 
Earning assets  2,292,251  2,268,579  2,256,341  2,004,686  1,976,679 
Loans  1,658,289  1,660,912  1,748,241  1,665,349  1,557,209 
Shareholders’ equity  215,086  202,562  187,899  176,911  169,467 
                 
Profitability ratios:                
Return on average assets  1.16% 1.12% 0.91% 1.02% 1.00%
Return on average equity  13.43  13.63  11.85  12.63  12.89 

(in thousands except per share amounts)

Year Ended December 31

 

2002

 

2001

 

2000

 

1999

 

1998

 

Interest income

 

$

146,550

 

$

176,835

 

$

175,749

 

$

163,516

 

$

160,570

 

Interest expense

 

57,293

 

93,717

 

91,515

 

79,740

 

83,986

 

Net interest income

 

89,257

 

83,118

 

84,234

 

83,776

 

76,584

 

Provision for loan losses

 

10,086

 

9,185

 

9,217

 

9,105

 

16,008

 

Noninterest income

 

27,928

 

23,774

 

19,526

 

21,026

 

19,466

 

Noninterest expense

 

67,341

 

64,938

 

61,927

 

64,388

 

62,166

 

Income before income taxes

 

39,758

 

32,769

 

32,616

 

31,309

 

17,876

 

Income taxes

 

12,158

 

10,497

 

10,270

 

9,464

 

3,907

 

Net income

 

$

27,600

 

$

22,272

 

$

22,346

 

$

21,845

 

$

13,969

 

 

 

 

 

 

 

 

 

 

 

 

 

Per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

2.21

 

$

1.76

 

$

1.70

 

$

1.63

 

$

1.04

 

Cash dividends declared-

 

0.78

 

0.74

 

0.68

 

0.65

 

0.60

 

as a% of net income

 

35.29

%

42.05

%

40.00

%

39.88

%

57.69

%

Book value, end of year

 

16.96

 

15.25

 

14.14

 

12.90

 

12.31

 

Market price, end of year

 

25.14

 

21.59

 

13.53

 

16.53

 

17.65

 

Market value to book value, end of year

 

1.48

x

1.42

x

0.96

x

1.28

x

1.43

x

Price/earnings ratio, end of year

 

11.38

x

12.27

x

7.96

x

10.14

x

16.97

x

Cash dividend yield, end of year

 

3.10

%

3.43

%

5.03

%

3.93

%

3.40

%

 

 

 

 

 

 

 

 

 

 

 

 

At year-end:

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,487,911

 

$

2,503,905

 

$

2,264,395

 

$

2,176,090

 

$

2,248,039

 

Trust preferred securities

 

59,500

 

34,500

 

34,500

 

34,500

 

34,500

 

Long-term debt

 

1,104

 

13,444

 

13,560

 

13,674

 

13,823

 

Shareholders’ equity

 

209,419

 

191,606

 

181,904

 

172,419

 

164,795

 

 

 

 

 

 

 

 

 

 

 

 

 

Averages:

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

2,467,469

 

$

2,444,695

 

$

2,195,380

 

$

2,182,721

 

$

2,038,680

 

Deposits

 

2,110,714

 

2,094,296

 

1,886,198

 

1,882,364

 

1,650,801

 

Earning assets

 

2,268,579

 

2,256,341

 

2,004,686

 

1,976,679

 

1,871,898

 

Loans

 

1,660,912

 

1,748,241

 

1,665,349

 

1,557,209

 

1,465,224

 

Shareholders’ equity

 

202,562

 

187,899

 

176,911

 

169,467

 

162,689

 

 

 

 

 

 

 

 

 

 

 

 

 

Profitability ratios:

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

1.12

%

0.91

%

1.02

%

1.00

%

0.69

%

Return on average equity

 

13.63

%

11.85

%

12.63

%

12.89

%

8.59

%

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios:

 

 

 

 

 

 

 

 

 

 

 

Equity to assets, end of year

 

8.42

%

7.65

%

8.03

%

7.92

%

7.33

%

Average equity to average assets

 

8.21

%

7.69

%

8.06

%

7.76

%

7.98

%

 

 

 

 

 

 

 

 

 

 

 

 

Risk based capital ratios:

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk Weighted Assets)

 

12.22

%

10.32

%

10.51

%

10.17

%

9.75

%

Tier 1 Capital (to Risk Weighted Assets)

 

10.98

%

9.11

%

9.26

%

8.92

%

8.50

%

Tier 1 Capital (to Average Assets)

 

8.23

%

6.44

%

7.29

%

7.09

%

6.09

%

 

 

 

 

 

 

 

 

 

 

 

 

Other significant ratios:

 

 

 

 

 

 

 

 

 

 

 

Allowance to net loans, end of year

 

1.42

%

1.38

%

1.53

%

1.55

%

1.74

%

Allowance to nonperforming loans, end of year

 

102.34

%

70.27

%

99.30

%

135.77

%

125.63

%

Nonperforming assets to loans and foreclosed properties, end of year

 

1.56

%

2.08

%

1.79

%

1.28

%

1.50

%

Net interest margin

 

4.02

%

3.77

%

4.33

%

4.37

%

4.21

%

 

 

 

 

 

 

 

 

 

 

 

 

Other statistics:

 

 

 

 

 

 

 

 

 

 

 

Average common shares outstanding

 

12,475

 

12,668

 

13,141

 

13,387

 

13,394

 

Number of full-time equivalent employees, end of year

 

874

 

883

 

795

 

830

 

818

 

17
Capital ratios:                
Equity to assets, end of year  8.95% 8.42% 7.65% 8.03% 7.92%
Average equity to average assets  8.63  8.21  7.69  8.06  7.76 
                 
Risk based capital ratios:                
Tier 1 capital (to average assets)  8.73% 8.23% 6.44% 7.29% 7.09%
Tier 1 capital (to risk weighted assets)  11.35  10.98  9.11  9.26  8.92 
Total capital (to risk weighted assets)  12.60  12.22  10.32  10.51  10.17 
                 
Other significant ratios:                
Allowance to net loans, end of year  1.42% 1.42% 1.38% 1.53% 1.55%
Allowance to nonperforming loans, end of year  145.93  102.34  70.27  99.30  135.77 
Nonperforming assets to loans and foreclosed properties, end of year  1.35  1.56  2.08  1.79  1.28 
Net interest margin  3.76  4.02  3.77  4.33  4.37 
                 
Other statistics:                
Average common shares outstanding  13,474  13,722  13,935  14,455  14,726 
Number of full-time equivalent employees, end of year  901  874  883  795  830 



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Overview


Community Trust Bancorp, Inc. reported net incomerecord earnings of $28.9 million for 2003 compared to $27.6 million for 2002 compared toand $22.3 million for 2001 and 2000.2001. Basic earnings per share for 20022003 were $2.21$2.14 compared to $1.76$2.01 per share for 20012002 and $1.70$1.60 per share for 2000.  Fourth quarter and year-to-date 20022001. Basic earnings were positively impacted by $0.045 per share and $0.18for the year 2003 reflects the Corporation’s fifth consecutive year of increased earnings per share, respectively, due to the implementation of SFAS No. 142, Goodwill and Other Intangible Assets.share. All per share data has been restated to reflect the 10% stock dividend distributed on December 15, 2002.

2003.


The increase in earnings is reflected in the Corporation’s performance ratios.Corporation's return on average assets for 2003. Return on average assets for 20022003 was 1.12%1.16% compared to 1.12% and 0.91% in 2002 and 1.02%2001, respectively. The growth in 2001 and 2000, respectively, andaverage shareholders’ equity of $12.5 million for the year ended December 31, 2003 resulted in a slightly lower average return on equity for 2003 of 13.43% compared to 13.63% for 2002. Return on average equity for 2001 was 11.85%.

    Income tax expense for the Corporation was reduced by $350 thousand during the fourth quarter of 2003 due to the receipt of a New Markets Tax Credit. This credit was earned through the capitalization of Community Trust Community Development Corporation, a wholly owned subsidiary of Community Trust Bank, Inc. The Corporation was awarded a $7 million investment allocation and the resulting tax credit through competitive application to the federal government during 2002 was 13.63% compared to 11.85%stimulate economic growth in low-income areas.

    The Corporation's assets were $2.5 billion at December 31, 2003 and 12.63% for 2001at December 31, 2002. The Corporation experienced an increase of $101.7 million in loans outstanding during 2003 as growth occurred in all three major loan categories--commercial, residential real estate, and 2000, respectively.

The Corporation’s assets remained relatively flatconsumer loans. Total deposits of $2.1 billion at December 31, 2003 represent a decrease of $60.1 million from December 31, 20012002. Forty-five million of this decrease in deposits was the result of a corporate customer electing to December 31, 2002 at $2.5 billion.move their money into repurchase agreements. Additionally, as a result of the continuing low interest rate environment for deposit accounts, the Corporation successfully moved $17.2 million in customer deposit accounts into alternative investments through its full service brokerage operations. The Corporation also elected not to renew brokered deposits, which were acquired during previous branch acquisitions, in the amount of $2.9 million. Collectively, the net decrease in deposits and repurchase agreements was $14.9 million. The Corporation’s consolidated balance sheet reflects the state of the U.S. economy during the past yearliquidity is adequate with weak commercialcash flows from its investment portfolio and wholesale funding sources considered available to fund its future loan demand, increased residential mortgage loan refinancing, and record low interest rates.  The loan portfolio at $1.6 billion decreased 4.4% from the $1.7 billion at prior year-end.  Total deposits at $2.1 billion decreased 1.3% from December 31, 2001.  The Corporation continues to have a high level of liquidity due to the weak loan demand and low yielding investment options.  With limited investment opportunity and high liquidity, the Corporation has been pricing its interest bearing deposits at the mid-range of its competitors to manage its interest margin.

growth.


Charter Changes


Effective January 1, 2003, the Bank and the Trust Company converted their charters to state charters from national associations. The Bank remained a member of the Federal Reserve System

18


following conversion. Following its conversion, the Trust Company changed its name from Trust Company of Kentucky, National Association to Community Trust and Investment Company in order to identify more closely the Trust Company with the Bank. While the Corporation believes that the conversions resulted in some reduction in expenses, the conversionsthey did not result in any changes in the management or operations of the Bank or the Trust Company.

Acquisitions

On January 26, 2001, Community Trust Bank, Inc., the Corporation’s lead bank, acquired the deposits, loans, and fixed assets of The Bank of Mt.Vernon, Inc.  The offices acquired from The Bank of Mt. Vernon, Inc. are located in Mt. Vernon, Somerset, Richmond, and Berea, Kentucky.  The offices acquired had deposits totaling $109.3 million and loans totaling $79 million.  The purchase price paid by Community Trust Bank, Inc. for the offices was a 9.5% premium on the non-brokered deposits as of the closing date plus approximately $1.6 million for fixed assets, $12.6 million for investment securities, and $1.0 million for the cash held at the acquired branches of The Bank of Mt. Vernon, Inc.

During the third quarter of 2001, the Corporation acquired 75.28% of the outstanding shares of Citizens National Bank and Trust, Hazard, Kentucky (“Citizens”) independently valued at that time at $15.1 million in lieu of a debt owed to the Corporation by a Citizens’ shareholder.  On January 3, 2002, the Corporation acquired the remaining 24.72% of Citizens for $4.9 million.  Citizens had total assets of $138.5 million and equity capital of $19.4 million as of December 31, 2001.  On March 15, 2002, Citizens was merged into Community Trust Bank, Inc.


Critical Accounting Policies and Estimates


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


We believe application of accounting policies and the estimates required therein are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.


Our accounting policies are more fully described in note 1 to the consolidated financial statements. We have identified the following critical accounting policies:

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

&nbs p;

    Allowance for Loan Losses -The adequacy of the allowance is reviewed quarterly by management using a methodology that includes several key factors. The Corporation utilizes an internal risk grading system for commercial credits, and those larger commercial credits identified through this grading system as having weaknesses are individually reviewed for the customer’scustomer's ability and potential to repay their loans. The borrower’s cash flow, adequacy of collateral held for the loan, and other options available to the Corporation including legal

19


avenues are all evaluated. Based upon this individual credit evaluation, a specific allocation to the allowance may be made for the loan.


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


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


The Corporation has not substantively changed any aspect of its overall approach in the determination of the allowance for loan losses except convertingsince January 2002 when it converted to an eight quarter moving average for determining historical loss rates, using specific allocations for homogenous pools of loans, and applying the inherent risk factors discussed above against the total loan portfolio instead of against the preliminary allowance calculation as was done previously. There have been no material changes in assumptions or estimation techniques as compared to prior years that impacted the determination of the current year allowance.


    Investments -Management determines the classification of securities at purchase. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities, the Corporation classifies securities into held-to-maturity or available-for-sale categories. Held-to-maturity securities are those which the Corporation has the positive intent and ability to hold to maturity and are reported at amortized cost. Available-for-sale securities are those the Corporation may decide to sell if needed for liquidity, asset/liability management, or other reasons. Available-for-sale securities are reported at fair value, with unrealized gains and losses included as a separate component of shareholders’ equity, net of tax. If declines in fair value are not temporary, the carrying value of the securities i s 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.

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

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


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


EffectEffects of Accounting ChangeChanges
    Goodwill and Other Intangible Assets

-Effective January 1, 2002, the Corporation adopted SFAS No. 142.142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment.

20



The Corporation evaluated total goodwill for impairment upon adoption of SFAS No. 142 and SFAS No. 147, Acquisitions of Certain Financial Institutions, concluding that there is no impairment as determined by evaluating goodwill using fair value techniques including multiples of price/equity.

Goodwill is evaluated for impairment on an annual basis.


Upon adoption, the Corporation ceased amortizing goodwill of approximately $59.5 million arising from previous purchase transactions. This will reducereduced amortization expense on an annual basis by $3.1 million and increaseincreased after-tax earnings on an annual basis by $2.3 million. Goodwill will continuecontinues to be evaluated for impairment in accordance with SFAS No. 142. Year-to-date 2002 earnings were positively impacted by $0.18 per share due to the implementation of SFAS No. 142.  The following tables showtable shows on a pro forma basis the results for the twelve months ended December 31, 2000 and 2001 had SFAS No. 142 been implemented on January 1, 2000.2001. Amortization of core deposit intangible for the twelve months ended December 31, 2003 and 2002 was $580 thousand.thousand annually. Anticipated amortization for the next five years is $580 thousand annually.

  
Twelve Months Ended
December 31, 2001
  
 
  
Reported Earnings
Goodwill Amortization
Pro Forma
Income before income tax expense $32,769 $3,121 $35,890 
Income tax expense  10,497  821  11,318 
Net income $22,272 $2,300 $24,572 
   
 
  
 
  
 
 
Basic earnings per share $1.60 $0.16 $1.76 
Diluted earnings per common share  1.59  0.16  1.75 

    Accounting for Stock-Based Compensation—Transition and Disclosure-In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock-Based Compensation--Transition and Disclosure. This statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years ending after December 15, 2002. Adoption of SFAS No. 148 did not have a material impact on the Corporation's consolidated financial statements. As permitted by SFAS No. 148, the Corporation will continue to apply the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock-Based Compensation, for all employee stock option grants and has elected to disclose pro forma net income and earnings per share amounts as if the fair-value based method had been applied in measuring compensation costs.
    Had compensation cost for the Corporation’s stock options granted in 2003, 2002, and 2001 been determined under the fair value approach described in SFAS No. 123, Accounting for Stock-Based Compensation, the Corporation’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:

(in thousands, except per share amounts)
Years ended December 31
2003
2002
2001
Net income as reported  
 
 $28,891 $27,600 $22,272 
Loss effect of stock compensation  
 
  (339) (495) (257)
Net income pro forma  
 
 $28,552 $27,105 $22,015 
   
 
  
 
  
 
  
 
 
Basic net income per share  As reported$2.14 $2.01 $1.60 
  Pro forma  2.10  1.98  1.58 
     
 
  
 
  
 
 
Diluted net income per share  As reported $2.11 $1.99 $1.59 
   Pro forma  2.08  1.95  1.57 

 

 

Twelve Months Ended
December 31, 2000

 

 

 

Amortization

 

 

 

Reported
Earnings

 

Goodwill

 

Pro Forma

 

Income before income tax expense

 

$

32,616

 

$

2,533

 

$

35,149

 

Income tax expense

 

10,270

 

616

 

10,886

 

Net income

 

$

22,346

 

$

1,917

 

$

24,263

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.70

 

$

0.15

 

$

1.85

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

1.70

 

$

0.15

 

$

1.85

 

 

 

 

 

 

 

 

 

 

 

Twelve Months Ended
December 31, 2001

 

 

 

Amortization

 

 

 

Reported
Earnings

 

Goodwill

 

Pro Forma

 

Income before income tax expense

 

$

32,769

 

$

3,121

 

$

35,890

 

Income tax expense

 

10,497

 

821

 

11,318

 

Net income

 

$

22,272

 

$

2,300

 

$

24,572

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.76

 

$

0.18

 

$

1.94

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

1.75

 

$

0.18

 

$

1.93

 

    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 2003, 2002, and 2001, respectively: risk-free interest rates of 2.69%, 3.68%, and 4.95%, dividend yields of 3.29%, 3.58%, and 4.86%, volatility factors of the expected market price of the Corporation’s common stock of 0.593, 0.290, and 0.300, and a weighted average expected option life of 4.0, 5.0, and 5.0.
    Consolidation of Variable Interest Entities -In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin (“ARB”) No. 51, Consolidated Financial Statements, for certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. FIN 46 requires variable interest entities to be consolidated by the primary beneficiary which represents the enterprise that will absorb the majority of the variable interest entities’ expected losses if they occur, receive a majority of the variable interest entities' residual returns if they occur, or both. Qualifying special purpose entities are exempt from the consolidation requirements of FIN 46. FIN 46 is effective immediately for variable interest entities created after January 31, 2003 and for variable interest entities in which an enterprise obtains an interest after that date. FIN 46 is effective in the first fiscal year or interim period beginning after June 15, 2003 for variable interest entities in which an enterprise holds a variable interest that was acquired before February 1, 2003, with earlier adoption permitted. The Corporation adopted the provisions of FIN 46 on July 1, 2003. The adoption of FIN 46 had no material impact on the Corporation's consolidated financial statements.
Amendment of Statement 133 on Derivative Instruments and Hedging Activities- In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain embedded derivatives, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement amends SFAS No. 133 to reflect the decisions made as part of the Derivatives Implementation Group (DIG) and in other FASB projects or deliberations. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. SFAS No. 149 was adopted by the Corporation on July 1, 2003. The Corporation has not entered into any contracts or hedging relation ships; therefore, adoption of SFAS No. 149 had no effect on the Corporation's consolidated financial statements.
    Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity-In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This Statement establishes standards for how an entity classifies and measures certain financial instruments with characteristics of both liabilities and equity. This Statement requires that an issuer classify a financial instrument that is within its scope as a liability. Many of those instruments were previously classified as equity or in some cases presented between the liabilities section and the equity section of the statement of financial position. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Corporation adopted the provisions of SFAS No. 150 on June 1, 2003. The adoption of SFAS No. 150 had no material effect on the Corporation's consolidated financial statements.

