UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (NO FEE REQUIRED)
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For
the fiscal year ended December 31, 2008
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Or
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (NO FEE REQUIRED)
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For
the transition period from _____________ to
_____________
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Commission
file number 0-11129
COMMUNITY
TRUST BANCORP, INC.
(Exact
name of registrant as specified in its charter)
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Kentucky
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61-0979818
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(State
or other jurisdiction of incorporation or organization)
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IRS
Employer Identification No.
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346
North Mayo Trail
Pikeville,
Kentucky
(address
of principal executive offices)
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41501
(Zip
Code)
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(606)
432-1414
(Registrant’s
telephone number)
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, $5.00 par value
(Title
of Class)
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
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Yes
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No
ü
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Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.
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Yes
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No
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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.
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Yes ü
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No
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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. [ ]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definition of “accelerated
filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of
the Exchange Act.
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Large
accelerated filer
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Accelerated
filer ü
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Non-accelerated
filer
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Smaller
reporting company
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(Do
not check if a smaller reporting company)
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Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
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Yes
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No
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Based upon the closing price of the
Common Shares of the Registrant on the NASDAQ-Stock Market LLC – Global Select
Market, the aggregate market value of voting stock held by non-affiliates of the
Registrant as of June 30, 2008 was $364.2 million. For the purpose of
the foregoing calculation only, all directors and executive officers of the
Registrant have been deemed affiliates. The number of shares
outstanding of the Registrant’s Common Stock as of February 28, 2009 was
15,075,738.
TABLE
OF CONTENTS
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Portions of the following documents are
incorporated by reference into the Form 10-K part indicated:
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Document
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Form 10-K
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(1) Proxy
statement for the annual meeting of shareholders to be held April 28,
2009
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Part
III
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Community Trust Bancorp, Inc. (“CTBI”)
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. CTBI 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, 2008, CTBI owned all the capital stock of
one commercial bank and one trust company, serving small and mid-sized
communities in eastern, northeastern, central, and south central Kentucky and
southern West Virginia. The commercial bank is Community Trust Bank,
Inc., Pikeville, Kentucky (the “Bank”) and the trust company is Community Trust
and Investment Company, Lexington, Kentucky (the “Trust Company”). At
December 31, 2008, CTBI had total consolidated assets of $3.0 billion and total
consolidated deposits, including repurchase agreements, of $2.5 billion, making
it the largest bank holding company headquartered in the Commonwealth of
Kentucky.
Through its subsidiaries, CTBI 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; and providing funds transfer services. The lending
activities of our Bank include making commercial, construction, mortgage, and
personal loans. Lease-financing, lines of credit, revolving lines of
credit, term loans, and other specialized loans, including asset-based
financing, are also available. Our 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 full service
brokerage services.
COMPETITION
CTBI’s subsidiaries face substantial
competition for deposit, credit, trust, and brokerage relationships in the
communities we serve. Competing providers include state banks,
national banks, thrifts, 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 our subsidiaries. Many of these
providers offer services within and outside the market areas served by our
subsidiaries. We strive to offer competitively priced products along
with quality customer service to build customer relationships in the communities
we serve.
Recently, the United States and global
markets, as well as general economic conditions, have been disrupted and
volatile. Some financial institutions have failed and others have
been forced to seek acquisition partners. Larger financial
institutions, some of whom may benefit from partial nationalization, could
strengthen their competitive position as a result of ongoing consolidation
within the financial services industry.
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
“GLB Act”) has expanded the permissible activities of a bank holding
company. The GLB 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. We have not yet
elected to be treated as a financial holding company. The GLB 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.
No material portion of our business is
seasonal. We are 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 us. See note 17 to the consolidated financial
statements for additional information regarding concentrations of
credit.
We do not engage in any operations in
foreign countries.
EMPLOYEES
As of December 31, 2008, CTBI and
subsidiaries had 986 full-time equivalent employees. Our employees
are provided with a variety of employee benefits. A retirement plan,
an employee stock ownership plan, group life insurance, major medical insurance,
a cafeteria plan, and annual management and employee incentive compensation
plans are available to eligible personnel.
SUPERVISION
AND REGULATION
We, as a registered bank holding
company, are restricted to those activities permissible under the Bank Holding
Company Act of 1956, as amended, and are subject to actions of the Board of
Governors of the Federal Reserve System thereunder. We are required
to file an annual report with the Federal Reserve Board and are subject to an
annual examination by the Board.
Our Bank is a state-chartered bank
subject to state and federal banking laws and regulations and periodic
examination by the Kentucky Department of Financial Institutions and the
restrictions, including dividend restrictions, thereunder. Our Bank
is also a member of the Federal Reserve System and is subject to certain
restrictions imposed by and to examination and supervision under the Federal
Reserve Act. Our Trust Company is also regulated by the Kentucky
Office of Financial Institutions and the Federal Reserve.
Deposits of our 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.
In response to global credit and
liquidity issues involving a number of financial institutions, the United States
government, particularly the United States Department of the Treasury and the
FDIC, have taken a variety of extraordinary measures designed to restore
confidence in the financial markets and to strengthen financial institutions,
including capital injections, guarantees of bank liabilities and the acquisition
of illiquid assets from banks.
On October 3, 2008, the Emergency
Economic Stabilization Act of 2008 (the “EESA”) was signed into law.
Pursuant to the EESA, the United States Treasury was granted the authority to
take a range of actions for the purpose of stabilizing and providing liquidity
to the U.S. financial markets and has proposed several programs, including the
purchase by the U.S. Treasury of certain troubled assets from financial
institutions (the “Troubled Asset Relief Program”) and the direct purchase by
the U.S. Treasury of equity of financial institutions (the “Capital Purchase
Program”).
CTBI announced on January 16, 2009,
that it had elected not to participate in the United States Treasury
Department’s Capital Purchase Program. The Capital Purchase Program
is a voluntary program designed to help financial institutions build capital to
support the United States economy. CTBI currently maintains a capital
level significantly exceeding regulatory guidelines for a well-capitalized
institution and is able to meet the lending needs of our customers.