Results of Operations


2003 Compared to 2002

    Net income for 2003 was $28.9 million compared to $27.6 million for 2002. The increase in net income was primarily driven by a 30.2% increase in noninterest income. See the Noninterest Income section below for additional information. Basic earnings per share for 2003 were $2.14 compared to $2.01 per share for 2002. The average shares outstanding in 2003 and 2002 were 13.5 million and 13.7 million, respectively.

    Net interest income for 2003 was $84.6 million compared to $89.3 million in 2002. Noninterest income was $36.4 million compared to $27.9 million in 2002 and noninterest expense was $70.7 million compared to $67.3 million in 2002.

    Return on average assets was 1.16% for 2003 compared to 1.12% in 2002, and return on average equity was 13.43% compared to 13.63% in 2002.

Net Interest Income:

    The Corporation's net interest marginof 3.76% was a 26 basis point or 7.2% decrease from the 4.02% for the year ended December 31, 2002. However, the net interest margin has shown improvement as seen by the 31 basis point increase quarter-over-quarter from 3.62% for the quarter ended September 30, 2003 to 3.93% for the quarter ended December 31, 2003. The Corporation experienced growth in all three loan categories during the last seven months of 2003. Assuming the current loan growth and the reallocation of earning assets from the investment portfolio to the higher yielding loan portfolio continue, management expects continuing improvement in its net interest margin. For further information, see the table titled "Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates" in the Selected Sta tistical Information.

    Average earning assets were $2.3 billion at December 31, 2003 and at December 31, 2002. Average interest bearing liabilities were $1.9 billion at December 31, 2003 and at December 31, 2002. Average interest bearing liabilities as a percentage of average earning assets were 83.7% at December 31, 2003 compared to 85.3% in 2002.

    The taxable equivalent yield on average earning assets was 5.68% for 2003 compared to 6.54% in 2002. The cost of average interest bearing liabilities was 2.29% for 2003 compared to 2.96% for 2002. The yield on interest bearing assets has been impacted by the change in the earning asset mix between the loan portfolio and the investment portfolio as well as by the change in market rates. Average loans accounted for 73.2% of average earning assets in 2002 while average loans accounted for 72.3% of average earning assets in 2003. Average loans accounted for 67.3% of total average assets for the year ended December 31, 2002 compared to 66.5% for the year ended December 31, 2003. Total loans as a percentage of total assets as of December 31, 2003 and 2002 were 70.2% and 65.7%, respectively.

    As presented in the interest rate sensitivity table in the Liquidity and Market Risk section that is included later in the Management Discussion and Analysis, the Corporation’s gap position on December 31, 2003 was relatively flat as the Corporation had sold securities during the year and reinvested in securities with shorter maturities to offset the shortened term of its liabilities. During 2003, the Corporation sold floating rate securities, U.S. treasuries, and 15-year mortgage-backed securities and reinvested in agencies, municipals, and mortgage-backed securities with a slightly longer duration, but with a favorable increase in the portfolio’s taxable equivalent yield. This extension of duration on the asset side of the balance sheet was the primary factor in the Corporation’s estimated earnings sensitivity in a 200 basis point increased rate environment declining from 4.38% at Decembe r 31, 2002 to 1.46% at December 31, 2003. For additional information, please refer to the Liquidity and Market Risk section below.
Provision for Loan Losses and Allowance for Loan Losses:

    The provision for loan losses that was added to the allowance was $9.3 million as of December 31, 2003 compared to $10.1 million for 2002. This provision represents a charge against current earnings in order to maintain the allowance at an appropriate level determined using the accounting estimates described above. Loan losses, net of recoveries, as a percentage of average loans outstanding were 0.48% in 2003 compared to 0.63% in 2002 as net loan losses were $8.0 million for 2003 compared to $10.5 million for 2002.

    Our reserve for losses on loans as a percentage of total loans outstanding remained flat at 1.42% as of December 31, 2003 and December 31, 2002.

    Asset quality improved for the Corporation with nonperforming loans decreasing to $16.9 million, a 25.7% decrease from the $22.7 million at December 31, 2002. Nonperforming assets also improved by 8.0% for the year 2003, reflecting management’s continuing focus on improving asset quality.

    Foreclosed properties on December 31, 2003 were $6.6 million, an increase from the $2.8 million at December 31, 2002. During the fourth quarter of 2003, the Corporation was successful in obtaining title to $3.1 million in real estate collateral from a problem credit that has been in foreclosure proceedings for approximately two years. The property was recorded at cost which was lower than market value. Foreclosed properties consist primarily of 1-4 family residential real estate.

Noninterest Income:

    Noninterest income for the year ended December 31, 2003 of $36.4 million was a 30.2% increase from the $27.9 million earned during 2002. Increased deposit service charge income due to the Overdraft Honor Program implemented in September 2002 and a 20% increase in the overdraft fee effective June 2003, gains on sales of securities, gains on sales of loans due to increased refinancing activity, and other noninterest income contributed to the increase in noninterest income year-over-year. Service charges on deposit accounts increased $3.6 million from December 31, 2002 to December 31, 2003, securities gains increased $1.5 million, gains on sales of loans increased $1.3 million, and other noninterest income increased $2.1 million. As residential mortgage refinancing slowed, the Corporation had a decrease in gains on sales of loans during the fourth quarter of 2003.

    While the increase in residential real estate loan refinancing activity, due to the low interest rate environment, resulted in higher noninterest income from the gains on sales of loans, noninterest income was negatively impacted by charges to our valuation reserve for capitalized mortgage servicing rights of $1.3 million for the year ended December 31, 2003 compared to $1.1 million for the year ended December 31, 2002. The impact to earnings per share for the years ended December 31, 2003 and 2002 was $0.06 per share and $0.05 per share, respectively. With the slow down in residential mortgage refinancing referenced above, the Corporation expects any impairment charge in 2004 to be less than prior years.

Noninterest Expense:

    Noninterest expense increased 5.0% from $67.3 million for the year ended December 31, 2002 to $70.7 million for the year ended December 31, 2003. The increase in noninterest expense for the year was primarily attributable to increases in legal and professional fees, operating losses, and other noninterest expense. Legal and professional fees increased $1.0 million from December 31, 2002 to December 31, 2003, primarily due to fees incurred as a result of implementing the Overdraft Honor Program, operating losses increased $0.8 million, and other noninterest expense increased $1.6 million, including $0.8 million in nonrecurring charges to miscellaneous expense. Salaries and employee benefits remained relatively flat to prior year at $34.6 million; however, this line item included $1.8 million in charges in 2002 relative to the Corporation’s performance incentive plan. This plan requires a performance i ncentive payment to eligible employees if the Corporation reaches goals established by the Board of Directors. These goals were not met in 2003; however, if they are met in 2004, it is anticipated the cost will be approximately $2 million.
    Our efficiency ratio was 59.2% at year-end 2003 compared to 57.3% at year-end 2002. The deposit to FTE (full-time equivalent) ratio decreased to $2.3 million at December 31, 2003 from $2.4 million at December 31, 2002.

2002 Compared to 2001


Net income for 2002 was $27.6 million compared to $22.3 million for 2001. Basic earnings per share for 2002 were $2.21$2.01 compared to $1.76$1.60 per share for 2001. The average shares outstanding in 2002 and 2001 were 12.513.7 million and 12.713.9 million, respectively.


Net interest income for 2002 was $89.3 million compared to $83.1 million in 2001. Noninterest income was $27.9 million compared to $23.8 million in 2001 and noninterest expense was $67.3 million compared to $64.9 million in 2001.


Return on average assets was 1.12% for 2002 compared to 0.91% in 2001, and return on average equity was 13.63% compared to 11.85% in 2001.

21



Net Interest Income:


The Corporation’sCorporation's net interest margin ofof 4.02% was a 25 basis point or 6.6% increase from the 3.77% for the year ended December 31, 2001. While the net interest margin increased over prior year, it began to decline in the fourth quarter 2002. Management expects continuing pressure on its net interest margin due to the continuing amortization and maturities of its fixed rate loan and investment portfolios and reinvestment at current market rates.  For further information, see the table titled “Consolidated"Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates”Rates" in the Selected Statistical Information.


Average earning assets remained relatively flat at $2.3 billion from December 31, 2001 to December 31, 2002. Average interest bearing liabilities decreased slightly by 1.2% from $2.0 billion at December 31, 2001 to $1.9 billion at December 31, 2002. Average interest bearing liabilities as a percentage of average earning assets were 85.3% at December 31, 2002 compared to 86.7% in 2001.


The taxable equivalent yield on average earning assets was 6.54% for 2002 compared to 7.93% in 2001. The cost of average interest bearing liabilities was 2.96% for 2002 compared to 4.79% for 2001. The yield on interest bearing assets has beenwas impacted by the change in the earning asset mix as well as by the change in market rates in 2002. Loans accounted for 77.5% of average earning assets in 2001 while loans accounted for 73.2% of average earning assets in 2002. Loans accounted for 71.5% of total average assets for the year ended December 31, 2001 compared to 67.3% for the year ended December 31, 2002.

As presented in the interest rate sensitivity table in the Liquidity and Market Risk section that is included later in the Management Discussion and Analysis, the Corporation’s consolidated balance sheet on December 31, 2001 was negatively gapped over a twelve-month period.


    During 2001, as liabilities matured, our depositors elected to shorten the term of their deposits and consequently by December 31, 2001 our consolidated balance sheet had become negatively gapped.gapped over a twelve-month period. During 2002, the Corporation sold securities and reinvested in securities with shorter maturities to offset the shortened term of its liabilities. Consequently, at December 31, 2002 the Corporation’sCorporation's gap position was relatively flat.

Provision for Loan Losses and Allowance for Loan Losses:


The provision for loan losses that was added to the allowance was $10.1 million as of December 31, 2002 compared to $9.2 million for 2001. This provision representsrepresented a charge against current earnings in order to maintain the allowance at an appropriate level. Loan losses, net of recoveries, as a percentage of average loans outstanding were 0.63% in 2002 compared to 0.65% in 2001 as net loan losses were $10.5 million for 2002 compared to $11.4 million for 2001.


Our reserve for losses on loans and leases as a percentage of total loans outstanding increased from the 1.38% of December 31, 2001 to 1.42% at December 31, 2002. The increase in reserve for losses on loans from prior year was reflective of current weak economic conditions.


Nonperforming loans decreased 32.4% from prior year. Nonperforming loans on December 31, 2002 were $22.7 million compared to $33.7 million at December 31, 2001. The significant decline in nonperforming loans iswas attributable to the payout of one commercial problem loan totaling $3.7 million and the Corporation’s continuing focus on asset quality during thisa weak period in the economy.  Specific reserves are established for all large loans where a loss may occur; therefore, no significant losses are anticipated except for those loans with specific reserve allocations.

The adequacy of the allowance is reviewed quarterly by management using a methodology that includes several key factors.  The Corporation utilizes an internal risk grading system for commercial credits, and those larger commercial credits identified through this grading system as having weaknesses are individually reviewed for the customer’s ability and potential to repay their loans.  The borrower’s cash flow, adequacy of collateral held for the loan, and other options available to the Corporation

22



including legal avenues are all evaluated.  Based upon this individual credit evaluation, a specific allocation to the allowance may be made for the loan.

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

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

The Corporation has not substantively changed any aspect of its overall approach in the determination of the allowance for loan losses, except converting to an eight quarter moving average for determining historical loss rates, using specific allocations for homogenous pools of loans, and applying the inherent risk factors discussed above against the total loan portfolio instead of against the preliminary allowance calculation as was done previously.  There have been no material changes in assumptions or estimation techniques as compared to prior years that impacted the determination of the current year allowance.

Noninterest Income:


Noninterest income for the year ended December 31, 2002 of $27.9 million was a 17.5% increase from the $23.8 million earned during the same period in 2001. The increase in noninterest income for the year ended December 31, 2002 is primarily the result of increased deposit service charge revenue due to the implementation of our Overdraft Honor program, increased gains on sales of residential real estate loans due to increased refinancing activity, and increased gains on sales of securities. While the increase in residential real estate loan refinancing activity, due to the low interest rate environment, resulted in higher noninterest income from the gains on sales of loans, noninterest income was negatively impacted by the establishment of a valuation reserve of $1.1 million for the year to capitalized mortgage loan servicing rights.


Noninterest Expense:


Noninterest expense increased 3.7% from $64.9 million for the year ended December 31, 2001 to $67.3 million for the year ended December 31, 2002. The increase in noninterest expense for the year was primarily attributable to an increase in personnel expense due to the filling of budgeted key positions within the Corporation, an increase in salaries due to base salary costs associated with the acquisition of our Hazard Market, incentives earned by employees under our performance incentive program, and annual merit increases.


Our efficiency ratio wasof 57.3% at year-end 2002 comparedimproved to 60.1% at year-end 2001. The deposit to FTE (full-time equivalent) ratio remained flat at $2.4 million from December 31, 2001 to December 31, 2002. Salaries and employee benefits in 2002 were $34.6 million compared to $31.1 million in 2001. Occupancy expense was $5.6 million in 2002 compared to $5.3 million in 2001. Equipment expense remained flat at $3.6 million. Data processing costs were $3.9 million in 2002 compared to $4.0 million in 2001, and stationery, printing, and office supplies were $1.5 million compared to $1.4 million in 2001. Taxes other than payroll, property, and income, which consists mainly of franchise taxes on the equity and deposits of the Corporation, were $2.9 million compared to $2.2

23


million in 2001. FDIC insurance expense was $375 thousand compared to $395 thousand in 2001. Other categories of noninterest expense were $14.9$14. 9 million in 2002 compared to $17.0 million in 2001.

2001 Compared to 2000

Net income for 2001 was relatively flat with 2000 at $22.3 million.  Basic earnings per share for 2001 were $1.76 compared to $1.70 per share for 2000.  The average shares outstanding in 2001 and 2000 were 12.7 million and 13.1 million, respectively.

Net interest income for 2001 decreased compared to 2000 from $84.2 million in 2000 to $83.1 million in 2001.  Noninterest income increased 21.8% from $19.5 million in 2000 to $23.8 million in 2001 while noninterest expense increased 4.9% from $61.9 million in 2000 to $64.9 million in 2001.

Return on average assets decreased from 1.02% in 2000 to 0.91% in 2001, and return on average equity decreased from 12.63% in 2000 to 11.85% in 2001.

Net Interest Income:

Although a decline in the Corporation’s net interest margin was anticipated as the economy began to weaken during 2000 and interest rates began to decline in January 2001, the magnitude of the decrease in interest rates was not anticipated.  The Corporation’s net interest margin was negatively impacted by the repricing of assets quicker than liabilities through the first eight months of 2001.  The Corporation was seeing some relief on its margin during September 2001 when the national disaster of September 11, 2001 prompted an additional lowering of interest rates by the Federal Open Market Committee.  The 475 basis point decline in market interest rates during 2001 resulted in a 56 basis point decline in our net interest margin from 4.33% for the year ended December 31, 2000 to 3.77% for the year ended December 31, 2001.  For further information, see the table titled “Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates” in the Selected Statistical Information.

The Corporation’s average earning assets increased from $2.0 billion in 2000 to $2.3 billion in 2001.  Average interest bearing liabilities also increased during the period, from $1.8 billion in 2000 to $2.0 billion in 2001.  Average interest bearing liabilities as a percentage of average earning assets decreased from 87.4% in 2000 to 86.7% in 2001.

The taxable equivalent yield on average earning assets decreased from 8.87% in 2000 to 7.93% in 2001.  The cost of average interest bearing liabilities also decreased during the same period from 5.22% to 4.79%.  The yield on interest bearing assets was impacted by the change in the earning asset mix as well as by the decrease in market rates in 2001.  Loans accounted for 83.1% of all earning assets in 2000 while loans accounted for 77.6% of earning assets in 2001.  Loans accounted for 74.8% of total assets as of December 31, 2000 compared to 68.3% as of December 31, 2001.

The Corporation’s consolidated balance sheet on December 31, 2000 was positively gapped over a twelve-month period.  During 2001, as liabilities matured, our depositors elected to shorten the term of their deposits and consequently by December 31, 2001 our consolidated balance sheet had become negatively gapped.

Provision for Loan Losses and Allowance for Loan Losses:

The provision for loan losses that was added to the allowance remained relatively flat at $9.2 million from 2000 to 2001.  This provision represented a charge against current earnings in order to maintain the allowance at an appropriate level.  Loan losses, net of recoveries, as a percentage of average loans outstanding increased from 0.51% in 2000 to 0.65% in 2001 as net loan losses increased by $3 million in 2001 to $11.4 million.  As was discussed in our June 30, 2001 and September 30, 2001 earnings releases, $2.3 million of the increase in net loan losses is the result of the Bank’s recognition of the loss on one large commercial credit for which a specific allocation of loss allowance had been established.

24



The allowance declined from 1.53% of total loans at December 31, 2000 to 1.38% at December 31, 2001.  The decline in the allowance as a percentage of total loans was primarily the result of the addition of $124 million in loans from the Mt. Vernon and Hazard acquisitions to the Corporation’s loan portfolio which did not require a corresponding addition to the Corporation’s loan loss allowance (an impact to the allowance ratio of 11 basis points) and the one large commercial loan loss mentioned above for which a specific allocation of the allowance had previously been made.

Nonperforming loans, which are mainly commercial credits, increased from 1.54% of total loans at December 31, 2000 to 1.97% at December 31, 2001.  The increase was primarily due to a few commercial real estate loans with problems unrelated to the economy of the markets where they are located.

Noninterest Income:

Noninterest income increased 21.8% from $19.5 million in 2000 to $23.8 million in 2001, due to an increase in service charges on deposit accounts, gains on sales of loans, and securities gains.  Service charges on deposit related products generated $11.1 million for the year, as compared to $9.7 million for the previous year.  Factors impacting the increase in service charges on deposits were:  (1) increasing the overdraft fee by 25% in the first quarter of 2001 and (2) increasing our deposit base by $109.3 million in January with the acquisition of the branches of The Bank of Mt. Vernon and by $120.1 million in October with the acquisition of Citizens.  The gains on sales of loans increased from $0.9 million in 2000 to $2.6 million in 2001, a result of a 322% increase in the dollar volume of residential mortgage loans sold in 2001 compared to 2000.  This increase in volume was primarily the result of refinancing existing mortgages as customers took advantage of historically low mortgage interest rates.  Securities gains increased from $59 thousand in 2000 to $775 thousand in 2001.  Other noninterest income increased from $6.3 million in 2000 to $6.8 million in 2001.  Trust income remained flat from 2000 to 2001 at $2.5 million.