On October 14, 2008, the FDIC announced
a new program, the Temporary Liquidity Guarantee Program, that provides
unlimited deposit insurance on funds in noninterest bearing transaction deposit
accounts not otherwise covered by the existing deposit insurance limit of
$250,000, as well as a 100% guarantee of the senior debt of FDIC insured
institutions and their holding companies. All eligible institutions
were covered under this program during an initial 30-day period without
incurring costs. After the 30-day period, participating institutions
have been assessed a charge of 10 basis points per annum for the additional
insured deposits and a charge of 75 basis points per annum for guaranteed senior
unsecured debt. CTBI elected to participate in the unlimited deposit
insurance for noninterest bearing accounts beyond the initial 30-day period and
opted out of the coverage of senior unsecured debt.
On February 27, 2009, the FDIC
announced a special assessment on insured institutions, implemented changes to
the risk-based assessment system, and set FDIC insurance assessment rates
beginning the second quarter of 2009. Under the deposit insurance
restoration plan approved by the FDIC in October 2008, the Board set a rate
schedule to raise the insurance reserve ratio to 1.15 percent within five
years. On February 27, 2009, the FDIC announced that the restoration
plan horizon has been extended to seven years in light of the current
significant strains on banks and the financial system and the likelihood of a
severe recession. Also, the FDIC will collect a special assessment of
up to 20 basis points on September 30, 2009. The FDIC will also be
permitted to impose an emergency special assessment after June 30, 2009 of up to
10 basis points if the FDIC deems that such action is necessary to maintain
public confidence in federal deposit insurance. Changes to the
assessment system include higher rates for institutions that rely significantly
on secured liabilities. In addition, higher rates will be imposed on
institutions that rely significantly on brokered deposits, but only when
accompanied by rapid growth. The final rule will provide incentives
in the form of a reduction in assessment rates for institutions holding
long-term unsecured debt.
The operations of CTBI and our
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.
CTBI’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 our website at www.ctbi.com
as soon as reasonably practicable after such materials are electronically filed
with or furnished to the Securities and Exchange Commission. CTBI’s
Code of Business Conduct and Ethics is also available on our
website. Copies of our 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. CTBI’s actual results
may differ materially from those included in the forward-looking statements.
Forward-looking statements are typically identified by words or phrases such as
“believe,” “expect,” “anticipate,” “intend,” “estimate,” “may increase,” “may
fluctuate,” and similar expressions or future or conditional verbs such as
“will,” “should,” “would,” and “could.” These forward-looking statements involve
risks and uncertainties including, but not limited to, economic conditions,
portfolio growth, the credit performance of the portfolios, including
bankruptcies, and seasonal factors; changes in general economic conditions
including the performance of financial markets, prevailing inflation and
interest rates, realized 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, changes in
laws and regulations, competition, and 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 CTBI of a Federal Financial Institutions Examination Council
(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
CTBI’s results. These statements are representative only on the date
hereof, and CTBI undertakes no obligation to update any forward-looking
statements made.
Enterprise
Risk Management
Risk is an inherent component of CTBI’s
business activities. The ability to effectively identify, assess,
measure, respond, monitor, and report on risk in our business activities is
critical to the achievement of CTBI’s mission and strategic
objectives. CTBI utilizes an enterprise wide risk management (EWRM)
process designed to provide the Board and management with the capabilities
needed to identify, assess, and manage the full spectrum of risks inherent to
our industry. While business unit managers are primarily responsible
for managing risk inherent in their areas of responsibility, CTBI has
established a risk management governance structure to establish policies,
monitor adherence to the policies, and manage the overall risk profile of the
company. CTBI’s EWRM program is not intended to replace normal risk
management activities conducted by the business unit managers. The
EWRM program is designed to provide a portfolio view of risks across the entire
enterprise.
As an integral part of the risk
management process, management has established various committees consisting of
senior executives and others within CTBI. The purpose of these
committees is to closely monitor risks and ensure that adequate risk management
practices exist within their respective areas of authority. Some of
the principal committees include the Asset/Liability Management (ALCO)
Committee, the Loan Portfolio Risk Management Committee, the Senior Credit
Committee, the Information Technology Steering Committee, and various
compliance-related committees. Overlapping membership of these
committees by senior executives and others helps provide a unified view of risk
on an enterprise-wide basis. To facilitate an enterprise-wide view of
CTBI’s risk profile and coordinate the enterprise risk management governance
process, a Chief Risk Officer has been appointed, who oversees the process and
reports on CTBI’s risk profile. Additionally, risk champions are
assigned for various areas. The risk champions facilitate
implementation of the enterprise risk management and governance process across
the company. An Enterprise Risk Management Committee has been
established consisting of senior executives and others within CTBI, which
oversees and supports the EWRM process. The Board of Directors,
through its Risk and Compliance Committee, has overall responsibility for
oversight of CTBI’s enterprise risk management governance process.
Economic
Risk
CTBI
may continue to be adversely affected by current economic and market
conditions.
The national and global economic
downturn has recently resulted in unprecedented levels of financial market
volatility and has in general adversely impacted the market value of financial
institutions, limited access to capital and had an adverse effect on the
financial condition or results of operations of banking companies in general,
including CTBI. In some cases, the markets have produced downward
pressure on stock prices and credit capacity for certain issuers without regard
to those issuers’ underlying financial strength. During this time,
CTBI has experienced challenges, credit quality has deteriorated and net income
and results of operations have been adversely impacted. Although CTBI
operated at a profit last year, CTBI is a part of the financial system and a
continuation of the systemic lack of available credit, lack of confidence in the
financial sector, increased volatility in the financial markets, and reduced
business activity could materially and adversely impact CTBI’s business,
financial condition, and results of operations. In addition, the
possible duration and severity of the adverse economic cycle is unknown and may
exacerbate financial service providers’, including CTBI’s, exposure to credit
risk. Actions by Congress, Treasury, the FDIC and other governmental
agencies and regulators have been initiated to address economic stabilization,
yet the efficacy of these programs in stabilizing the economy and the banking
system is uncertain. There can be no assurance that these actions
will not have an adverse effect on the financial position or results of
operations of financial service providers including CTBI.