Noninterest Expense:

Noninterest expense for the year ended December 31, 2001 was $64.9 million, a 4.9% increase from the $61.9 million for the year ended December 31, 2000.  The increase in noninterest expense was primarily attributable to the operating expenses associated with the addition of the five banking offices acquired from The Bank of Mt. Vernon, Inc. on January 26, 2001 and the addition of a controlling interest in Citizens on October 11, 2001.  The additional expenses were also reflected in our efficiency ratio which increased 154 basis points from 58.53% at year-end 2000 to 60.07% at year-end 2001.  The deposit to FTE (full-time equivalent) ratio decreased from $2.45 million to $2.44 million year over year.  Salaries and employee benefits increased from $29.7 million in 2000 to $31.1 million in 2001.  Occupancy expense increased from $5.1 million in 2000 to $5.3 million in 2001 while equipment expense decreased from $3.9 million to $3.6 million, respectively.  Data processing costs increased from $3.7 million in 2000 to $4.0 million in 2001, and stationery, printing, and office supplies increased from $1.2 million in 2000 to $1.4 million in 2001.  Taxes other than payroll, property, and income, which consisted mainly of franchise taxes on the equity and deposits of the Corporation, increased from $2.1 million in 2000 to $2.2 million in 2001.  FDIC insurance expense increased from $376 thousand in 2000 to $395 thousand in 2001.  Other categories of noninterest expense increased from $15.9 million in 2000 to $17.0 million in 2001.

Liquidity and Market Risk


The objective of the Corporation’s Asset/Liability management function is to maintain consistent growth in net interest income within the Corporation’s policy limits. This objective is accomplished through management of the Corporation’s consolidated balance sheet composition, liquidity, and interest rate risk exposures arising from changing economic conditions, interest rates, and customer preferences. The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand or unexpected deposit withdrawals. This is accomplished by maintaining liquid assets in the form of

25


investment securities, maintaining sufficient unused borrowing capacity, and growth in core deposits. As of December 31, 2002,2003, the Corporation had approximately $527$422 million in securitiesvalued at estimated fair value designated as available-for-sale and available to meet liquidity needs on a continuing basis.Additional asset-driven liquidity is provided by the remainder of the securities portfolio and the repayment of loans. These sources, in addition to the Corporation’s 8%9% average equity capital base, provide a stable funding base. In addition to core deposit funding, the Corporation also accesses a variety of other short-term and long-term funding sources.The Corporation also relies on Federal Home Loan Bank advances for both liquidity and management of its asset/liability position. Federal Home Loan Bank advances were $3.2 million at December 31, 2003 compared to $5.6 million at December 31, 2002 compared to $9.5 million at2002. As of December 31, 2001.2003, the Corporation had a $290.4 million available borrowing position with the Federal Home Loan Bank. The Corporation generally relies upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities,activitie s, to provide cash for its investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, use of short-term borrowing facilities such as federal funds purchased and securities sold under repurchase agreements, and issuance of long-term debt. TheAt December 31, 2003, the Corporation currently hashad a $12 million revolving line of credit, all of which is currently available to meet any future cash needs. The Corporation’s primary investing activities include purchases of securities and loan originations.Management does not rely on any one source of liquidity and manages availability in response to changing consolidated balance sheet needs.


The Corporation began a program of stock repurchase in December 1998 with the authorization to acquire up to 500,000 shares. The Corporation issued a press release in July 2000 announcing its intention to repurchase up to an additional 1,000,000 shares.  During 2002,2003, the Corporation continued its stock repurchase program which continues to be accretive to shareholder value.Through thisThis program began in December 1998 with the authorization to acquire up to 500,000 shares and was increased by an additional 1,000,000 shares in July 2000. The Corporation repurchased 297,758, 367,723, 573,606, and 108,692 shares during 2002, 2001, 2000, andissued a press release on May 13, 2003 announcing its intention to repurchase up to an additional 1,000,000 shares. The following table shows repurchases made through the stock repurchase program for the years 1999 respectively.through 2003:

 
Board Allocation
Repurchases
Average Price ($)
Shares Available for Repurchase
1998500,00000500,000
19990119,56117.48380,439
20001,000,000630,96712.40749,472
20010404,49516.16344,977
20020327,53421.4317,443
20031,000,000214,24423.74803,199
Total2,500,0001,696,80116.83803,199


Management considers interest rate risk the Corporation’s most significant market risk. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of the Corporation’s net interest revenue is largely dependent upon the effective management of interest rate risk. The Corporation employs a variety of measurement techniques to identify and manage its interest rate risk including the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. Assumptions based on the historical behavior of deposit rates and balances in relation to changesch anges in interest rates are also incorporated into the model. These assumptions are inherently uncertain, and as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

The Corporation’s Asset/Liability Management Committee (ALCO), which includes executive and senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk within Board-approved policy limits. The Corporation’s current exposure to interest rate risk policy limits arerisks is determined by measuring the anticipated change in net interest income over a twelve-month horizonperiod assuming a 200 basis point immediate and sustained increase or decrease in all interest rates.rates, spread evenly over the twelve-month period. The following table shows the Corporation’s estimated earnings sensitivity profile as of December 31, 2002:

Change in Interest Rates
(basis points)

 

Percentage Change in Net Interest Income
(12 Months)

 

+200

 

4.38%

 

-200

 

(7.42)%

 

262003:


Change in Interest Rates
(basis points)
Percentage Change in Net Interest Income
(12 Months)
+200  1.46%
-200(2.18)%


The following table shows the Corporation’s estimated earnings sensitivity profile as of December 31, 2001:2002:


Change in Interest Rates
(basis points)
Percentage Change in Net Interest Income
(12 Months)
+200  4.38%
-200(7.42)%

   

Change in Interest Rates
(basis points)

 

Percentage Change in Net Interest Income
(12 Months)

 

+200

 

(11.03)%

 

-200

 

7.31%

 

Given an immediate and sustainedThe simulation model used a 200 basis point increase in the yield curve used in the simulation model, it is estimatedspread evenly over a twelve-month period. The measurement at December 31, 2003 estimates that net interest income for the Corporation would increase by 4.38%1.46% over one year. A 200 basis point immediate and sustained decrease in interest rates would decrease net interest income by 7.42%2.18% over one year. In order to reduce the exposure to interest rate fluctuations and to manage liquidity, the Corporation has developed sale procedures for several types of interest-sensitive assets. All long-term, fixed rate single family residential mortgage loans underwritten according to Federal Home Loan Mortgage Corporation guidelines are sold for cash upon origination. Periodically, additional assets such as commercial loans are also sold. In 2003 and 2002, and 2001, $162.9$195.8 million and $119.8$162.9 million, respectively, was realized on the sale of fixed rate residential mortgages.mor tgages. Management focuses its efforts on consistent net interest revenue and net interest margin growth through each of the retail and wholesale business lines. The Corporation does not currently engage in trading activities.

Capital Resources

Total    The Corporation continues to grow its shareholders’ equity atwhile also providing an average annual dividend yield during 2003 of 3.05% to shareholders. Shareholders’ equity of $221.4 million on December 31, 2002 was2003 is a 5.7% increase from the $209.4 million compared to $191.6 million aton December 31, 2001.2002. The primary source of capital growth for the Corporation is retained earnings. Cash dividends were $0.78$0.82 per share for 20022003 and $0.74$0.71 per share for 2001.2002. The Corporation retained 64.7%61.7% of its earnings in 2003 compared to 64.7% in 2002.

Regulatory guidelines require bank holding companies, commercial banks, and savings banks to maintain certain minimum ratios and define companies as “well-capitalized”"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”"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 Corporation’s ratios as of December 31, 20022003 were 8.23%8.73%, 10.98%11.35%, and 12.22%12.60%, respectively. Community Trust Bancorp, Inc. and all banking affiliatesit subsidiaries met the criteria for “well-capitalized”"well-capitalized" at December 31, 2002.2003. See note 2018 to the consolidated financial statements for further information.


On February 1, 2002, the Corporation issued an additional $25 million of trust preferred securities through an issuance byjunior subordinated debentures to CTBI Preferred Capital Trust II (CPCTII), a wholly owned subsidiary grantor trust. TheCPCTII subsequently issued trust preferred securities bearbearing interest at an annual rate of 8.25%, havehaving a redemption date of March 31, 2007, and maturematuring on March 31, 2032. Proceeds of $8 million from this offering were used to pay off a revolving line of credit; $12.4 million was used for payment of the redemption of senior notes on February 25, 2002.


    Upon the early adoption of FIN 46 effective July 1, 2003, the Corporation deconsolidated CPCTII, as well as CTBI Preferred Capital Trust, resulting in a recharacterization of the underlying consolidated debt obligations from the previous trust preferred securities obligations to junior subordinated debenture obligations. Under the current Federal Reserve Board’s regulatory framework, the junior subordinated debenture obligations both qualify as total capital for regulatory capital purposes. The Federal Reserve Board is currently evaluating whether these capital securities should continue to qualify as Tier 1 capital as a result of deconsolidating the related trust preferred securities in accordance with generally accepted accounting principals. If the Federal Reserve Board disallows the capital securities as Tier 1 regulatory capital, the effect of such a change could have a material impact on the Co rporation’s regulatory ratios.

As of December 31, 2002,2003, management is not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material adverse impact on the Corporation’s liquidity, capital resources, or operations.


Impact of Inflation, Changing Prices and Local Economic Conditions


The majority of the Corporation’s assets and liabilities are monetary in nature. Therefore, the Corporation differs greatly from most commercial and industrial companies that have significant investments in non-monetary 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

27


equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other expenses, which tend to rise during periods of general inflation.


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


Our success is dependent on the general economic conditions of the communities we serve. Unlike larger banks that are more geographically diversified, weWe provide financial and banking services primarily to eastern, northeast, central, and south central Kentucky and southern West Virginia. The economies of a majority of these markets are dependent to a significant extent on the coal industry and coal-related industries.  The economic conditions in these areas have a significant impact on loan demand, the ability of borrowers to repay these loans, and the value of the collateral securing these loans. A significant decline in general economic conditions and in particular the coal industry, will affect these local economic conditions and will negatively affect the financial results of our banking operations. Factors influencing general conditions include inflation, recession, unemployment, and other factors beyond our control. While the economies of a majority of the markets the Corporation serves are dependent to a significant extent on the coal and coal-related industries, the Corporation has determined that it has successfully diversified its loa n portfolio to the extent that a significant decline in the coal or coal-related industries would not have a material impact on its banking operations. For additional information regarding concentrations of credit see note 1816 to the consolidated financial statements.

Contractual Obligations and Commitments


As disclosed in the notes to the consolidated financial statements, the Corporation has certain obligations and commitments to make future payments under contracts. At December 31, 2002,2003, the aggregate contractual obligations and commitments are:

Contractual Obligations:
 
Payments Due by Period
  
(in thousands)
  
Total
  
1 Year
  
2-5 Years
  
After 5 Years
 
Deposits without stated maturity $973,952 $973,952 $0 $0 
Certificates of deposit  1,093,663  979,833  113,061  769 
Federal funds purchased and other short-term borrowings  105,293  77,008  28,267  18 
Advances from Federal Home Loan Bank  3,192  846  1,628  718 
Long-term debt  59,500  0  0  59,500 
Annual rental commitments under leases  16,732  1,213  4,153  11,366 
Total $2,252,332 $2,032,852 $147,109 $72,371 


Other Commitments:
 
Amount of Commitment - Expiration by Period
  
(in thousands)
  
Total

 

 

1 Year

 

 

2-5 Years

 

 

After 5 Years
 
Standby letters of credit $30,654 $30,592 $52 $10 
Commitments to extend credit  269,095  189,884  72,884  6,327 
Total $299,749 $220,476 $72,936 $6,337 

Contractual Obligations:

 

Payments Due by Period

 

(in thousands)

 

Total

 

1 Year

 

2-5 Years

 

After 5 Years

 

Long-term debt

 

$

1,104

 

$

74

 

$

1,030

 

$

0

 

Annual rental commitments under leases

 

17,476

 

1,125

 

4,173

 

12,178

 

Total

 

$

18,580

 

$

1,199

 

$

5,203

 

$

12,178

 

 

 

 

 

 

 

 

 

 

 

Other Commitments:

 

Amount of Commitment - Expiration by Period

 

(in thousands)

 

Total

 

1 Year

 

2-5 Years

 

After 5 Years

 

Standby letters of credit

 

$

22,763

 

$

22,465

 

$

298

 

$

0

 

Commitments to extend credit

 

258,515

 

162,606

 

89,963

 

5,946

 

Total

 

$

281,278

 

$

185,071

 

$

90,261

 

$

5,946

 

    Commitments to extend credit and standby letters of credit do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk


The Corporation currently does not engage in any derivative or hedging activity. Analysis of the Corporation’s interest rate sensitivity can be found above.

28



Item 8. Financial Statements


Consolidated Balance Sheets


(dollars in thousands)
December 31

 

2002

 

2001

 

(dollars in thousands)
December 31
 
 
2003
 
2002

Assets:

 

 

 

 

 

  
 
  
 
 

Cash and due from banks

 

$

92,955

 

$

96,173

 

 $79,907 $92,955 

Federal funds sold

 

49,251

 

113,623

 

  9,054  49,251 

Securities available-for-sale at fair value (amortized cost of $515,931 and $364,218, respectively)

 

527,339

 

367,233

 

Securities held-to-maturity at amortized cost (fair value of $52,673 and $85,088, respectively)

 

51,243

 

83,324

 

Securities available-for-sale at fair value  
 
  
 
 
(amortized cost of $414,404 and $515,931, respectively)  421,855  527,339 
Securities held-to-maturity at amortized cost  
 
  
 
 
(fair value of $87,061 and $52,673, respectively)  87,497  51,243 

Loans held for sale

 

2,279

 

1,246

 

  315  2,279 

 

 

 

 

 

  
 
  
 
 

Loans

 

1,634,607

 

1,709,826

 

  1,736,260  1,634,607 

Allowance for loan losses

 

(23,271

)

(23,648

)

  (24,653) (23,271)

Net loans

 

1,611,336

 

1,686,178

 

  1,711,607  1,611,336 

 

 

 

 

 

  
 
  
 
 

Premises and equipment, net

 

50,767

 

51,101

 

  49,990  50,767 

Goodwill

 

60,122

 

59,545

 

  60,122  60,122 

Core deposit intangible (net of accumulated amortization of $2,552 and $1,972, respectively)

 

4,409

 

4,989

 

Core deposit intangible (net of accumulated amortization of $3,131 and  
 
  
 
 
$2,552, respectively)  3,829  4,409 

Other assets

 

38,210

 

40,493

 

  49,863  38,210 

Total assets

 

$

2,487,911

 

$

2,503,905

 

 $2,474,039 $2,487,911 

 

 

 

 

 

  
 
  
 
 

Liabilities and shareholders’ equity:

 

 

 

 

 

  
 
  
 
 

Deposits

 

 

 

 

 

  
 
  
 
 

Noninterest bearing

 

$

343,565

 

$

320,437

 

 $359,403 $343,565 

Interest bearing

 

1,784,151

 

1,835,335

 

  1,708,212  1,784,151 

Total deposits

 

2,127,716

 

2,155,772

 

  2,067,615  2,127,716 

 

 

 

 

 

  
 
  
 
 

Federal funds purchased and other short-term borrowings

 

68,431

 

82,584

 

  105,293  68,431 

Advances from Federal Home Loan Bank

 

5,617

 

9,525

 

  3,192  5,617 

Trust preferred securities

 

59,500

 

34,500

 

Long-term debt

 

1,104

 

13,444

 

  59,500  60,604 

Other liabilities

 

16,124

 

16,474

 

  17,046  16,124 

Total liabilities

 

2,278,492

 

2,312,299

 

  2,252,646  2,278,492 

 

 

 

 

 

  
 
  
 
 

Shareholders’ equity:

 

 

 

 

 

  
 
  
 
 

Preferred stock, 300,000 shares authorized and unissued

 

 

 

 

 

  
 
  
 
 

Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2002 - 12,348,177; 2001 - 12,568,347

 

61,741

 

57,129

 

Common stock, $5 par value, shares authorized 25,000,000;  
 
  
 
 
shares outstanding 2003 - 13,461,600; 2002 - 13,582,995  67,308  61,741 

Capital surplus

 

73,723

 

51,122

 

  105,579  73,723 

Retained earnings

 

66,540

 

81,395

 

  43,663  66,540 

Accumulated other comprehensive income, net of tax

 

7,415

 

1,960

 

  4,843  7,415 

Total shareholders’ equity

 

209,419

 

191,606

 

  221,393  209,419 

 

 

 

 

 

  
 
  
 
 

Total liabilities and shareholders’ equity

 

$

2,487,911

 

$

2,503,905

 

 $2,474,039 $2,487,911 

See notes to consolidated financial statements.statements

 

29


Consolidated Statements of Income


(in thousands except per share data)
Year Ended December 31

 

2002

 

2001

 

2000

 

(in thousands except per share data)
Year Ended December 31
 
 
2003
 
2002
 
2001

Interest income:

 

 

 

 

 

 

 

  
 
  
 
  
 
 

Interest and fees on loans, including loans held for sale

 

$

121,460

 

$

151,001

 

$

155,447

 

 $108,885 $121,460 $151,001 

Interest and dividends on securities

 

 

 

 

 

 

 

  
 
  
 
  
 
 

Taxable

 

20,899

 

16,753

 

14,960

 

  16,667  20,899  16,753 

Tax exempt

 

2,704

 

2,885

 

2,926

 

  2,215  2,704  2,885 

Other, including interest on federal funds sold

 

1,487

 

6,196

 

2,416

 

  747  1,487  6,196 

Total interest income

 

146,550

 

176,835

 

175,749

 

  128,514  146,550  176,835 

 

 

 

 

 

 

 

  
 
  
 
  
 
 

Interest expense:

 

 

 

 

 

 

 

  
 
  
 
  
 
 

Interest on deposits

 

50,111

 

85,609

 

83,248

 

  37,210  50,111  85,609 

Interest on federal funds purchased and other short-term borrowings

 

1,433

 

3,191

 

3,110

 

  1,132  1,433  3,191 

Interest on advances from Federal Home Loan Bank

 

418

 

645

 

863

 

  230  418  645 

Interest on long-term debt and trust preferred securities

 

5,331

 

4,272

 

4,294

 

Interest on long-term debt  5,323  5,331  4,272 

Total interest expense

 

57,293

 