Economy
of Our Markets
Our
business may continue to be adversely affected by downturns in the local
economies on which we depend.
Our loan portfolio is concentrated
primarily in eastern, northeastern, central, and south central Kentucky and
southern West Virginia. Our profits depend on providing products and
services to clients in these local regions. These regions have
recently experienced an increase in unemployment and a decrease in real estate
values. Further increases in unemployment, additional decreases in
real estate values, or increases in interest rates could weaken the local
economies in which we operate. Weakness in our market area could
depress our earnings and consequently our financial condition
because:
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Clients
may not want or need our products and
services;
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Borrowers
may not be able to repay their
loans;
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The
value of the collateral securing our loans to borrowers may decline;
and
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The
quality of our loan portfolio may
decline.
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Interest
Rate Risk
Changes
in interest rates could adversely affect our earnings and financial
condition.
Our earnings and financial condition
are dependent to a large degree upon net interest income, which is the
difference between interest earned from loans and investments and interest paid
on deposits and borrowings. The narrowing of interest-rate spreads,
meaning the difference between the interest rates earned on loans and
investments and the interest rates paid on deposits and borrowings, could
adversely affect our earnings and financial condition. Interest rates
are highly sensitive to many factors, including:
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The
rate of inflation;
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The
rate of economic growth;
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Employment
levels;
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Monetary
policies; and
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Instability
in domestic and foreign financial
markets.
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Changes in market interest rates will
also affect the level of voluntary prepayments on our loans and the receipt of
payments on our mortgage-backed securities resulting in the receipt of proceeds
that may be reinvested at a lower rate than the loan or mortgage-backed security
being prepaid.
We originate residential loans for sale
and for our portfolio. The origination of loans for sale is designed to meet
client financing needs and earn fee income. The origination of loans for sale is
highly dependent upon the local real estate market and the level and trend of
interest rates. Increasing interest rates may reduce the origination
of loans for sale and consequently the fee income we earn. While our
commercial banking, construction, and income property business lines remain a
significant portion of our activities, high interest rates may reduce our
mortgage-banking activities and thereby our income. In contrast,
decreasing interest rates have the effect of causing clients to refinance
mortgage loans faster than anticipated. This causes the value of
assets related to the servicing rights on loans sold to be lower than originally
anticipated. If this happens, we may need to write down our servicing
assets faster, which would accelerate our expense and lower our
earnings.
We consider interest rate risk one of
our most significant market risks. Interest rate risk is the exposure to adverse
changes in net interest income due to changes in interest
rates. Consistency of our net interest revenue is largely dependent
upon the effective management of interest rate risk. We employ a
variety of measurement techniques to identify and manage our 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 changes 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.
Federal
Deposit Insurance Increases
Our
results of operations may be adversely impacted by increased FDIC insurance
assessments.
As a result of the weakness of certain
financial institutions, the FDIC has taken action that will result in increased
FDIC insurance assessments for United States FDIC-insured financial
institutions, including CTBI. Under the deposit insurance restoration
plan approved by the FDIC in October 2008, the Board set a rate schedule to
raise the insurance reserve ratio to 1.15 percent within five
years. On February 27, 2009, the FDIC announced that the restoration
plan horizon has been extended to seven years in light of the current
significant strains on banks and the financial system and the likelihood of a
severe recession. In addition, the FDIC announced a special
assessment of up to 20 basis points to be collected on September 30,
2009. The FDIC may also impose an emergency special assessment after
June 30, 2009 of up to 10 basis points if the FDIC deems that an additional
special assessment is necessary to maintain public confidence in federal deposit
insurance. The special assessment of up to 20 basis points, the
increase in regular quarterly assessments, and a possible 10 basis point
emergency assessment will significantly increase insurance assessments for
FDIC-insured institutions in general, including CTBI.
Government
Policies
Our
business may be adversely affected by changes in government
policies.
The earnings of banks and bank holding
companies such as ours are affected by the policies of regulatory authorities,
including the Federal Reserve Board, which regulates the money
supply. Among the methods employed by the Federal Reserve Board are
open market operations in U.S. Government securities, changes in the discount
rate on member bank borrowings, and changes in reserve requirements against
member bank deposits. These methods are used in varying combinations
to influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or paid
on deposits. The monetary policies of the Federal Reserve Board have
had a significant effect on the operating results of commercial and savings
banks in the past and are expected to continue to do so in the
future.
The banking industry is highly
regulated and changes in federal and state banking regulations as well as
policies and administration guidelines may affect our practices, growth
prospects, and earnings. In particular, there is no assurance that
recent governmental actions designed to stabilize the economy and banking system
will not adversely affect the financial position or results of operations of
CTBI.
Proposed legislation may create an
environment that will unreasonably delay the collection of past due amounts,
result in restructurings and collection of less than the full amount due to CTBI
and impede our ability to make new residential loans. In addition,
the recently announced special FDIC deposit insurance assessment of up to 20
basis points, the increase in regular quarterly deposit insurance assessments,
the possible 10 basis point emergency assessment, and possible future increases
in regular quarterly deposit insurance assessments will significantly increase
insurance assessments for FDIC-insured institutions in general, including
CTBI.
Credit
Risk
Our
earnings and reputation may be adversely affected if we fail to effectively
manage our credit risk.
Originating and underwriting loans are
integral to the success of our business. This business requires us to
take “credit risk,” which is the risk of losing principal and interest income
because borrowers fail to repay loans. Collateral values and the
ability of borrowers to repay their loans may be affected at any time by factors
such as:
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The
length and severity of downturns in the local economies in which we
operate or the national economy;
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The
length and severity of downturns in one or more of the business sectors in
which our customers operate, particularly the automobile, hotel/motel,
coal, and residential development industries;
or
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A
rapid increase in interest rates.
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Although we do not have a subprime
lending program, the current subprime lending crisis may have an adverse effect
on our residential loan portfolio as proposed legislation may create an
environment that will unreasonably delay the collection of past due amounts,
result in restructurings and collection of less than the full amounts due to
CTBI, and impede our ability to make new residential loans.