93,717

 

91,515

 

  43,895  57,293  93,717 

 

 

 

 

 

 

 

  
 
  
 
  
 
 

Net interest income

 

89,257

 

83,118

 

84,234

 

  84,619  89,257  83,118 

Provision for loan losses

 

10,086

 

9,185

 

9,217

 

  9,332  10,086  9,185 

Net interest income after provision for loan losses

 

79,171

 

73,933

 

75,017

 

  75,287  79,171  73,933 

 

 

 

 

 

 

 

  
 
  
 
  
 
 

Noninterest income:

 

 

 

 

 

 

 

  
 
  
 
  
 
 

Service charges on deposit accounts

 

13,484

 

11,086

 

9,671

 

  17,057  13,484  11,086 

Gains on sales of loans, net

 

4,415

 

2,554

 

942

 

  5,693  4,415  2,554 

Trust income

 

2,500

 

2,520

 

2,523

 

  2,457  2,500  2,520 

Securities gains, net

 

1,528

 

775

 

59

 

  3,042  1,528  775 

Other

 

6,001

 

6,839

 

6,331

 

  8,123  6,001  6,839 

Total noninterest income

 

27,928

 

23,774

 

19,526

 

  36,372  27,928  23,774 

 

 

 

 

 

 

 

  
 
  
 
  
 
 

Noninterest expense:

 

 

 

 

 

 

 

  
 
  
 
  
 
 

Salaries and employee benefits

 

34,643

 

31,093

 

29,686

 

  34,593  34,643  31,093 

Occupancy, net

 

5,580

 

5,291

 

5,148

 

  5,819  5,580  5,291 

Equipment

 

3,626

 

3,593

 

3,878

 

  3,688  3,626  3,593 

Data processing

 

3,890

 

3,973

 

3,658

 

  3,841  3,890  3,973 

Stationery, printing, and office supplies

 

1,459

 

1,364

 

1,226

 

  1,407  1,459  1,364 

Taxes other than payroll, property, and income

 

2,850

 

2,231

 

2,069

 

  2,772  2,850  2,231 

FDIC insurance

 

375

 

395

 

376

 

  319  375  395 
Legal and professional fees  3,937  2,940  2,677 

Other

 

14,918

 

16,998

 

15,886

 

  14,359  11,978  14,321 

Total noninterest expense

 

67,341

 

64,938

 

61,927

 

  70,735  67,341  64,938 

 

 

 

 

 

 

 

Income before income taxes

 

39,758

 

32,769

 

32,616

 

  40,924  39,758  32,769 

Income taxes

 

12,158

 

10,497

 

10,270

 

  12,033  12,158  10,497 

Net income

 

$

27,600

 

$

22,272

 

$

22,346

 

 $28,891 $27,600 $22,272 

 

 

 

 

 

 

 

  
 
  
 
  
 
 

Basic earnings per share

 

$

2.21

 

$

1.76

 

$

1.70

 

 $2.14 $2.01 $1.60 

Diluted earnings per share

 

$

2.19

 

$

1.75

 

$

1.70

 

  2.11  1.99  1.59 

See notes to consolidated financial statements.statements

 

30


Consolidated Statements of Changes in Shareholders’ Equity


(in thousands except per share and share amounts)

 

Common
Stock

 

Capital
Surplus

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax

 

Total

 

 
Common Stock
Capital Surplus
Retained Earnings
Accumulated Other Comprehensive Income (Loss), Net of Tax
Total

Balance, January 1, 2000

 

$

55,216

 

$

45,307

 

$

75,020

 

$

(3,124

)

$

172,419

 

Net income

 

 

 

 

 

22,346

 

 

 

22,346

 

Net change in unrealized appreciation on securities available-for-sale, net of tax of $1,811

 

 

 

 

 

 

 

3,363

 

3,363

 

Comprehensive income

 

 

 

 

 

 

 

 

 

25,709

 

Cash dividends declared ($0.68 per share)

 

 

 

 

 

(9,100

)

 

 

(9,100

)

To record 10% common stock dividend

 

5,532

 

14,314

 

(19,846

)

 

 

0

 

Issuance of 45,166 shares of common stock

 

201

 

498

 

 

 

 

 

699

 

Purchase of 573,606 shares of common stock

 

(2,597

)

(5,226

)

 

 

 

 

(7,823

)

Balance, December 31, 2000

 

58,352

 

54,893

 

68,420

 

239

 

181,904

 

Balance, January 1, 2001
 $58,352 $54,893 $68,420 $239 $181,904 

Net income

 

 

 

 

 

22,272

 

 

 

22,272

 

  
 
 
 
 22,272 
 
 22,272 

Net change in unrealized appreciation on securities available-for-sale, net of tax of $927

 

 

 

 

 

 

 

1,721

 

1,721

 

  
 
 
 
 
 
 1,721 1,721 
          
 

Comprehensive income

 

 

 

 

 

 

 

 

 

23,993

 

  
 
 
 
 
 
 
 
 23,993 

Cash dividends declared ($0.74 per share)

 

 

 

 

 

(9,297

)

 

 

(9,297

)

Issuance of 99,130 shares of common stock

 

451

 

1,004

 

 

 

 

 

1,455

 

Purchase of 368,216 shares of common stock

 

(1,674

)

(4,775

)

 

 

 

 

(6,449

)

Cash dividends declared ($0.67 per share)  
 
 
 
 (9,297) 
 
 (9,297)
Issuance of 109,043 shares of common stock  451 1,004 
 
 
 
 1,455 
Purchase of 405,038 shares of common stock  (1,674) (4,775) 
 
 
 
 (6,449)

Balance, December 31, 2001

 

57,129

 

51,122

 

81,395

 

1,960

 

191,606

 

  57,129 51,122 81,395 1,960 191,606 

Net income

 

 

 

 

 

27,600

 

 

 

27,600

 

  
 
 
 
 27,600 
 
 27,600 

Net change in unrealized appreciation on securities available-for-sale, net of tax of $2,938

 

 

 

 

 

 

 

5,455

 

5,455

 

  
 
 
 
 
 
 5,455 5,455 
          
 

Comprehensive income

 

 

 

 

 

 

 

 

 

33,055

 

  
 
 
 
 
 
 
 
 33,055 

Cash dividends declared ($0.78 per share)

 

 

 

 

 

(9,770

)

 

 

(9,770

)

Cash dividends declared ($0.71 per share)  
 
 
 
 (9,770) 
 
 (9,770)

To record 10% common stock dividend

 

5,604

 

27,081

 

(32,685

)

 

 

0

 

  5,604 27,081 (32,685) 
 
 0 

Issuance of 80,584 shares of common stock

 

372

 

1,224

 

 

 

 

 

1,596

 

Purchase of 300,082 shares of common stock

 

(1,364

)

(5,704

)

 

 

 

 

(7,068

)

Issuance of 88,642 shares of common stock  372 1,224 
 
 
 
 1,596 
Purchase of 330,090 shares of common stock  (1,364) (5,704) 
 
 
 
 (7,068)

Balance, December 31, 2002

 

$

61,741

 

$

73,723

 

$

66,540

 

$

7,415

 

$

209,419

 

  61,741 73,723 66,540 7,415 209,419 
Net income  
 
 
 
 28,891 
 
 28,891 
Net change in unrealized depreciation on securities available-for-sale, net of tax of $1,385  
 
 
 
 
 
 (2,572) (2,572)
          
 
Comprehensive income  
 
 
 
 
 
 
 
 26,319 
Cash dividends declared ($0.82 per share)  
 
 
 
 (11,055) 
 
 (11,055)
To record 10% common stock dividend  6,114 34,599 (40,713) 
 
 0 
Issuance of 93,849 shares of common stock  431 1,389 
 
 
 
 1,820 
Purchase of 215,244 shares of common stock  (978) (4,132) 
 
 
 
 (5,110)
Balance, December 31, 2003
 $67,308 $105,579 $43,663 $4,843 $221,393 

See notes to consolidated financial statements.statements

 

31


Consolidated Statements of Cash Flows


(in thousands)
Year Ended December 31
 
 
2003
 
2002
 
2001
Cash flows from operating activities:
  
 
  
 
  
 
 
Net income $28,891 $27,600 $22,272 
Adjustments to reconcile net income to net cash provided by operating activities:  
 
  
 
  
 
 
Depreciation and amortization  4,418  4,458  7,451 
Change in net deferred tax asset, net  561  2,448  1,465 
Provision for loan and other real estate losses  9,541  10,158  9,514 
Securities gains  (3,404) (1,580) (775)
Securities losses  362  52  0 
Gains on sale of mortgage loans held for sale  (5,378) (4,415) (2,554)
Gains on sale of other loans  (315) 0  0 
Gains (losses) on sale of assets, net  90  (22) 2 
Proceeds from sale of mortgage loans held for sale  195,794  162,864  119,775 
Amortization (accretion) of securities premiums, net  1,435  626  (291)
Change in mortgage loans held for sale, net  1,964  (1,033) (534)
Changes in:  
 
  
 
  
 
 
Other liabilities  2,306  (3,712) (1,764)
Other assets  (8,549) 986  (10,505)
Net cash provided by operating activities
  227,716  198,430  144,056 
   
 
  
 
  
 
 
Cash flows from investing activities:
  
 
  
 
  
 
 
Securities available-for-sale:  
 
  
 
  
 
 
Proceeds from sales  189,628  74,960  26,827 
Proceeds from prepayments and maturities  138,504  101,875  117,166 
Purchase of securities  (224,837) (327,720) (270,908)
Securities held-to-maturity:  
 
  
 
  
 
 
Proceeds from prepayments and maturities  44,646  32,154  16,057 
Purchase of securities  (81,060) 0  (50,390)
Proceeds from sale of loans  7,315  0  0 
Change in loans, net  (315,128) (99,029) (147,726)
Purchase of premises, equipment, and other real estate  (3,065) (3,544) (6,403)
Proceeds from sale of premises and equipment  15  8  564 
Proceeds from sale of other real estate  4,134  4,552  5,470 
Assets acquired net of cash  0  (577) (11,913)
Net cash used in investing activities
  (239,848) (217,321) (321,256)
   
 
  
 
  
 
 
Cash flows from financing activities:
  
 
  
 
  
 
 
Change in deposits, net  (60,101) (28,056) 211,856 
Change in federal funds purchased and other short-term borrowings, net  36,862  (14,153) 23,633 
Payments on advances from Federal Home Loan Bank  (2,425) (3,908) (3,801)
Proceeds from junior subordinated debentures  0  25,000  0 
Payments on long-term debt  (1,104) (12,340) (116)
Issuance of common stock  1,820  1,596  1,455 
Purchase of common stock  (5,110) (7,068) (6,449)
Dividends paid  (11,055) (9,770) (9,297)
Net cash provided by (used in) financing activities
  (41,113) (48,699) 217,281 
Net increase (decrease) in cash and cash equivalents  (53,245) (67,590) 40,081 
Cash and cash equivalents at beginning of year  142,206  209,796  169,715 
Cash and cash equivalents at end of year
 $88,961 $142,206 $209,796 

(in thousands)
Year Ended December 31

 

2002

 

2001

 

2000

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

27,600

 

$

22,272

 

$

22,346

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

4,458

 

7,451

 

7,095

 

Change in net deferred tax asset, net

 

2,448

 

1,465

 

545

 

Provision for loan and other real estate losses

 

10,158

 

9,514

 

9,442

 

Securities gains

 

(1,580

)

(775

)

(76

)

Securities losses

 

52

 

0

 

17

 

Gains on sale of mortgage loans held for sale

 

(4,415

)

(2,554

)

(688

)

Gains on sale of other loans

 

0

 

0

 

(254

)

Gains (losses) on sale of assets, net

 

(22

)

2

 

(345

)

Proceeds from sale of mortgage loans held for sale

 

162,864

 

119,775

 

28,847

 

Amortization (accretion) of securities premiums, net

 

626

 

(291

)

252

 

Change in mortgage loans held for sale, net

 

(1,033

)

(534

)

250

 

Changes in:

 

 

 

 

 

 

 

Other liabilities

 

(3,712

)

(1,764

)

5,706

 

Other assets

 

986

 

(10,505

)

(609

)

Net cash provided by operating activities

 

198,430

 

144,056

 

72,528

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

Proceeds from sales

 

74,960

 

26,827

 

14,043

 

Proceeds from prepayments and maturities

 

101,875

 

117,166

 

79,114

 

Purchase of securities

 

(327,720

)

(270,908

)

(54,282

)

Securities held-to-maturity:

 

 

 

 

 

 

 

Proceeds from prepayments and maturities

 

32,154

 

16,057

 

11,688

 

Purchase of securities

 

0

 

(50,390

)

(390

)

Proceeds from sale of loans

 

0

 

0

 

6,554

 

Change in loans, net

 

(99,029

)

(147,726

)

(122,762

)

Purchase of premises, equipment, and other real estate

 

(3,544

)

(6,403

)

(1,737

)

Proceeds from sale of premises and equipment

 

8

 

564

 

967

 

Proceeds from sale of other real estate

 

4,552

 

5,470

 

2,064

 

Assets acquired net of cash

 

(577

)

(11,913

)

0

 

Net cash used in investing activities

 

(217,321

)

(321,256

)

(64,741

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Change in deposits, net

 

(28,056

)

211,856

 

66,582

 

Change in federal funds purchased and other short-term borrowings, net

 

(14,153

)

23,633

 

7,825

 

Advances from Federal Home Loan Bank

 

0

 

0

 

103

 

Payments on advances from Federal Home Loan Bank

 

(3,908

)

(3,801

)

(3,701

)

Proceeds from trust preferred securities

 

25,000

 

0

 

0

 

Payments on long-term debt

 

(12,340

)

(116

)

(114

)

Issuance of common stock

 

1,596

 

1,455

 

699

 

Purchase of common stock

 

(7,068

)

(6,449

)

(7,823

)

Dividends paid

 

(9,770

)

(9,297

)

(9,100

)

Net cash provided by (used in) financing activities

 

(48,699

)

217,281

 

54,471

 

Net increase (decrease) in cash and cash equivalents

 

(67,590

)

40,081

 

62,258

 

Cash and cash equivalents at beginning of year

 

209,796

 

169,715

 

107,457

 

Cash and cash equivalents at end of year

 

$

142,206

 

$

209,796

 

$

169,715

 

See notes to consolidated financial statements.statements


32


Notes to Consolidated Financial Statements


1. Accounting Policies


Basis of Presentation– The consolidated financial statements include Community Trust Bancorp, Inc. (the “Corporation”"Corporation") and its subsidiaries, including its principal subsidiary, Community Trust Bank, Inc. (the “Bank”"Bank"). Intercompany transactions and accounts have been eliminated in consolidation. In preparing the consolidated 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. Such estimates include, but are not limited to, the allowance for loan losses, fair value of securities and mortgage servicing rights, and goodwill (the excess of cost over net assets acquired).


Nature of Operations– Substantially all assets, liabilities, revenues, and expenses are related to banking operations, including lending, investing of funds, obtaining of deposits, trust operations, discountfull service brokerage services,operations, and other financing. All of the Corporation’s business offices and the majority of its business are located in eastern, northeast, central, and south central Kentucky and southern West Virginia.


Cash and Cash Equivalents– Cash and cash equivalents include cash on hand, amounts due from banks, interest bearing deposits in other financial institutions, and federal funds sold. Generally, federal funds are sold for one-day periods.


    InvestmentsSecurities– Management determines the classification of securities at purchase. In accordance with Statement of Financial Accounting Standards (“SFAS”("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities, the Corporation classifies securities into held-to-maturity or available-for-sale categories. Held-to-maturity securities are those which the Corporation has the positive intent and ability to hold to maturity and are reported at amortized cost. Available-for-sale securities are those the Corporation may decide to sell if needed for liquidity, asset/liability management, or other reasons. Available-for-sale securities are reported at fair value, with unrealized gains and losses included as a separate component of shareholders’ equity, net of tax. If declines in fair value are not temporary, the carrying value of the securitiessecurit ies 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.


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

    LoansLoans– Loans are reported at the carrying value of unpaid principal reduced by unearned interest and an allowance for loan losses. Income is recorded on the level yield basis. Interest accrual is discontinued when management believes, after considering economic and business conditions, collateral value, and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. Any loan greater than 90 days past due must be well secured and in the process of collection to continue accruing interest. Cash payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured. Loans are not reclassified as accruing until principal and interest payments are brought current and future payments appear reasonably certain.

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

Loan Losses– The adequacy of the allowance is reviewed quarterly by management using a methodology that includes several key factors. The Corporation utilizes an internal risk grading system for commercial credits, and those larger commercial credits identified through this grading system as having weaknesses are individually reviewed for the customer’scustomer's ability and potential to repay their loans. The borrower’s

33


cash flow, adequacy of collateral held for the loan, and other options available to the Corporation including legal avenues are all evaluated. Based upon this individual credit evaluation, a specific allocation to the allowance may be made for the loan.

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

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


The Corporation has not substantively changed any aspect of its overall approach in the determination of the allowance for loan losses except convertingsince January 2002 when it converted to an eight quarter moving average for determining historical loss rates, using specific allocations for homogenous pools of loans, and applying the inherent risk factors discussed above against the total loan portfolio instead of against the preliminary allowance calculation as was done previously. There have been no material changes in assumptions or estimation techniques as compared to prior years that impacted the determination of the current year allowance.


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, fixtures, 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.  For the years 2000 and 2001, an allowance for estimated losses onOther real estate was providedowned by a charge to operating expense when a subsequent decline in value occurred.  The cost of operating such properties, net of related income, and gains and losses on disposition werethe Corporation included in other expenses.  During a routine safetyassets at December 31, 2003 and soundness audit in the fourth quarter of 2001, it2002 was determined that a direct write-down method should be utilized for other real estate owned valuation adjustments.  In the first quarter of 2002, the allowance was eliminated by reducing the carrying amount of the individual properties held at the time by the amount of their specific reserve$7.0 million and the remainder was allocated on a pro-rata basis.

$3.4 million, respectively.


Goodwill and Other Intangible Assets -– Effective January 1, 2002, the Corporation adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment.


The Corporation evaluated total goodwill for impairment upon adoption of SFAS No. 142 and SFAS No. 147, Acquisitions of Certain Financial Institutions, concluding that there is no impairment as

34


determined by evaluating goodwill using fair value techniques including multiples of price/equity. Goodwill will beis evaluated for impairment on an annual basis.