Competition
Strong
competition within our market area may reduce our ability to attract and retain
deposits and originate loans.
We face competition both in originating
loans and in attracting deposits. Competition in the financial services industry
is intense. We compete for clients by offering excellent service and
competitive rates on our loans and deposit products. The type of
institutions we compete with include commercial banks, savings institutions,
mortgage banking firms, credit unions, finance companies, mutual funds,
insurance companies and brokerage and investment banking
firms. Competition arises from institutions located within and
outside our market areas. As a result of their size and ability to
achieve economies of scale, certain of our competitors offer a broader range of
products and services than we offer. The recent economic crisis is
likely to result in increased consolidation in the financial industry and larger
financial institutions, some of whom may benefit from partial nationalization,
may strengthen their competitive positions. In addition, to stay
competitive in our markets we may need to adjust the interest rates on our
products to match the rates offered by our competitors, which could adversely
affect our net interest margin. As a result, our profitability
depends upon our continued ability to successfully compete in our market areas
while achieving our investment objectives.
Acquisition
Risk
We
may have difficulty in the future continuing to grow through
acquisitions.
Due to consolidation within the banking
industry, the number of suitable acquisition targets has decreased and there is
intense competition for attractive acquisitions. As a result, we may
experience difficulty in making acquisitions on acceptable terms.
Any future acquisitions or mergers by
CTBI or its banking subsidiary are subject to approval by the appropriate
federal and state banking regulators. The banking regulators evaluate
a number of criteria in making their approval decisions, such as:
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Safety
and soundness guidelines;
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Compliance
with all laws including the USA Patriot Act, the International Money
Laundering Abatement and Anti-Terrorist Financing Act, the Sarbanes-Oxley
Act and the related rules and regulations promulgated under such Act or
the Exchange Act, the Equal Credit Opportunity Act, the Fair Housing Act,
the Community Reinvestment Act, the Home Mortgage Disclosure Act, and all
other applicable fair lending laws and other laws relating to
discriminatory business practices;
and
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Anti-competitive
concerns with the proposed
transaction.
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If the banking regulators or a
commenter on our regulatory application raise concerns about any of these
criteria at the time a regulatory application is filed, the banking regulators
may deny, delay, or condition their approval of a proposed
transaction.
We have grown, and intend to continue
to grow, through acquisitions of banks and other financial
institutions. After these acquisitions, we may experience adverse
changes in results of operations of acquired entities, unforeseen liabilities,
asset quality problems of acquired entities, loss of key personnel, loss of
clients because of change of identity, difficulties in integrating data
processing and operational procedures, and deterioration in local economic
conditions. These various acquisition risks can be heightened in
larger transactions.
Integration
Risk
We
may not be able to achieve the expected integration and cost savings from our
ongoing bank acquisition activities.
We have a long history of acquiring
financial institutions and we expect this acquisition activity to continue in
the future. Difficulties may arise in the integration of the business
and operations of the financial institutions that agree to merge with and into
CTBI and, as a result, we may not be able to achieve the cost savings and
synergies that we expect will result from the merger
activities. Achieving cost savings is dependent on consolidating
certain operational and functional areas, eliminating duplicative positions and
terminating certain agreements for outside services. Additional
operational savings are dependent upon the integration of the banking businesses
of the acquired financial institution with that of CTBI, including the
conversion of the acquired entity’s core operating systems, data systems and
products to those of CTBI and the standardization of business
practices. Complications or difficulties in the conversion of the
core operating systems, data systems, and products of these other banks to those
of CTBI may result in the loss of clients, damage to our reputation within the
financial services industry, operational problems, one-time costs currently not
anticipated by us, and/or reduced cost savings resulting from the merger
activities.
Operational
Risk
An
extended disruption of vital infrastructure or a security breach could
negatively impact our business, results of operations, and financial
condition.
Our operations depend upon, among other
things, our infrastructure, including equipment and
facilities. Extended disruption of vital infrastructure by fire,
power loss, natural disaster, telecommunications failure, computer hacking or
viruses, terrorist activity or the domestic and foreign response to such
activity, or other events outside of our control could have a material adverse
impact on the financial services industry as a whole and on our business,
results of operations, cash flows, and financial condition in
particular. Our business recovery plan may not work as intended or
may not prevent significant interruption of our operations. The
occurrence of any failures, interruptions, or security breaches of our
information systems could damage our reputation, result in the loss of customer
business, subject us to additional regulatory scrutiny, or expose us to civil
litigation and possible financial liability, any of which could have an adverse
effect on our financial condition and results of operation.
Market
Risk
Community
Trust Bancorp, Inc.'s stock price is volatile.
Our stock price has been volatile in
the past, and several factors could cause the price to fluctuate substantially
in the future. These factors include:
|
·
|
Actual
or anticipated variations in
earnings;
|
|
·
|
Changes
in analysts' recommendations or
projections;
|
|
·
|
CTBI's
announcements of developments related to our
businesses;
|
|
·
|
Operating
and stock performance of other companies deemed to be
peers;
|
|
·
|
New
technology used or services offered by traditional and non-traditional
competitors; and
|
|
·
|
News
reports of trends, concerns, and other issues related to the financial
services industry.
|
Our stock price may fluctuate
significantly in the future, and these fluctuations may be unrelated to CTBI's
performance. The recent financial crisis has resulted in a lack of
investor confidence in the financial institutions sector. General
market price declines or market volatility in the future could adversely affect
the price of our common stock, and the current market price may not be
indicative of future market prices.
Technology
Risk
CTBI
continually encounters technological change.
The financial services industry is
continually undergoing rapid technological change with frequent introductions of
new technology-driven products and services. The effective use of
technology increases efficiency and enables financial institutions to better
serve customers and to reduce costs. Our future success depends, in
part, upon our ability to address the needs of our customers by using technology
to provide products and services that will satisfy customer demands, as well as
to create additional efficiencies in our operations. Many of our
competitors have substantially greater resources to invest in technological
improvements. We may not be able to effectively implement new
technology-driven products and services or be successful in marketing these
products and services to our customers. Failure to successfully keep
pace with technological change affecting the financial services industry could
have a material adverse impact on our business and, in turn, our financial
condition and results of operations.
Counterparty
Risk
The
soundness of other financial institutions could adversely affect
CTBI.
Our ability to engage in routine
funding transactions could be adversely affected by the actions and commercial
soundness of other financial institutions. Financial services
companies are interrelated as a result of trading, clearing, counterparty, or
other relationships. We have exposure to many different industries
and counterparties, and we routinely execute transactions with counterparties in
the financial services industry, including brokers and dealers, commercial
banks, investment banks, mutual and hedge funds, and other institutional
counterparties. As a result, defaults by, or even rumors or questions about, one
or more financial services companies, or the financial services industry
generally, have led to market-wide liquidity problems and could lead to losses
or defaults by us or by other institutions. Many of these
transactions expose us to credit risk in the event of default of our
counterparty or client. In addition, our credit risk may be
exacerbated when the collateral held by us cannot be realized or is liquidated
at prices not sufficient to recover the full amount of the loan or derivative
exposure due us. There is no assurance that any such losses would not
materially and adversely affect our businesses, financial condition, or results
of operations.
None.
The following tables set forth certain
statistical information relating to CTBI and subsidiaries on a consolidated
basis and should be read together with our consolidated financial
statements.
Consolidated Average Balance
Sheets and Taxable Equivalent Income/Expense and
Yields/Rates
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||||||||
|
(in
thousands)
|
Average
Balances
|
Interest
|
Average
Rate
|
Average
Balances
|
Interest
|
Average
Rate
|
Average
Balances
|
Interest
|
Average
Rate
|
|||||||||||||||||||||||||||
|
Earning
assets:
|
||||||||||||||||||||||||||||||||||||
|
Loans
(1)(2)(3)
|
$ | 2,283,180 | $ | 150,413 | 6.59 | % | $ | 2,205,431 | $ | 171,632 | 7.78 | % | $ | 2,131,649 | $ | 163,526 | 7.67 | % | ||||||||||||||||||
|
Loans
held for sale
|
1,752 | 171 | 9.76 | 2,484 | 157 | 6.32 | 1,685 | 130 | 7.71 | |||||||||||||||||||||||||||
|
Securities:
|
||||||||||||||||||||||||||||||||||||
|
U.S.
Treasury and agencies
|
249,515 | 10,912 | 4.37 | 275,219 | 12,034 | 4.37 | 312,611 | 13,520 | 4.32 | |||||||||||||||||||||||||||
|
Tax
exempt state and political subdivisions (3)
|
45,146 | 2,875 | 6.37 | 45,514 | 2,946 | 6.47 | 49,173 | 3,175 | 6.46 | |||||||||||||||||||||||||||
|
Other
securities
|
32,842 | 1,723 | 5.25 | 117,136 | 5,350 | 4.57 | 125,937 | 5,396 | 4.28 | |||||||||||||||||||||||||||
|
Federal
Reserve Bank and Federal Home Loan Bank stock
|
28,549 | 1,559 | 5.46 | 28,040 | 1,794 | 6.40 | 27,176 | 1,588 | 5.84 | |||||||||||||||||||||||||||
|
Federal
funds sold
|
53,816 | 1,083 | 2.01 | 82,324 | 4,246 | 5.16 | 66,422 | 3,346 | 5.04 | |||||||||||||||||||||||||||
|
Interest
bearing deposits
|
6,397 | 124 | 1.94 | 2,010 | 88 | 4.38 | 811 | 38 | 4.69 | |||||||||||||||||||||||||||
|
Investment
in unconsolidated subsidiaries
|
1,857 | 120 | 6.46 | 1,856 | 130 | 7.00 | 1,861 | 160 | 8.60 | |||||||||||||||||||||||||||
|
Total
earning assets
|
2,703,054 | $ | 168,980 | 6.25 | % | 2,760,014 | $ | 198,377 | 7.19 | % | 2,717,325 | $ | 190,879 | 7.02 | % | |||||||||||||||||||||
|
Allowance
for loan and lease losses
|
(29,901 | ) | (28,129 | ) | (28,622 | ) | ||||||||||||||||||||||||||||||
| 2,673,153 | 2,731,885 | 2,688,703 | ||||||||||||||||||||||||||||||||||
|
Nonearning
assets:
|
||||||||||||||||||||||||||||||||||||
|
Cash
and due from banks
|
74,264 | 75,667 | 78,069 | |||||||||||||||||||||||||||||||||
|
Premises
and equipment, net
|
52,559 | 54,434 | 56,846 | |||||||||||||||||||||||||||||||||
|
Other
assets
|
121,241 | 118,727 | 119,274 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 2,921,217 | $ | 2,980,713 | $ | 2,942,892 | ||||||||||||||||||||||||||||||
|
Interest
bearing liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||||||||||||||
|
Savings
and demand deposits
|
$ | 655,577 | $ | 7,885 | 1.20 | % | $ | 696,329 | $ | 17,457 | 2.51 | % | $ | 664,958 | $ | 15,399 | 2.32 | % | ||||||||||||||||||
|
Time
deposits
|
1,204,550 | 45,964 | 3.82 | 1,231,039 | 58,180 | 4.73 | 1,194,410 | 48,457 | 4.06 | |||||||||||||||||||||||||||
|
Repurchase
agreements and federal funds purchased
|
170,231 | 4,424 | 2.60 | 174,697 | 8,429 | 4.82 | 185,098 | 8,620 | 4.66 | |||||||||||||||||||||||||||
|
Advances
from Federal Home Loan Bank
|
49,001 | 1,701 | 3.47 | 67,452 | 2,402 | 3.56 | 108,355 | 3,648 | 3.37 | |||||||||||||||||||||||||||
|
Long-term
debt
|
61,341 | 4,000 | 6.52 | 61,830 | 4,364 | 7.06 | 61,341 | 5,414 | 8.83 | |||||||||||||||||||||||||||
|
Total
interest bearing liabilities
|
2,140,700 | $ | 63,974 | 2.99 | % | 2,231,347 | $ | 90,832 | 4.07 | % | 2,214,162 | $ | 81,538 | 3.68 | % | |||||||||||||||||||||
|
Noninterest
bearing liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Demand
deposits
|
443,593 | 425,534 | 435,017 | |||||||||||||||||||||||||||||||||
|
Other
liabilities
|
28,523 | 29,726 | 24,511 | |||||||||||||||||||||||||||||||||
|
Total
liabilities
|
2,612,816 | 2,686,607 | 2,673,690 | |||||||||||||||||||||||||||||||||
|
Shareholders’
equity
|
308,401 | 294,106 | 269,202 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ | 2,921,217 | $ | 2,980,713 | $ | 2,942,892 | ||||||||||||||||||||||||||||||
|
Net
interest income
|
$ | 105,006 | $ | 107,545 | $ | 109,341 | ||||||||||||||||||||||||||||||
|
Net
interest spread
|
3.26 | % | 3.12 | % | 3.34 | % | ||||||||||||||||||||||||||||||
|
Benefit
of interest free funding
|
0.62 | 0.78 | 0.68 | |||||||||||||||||||||||||||||||||
|
Net
interest margin
|
3.88 | % | 3.90 | % | 4.02 | % | ||||||||||||||||||||||||||||||
(1)
Interest includes fees on loans of $1,679, $1,819, and $1,500 in 2008, 2007, and
2006, respectively.