Upon adoption, the Corporation ceased amortizing goodwill of approximately $59.5 million arising from previous purchase transactions. This will reducereduced amortization expense on an annual basis by $3.1 million and increaseincreased earnings on an annual basis by $2.3 million. Goodwill will continuecontinues to be evaluated for impairment in accordance with SFAS No. 142. Year-to-date 2002 earnings were positively impacted by $0.18 per share due to the implementation of SFAS No. 142.  The following tables showtable shows on a pro forma basis the results for the twelve months ended December 31, 2000 and 2001 had SFAS No. 142 been implemented on January 1, 2000.2001. Amortization of core deposit intangible for the twelve months ended December 31, 2003 and 2002 was $580 thousand.thousand annually. Anticipated amortization for the next five years is $580 thousand annually.

  
Twelve Months Ended
December 31, 2001
  
  
Reported Earnings
Goodwill Amortization
Pro Forma
Income before income tax expense $32,769 $3,121 $35,890 
Income tax expense  10,497  821  11,318 
Net income $22,272 $2,300 $24,572 
   
 
  
 
  
 
 
Basic earnings per share $1.60 $0.16 $1.76 
Diluted earnings per common share  1.59  0.16  1.75 

 

 

Twelve Months Ended
December 31, 2000

 

 

 

Amortization

 

 

 

Reported
Earnings

 

Goodwill

 

Pro Forma

 

Income before income tax expense

 

$

32,616

 

$

2,533

 

$

35,149

 

Income tax expense

 

10,270

 

616

 

10,886

 

Net income

 

$

22,346

 

$

1,917

 

$

24,263

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.70

 

$

0.15

 

$

1.85

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

1.70

 

$

0.15

 

$

1.85

 

 

 

 

 

 

 

 

 

 

 

Twelve Months Ended
December 31, 2001

 

 

 

Amortization

 

 

 

Reported
Earnings

 

Goodwill

 

Pro Forma

 

Income before income tax expense

 

$

32,769

 

$

3,121

 

$

35,890

 

Income tax expense

 

10,497

 

821

 

11,318

 

Net income

 

$

22,272

 

$

2,300

 

$

24,572

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.76

 

$

0.18

 

$

1.94

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

1.75

 

$

0.18

 

$

1.93

 

Loan Servicing Rights - -– Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets with servicing retained. Capitalized servicing rights are amortized intoagainst noninterest income in proportion to, and over the period of, the estimated future life of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Fair value is determined using prices for similar assets with like characteristics. Impairment is recorded to a capitalized servicing rights valuation reserve and recognized through earnings to the extent that fair value is less than the capitalized 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 (“EPS”("EPS") -– Basic EPS is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding.


Diluted EPS adjusts the number of weighted average shares of common stock outstanding under the treasury stock method, which includes the dilutive effect of stock options.

35



Basic and diluted EPS have been restated for 2000, 2001 and 2002 to reflect the 10 percent common stock dividend paid on December 15, 2002.

2003.

New Accounting Pronouncements -

•                  Accounting for the Impairment or Disposal of Long-Lived Assets - In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which was required to be adopted January 1, 2002.  SFAS No. 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and APB Opinion No. 30, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, and combines the two accounting models into a single model based on the framework established in SFAS No. 121.  Effects of adopting SFAS No. 144 on January 1, 2002 have had no material impact on our earnings and financial position.

•             ��      –


Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections - In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, which is required to be adopted January 1, 2003.  SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinquishment of Debt, and an amendment of that Statement, SFAS No. 64, Extinquishments of Debt Made to Satisfy Sinking-Fund Requirements.  SFAS No. 145 also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor Carriers.  SFAS No. 145 amends SFAS No. 13, Accounting for Leases.  SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions.  Management has determined that the adoption of this Statement will have no material effect on the Corporation’s financial position, results of operations, or cash flows.

•Accounting for Costs Associated with Exit or Disposal Activities - In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which is required to be adopted January 1, 2003.  SFAS No. 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred.  Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred.  Management has determined that the adoption of this Statement will have no material effect on the Corporation’s financial position, results of operations, or cash flows.

•Acquisitions of Certain Financial Institutions - SFAS No. 147, Acquisitions of Certain Financial Institutions, was issued in October 2002.  This statement clarifies that, if certain criteria are met, an acquisition of a less-than-whole financial institution (such as a branch acquisition) should be accounted for as a business combination.  SFAS No. 147 states that, in such instances, the excess of the fair value of liabilities assumed over the value of tangible and identifiable intangible assets acquired represents goodwill.  Prior to SFAS No. 147, such excesses were classified as an unidentifiable intangible asset subject to continuing amortization under SFAS No. 142.  As a result of SFAS No. 147, entities are required to reclassify and restate both the goodwill asset and amortization expense as of the date SFAS No. 142 was adopted.  In addition, SFAS No. 147 amends SFAS No. 144 to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets.  As a result, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires for other long-lived assets that are held and used by a company.  SFAS No. 147 was effective October 1, 2002 and did not have a material impact on the Corporation’s consolidated financial statements.

36


•Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - In November 2002, the FASB issued Interpretation No. 45, (“FIN 45”) Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees issued.  It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  FIN 45 expands on the accounting guidance of SFAS No. 5, Accounting for Contingencies, SFAS No. 57, Related Party Disclosures, and SFAS No. 107, Disclosures about Fair Value of Financial Instruments.  It also incorporates without change the provisions of FASB Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others, which is superseded.  The initial recognition and measurement provisions of FIN 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002.  The disclosure requirements in FIN 45 are effective for periods ending after December 15, 2002.  Significant guarantees that have been entered into by the Corporation are disclosed in note 17 to the consolidated financial statements.  The adoption of FIN 45 will have no material impact on the Corporation’s consolidated financial statements.

•Accounting for Stock-Based Compensation—Transition and Disclosure-In December 2002, the FASBFinancial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock-Based Compensation—TransitionCompensation--Transition and Disclosure. This statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective forf or fiscal years ending after December 15, 2002. Adoption of SFAS No. 148 did not have a material impact on the Corporation’sCorporation's consolidated financial statements. As permitted by SFAS No. 148, the Corporation will continue to apply the provisions of APBAccounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock-Based Compensation, for all employee stock option grants and has elected to disclose pro forma net income and earnings per share amounts as if the fair-value based method had been applied in measuring compensation costs.  In addition, the Corporation is awaiting further guidance and clarity that may result from current FASB stock compensation projects and will continue to evaluate any developments concerning mandated, as opposed to optional, fair-value based expense recognition.

Had compensation cost for the Corporation’s stock options granted in 2003, 2002, 2001, and 20002001 been determined under the fair value approach described in SFAS No. 123, Accounting for Stock-Based Compensation, the Corporation’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:

(in thousands, except per share amounts)
Years ended December 31
2003
2002
2001
Net income as reported  
 
 $28,891 $27,600 $22,272 
Loss effect of stock compensation  
 
  (339) (495) (257)
Net income pro forma  
 
 $28,552 $27,105 $22,015 
   
 
  
 
  
 
  
 
 
Basic net income per share  As reported $2.14 $2.01 $1.60 
 

 Pro forma

  2.10  1.98  1.58 
   
 
  
 
  
 
  
 
 
Diluted net income per share 

 As reported

 $2.11 $1.99 $1.59 
   Pro forma  2.08  1.95  1.57 

(in thousands, except per share amounts)
Years ended December 31

 

 

 

2002

 

2001

 

2000

 

Net income as reported

 

 

 

$

27,600

 

$

22,272

 

$

22,346

 

Loss effect of stock compensation

 

 

 

(495

)

(257

)

(399

)

Net income pro forma

 

 

 

$

27,105

 

$

22,015

 

$

21,947

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

As reported

 

$

2.21

 

$

1.76

 

$

1.70

 

 

 

Pro forma

 

2.16

 

1.75

 

1.67

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share

 

As reported

 

$

2.19

 

$

1.75

 

$

1.70

 

 

 

Pro forma

 

2.15

 

1.75

 

1.67

 

37


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 2003, 2002, 2001, and 2000,2001, respectively: risk-free interest rates of 3.68%2.69%, 4.95%3.68%, and 6.87%4.95%, dividend yields of 3.58%3.29%, 4.86%3.58%, and 1.06%4.86%, volatility factors of the expected market price of the Corporation’s common stock of 0.593, 0.290, 0.300, and 0.300, and a weighted average expected option life of 5.0,4.0, 5.0, and 4.3 years.

5.0.


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


•    Amendment of Statement 133 on Derivative Instruments and Hedging ActivitiesReclassification- In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain embedded derivatives, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement amends SFAS No. 133 to reflect the decisions made as part of the Derivatives Implementation Group (DIG) and in other FASB projects or deliberations. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. SFAS No. 149 was adopted by the Corporation on July 1, 2003. The Corporation has not entered into any contracts or hedging relationships; therefore, adoption of SFAS No. 149 had no effect on the Corporation's consolidated financial statements.

    Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity- In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This Statement establishes standards for how an entity classifies and measures certain financial instruments with characteristics of both liabilities and equity. This Statement requires that an issuer classify a financial instrument that is within its scope as a liability. Many of those instruments were previously classified as equity or in some cases presented between the liabilities section and the equity section of the statement of financial position. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Corporation adopted the provisions of SFAS No. 150 on June 1, 2003. The adoption of SFAS No. 150 had no material effect on the Corporation's consolidated financial statements.

    Reclassification– Certain reclassifications have been made in the prior year consolidated financial statements to conform to current year classifications.


2.  Business Combinations

On January 26, 2001, Community Trust Bank, Inc., the Corporation’s lead bank, acquired the deposits, loans, and fixed assets of The Bank of Mt.Vernon, Inc.  The offices acquired from The Bank of Mt. Vernon, Inc. are located in Mt. Vernon, Somerset, Richmond, and Berea, Kentucky.  The offices acquired had deposits totaling $109.3 million and loans totaling $79 million.  The purchase price paid by Community Trust Bank, Inc. for the offices was a 9.5% premium on the non-brokered deposits as of the closing date plus approximately $1.6 million for fixed assets, $12.6 million for investment securities, and $1.0 million for the cash held at the acquired branches of The Bank of Mt. Vernon, Inc.

During the third quarter of 2001, the Corporation acquired 75.28% of the outstanding shares of Citizens National Bank and Trust, Hazard, Kentucky (“Citizens”) independently valued at that time at $15.1 million in lieu of a debt owed to the Corporation by a Citizens’ shareholder.  On January 3, 2002, the Corporation acquired the remaining 24.72% of Citizens for $4.9 million.  Citizens had total assets of $138.5 million and equity capital of $19.4 million as of December 31, 2001.  On March 15, 2002, Citizens was merged into Community Trust Bank, Inc.

3. Cash and Due from Banks


Included in cash and due from banks are noninterest bearing deposits that are required to be held at the Federal Reserve or maintained in vault cash in accordance with regulatory reserve requirements. The balance requirements were $28.1$31.8 million and $26.1$28.1 million at December 31, 20022003 and 2001,2002, respectively. Cash paid during the years ended 2003, 2002, 2001, and 20002001 for interest was $45.4 million, $59.8 million, $97.1 million, and $89.3$97.1 million, respectively. Cash paid during the same periods for income taxes was $11$9.3 million, $11.0 million and $9.4 million, respectively.

3. Securities

    Amortized cost and $8.1 million, respectively.fair value of securities at December 31, 2003 are as follows:

Available-for-Sale

(in thousands)
 
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
U.S. Treasury and government agencies $34,165 $149 $0 $34,314 
State and political subdivisions  89,107  2,965  0  92,072 
U.S. agency mortgage-backed pass through certificates  180,236  4,252  (748) 183,740 
Collateralized mortgage obligations  4,197  178  0  4,375 
Other debt securities  30,538  621  (10) 31,149 
Total debt securities  338,243  8,165  (758) 345,650 
Marketable equity securities  76,161  44  0  76,205 
  $414,404 $8,209 $(758)$421,855 

38



Held-to-Maturity

(in thousands)
 
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
U.S. Treasury and government agencies $9,499 $168 $0 $9,667 
State and political subdivisions  3,726  177  0  3,903 
U.S. agency mortgage-backed pass through certificates  74,272  0  (781) 73,491 
  $87,497 $345 $(781)$87,061 
4.  Securities

Amortized cost and fair value of securities at December 31, 2002 are as follows:


Available-for-Sale

(in thousands)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

U.S. Treasury and government agencies

 

$

88,467

 

$

1,821

 

$

0

 

$

90,288

 

States and political subdivisions

 

186,984

 

2,362

 

0

 

189,346

 

U.S. agency mortgage-backed pass through certificates

 

154,916

 

7,416

 

(7

)

162,325

 

Collateralized mortgage obligations

 

7,685

 

327

 

0

 

8,012

 

Other debt securities

 

18,811

 

49

 

(548

)

18,312

 

Total debt securities

 

456,863

 

11,975

 

(555

)

468,283

 

Marketable equity securities

 

59,068

 

0

 

(12

)

59,056

 

 

 

$

515,931

 

$

11,975

 

$

(567

)

$

527,339

 

(in thousands)
 
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
U.S. Treasury and government agencies $88,467 $1,821 $0 $90,288 
State and political subdivisions  186,984  2,362  0  189,346 
U.S. agency mortgage-backed pass through certificates  154,916  7,416  (7) 162,325 
Collateralized mortgage obligations  7,685  327  0  8,012 
Other debt securities  18,811  49  (548) 18,312 
Total debt securities  456,863  11,975  (555) 468,283 
Marketable equity securities  59,068  0  (12) 59,056 
  $515,931 $11,975 $(567)$527,339 


Held-to-Maturity

(in thousands)
 
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
U.S. Treasury and government agencies $37,318 $1,052 $0 $38,370 
State and political subdivisions  13,925  378  0  14,303 
  $51,243 $1,430 $0 $52,673 

(in thousands)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross Unrealized Losses

 

Fair Value

 

U.S. Treasury and government agencies

 

$

37,318

 

$

1,052

 

$

0

 

$

38,370

 

State and political subdivisions

 

13,925

 

378

 

0

 

14,303

 

 

 

$

51,243

 

$

1,430

 

$

0

 

$

52,673

 

Amortized cost and fair value of securities at December 31, 2001 are as follows:

Available-for-Sale

(in thousands)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

U.S. Treasury and government agencies

 

$

51,726

 

$

426

 

$

(805

)

$

51,347

 

State and political subdivisions

 

40,812

 

594

 

(141

)

41,265

 

U.S. agency mortgage-backed pass through certificates

 

229,400

 

3,345

 

(240

)

232,505

 

Collateralized mortgage obligations

 

9,654

 

248

 

(1

)

9,901

 

Other debt securities

 

26,258

 

85

 

0

 

26,343

 

Total debt securities

 

357,850

 

4,698

 

(1,187

)

361,361

 

Marketable equity securities

 

6,368

 

14

 

(510

)

5,872

 

 

 

$

364,218

 

$

4,712

 

$

(1,697

)

$

367,233

 

Held-to-Maturity

(in thousands)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

U.S. Treasury and government agencies

 

$

57,499

 

$

1,146

 

$

0

 

$

58,645

 

State and political subdivisions

 

23,739

 

608

 

(6

)

24,341

 

U.S. agency mortgage-backed pass through certificates

 

2,086

 

16

 

0

 

2,102

 

 

 

$

83,324

 

$

1,770

 

$

(6

)

$

85,088

 

39



The amortized cost and fair value of securities at December 31, 20022003 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repayprepay obligations with or without call or prepayment penalties.


  
Available-for-Sale
Held-to-Maturity
(in thousands)
 
Amortized Cost
Fair
Value
Amortized Cost
Fair
Value
Due in one year or less $33,011 $33,073 $5,650 $5,823 
Due after one through five years  14,302  15,239  2,182  2,295 
Due after five through ten years  33,358  35,251  5,393  5,452 
Due after ten years  42,602  42,824  0  0 
Mortgage-backed securities and collateralized mortgage obligations  184,432  188,114  74,272  73,491 
Other securities  30,538  31,149  0  0 
   338,243  345,650  87,497  87,061 
Marketable equity securities  76,161  76,205  0  0 
  $414,404 $421,855 $87,497 $87,061 

 

 

Available-for-Sale

 

Held-to-Maturity

 

(in thousands)

 

Amortized
Cost

 

Fair Value

 

Amortized
Cost

 

Fair Value

 

Due in one year or less

 

$

47,611

 

$

47,796

 

$

23,074

 

$

23,458

 

Due after one through five years

 

26,856

 

27,780

 

9,572

 

10,071

 

Due after five through ten years

 

45,204

 

47,796

 

18,597

 

19,144

 

Due after ten years

 

155,780

 

156,263

 

0

 

0

 

Mortgage-backed securities and collateralized mortgage obligations

 

162,601

 

170,337

 

0

 

0

 

Other securities

 

14,894

 

14,847

 

0

 

0

 

 

 

452,946

 

464,819

 

51,243

 

52,673

 

Marketable equity securities

 

62,985

 

62,520

 

0

 

0

 

 

 

$

515,931

 

$

527,339

 

$

51,243

 

$

52,673

 

Pre-tax gains of $3.4 million and losses of $0.4 million were realized on sales and calls in 2003, pre-tax gains of $1.6 million and losses of $0.1 million were realized on sales and calls in 2002, and pre-tax gains of $0.8 million were realized in 2001, and pre-tax gains of $0.1 million were realized in 2000.

When it acquired 75.28% of the outstanding stock of Citizens, the Corporation elected under SFAS No. 115 to reclassify securities totaling $6 million from held-to-maturity to available-for-sale.  This election was made pursuant to the SFAS No. 115 exception allowing the Corporation to restructure the acquired portfolio to conform to the Corporation’s investment portfolio objectives.

2001.

Securities in the amount of $286$358 million and $289$286 million at December 31, 20022003 and 2001,2002, respectively, were pledged to secure public deposits, trust funds, securities sold under repurchase agreements, and advances from the Federal Home Loan Bank.

The Corporation evaluates its investment portfolio on a quarterly basis for impairment. The analysis performed as of December 31, 2003 indicates that all impairment is considered temporary, market driven, and not credit-related. In addition, all securities currently impaired have been so for less than twelve months.

Available-for-Sale

(in thousands)
 
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
U.S. agency mortgage-backed pass through certificates $34,871 $0 $(748)$34,123 
Other debt securities  1,409  0  (10) 1,399 
  $36,280 $0 $(758)$35,522 

5.Held-to-Maturity

(in thousands)
 
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
U.S. agency mortgage-backed pass through certificates $74,272 $0 $(781)$73,491 

4. Loans


Major classifications of loans, net of unearned income and deferred loan origination costs, are summarized as follows:

(in thousands)
December 31
 
2003
2002
Commercial construction $67,147 $66,797 
Commercial secured by real estate  583,924  509,856 
Commercial other  256,837  280,492 
Real estate construction  32,495  23,311 
Real estate mortgage  413,939  377,109 
Consumer  368,578  366,493 
Equipment lease financing  13,340  10,549 
  $1,736,260 $1,634,607 

(in thousands)
December 31

 

2002

 

2001

 

Commercial construction

 

$

66,797

 

$

78,508

 

Commercial secured by real estate

 

509,856

 

496,790

 

Commercial other

 

280,492

 

293,502

 

Real estate construction

 

23,311

 

19,932

 

Real estate mortgage

 

377,109

 

423,953

 

Consumer

 

366,493

 

390,311

 

Equipment lease financing

 

10,549

 

6,830

 

 

 

$

1,634,607

 

$

1,709,826

 

Not includedincluded in the loan balances above are loans held for sale in the amount of $2.3$0.3 million and $1.2$2.3 million at December 31, 20022003 and at December 31, 2001,2002, respectively.

The amount of loans on a non-accruing income status was $19.6$9.7 million and $30.5$19.6 million at December 31, 20022003 and December 31, 2001,2002, respectively. Additional interest which would have been recorded during 2003, 2002, 2001, and 20002001 if such loans had been accruing interest was approximately $0.9 million, $2.1 million, and $2.6 million, and $2.0 million, respectively.


At December 31, 20022003 and 2001,2002, the recorded investment in impaired loans was $14.5$6.5 million and $22.9$14.5 million, respectively. Included in these amounts at December 31, 20022003 and December 31,

40


2001, 2002, respectively are $6.0$3.0 million and $8.1$6.0 million of impaired loans for which specific reserves for loan losses are carried in the amounts of $1.4$1.1 million and $3.2$1.4 million. The average investment in impaired loans for 2003 and 2002 and 2001 was $15.0$6.6 million and $23.4$15.0 million, respectively while interest income of $0.2$0.1 million and $0.7$0.2 million was recognized on cash payments of $0.5$0.4 million and $0.9$0.5 million.


6.5. Related Party Transactions


In the ordinary course of business, the Corporation’s banking subsidiary has made loans at prevailing interest rates and terms to directors and executive officers of the Corporation or its 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 of these loans at January 1, 20022003 was $35.1$31.2 million. During 2002,2003, activity with respect to these loans included new loans of $3.7$3.2 million and repayment of $2.8 million, and a net decrease of $4.8 million due to changes in the status of executive officers and directors.  The net decrease due to status changes is primarily a result of the merger of Citizens into the Bank eliminating the designation of those individuals as directors or executive officers.$2.4 million. As a result of these activities, the aggregate balance of these loans was $31.2$32.0 million at December 31, 2002.

2003.


At December 31, 2003, 2002, 2001, and 2000,2001, loans serviced for the benefit of others, not included in the detail above, totaled $383 million, $331 million, and $274 million, and $255 million, respectively.


7.6. Allowance for Loan Losses


Activity in the allowance for loan losses was as follows:

(in thousands)
 
2003
2002
2001
Balance, beginning of year $23,271 $23,648 $25,886 
Provision charged to operations  9,332  10,086  9,185 
Recoveries  3,754  3,674  4,023 
Charge-offs  (11,704) (14,137) (15,446)
Balance, end of year $24,653 $23,271 $23,648 

(in thousands)

 

2002

 

2001

 

2000

 

Balance, beginning of year

 

$

23,648

 

$

25,886

 

$

25,102

 

Provision charged to operations

 

10,086

 

9,185

 

9,217

 

Recoveries

 

3,674

 

4,023

 

5,014

 

Charge-offs

 

(14,137

)

(15,446

)

(13,447

)

Balance, end of year

 

$

23,271

 

$

23,648

 

$

25,886

 

Activity in the allowance for other real estate losses was as follows:

(in thousands)

 

2002

 

2001

 

2000

 

Balance, beginning of year

 

$

780

 

$

686

 

$

630

 

Provision charged to operations

 

0

 

329

 

229

 

Charge-offs

 

0

 

(235

)

(173

)

Asset basis adjustment

 

(780

)

0

 

0

 

Balance, end of year

 

$

0

 

$

780

 

$

686

 

During a routine safety and soundness audit in the fourth quarter of 2001, it was determined that a direct write-down method should be utilized for other real estate owned valuation adjustments.  In the first quarter of 2002, the allowance was eliminated by reducing the carrying amount of the individual properties held at the time by the amount of their specific reserve and the remainder was allocated on a pro-rata basis.

Other real estate owned by the Corporation, net of reserves, included in Other assets at December 31, 2002 and 2001 was $3.4 million and $2.6 million, respectively. 

41


8.7. Premises and Equipment


Premises and equipment are summarized as follows:

(in thousands)
December 31

 

2002

 

2001

 

Land and buildings

 

$

59,005

 

$

58,670

 

Leasehold improvements

 

4,328

 

4,143

 

Furniture, fixtures, and equipment

 

29,978

 

27,149

 

Construction in progress

 

480

 

287

 

 

 

93,791

 

90,249

 

Less accumulated depreciation and amortization

 

(43,024

)

(39,148

)

 

 

$

50,767

 

$

51,101

 


(in thousands)
December 31
 
2003
2002
Land and buildings $57,140 $59,005 
Leasehold improvements  4,826  4,328 
Furniture, fixtures, and equipment  29,351  29,978 
Construction in progress  343  480 
   91,660  93,791 
Less accumulated depreciation and amortization  (41,670) (43,024)
  $49,990 $50,767 

Depreciation and amortization of premises and equipment for 2003, 2002, and 2001 and 2000 was $3.8 million, $3.9 million, and $3.8 million, and $4.0 million, respectively.


9.8. Deposits


Major classifications of deposits are categorized as follows:

(in thousands)
December 31
 
2003
2002
Noninterest bearing deposits $359,403 $343,565 
NOW accounts  16,578  16,177 
Money market deposits  380,613  425,973 
Savings  217,358  202,068 
Certificates of deposit of $100,000 or more  357,573  354,007 
Certificates of deposit less than $100,000 and other time deposits  736,090  785,926 
  $2,067,615 $2,127,716 

(in thousands)
December 31

 

2002

 

2001

 

Noninterest bearing deposits

 

$

343,565

 

$

320,437

 

NOW accounts

 

16,177

 

33,082

 

Money market deposits

 

425,973

 

391,075

 

Savings

 

202,068

 

177,153

 

Certificates of deposit of $100,000 or more

 

354,007

 

385,724

 

Certificates of deposit less than $100,000 and other time deposits

 

785,926

 

848,301

 

 

 

$

2,127,716

 

$

2,155,772

 

Interest expense on deposits is categorized as follows:


(in thousands)

 

2002

 

2001

 

2000

 

Savings, NOW, and money market accounts

 

$

9,007

 

$

13,343

 

$

18,095

 

Certificates of deposit of $100,000 or more

 

13,372

 

22,812

 

20,001

 

Certificates of deposit less than $100,000 and other time deposits

 

27,732

 

49,454

 

45,152

 

 

 

$

50,111

 

$

85,609

 

$

83,248

 

(in thousands)
 
2003
2002
2001
Savings, NOW, and money market accounts $6,309 $9,007 $13,343 
Certificates of deposit of $100,000 or more  10,092  13,372  22,812 
Certificates of deposit less than $100,000 and other time deposits  20,809  27,732  49,454 
  $37,210 $50,111 $85,609 
10.9. Advances from Federal Home Loan Bank


The advances from the Federal Home Loan Bank were due for repayment as follows:

(in thousands)
December 31

 

2002

 

2001

 

Due in one year or less

 

$

2,559

 

$

4,197

 

Due in one to five years

 

2,168

 

4,126

 

Due in five to ten years

 

852

 

1,156

 

Due after ten years

 

38

 

46

 

 

 

$

5,617

 

$

9,525

 

(in thousands)
December 31
 
2003
2002
Due in one year or less $846 $2,559 
Due in one to five years  1,628  2,168 
Due in five to ten years  689  852 
Due after ten years  29  38 
  $3,192 $5,617 

These advances generally require monthly principal payments and were collateralized by Federal Home Loan Bank stock of $19.2$20.0 million and certain first mortgage loans totaling $7.6$4.3 million as of December 31, 2002.2003. Advances totaled $5.6$3.2 million at December 31, 20022003 with fixed interest rates ranging from 1.00% to 7.05% and a weighted average rate of 5.63%5.51%.

42



11.10. Borrowings


Short-term debt is categorized as follows:

(in thousands)
December 31
 
2003
2002
Subsidiaries:  
 
  
 
 
Federal funds purchased $7,785 $17,080 
Securities sold under agreements to repurchase  96,506  51,351 
Capital lease obligations, interest at lender's prime rate, payable in quarterly principal and interest installments of $53 thousand, adjusted for prime rate changes through September 2004, secured by real property. The Bank intends to exercise the purchase option that becomes available in September 2004 for $921 thousand.  1,002  0 
  $105,293 $68,431 

(in thousands)
December 31

 

2002

 

2001

 

Parent Company:

 

 

 

 

 

$ 14 million revolving line of credit, 4.1875% interest due semiannually.  Paid February 1, 2002.

 

$

0

 

$

8,000

 

Subsidiaries:

 

 

 

 

 

Federal funds purchased

 

17,080

 

16,864

 

Securities sold under agreements to repurchase

 

51,351

 

57,720

 

 

 

$

68,431

 

$

82,584

 

Effective February 1, 2002, the Corporation paid off and closed the $14 million revolving line of credit using a portion of the proceeds of the CTBI Preferred Capital Trust II offering as detailed in note 12.

On April 29, 2002,2003, the Corporation entered into a revolving note agreement for a line of credit in the amount of $12 million, all of which is currently available to meet any future cash needs. The agreement will mature on April 28, 2003.

2004.


All federal funds purchased and the majority of securities sold under agreements to repurchase mature and reprice daily. The average rates paid for federal funds purchased and repurchase agreements on December 31, 20022003 were 0.73%0.78% and 1.69%1.29%, respectively.


The maximum balance for federal funds purchased and repurchase agreements at any month-end during 20022003 occurred at February 28, 2002,November 30, 2003, with a month-end balance of $87.7$112.7 million.


Long-term debt is categorized as follows:

(in thousands)
December 31

 

2002

 

2001

 

Parent Company:

 

 

 

 

 

Ten Year Senior Notes, 8.25% interest, due January 1, 2003; interest payable semiannually; redeemable in whole or in part at the option of the Corporation.  Redeemed February 25, 2002.

 

$

0

 

$

12,230

 

Subsidiaries:

 

 

 

 

 

Capital lease obligations, interest at lender’s prime rate, payable in quarterly principal and interest installments of $53 thousand, adjusted for prime rate changes through September 2004, secured by real property.  The Bank has a purchase option in September 2004 for $921 thousand or a renewal option for five years.

 

1,102

 

1,212

 

Other

 

2

 

2

 

 

 

$

1,104

 

$

13,444

 

On February 25, 2002,

(in thousands)
December 31
 
2003
2002
Parent:  
 
  
 
 
Junior subordinated debentures, 9.00%, due 3/31/27 $34,500 $34,500 
Junior subordinated debentures, 8.25%, due 3/31/32  25,000  25,000 
Subsidiaries:  
 
  
 
 
Capital lease obligations  0  1,102 
Other  0  2 
  $59,500 $60,604 
    The 9.00% junior subordinated debentures due March 31, 2027 were issued by the Corporation redeemed all ofto CTBI Preferred Capital Trust (CPCT). The 8.25% junior subordinated debentures due March 31, 2032 were issued by the $12.2 million in remaining principal amount of outstanding 8.25% senior notes due January 1, 2003, at a redemption price of 100.5% of the principal amount of the notes, plus accrued interestCorporation to the redemption date.  The Corporation paid the redemption price with a portion of the proceeds of the CTBI Preferred Capital Trust II offering as detailed in note 12.

43


12. Company-Obligated Mandatorily Redeemable Preferred Securities(CPCTII). The Corporation has fully and unconditionally guaranteed all of Subsidiary TrustsHolding Solely the Junior Subordinated Debentures of the Corporation

The following table is a summary of the obligatedCPCT’s and CPCTII’s obligations under trust preferred securities asissued by CPCT and CPCTII.


    Upon the early adoption of December 31, 2002 and 2001.

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance
Trust

 

Issuance
Date

 

Amount

 

Rate
Amount

 

Rate
Type

 

Maturity
Date

 

Redemption
Date

 

CTBI Preferred Capital Trust

 

3/31/97

 

$

34,500

 

9.00

%

Fixed

 

3/31/27

 

3/31/07

 

December 31, 2001 Balance

 

 

 

34,500

 

 

 

 

 

 

 

 

 

CTBI Preferred Capital Trust II

 

2/1/02

 

25,000

 

8.25

%

Fixed

 

3/31/32

 

3/31/07

 

December 31, 2002 Balance

 

 

 

$

59,500

 

 

 

 

 

 

 

 

 

On FebruaryFIN 46 effective July 1, 2002,2003, the Corporation issued an additional $25 milliondeconsolidated both CPCT and CPCTII resulting in a recharacterization of the underlying consolidated debt obligations from the previous trust preferred securities through an issuance by CTBI Preferred Capital Trust II,obligations to junior subordinated debenture obligations. Under the current Federal Reserve Board’s regulatory framework, both the junior subordinated debenture obligations qualify as total capital for regulatory capital purposes. The Federal Reserve Board is currently evaluating whether these capital securities should continue to qualify as Tier 1 capital as a wholly owned subsidiary grantor trust.  Proceedsresult of $8 million from this offering were used to pay offdeconsolidating the related trust preferred securities in accordance with generally accepted accounting principles. If the Federal Reserve Board disallows the capital securities as Tier 1 regulatory capital, the effect of such a revolving line of credit; $12.4 million was used for payment ofchange could have a material impact on the redemption of senior notes on February 25, 2002.

Corporation’s regulatory ratios.


13.11. Federal Income Taxes


The components of the provision for income taxes, exclusive of tax effect of unrealized securities gains, are as follows:

(in thousands)
 
2003
2002
2001
Current income taxes $11,472 $9,710 $9,032 
Deferred income taxes  561  2,448  1,465 
  $12,033 $12,158 $10,497 

(in thousands)

 

2002

 

2001

 

2000

 

Current income taxes

 

$

9,710

 

$

9,032

 

$

9,725

 

Deferred income taxes

 

2,448

 

1,465

 

545

 

 

 

$

12,158

 

$

10,497

 

$

10,270

 

The components of the net deferred tax asset as of December 31 are as follows:

(in thousands)
 
2003
2002
Deferred tax assets  
 
  
 
 
Allowance for loan losses $9,234 $8,036 
Interest on nonperforming loans  856  1,715 
Other  1,481  1,242 
Total deferred tax assets  11,571  10,993 
   
 
  
 
 
Deferred tax liabilities  
 
  
 
 
Depreciation  (5,841) (5,168)
FHLB stock dividends  (3,293) (3,020)
Other  (2,367) (2,174)
Total deferred tax liabilities  (11,501) (10,362)
   
 
  
 
 
Net deferred tax asset $70 $631 

(in thousands)

 

2002

 

2001

 

Deferred tax assets

 

 

 

 

 

Allowance for loan losses

 

$

8,036

 

$

8,277

 

Interest on nonperforming loans

 

1,715

 

1,820

 

Other

 

1,242

 

1,142

 

Total deferred tax assets

 

10,993

 

11,239

 

 

 

 

 

 

 

Deferred tax liabilities

 

 

 

 

 

Depreciation

 

(5,168

)

(3,746

)

FHLB stock dividends

 

(3,020

)

(2,712

)

Other

 

(2,174

)

(1,702

)

Total deferred tax liabilities

 

(10,362

)

(8,160

)

 

 

 

 

 

 

Net deferred tax asset

 

$

631

 

$

3,079

 

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

44


change in aggregate deferred tax assets and liabilities. The method focuses first on the consolidated balance sheet, and the amount of income tax expense is determined by changes in the components of the consolidated balance sheet.


(in thousands)

 

2002

 

2001

 

2000

 

Tax at statutory rate

 

$

13,915

 

$

11,469

 

$

11,415

 

Tax-exempt interest

 

(1,233

)

(1,288

)

(1,372

)

Other, net

 

(524

)

316

 

227

 

 

 

$

12,158

 

$

10,497

 

$

10,270

 

(in thousands)
 
2003
2002
2001
Tax at statutory rate $14,323 $13,915 $11,469 
Tax-exempt interest  (1,037) (1,233) (1,288)
Other, net  (1,253) (524) 316 
  $12,033 $12,158 $10,497 
14.12. 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 KSOP plan owned 881,6051,000,706 shares of Corporation stock at December 31, 2002.2003. Substantially all shares owned by the KSOP were allocated to employees’ accounts at December 31, 2002.2003. 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, for 2003, 2002, 2001, and 20002001 was $1.6 million, $1.4$1.6 million and $1.4 million, respectively.


The Corporation currently maintains two incentive stock option plans covering key employees; however, only one plan is active. The 1998 Stock Option Plan (“("1998 Plan”Plan") was approved by the Board of Directors and the Shareholders in 1998. The 1998 Plan had 865,150951,665 shares authorized, 397,200405,380 of which were available at December 31, 20022003 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”25") and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of all employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized.


The Corporation’s stock option activity for the 1998 Plan for the years ended December 31, 2003, 2002, 2001, and 20002001 is summarized as follows:

December 31

 

2002

 

2001

 

2000

 

 

 

Options

 

Weighted
Average
Exercise
Price

 

Options

 

Weighted
Average
Exercise
Price

 

Options

 

Weighted
Average
Exercise
Price

 

Outstanding at beginning of year

 

304,764

 

$

16.73

 

259,975

 

$

17.46

 

139,173

 

$

23.06

 

Granted

 

173,250

 

22.74

 

121,550

 

15.45

 

120,802

 

15.58

 

Exercised

 

(8,083

)

16.81

 

(5,886

)

16.50

 

0

 

0

 

Forfeited/expired

 

(1,981

)

17.88

 

(70,875

)

17.19

 

0

 

0

 

Outstanding at end of year

 

467,950

 

$

18.95

 

304,764

 

$

16.73

 

259,975

 

$

17.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at end of year

 

33,541

 

$

16.32

 

22,593

 

$

16.73

 

5,589

 

$

18.25

 

45
December 31
 
2003
2002
2001
   
Options

 

 

Weighted Average Exercise Price

 

 

Options

 

 

Weighted Average Exercise Price

 

 

Options

 

 

Weighted Average Exercise Price
 
Outstanding at beginning of year  514,744 $17.23  335,240 $15.21  285,973 $15.87 
Granted  115,199  23.08  190,575  20.67  133,705  14.05 
Exercised  (37,594) 17.56  (8,891) 15.28  (6,475) 15.00 
Forfeited/expired  (46,064) 17.31  (2,180) 16.25  (77,963) 15.63 
Outstanding at end of year  546,285 $18.43  514,744 $17.23  335,240 $15.21 
  
Exercisable at end of year  39,580 $14.59  36,895 $14.84  24,852 $15.21 


The 1998 Stock Option Plan had options with the following remaining lives at December 31, 2002:2003:


1998 Option Plan
Remaining Life
 
Outstanding Options
Weighted Average Price
Five years  70,948 $16.89 
Six years  79,787  13.90 
Seven years  108,446  14.29 
Eight years  181,198  20.79 
Nine years  105,906  23.08 
Total outstanding  546,285  
 
 
    
Weighted average price  
 
 $18.43 

1998 Option Plan

Remaining Life

 

Outstanding
Options

 

Weighted
Average Price

 

Five years

 

14,641

 

$

23.07

 

Six years

 

80,919

 

18.57

 

Seven years

 

88,865

 

15.42

 

Eight years

 

110,275

 

15.57

 

Nine years

 

173,250

 

22.74

 

Total outstanding

 

467,950

 

 

 

Weighted average price

 

 

 

$

18.95

 

The 1989 Stock Option Plan (“("1989 Plan”Plan") has no remaining options available for grant. The maximum term is ten years. Options granted as management retention options vest after five years, all other options vest ratably over four years.