(2) Loan
balances are net of unearned income and 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.
Net Interest
Differential
The following table illustrates the
approximate effect of volume and rate changes on net interest differentials
between 2008 and 2007 and also between 2007 and 2006.
|
Total
Change
|
Change
Due to
|
Total
Change
|
Change
Due to
|
|||||||||||||||||||||
|
(in
thousands)
|
2008/2007
|
Volume
|
Rate
|
2007/2006
|
Volume
|
Rate
|
||||||||||||||||||
|
Interest
income
|
||||||||||||||||||||||||
|
Loans
|
$ | (21,219 | ) | $ | 5,877 | $ | (27,096 | ) | $ | 8,106 | $ | 5,718 | $ | 2,388 | ||||||||||
|
Loans
held for sale
|
14 | (37 | ) | 51 | 27 | 54 | (27 | ) | ||||||||||||||||
|
U.S.
Treasury and agencies
|
(1,122 | ) | (1,124 | ) | 2 | (1,486 | ) | (1,601 | ) | 115 | ||||||||||||||
|
Tax
exempt state and political subdivisions
|
(71 | ) | (24 | ) | (47 | ) | (229 | ) | (236 | ) | 7 | |||||||||||||
|
Other
securities
|
(3,627 | ) | (3,375 | ) | (252 | ) | (46 | ) | (365 | ) | 319 | |||||||||||||
|
Federal
Reserve Bank and Federal Home Loan Bank stock
|
(235 | ) | 32 | (267 | ) | 206 | 52 | 154 | ||||||||||||||||
|
Federal
funds sold
|
(3,163 | ) | (1,794 | ) | (1,369 | ) | 900 | 818 | 82 | |||||||||||||||
|
Interest
bearing deposits
|
36 | 107 | (71 | ) | 50 | 53 | (3 | ) | ||||||||||||||||
|
Investment
in unconsolidated subsidiaries
|
(10 | ) | 0 | (10 | ) | (30 | ) | 0 | (30 | ) | ||||||||||||||
|
Total
interest income
|
(29,397 | ) | (338 | ) | (29,059 | ) | 7,498 | 4,493 | 3,005 | |||||||||||||||
|
Interest
expense
|
||||||||||||||||||||||||
|
Savings
and demand deposits
|
(9,572 | ) | (1,075 | ) | (8,497 | ) | 2,058 | 748 | 1,310 | |||||||||||||||
|
Time
deposits
|
(12,216 | ) | (1,277 | ) | (10,939 | ) | 9,723 | 1,523 | 8,200 | |||||||||||||||
|
Repurchase
agreements and federal funds purchased
|
(4,005 | ) | (221 | ) | (3,784 | ) | (191 | ) | (474 | ) | 283 | |||||||||||||
|
Advances
from Federal Home Loan Bank
|
(701 | ) | (672 | ) | (29 | ) | (1,246 | ) | (1,308 | ) | 62 | |||||||||||||
|
Long-term
debt
|
(364 | ) | (34 | ) | (330 | ) | (1,050 | ) | 43 | (1,093 | ) | |||||||||||||
|
Total
interest expense
|
(26,858 | ) | (3,279 | ) | (23,579 | ) | 9,294 | 532 | 8,762 | |||||||||||||||
|
Net
interest income
|
$ | (2,539 | ) | $ | 2,941 | $ | (5,480 | ) | $ | (1,796 | ) | $ | 3,961 | $ | (5,757 | ) | ||||||||
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, 2008 are as
follows:
Available-for-sale
|
Estimated
Maturity at December 31, 2008
|
||||||||||||||||||||||||||||||||||||||||||||
|
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
|
|||||||||||||||||||||||||||||||||
|
U.S.
Treasury, government agencies, and government sponsored
agencies
|
$ | 10,292 | 5.41 | % | $ | 158,605 | 4.51 | % | $ | 37,554 | 4.59 | % | $ | 760 | 6.05 | % | $ | 207,211 | 4.58 | % | $ | 205,720 | ||||||||||||||||||||||
|
State
and municipal obligations
|
6,578 | 7.10 | 23,077 | 6.39 | 2,571 | 6.09 | 7,618 | 5.94 | 39,844 | 6.40 | 39,738 | |||||||||||||||||||||||||||||||||
|
Other
securities
|
1 | 7.75 | 19,780 | 4.22 | 0 | 0.00 | 540 | 0.00 | 20,321 | 4.11 | 20,541 | |||||||||||||||||||||||||||||||||
|
Total
|
$ | 16,871 | 6.07 | % | $ | 201,462 | 4.70 | % | $ | 40,125 | 4.69 | % | $ | 8,918 | 5.59 | % | $ | 267,376 | 4.81 | % | $ | 265,999 | ||||||||||||||||||||||
Held-to-maturity
|
Estimated
Maturity at December 31, 2008
|
||||||||||||||||||||||||||||||||||||||||||||
|
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
|
|||||||||||||||||||||||||||||||||
|
U.S.
Treasury, government agencies, and government sponsored
agencies
|
$ | 0 | 0.00 | % | $ | 24,021 | 3.85 | % | $ | 0 | 0.00 | % | $ | 0 | 0.00 | % | $ | 24,021 | 3.85 | % | $ | 23,911 | ||||||||||||||||||||||
|
State
and municipal obligations
|
195 | 6.58 | 199 | 6.65 | 0 | 0.00 | 1,182 | 5.97 | 1,576 | 6.13 | 1,585 | |||||||||||||||||||||||||||||||||
|
Total
|
$ | 195 | 6.58 | % | $ | 24,220 | 3.87 | % | $ | 0 | 0.00 | % | $ | 1,182 | 5.97 | % | $ | 25,597 | 3.99 | % | $ | 25,496 | ||||||||||||||||||||||
|
Total
Securities
|
$ | 17,066 | 6.08 | % | $ | 225,682 | 4.61 | % | $ | 40,125 | 4.69 | % | $ | 10,100 | 5.63 | % | $ | 292,973 | 4.74 | % | $ | 291,495 | ||||||||||||||||||||||
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, government agencies, and
government sponsored agencies, there were no securities of any one issuer that
exceeded 10% of our shareholders’ equity at December 31, 2008.
The book values of securities
available-for-sale and securities held-to-maturity as of December 31, 2008 and
2007 are presented in note 3 to the consolidated financial
statements.
The book value of securities at
December 31, 2006 is presented below:
|
(in
thousands)
|
Available-for-Sale
|
Held-to-
Maturity
|
||||||
|
U.S.
Treasury and government agencies
|
$ | 20,491 | $ | 0 | ||||
|
State
and political subdivisions
|
45,562 | 3,068 | ||||||
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
239,590 | 37,440 | ||||||
|
Collateralized
mortgage obligations
|
1 | 0 | ||||||
|
Other
debt securities
|
19,557 | 0 | ||||||
|
Total
debt securities
|
325,201 | 40,508 | ||||||
|
Marketable
equity securities
|
100,650 | 0 | ||||||
|
Total
securities
|
$ | 425,851 | $ | 40,508 | ||||
Loan Portfolio
|
(in
thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Construction
|
$ | 156,425 | $ | 143,773 | $ | 133,902 | $ | 115,721 | $ | 75,078 | ||||||||||
|
Secured
by real estate
|
663,663 | 640,574 | 632,881 | 665,911 | 613,059 | |||||||||||||||
|
Other
|
365,685 | 333,774 | 337,075 | 301,828 | 276,921 | |||||||||||||||
|
Total
commercial
|
1,185,773 | 1,118,121 | 1,103,858 | 1,083,460 | 965,058 | |||||||||||||||
|
Real
estate construction
|
56,298 | 69,021 | 50,588 | 51,232 | 30,456 | |||||||||||||||
|
Real
estate mortgage
|
609,394 | 599,665 | 579,197 | 542,809 | 499,410 | |||||||||||||||
|
Consumer
|
484,843 | 435,273 | 422,291 | 414,920 | 395,588 | |||||||||||||||
|
Equipment
lease financing
|
12,343 | 5,817 | 11,524 | 14,923 | 12,007 | |||||||||||||||
|
Total
loans
|
$ | 2,348,651 | $ | 2,227,897 | $ | 2,167,458 | $ | 2,107,344 | $ | 1,902,519 | ||||||||||
|
Percent
of total year-end loans
|
||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Construction
|
6.65 | % | 6.45 | % | 6.18 | % | 5.49 | % | 3.95 | % | ||||||||||
|
Secured
by real estate
|
28.26 | 28.75 | 29.20 | 31.60 | 32.22 | |||||||||||||||
|
Other
|
15.57 | 14.98 | 15.55 | 14.32 | 14.56 | |||||||||||||||
|
Total
commercial
|
50.48 | 50.18 | 50.93 | 51.41 | 50.73 | |||||||||||||||
|
Real
estate construction
|
2.40 | 3.10 | 2.34 | 2.43 | 1.60 | |||||||||||||||
|
Real
estate mortgage
|
25.95 | 26.92 | 26.72 | 25.76 | 26.25 | |||||||||||||||
|
Consumer
|
20.64 | 19.54 | 19.48 | 19.69 | 20.79 | |||||||||||||||
|
Equipment
lease financing
|
0.53 | 0.26 | 0.53 | 0.71 | 0.63 | |||||||||||||||
|
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, 2008
|
||||||||||||||||
|
(in
thousands)
|
Within
One Year
|
After
One but Within Five Years
|
After
Five Years
|
Total
|
||||||||||||
|
Commercial
secured by real estate and commercial other
|
$ | 270,703 | $ | 243,925 | $ | 514,720 | $ | 1,029,348 | ||||||||
|
Commercial
and real estate construction
|
139,631 | 33,136 | 39,956 | 212,723 | ||||||||||||
| $ | 410,334 | $ | 277,061 | $ | 554,676 | $ | 1,242,071 | |||||||||
|
Rate
sensitivity:
|
||||||||||||||||
|
Predetermined
rate
|
$ | 92,866 | $ | 74,713 | $ | 38,531 | $ | 206,110 | ||||||||
|
Adjustable
rate
|
317,468 | 202,348 | 516,145 | 1,035,961 | ||||||||||||
| $ | 410,334 | $ | 277,061 | $ | 554,676 | $ | 1,242,071 | |||||||||
Nonperforming
Assets
|
(in
thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Nonaccrual
loans
|
$ | 40,945 | $ | 22,237 | $ | 9,863 | $ | 12,219 | $ | 13,808 | ||||||||||
|
Restructured
loans
|
0 | 20 | 66 | 899 | 974 | |||||||||||||||
|
90
days or more past due and still accruing interest
|
11,245 | 9,622 | 4,294 | 8,284 | 5,319 | |||||||||||||||
|
Total
nonperforming loans
|
52,190 | 31,879 | 14,223 | 21,402 | 20,101 | |||||||||||||||