The Corporation’s stock option activity for the 1989 Plan for the years ended December 31, 2003, 2002, 2001, and 20002001 is summarized as follows:

December 31
 
2003
2002
2001
   

Options

 

 

Weighted Average Exercise Price

 

 

Options

 

 

Weighted Average Exercise Price

 

 

Options

 

 

Weighted Average Exercise Price
 
Outstanding at beginning of year  120,834 $14.72  169,820 $15.15  228,158 $14.32 
Exercised  (22,786) 14.87  (40,934) 16.40  (57,908) 11.80 
Forfeited/expired  0  0  (8,052) 15.36  (430) 17.03 
Outstanding at end of year  98,048 $14.68  120,834 $14.72  169,820 $15.15 
 
Exercisable at end of year  98,048 $14.68  120,834 $14.72  83,073 $14.25 

December 31

 

2002

 

2001

 

2000

 

 

 

Options

 

Weighted
Average
Exercise
Price

 

Options

 

Weighted
Average
Exercise
Price

 

Options

 

Weighted
Average
Exercise
Price

 

Outstanding at beginning of year

 

154,382

 

$

16.66

 

207,416

 

$

15.75

 

243,219

 

$

15.80

 

Exercised

 

(37,213

)

18.04

 

(52,644

)

12.98

 

(3,295

)

8.20

 

Forfeited/expired

 

(7,320

)

16.90

 

(390

)

18.73

 

(32,508

)

16.74

 

Outstanding at end of year

 

109,849

 

$

16.19

 

154,382

 

$

16.66

 

207,416

 

$

15.75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at end of year

 

109,849

 

$

16.19

 

75,521

 

$

15.67

 

50,523

 

$

14.97

 

The 1989 Stock Option Plan had options with the following remaining lives at December 31, 2002:2003:

1989 Option Plan
Remaining Life
 
Outstanding Options
Weighted Average Price
One year or less  2,918 $21.42 
Two years  1,990  13.20 
Three years  41,668  12.83 
Four years  47,080  15.35 
Five years  4,392  21.26 
Total outstanding  98,048  
 
 
    
Weighted average price  
 
 $14.68 

1989 Option Plan

Remaining Life

 

Outstanding
Options

 

Weighted
Average Price

 

One year or less

 

4,393

 

$

14.80

 

Two years

 

4,801

 

23.56

 

Three years

 

4,949

 

14.98

 

Four years

 

41,042

 

14.08

 

Five years

 

50,671

 

16.87

 

Six years

 

3,993

 

23.39

 

Total outstanding

 

109,849

 

 

 

Weighted average price

 

 

 

$

16.19

 

The related information for the 1998 Plan for 2003, 2002, 2001, and 20002001 is summarized in note 1. No options were granted in 2003, 2002, 2001, or 20002001 from the 1989 Plan.


The weighted average fair value of options granted during the years 2003, 2002, and 2001 was $4.53, $4.83, and 2000 was $4.83, $3.25 and $5.26 per share, respectively.

46


15.13. Operating Leases


Certain premises and equipment are leased under operating leases. Minimum rental payments are as follows:

(in thousands)
  
2004 $1,213 
2005  1,150 
2006  1,137 
2007  1,087 
2008  779 
Thereafter  11,366 
  $16,732 

(in thousands)

 

 

 

2003

 

$

1,125

 

2004

 

1,086

 

2005

 

1,062

 

2006

 

1,049

 

2007

 

976

 

Thereafter

 

12,178

 

 

 

$

17,476

 

Rental expense net of rental income under operating leases was $0.5 million, $0.6 million, and $0.7 million in 2003, 2002, and $0.6 million in 2002, 2001, and 2000, respectively.


16.14. Fair Market 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.


FHLB Stock - The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.


Deposits - The fair value of deposits 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 rates currently offered for advances of similar remaining maturities.

Trust Preferred Securities - Fair values are based on quoted market prices.


Long-term Debt - - The fair value is estimated by discounting future cash flows using current rates.


Other Financial Instruments - The estimated fair value for other financial instruments and off-balance sheet loan commitments approximates cost at December 31, 20022003 and 2001.2002. Off-balance sheet loan commitments at December 31, 2003 and 2002 were $299.7 million and 2001 were $281.3 million, and $292.0 million, respectively.


Commitments to Extend Credit - The fair value of commitments to extend credit is based upon the difference between the interest rate at which the Corporation is committed to make the loans and the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for the estimated volume of loan commitments actually expected to close. The fair value of such commitments is not material.


47
(in thousands)
December 31
 
2003
2002
  
Carrying Amount
Estimated Fair Value
Carrying Amount
Estimated Fair Value
Financial assets  
 
  
 
  
 
  
 
 
Cash and cash equivalents $88,961 $88,961 $142,206 $142,206 
Securities  509,352  508,916  578,582  580,012 
Loans and loans held for sale  1,736,575  1,898,448  1,636,886  1,791,458 
  $2,334,888 $2,496,325 $2,357,674 $2,513,676 
   
 
  
 
  
 
  
 
 
Financial liabilities  
 
  
 
  
 
  
 
 
Deposits $2,067,615 $2,074,022 $2,127,716 $2,139,843 
Short-term borrowings  105,293  104,536  68,431  68,431 
Advances from Federal Home Loan Bank  3,192  3,244  5,617  5,915 
Long-term debt  59,500  66,295  60,604  62,756 
  $2,235,600 $2,248,097 $2,262,368 $2,276,945 



 

 

2002

 

2001

 

(in thousands)
December 31

 

Carrying Amount

 

Estimated Fair Value

 

Carrying Amount

 

Estimated Fair Value

 

Financial assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

142,206

 

$

142,206

 

$

209,796

 

$

209,796

 

Securities

 

578,582

 

580,012

 

450,557

 

452,321

 

Loans and loans held for sale

 

1,636,886

 

1,791,458

 

1,711,072

 

1,741,580

 

 

 

$

2,357,674

 

$

2,513,676

 

$

2,371,425

 

$

2,403,697

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,127,716

 

$

2,139,843

 

$

2,155,772

 

$

2,170,040

 

Short-term borrowings

 

68,431

 

68,431

 

82,584

 

82,584

 

Advances from Federal Home Loan Bank

 

5,617

 

5,915

 

9,525

 

9,277

 

Trust preferred securities

 

59,500

 

61,634

 

34,500

 

35,121

 

Long-term debt

 

1,104

 

1,122

 

13,444

 

14,229

 

 

 

$

2,262,368

 

$

2,276,945

 

$

2,295,825

 

$

2,311,251

 

17.15. Off-Balance Sheet Transactions and Guarantees


The Bank is a party to transactions with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include standby letters of credit and commitments to extend credit in the form of unused lines of credit. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.


At December 31, the Bank had the following financial instruments, whose approximate contract amounts represent credit risk:

(in thousands)
 
2003
2002
Standby letters of credit $30,654 $22,763 
Commitments to extend credit  269,095  258,515 

(in thousands)

 

2002

 

2001

 

Standby letters of credit

 

$

22,763

 

$

17,415

 

Commitments to extend credit

 

258,515

 

274,633

 

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. At December 31, 2002,2003, the Corporation maintained a credit loss reserve of approximately $0.01$0.02 million relating to these financial standby letters of credit. The reserve coverage calculation was determined using essentially the same methodology used for the allowance for loan losses. Approximately 75%84% of the total standby letters of credit are secured, with $13.3$20.9 million of the total $22.8$30.7 million secured by cash. Collateral for the remaining secured standby letters of credit varies but is comprised primarily of accounts receivable, inventory, property, equipment, and income-producing properties.


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 Bank evaluates 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 is to extend credit at fixed rates. Fixed rate loan commitments at December 31, 20022003 of $19.4$23.5 million had interest rates and terms ranging predominantly from 4.75% to 8.00%8.13% and 6 months to 1 year, respectively. These credit commitments were based on prevailing rates, terms, and conditions applicable to other loans being made at December 31, 2002.

48

2003.


18.16. Concentrations of Credit Risk


The Corporation’s banking subsidiary grants commercial, residential, and consumer loans to customers primarily located in eastern, northeast, central, and south central Kentucky and southern West Virginia. The Bank is continuing to increase all components of its portfolio mix in a manner to reduce risk from changes in economic conditions. Although the loan portfolio is diverse, a certain portion of the Corporation’s debtors is economically dependent upon the coal industry for the ability to repay.  Concentrations of credit, as defined for regulatory purposes, are reviewed quarterly by management to ensure that internally established limits based on Tier 1 Capital plus the allowance for loan losses are not exceeded. At December 31, 20022003 and 2001,2002, the Corporation’s concentration of coal mining and related support industries credits based on established limits was 42%44% and 33%42% of Tier 1 Capital plus the allowance for loan losses, respectively. Agricultural credits at December 31, 2003 and 2002 were 40% and 2001 were 41% and 44% of Tier 1 Capital plus the allowance for loan losses,los ses, respectively. These exposures were in the tobacco, beef cattle, dairy, and equine subsectors of this industry. Hotel/motel industry credits at December 31, 2003 and 2002 were 37% and 32%, respectively. Apartment and rental housing credits at December 31, 2003 and 2002 were 27% and 2001 were 25% and 10%, respectively.  Hotel/motel industry credits at December 31, 2002 and 2001 were 32% and 28%, respectively. These percentages are within the Corporation’s internally established limits regarding concentrations of credit.


19.17. Commitments and Contingencies


The Corporation and its subsidiaries, and from time to time, its officers are named defendants in legal actions arising from normalordinary business activities. Management, after consultation with legal counsel, believes these actions are without merit or that the ultimate liability, if any, will not materially affect the Corporation’s consolidated financial position or results of operations.


20.18. Regulatory Matters


The Corporation’s principal source of funds is dividends received from the subsidiary bank. Regulations limit the amount of dividends that may be paid by the Corporation’s banking subsidiary without prior approval. During 2003,2004, approximately $11.6$27.5 million plus any 20032004 net profits can be paid by the Corporation’s banking subsidiary without prior regulatory approval.


The FRBFederal Reserve Bank adopted quantitative measures which assign risk weightings to assets and off-balance-sheet items and also define and set minimum regulatory capital requirements (risk-based capital ratios). All banks are required to have corea minimum Tier 1 (core capital) leverage ratio of at least 4% of adjusted quarterly average assets, Tier 1 capital (Tier 1) of at least 4% of risk-weighted assets, and total capital of at least 8% of risk-weighted assets and a minimum Tier 1 leverage ratio of 4% of adjusted quarterly average assets. Tier 1 capital consists principally of shareholders’ equity including capital-qualifying subordinated debt but excluding unrealized gains and losses on securities available for sale,available-for-sale, less goodwill and certain other intangibles. Total capital consists of Tier 1 capital plus certain debt instruments and the reserve for credit losses, subject to limitation. Failure to meet certain capital requirements can initiate certain actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements of the Corporation. The regulations also define well-capitalized levels of Tier 1 leverage, Tier 1, and total capital and Tier 1 leverage as 5%, 6%, 10% and 5%10%, respectively. The Corporation had Tier 1 leverage, Tier 1, and total capital and leverage ratios above the well-capitalized levels at December 31, 20022003 and 2001.2002. Management believes, as of December 31, 2002,2003, the Corporation meets all capital adequacy requirements for which it is subject to be defined as well-capitalized under the regulatory framework for prompt corrective action.

49



    Under the current Federal Reserve Board’s regulatory framework, certain capital securities offered by wholly-owned unconsolidated trust preferred entities of the Corporation are included as Tier 1 regulatory capital. The Federal Reserve Board is currently evaluating whether these capital securities should continue to qualify as Tier 1 capital as a result of deconsolidating the related trust preferred securities in accordance with generally accepted accounting principals. If the Federal Reserve Board disallows the capital securities as Tier 1 regulatory capital, the effect of such a change could have a material impact on the Corporation’s regulatory ratios.

Consolidated Capital Ratios

  
Actual
For Capital Adequacy Purposes
To Be Well-Capitalized Under Prompt Corrective Action Provision
  
(in thousands)
 
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2003:
  
 
  
 
  
 
  
 
  
 
  
 
 
Tier 1 capital  
 
  
 
  
 
  
 
  
 
  
 
 
(to average assets) $211,751  8.73%$97,022  4.00%$121,278  5.00%
Tier 1 capital  
 
  
 
  
 
  
 
  
 
  
 
 
(to risk weighted assets)  211,751  11.35  74,626  4.00  111,939  6.00 
Total capital  
 
  
 
  
 
  
 
  
 
  
 
 
(to risk weighted assets)  235,047  12.60  149,236  8.00  186,545  10.00 
   
 
  
 
  
 
  
 
  
 
  
 
 
As of December 31, 2002:
  
 
  
 
  
 
  
 
  
 
  
 
 
Tier 1 capital  
 
  
 
  
 
  
 
  
 
  
 
 
(to average assets) $196,325  8.23%$95,419  4.00%$119,274  5.00%
Tier 1 capital  
 
  
 
  
 
  
 
  
 
  
 
 
(to risk weighted assets)  196,325  10.98  71,521  4.00  107,281  6.00 
Total capital  
 
  
 
  
 
  
 
  
 
  
 
 
(to risk weighted assets)  218,653  12.22  143,144  8.00  178,930  10.00 

(in thousands)

 

Actual

 

For Capital Adequacy
Purposes

 

To Be Well-Capitalized
Under Prompt
Corrective Action
Provision

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

As of December 31, 2002:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk Weighted Assets)

 

$

218,653

 

12.22

%

$

143,144

 

8.00

%

$

178,930

 

10.00

%

Tier 1 Capital (to Risk Weighted Assets)

 

196,325

 

10.98

%

71,521

 

4.00

%

107,281

 

6.00

%

Tier 1 Capital (to Average Assets)

 

196,325

 

8.23

%

95,419

 

4.00

%

119,274

 

5.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2001:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk Weighted Assets)

 

$

180,017

 

10.32

%

$

139,548

 

8.00

%

$

174,435

 

10.00

%

Tier 1 Capital (to Risk Weighted Assets)

 

158,938

 

9.11

%

69,786

 

4.00

%

104,679

 

6.00

%

Tier 1 Capital (to Average Assets)

 

158,938

 

6.44

%

98,719

 

4.00

%

123,399

 

5.00

%


21.19. Parent Company Financial Statements


Condensed Balance Sheets

(in thousands)
December 31
 
2003
2002
Assets:  
 
  
 
 
Cash on deposit $3,707 $2,264 
Securities available-for-sale  243  187 
Investment in and advances to subsidiaries  274,297  263,035 
Excess of cost over net assets acquired (net of accumulated amortization)  4,973  4,973 
Other assets  4,600  2,827 
Total assets $287,820 $273,286 
   
 
  
 
 
Liabilities and shareholders’ equity:  
 
  
 
 
Subordinated debt $61,341 $61,341 
Other liabilities  5,086  2,526 
Total liabilities  66,427  63,867 
   
 
  
 
 
Shareholders’ equity  221,393  209,419 
   
 
  
 
 
Total liabilities and shareholders’ equity $287,820 $273,286 

(in thousands)
December 31

 

2002

 

2001

 

Assets:

 

 

 

 

 

Cash on deposit

 

$

2,264

 

$

6,853

 

Securities available-for-sale

 

187

 

214

 

Investment in and advances to subsidiaries

 

263,035

 

241,753

 

Excess of cost over net assets acquired (net of accumulated amortization)

 

4,973

 

4,973

 

Other assets

 

2,827

 

1,787

 

Total assets

 

$

273,286

 

$

255,580

 

 

 

 

 

 

 

Liabilities and shareholders’ equity:

 

 

 

 

 

Short-term debt

 

$

0

 

$

8,000

 

Subordinated debt

 

61,341

 

35,568

 

Other long-term debt

 

0

 

12,230

 

Other liabilities

 

2,526

 

8,176

 

Total liabilities

 

63,867

 

63,974

 

 

 

 

 

 

 

Shareholders’ equity

 

209,419

 

191,606

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

273,286

 

$

255,580

 

 

50


Condensed Statements of Income


(in thousands)
Year Ended December 31
 
2003
2002
2001
Income:  
 
  
 
  
 
 
Dividends from subsidiary banks $18,660 $17,155 $28,296 
Other income  79  70  14 
Total income  18,739  17,225  28,310 
   
 
  
 
  
 
 
Expenses:  
 
  
 
  
 
 
Interest expense  5,415  5,425  4,604 
Amortization expense  0  6  406 
Other expenses  1,018  857  812 
Total expenses  6,433  6,288  5,822 
   
 
  
 
  
 
 
Income before income taxes and equity in undistributed income of subsidiaries  12,306  10,937  22,488 
Applicable income taxes  (2,715) (2,476) (1,873)
Income before equity in undistributed income of subsidiaries  15,021  13,413  24,361 
Equity in undistributed income of subsidiaries  13,870  14,187  (2,089)
   
 
  
 
  
 
 
Net income $28,891 $27,600 $22,272 

(in thousands)
Year Ended December 31

 

2002

 

2001

 

2000

 

Income:

 

 

 

 

 

 

 

Dividends from subsidiary banks

 

$

17,155

 

$

28,296

 

$

17,896

 

Other income

 

70

 

14

 

55

 

Total income

 

17,225

 

28,310

 

17,951

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Interest expense

 

5,270

 

4,508

 

4,571

 

Amortization expense

 

161

 

502

 

502

 

Other expenses

 

857

 

812

 

805

 

Total expenses

 

6,288

 

5,822

 

5,878

 

 

 

 

 

 

 

 

 

Income before income taxes and equity in undistributed income of subsidiaries

 

10,937

 

22,488

 

12,073

 

Applicable income taxes

 

(2,476

)

(1,873

)

(1,865

)

Income before equity in undistributed income of subsidiaries

 

13,413

 

24,361

 

13,938

 

Equity in undistributed income of subsidiaries

 

14,187

 

(2,089

)

8,408

 

 

 

 

 

 

 

 

 

Net income

 

$

27,600

 

$

22,272

 

$

22,346

 


Condensed Statements of Cash Flows

(in thousands)
Year Ended December 31
 
2003
2002
2001
Cash flows from operating activities:  
 
  
 
  
 
 
Net income $28,891 $27,600 $22,272 
Adjustments to reconcile net income to net cash provided by operating activities:  
 
  
 
  
 
 
Amortization, net  0  6  406 
Equity in undistributed earnings of subsidiaries  (13,870) (14,187) 2,089 
Change in other assets and liabilities, net  2,831  (6,698) (1,413)
Net cash provided by operating activities  17,852  6,721  23,354 
   
 
  
 
  
 
 
Cash flows from investing activities:  
 
  
 
  
 
 
Payments to acquire subsidiary  0  (1,639) (15,063)
Repayment of investments in and advances to subsidiaries  0  16  1,800 
Other  (2,066) 12  0 
Net cash used in investing activities  (2,066) (1,611) (13,263)
   
 
  
 
  
 
 
Cash flows from financing activities:  
 
  
 
  
 
 
Dividends paid  (11,055) (9,770) (9,297)
Net repurchase of common stock  (3,288) (5,472) (4,994)
Proceeds from long-term debt  0  25,773  0 
Repayment of long-term debt  0  (12,230) 0 
Proceeds from short-term debt  0  0  2,500 
Repayment of short-term debt  0  (8,000) 0 
Net cash used in financing activities  (14,343) (9,699) (11,791)
   
 
  
 
  
 
 
Net increase (decrease) in cash and cash equivalents  1,443  (4,589) (1,700)
Cash and cash equivalents at beginning of year  2,264  6,853  8,553 
Cash and cash equivalents at end of year $3,707 $2,264 $6,853 

(in thousands)
Year Ended December 31

 

2002

 

2001

 

2000

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

27,600

 

$

22,272

 

$

22,346

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Amortization, net

 

161

 

406

 

406

 

Gains on sales of assets

 

0

 

0

 

(8

)

Equity in undistributed earnings of subsidiaries

 

(14,187

)

2,089

 

(8,408

)

Change in other assets and liabilities, net

 

(6,853

)

(1,413

)

3,848

 

Net cash provided by operating activities

 

6,721

 

23,354

 

18,184

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Payments to acquire subsidiary

 

(1,639

)

(15,063

)

0

 

Repayment of investments in and advances to subsidiaries

 

16

 

1,800

 

4,700

 

Proceeds from sale of fixed asset

 

0

 

0

 

176

 

Other

 

11

 

0

 

0

 

Net cash provided by (used in) investing activities

 

(1,612

)

(13,263

)

4,876

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

(9,769

)

(9,297

)

(9,100

)

Net repurchase of common stock

 

(5,472

)

(4,994

)

(7,124

)

Proceeds from long-term debt

 

25,773

 

0

 

0

 

Repayment of long-term debt

 

(12,230

)

0

 

0

 

Proceeds from short-term debt

 

0

 

2,500

 

0

 

Repayment of short-term debt

 

(8,000

)

0

 

0

 

Net cash used in financing activities

 

(9,698

)

(11,791

)

(16,224

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(4,589

)

(1,700

)

6,836

 

Cash and cash equivalents at beginning of year

 

6,853

 

8,553

 

1,717

 

Cash and cash equivalents at end of year

 

$

2,264

 

$

6,853

 

$

8,553

 

51


22.20. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

Year Ended December 31
 
2003
2002
2001
Numerator:  
 
  
 
  
 
 
Net income(in thousands)
 $28,891 $27,600 $22,272 
   
 
  
 
  
 
 
Denominator:  
 
  
 
  
 
 
Basic earnings per share:  
 
  
 
  
 
 
Weighted average shares  13,473,559  13,722,355  13,935,186 
Diluted earnings per share:  
 
  
 
  
 
 
Effect of dilutive securities - stock options  203,620  145,852  61,968 
Adjusted weighted average shares  13,677,179  13,868,207  13,997,154 
   
 
  
 
  
 
 
Earnings per share:
  
 
  
 
  
 
 
Basic earnings per share $2.14 $2.01 $1.60 
Diluted earnings per share  2.11  1.99  1.59 

Year Ended December 31

 

2002

 

2001

 

2000

 

Numerator:

 

 

 

 

 

 

 

Net income (in thousands)

 

$

27,600

 

$

22,272

 

$

22,346

 

 

 

 

 

 

 

 

 

Denominator:-

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

Weighted average shares

 

12,474,868

 

12,668,352

 

13,141,184

 

Diluted earnings per share:

 

 

 

 

 

 

 

Effect of dilutive securities - stock options

 

132,593

 

56,334

 

8,781

 

Adjusted weighted average shares

 

12,607,461

 

12,724,686

 

13,149,965

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

Basic earnings per share

 

$

2.21

 

$

1.76

 

$

1.70

 

Diluted earnings per share

 

2.19

 

1.75

 

1.70

 

    At December 31, 2003, all outstanding stock options were used in the computation of diluted earnings per share. At December 31, 2002, 110,000121,000 stock options at a price of $24.19$21.99 were outstanding and were not used in the computation of diluted earnings per share because their exercise price was greater than the average market value of the common stock. At December 31, 2001, 74,11881,530 stock options at prices ranging from $18.78$17.07 to $23.56$21.42 and a weighted average price of $20.76$18.87 were outstanding and were not used in the computation of diluted earnings per share because their exercise price was greater than the average market value of the common stock.  At December 31, 2000, 362,943 stock options at prices ranging from $14.69 to $23.56 and a weighted average price of $17.66 were outstanding and were not used in the computation of diluted earnings per share because their price was greater than the average market value of the common stock.


23.21. Accumulated Other Comprehensive Income


The Corporation has elected to present the disclosure required by SFAS No. 130, Reporting Comprehensive Income, in the consolidated Statements of Changes in Shareholders’Shareholders' Equity. The subtotal Comprehensive income represents total comprehensive income as defined in the statement. Reclassification adjustments, related tax effects allocated to changes in equity, and accumulated other comprehensive income as of and for the years ended December 31 were as follows:

(in thousands)
 
2003
2002
2001
Reclassification adjustment, pretax:  
 
  
 
  
 
 
Change in unrealized net gains arising during year $(915)$9,921 $3,423 
Reclassification adjustment for net gains included in net income  (3,042) (1,528) (775)
Change in unrealized gains on securities available-for-sale  (3,957) 8,393  2,648 
Related tax effects:  
 
  
 
  
 
 
Change in unrealized net gains arising during year  (320) 3,473  1,198 
Reclassification adjustment for net gains included in net income  (1,065) (535) (271)
Change in unrealized gains on securities available-for-sale  (1,385) 2,938  927 
Reclassification adjustment, net of tax:  
 
  
 
  
 
 
Change in unrealized net gains arising during year  (595) 6,448  2,225 
Reclassification adjustment for net gains included in net income  (1,977) (993) (504)
Change in unrealized gains on securities available-for-sale $(2,572)$5,455 $1,721 

 

(in thousands)

 

2002

 

2001

 

2000

 

Reclassification adjustment, pretax:

 

 

 

 

 

 

 

Change in unrealized net gains arising during year

 

$

6,983

 

$

2,496

 

$

3,422

 

Reclassification adjustment for net gains included in net income

 

(1,528

)

(775

)

(59

)

Change in unrealized gains on securities available-for-sale

 

5,455

 

1,721

 

3,363

 

Related tax effects:

 

 

 

 

 

 

 

Change in unrealized net gains arising during year

 

2,444

 

873

 

1,198

 

Reclassification adjustment for net gains included in net income

 

(535

)

(271

)

(21

)

Change in unrealized gains on securities available-for-sale

 

1,909

 

602

 

1,177

 

Reclassification adjustment, net of tax:

 

 

 

 

 

 

 

Change in unrealized net gains arising during year

 

4,539

 

1,623

 

2,224

 

Reclassification adjustment for net gains included in net income

 

(993

)

(504

)

(38

)

Change in unrealized gains on securities available-for-sale

 

$

3,546

 

$

1,119

 

$

2,186

 

52


Report of Independent Auditors


To the Board of Directors and Shareholders

Community Trust Bancorp, Inc.

Pikeville, Kentucky
We have audited the accompanying consolidated balance sheets of Community Trust Bancorp, Inc. and subsidiaries (“the Corporation”) as of December 31, 20022003 and 2001,2002, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002.2003. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.


We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Community Trust Bancorp, Inc. and subsidiaries as of December 31, 20022003 and 20012002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20022003, in conformity with accounting principles generally accepted in the United States of America.


As discussed in Note 1 to the consolidated financial statements, the Corporation adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002.

/s/ Deloitte & Touche LLP

Louisville, Kentucky

January 14, 2003 

53


/s/ Deloitte & Touche LLP
Louisville, Kentucky
March 12, 2004

 

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure


None

PART III


Item 9A.Controls and Procedures

    As of the end of the quarter ended December 31, 2003, the Corporation performed an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Principal Executive Officer and Principal Financial Officer, of the effectiveness and the design and operation of the Corporation's disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that the Corporation's disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation required to be included in the Corporation's periodic SEC filings. Since the date of the Corporation's most recent evaluation, there were no significant changes in the Corporation's internal controls or in other factors that cou ld significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

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

PART III

Items 10 and 11. Directors and Executive Officers of the Registrant and Executive Compensation


The information required by these Items other than the information set forth above under Part I, “Executive"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.


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters


The information required by this Item other than the information provided below 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.


Equity Compensation Plan Information


The following table provides information as of December 31, 2002,2003, with respect to compensation plans under which common shares of the Corporation are authorized for issuance to officers or employees in exchange for consideration in the form of services provided to the Corporation and/or its subsidiaries. The Corporation currently maintains two incentive stock option plans covering key employees; however, only one plan is active. The 1998 Stock Option Plan (“("1998 Plan”Plan") was approved by the Board of Directors and the Shareholders in 1998. The 1998 Plan had 865,150951,665 shares authorized, 397,200405,380 of which were available at December 31, 20022003 for future grants. The 1989 Stock Option Plan (“("1989 Plan”Plan") was approved by the Board of Directors and the Shareholders in 1989. The 1989 Stock Option Plan (“("1989 Plan”Plan") has no remaining options available for grant.

 
A
B
C
Plan Category
Number of Common Shares to be Issued Upon Exercise of Outstanding Options
Weighted Average Exercise Price of Issuance Outstanding Options
Number of Securities Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in Column A)
    
Equity compensation plans approved by shareholders644,333$17.86405,380
    
Equity compensation plans not approved by shareholders000
    
Total644,333$17.86405,380

 

 

A

 

B

 

C

 

Plan Category

 

Number of Common
Shares to be Issued
Upon Exercise of
Outstanding Options

 

Weighted Average
Exercise Price of
Issuance Outstanding
Options

 

Number of Securities
Available for Future
Issuance Under Equity
Compensation Plans
(excluding securities
reflected in Column A)

 

Equity compensation plans approved by shareholders

 

577,799

 

$

18.43

 

397,200

 

 

 

 

 

 

 

 

 

Equity compensation plans not approved by shareholders

 

0

 

0

 

0

 

 

 

 

 

 

 

 

 

Total

 

577,799

 

$

18.43

 

397,200

 

Additional information regarding the Corporation’s stock option plans can be found in notes 1 and 1412 to the consolidated financial statements.

54



Item 13. Certain Relationships and Related Transactions


The information required by this Item 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.

Item 14. Principal Accountant Fees and Services

    The information required by this Item 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.  Controls and Procedures

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

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

55


PART IV

Item 15. 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

Exhibit No.

Exhibit
No.

Description of Exhibits

3.1

3.1

Articles of Incorporation and all amendments thereto (incorporated by reference to registration statement no. 33-35138)

3.2

3.2

By-laws of the Corporation, as amended July 25,199525, 1995 (incorporated by reference to registration statement no. 33-61891)

10.1

10.1

Community Trust Bancorp, Inc. Savings and Employee Stock Ownership Plan (Revised November 2002)

(incorporated herein by reference to Form 10-K for the fiscal year ended December 31, 2002 under SEC file no. 000-111-29)

10.2

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)

10.3

10.3

Community Trust Bancorp, Inc. 1998 Stock Option Plan (incorporated by reference to registration statement no. 333-74217)

10.4

10.4

Form of Severance Agreement between Community Trust Bancorp, Inc. and executive officers (currently in effect with respect to eleven executive officers) (incorporated herein by reference to Form 10-K for the fiscal year ended December 31, 2001 under SEC file no. 000-111-29)

10.5

10.5

Senior Management Incentive Compensation Plan (2003)

(2004)

21

21

List of subsidiaries

23.1

23.1

Consent of Deloitte & Touche LLP, Independent Auditors

31.1

99.1

Certification of Principal Executive Officer (Jean R. Hale, Vice Chairman, President and CEO)

31.2

Certification of Principal Financial Officer (Kevin J. Stumbo, Executive Vice President/Controller)

32.1Certification of Jean R. Hale, Vice Chairman, President and CEO, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

32.2

99.2

Certification of Kevin J. Stumbo, Executive Vice President/Controller, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)

Reports on Form 8-K required to be filed during the last quarter of 2002

2003

1.)On October 15, 2003, the Corporation issued a Form 8-K announcing third quarter earnings. (incorporated herein by reference to Form 8-K filed under SEC file no. 000-111-29)

2.)On October 24, 2002,29, 2003, the Corporation issued a Form 8-K with respect to the declaration of a 10% stock dividenddividend. (incorporated herein by reference to Form 8-K filed under SEC file no. 000-111-29)

3.)On October 31, 2003, the Corporation issued a Form 8-K announcing the addition of James R. Ramsey to the Board of Directors. (incorporated herein by reference to Form 8-K filed under SEC file no. 000-111-29)

(c) Exhibits

(c)		Exhibits

The response to this portion of Item 15 is submitted as a separate section of this report

report.

(d)

Financial Statement Schedules

None

56



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.




Date: March 15, 2004

By:  

March 28, 2003

By:

/s/ Jean R. Hale

Jean R. Hale
Vice Chairman, President and
Chief Executive Officer

/s/ Kevin J. Stumbo

Kevin J. Stumbo
Executive Vice President/Controller

57


Certification of Principal Executive Officer

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

(1)

I have reviewed this annual report on Form 10-K of Community Trust Bancorp, Inc. (the "Corporation");

(2)

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

(3)

Based on my knowledge, the financial statements and other financial information included in this annual report fairly present in all material respects the financial condition, results of operation, and cash flows of the Corporation as of and for the periods presented in this annual report;

(4)

The Corporation's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Corporation and we have:

(a)

designed such disclosure controls and procedures to ensure that material information relating to the Corporation, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b)

evaluated the effectiveness of the Corporation’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

(c)

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(5)

The Corporation’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Corporation’s auditors and the Audit Committee of the Corporation’s Board of Directors:

(a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the Corporation’s ability to record, process, summarize, and report financial data and have identified for the Corporation’s auditors any material weaknesses in internal controls; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Corporation’s internal controls; and

(6)

The Corporation’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ Jean R. Hale

Jean R. Hale

Vice Chairman, President and CEO

March 28, 2003

58


Certification of Principal Financial Officer

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

(1)

I have reviewed this annual report on Form 10-K of Community Trust Bancorp, Inc. (the “Corporation”);




(2)

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

By:  

(3)

Based on my knowledge, the financial statements and other financial information included in this annual report fairly present in all material respects the financial condition, results of operation, and cash flows of the Corporation as of and for the periods presented in this annual report;

(4)

The Corporation’s other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Corporation and we have:

(a)

designed such disclosure controls and procedures to ensure that material information relating to the Corporation, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b)

evaluated the effectiveness of the Corporation’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

(c)

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(5)

The Corporation’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Corporation’s auditors and the Audit Committee of the Corporation’s Board of Directors:

(a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the Corporation’s ability to record, process, summarize, and report financial data and have identified for the Corporation’s auditors any material weaknesses in internal controls; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Corporation’s internal controls; and

(6)

The Corporation’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ Kevin J. Stumbo

Kevin J. Stumbo

Executive Vice President/Controller

March 28, 2003

59


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 Registrant and in the capacities and on the date indicated.


March 28, 2003

15, 2004

/s/ Burlin Coleman

Chairman of the Board
and Director

Burlin Coleman

Burlin Coleman

March 28, 2003

15, 2004

/s/ Jean R. Hale

Vice Chairman,
President and Chief
Executive Officer

Jean R. Hale

March 28, 2003

15, 2004

/s/ Kevin J. Stumbo

Executive Vice
President and Controller

Kevin J. Stumbo

March 28, 2003

15, 2004

/s/ Charles J. Baird

Director

Charles J. Baird

March 28, 2003

15, 2004

/s/ Nick A. Cooley

Director

Nick A. Cooley

March 28, 2003

15, 2004

/s/ William A. Graham, Jr.

Director

William A. Graham, Jr.

March 28, 2003

15, 2004

/s/ M. Lynn Parrish

Director

M. Lynn Parrish

March 28, 2003

15, 2004

/s/ E. M. Rogers

Director

E. M. Rogers

March 15, 2004/s/ James R. RamseyDirector
James R. Ramsey

60


COMMUNITY TRUST BANCORP, INC. AND SUBSIDIARIES

INDEX TO EXHIBITS


Exhibit No.

Description of Exhibits

3.1

3.1

Articles of Incorporation for the Corporationand all amendments thereto (incorporated herein by reference)

3.2

By-laws of the Corporation, as amended through the date of this filingJuly 25, 1995 (incorporated herein by reference)

10.1

Community Trust Bancorp, Inc. Savings and Employee Stock Ownership Plan (Revised November 2002)

(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)

10.4

Form of Severance Agreement between Community Trust Bancorp, Inc. and executive officers (currently in effect with respect to eleven executive officers) (incorporated herein by reference)

10.5

Senior Management Incentive Compensation Plan (2003)

(2004)

21

List of subsidiaries

23.1

Consent of Deloitte & Touche LLP, Independent Auditors

99.1

31.1

Certification of Principal Executive Officer (Jean R. Hale, Vice Chairman, President and CEO)

31.2Certification of Principal Financial Officer (Kevin J. Stumbo, Executive Vice President/Controller)
32.1Certification of Jean R. Hale, Vice Chairman, President and CEO, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

99.2

32.2

Certification of Kevin J. Stumbo, Executive Vice President/Controller, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

61