|
Foreclosed
properties
|
10,425 | 7,851 | 4,524 | 5,410 | 4,756 | |||||||||||||||
|
Total
nonperforming assets
|
$ | 62,615 | $ | 39,730 | $ | 18,747 | $ | 26,812 | $ | 24,857 | ||||||||||
|
Nonperforming
assets to total loans and foreclosed properties
|
2.65 | % | 1.78 | % | 0.86 | % | 1.27 | % | 1.30 | % | ||||||||||
|
Allowance
to nonperforming loans
|
59.06 | % | 88.00 | % | 193.54 | % | 137.87 | % | 134.41 | % | ||||||||||
Nonaccrual,
Past Due, and Restructured 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, 2008
|
||||||||||||||||||||||||||||
|
Commercial
construction
|
$ | 21,602 | 13.81 | % | $ | 0 | 0.00 | % | $ | 3,741 | 2.39 | % | $ | 156,425 | ||||||||||||||
|
Commercial
secured by real estate
|
10,780 | 1.62 | 0 | 0.00 | 3,319 | 0.50 | 663,663 | |||||||||||||||||||||
|
Commercial
other
|
4,471 | 1.22 | 0 | 0.00 | 634 | 0.17 | 365,685 | |||||||||||||||||||||
|
Consumer
real estate construction
|
1,255 | 2.23 | 0 | 0.00 | 55 | 0.10 | 56,298 | |||||||||||||||||||||
|
Consumer
real estate secured
|
2,837 | 0.47 | 0 | 0.00 | 3,008 | 0.49 | 609,394 | |||||||||||||||||||||
|
Consumer
other
|
0 | 0.00 | 0 | 0.00 | 488 | 0.10 | 484,843 | |||||||||||||||||||||
|
Equipment
lease financing
|
0 | 0.00 | 0 | 0.00 | 0 | 0.00 | 12,343 | |||||||||||||||||||||
|
Total
|
$ | 40,945 | 1.74 | % | $ | 0 | 0.00 | % | $ | 11,245 | 0.48 | % | $ | 2,348,651 | ||||||||||||||
|
December
31, 2007
|
||||||||||||||||||||||||||||
|
Commercial
construction
|
$ | 8,682 | 6.04 | % | $ | 0 | 0.00 | % | $ | 1,733 | 1.21 | % | $ | 143,773 | ||||||||||||||
|
Commercial
secured by real estate
|
5,715 | 0.89 | 0 | 0.00 | 3,300 | 0.52 | 640,574 | |||||||||||||||||||||
|
Commercial
other
|
4,489 | 1.34 | 20 | 0.01 | 1,305 | 0.39 | 333,774 | |||||||||||||||||||||
|
Consumer
real estate construction
|
723 | 1.05 | 0 | 0.00 | 722 | 1.05 | 69,021 | |||||||||||||||||||||
|
Consumer
real estate secured
|
2,628 | 0.44 | 0 | 0.00 | 2,113 | 0.35 | 599,665 | |||||||||||||||||||||
|
Consumer
other
|
0 | 0.00 | 0 | 0.00 | 449 | 0.10 | 435,273 | |||||||||||||||||||||
|
Equipment
lease financing
|
0 | 0.00 | 0 | 0.00 | 0 | 0.00 | 5,817 | |||||||||||||||||||||
|
Total
|
$ | 22,237 | 1.00 | % | $ | 20 | 0.00 | % | $ | 9,622 | 0.43 | % | $ | 2,227,897 | ||||||||||||||
In 2008, gross interest income that
would have been recorded on nonaccrual loans had the loans been current in
accordance with their original terms amounted to $3.5
million. Interest income actually received and included in net income
for the period was $0.7 million, leaving $2.8 million of interest income not
recognized during the period.
Discussion
of the Nonaccrual Policy
The accrual of interest income on loans
is discontinued when the collection of interest and principal in full is not
expected. When interest accruals are discontinued, interest income
accrued in the current period is reversed and interest income accrued in prior
periods is charged to the allowance for loan and lease 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
we believe, 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.
Foreign
Outstandings
None
Loan
Concentrations
We had no concentration of loans
exceeding 10% of total loans at December 31, 2008. See note 17 to the
consolidated financial statements for further information.
Analysis of the Allowance
for Loan and Lease Losses
|
(in
thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Allowance
for loan and lease losses, beginning of year
|
$ | 28,054 | $ | 27,526 | $ | 29,506 | $ | 27,017 | $ | 24,653 | ||||||||||
|
Loans
charged off:
|
||||||||||||||||||||
|
Commercial
construction
|
1,491 | 273 | 23 | 56 | 339 | |||||||||||||||
|
Commercial
secured by real estate
|
914 | 1,106 | 872 | 826 | 1,135 | |||||||||||||||
|
Commercial
other
|
2,080 | 2,134 | 3,816 | 4,233 | 2,331 | |||||||||||||||
|
Real
estate construction
|
125 | 32 | 56 | 10 | 20 | |||||||||||||||
|
Real
estate mortgage
|
746 | 547 | 572 | 746 | 683 | |||||||||||||||
|
Consumer
|
5,942 | 4,340 | 4,091 | 5,097 | 5,080 | |||||||||||||||
|
Equipment
lease financing
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
Total
charge-offs
|
11,298 | 8,432 | 9,430 | 10,968 | 9,588 | |||||||||||||||
|
Recoveries
of loans previously charged off:
|
||||||||||||||||||||
|
Commercial
construction
|
25 | 0 | 0 | 0 | 1 | |||||||||||||||
|
Commercial
secured by real estate
|
177 | 180 | 132 | 94 | 301 | |||||||||||||||
|
Commercial
other
|
534 | 428 | 689 | 766 | 382 | |||||||||||||||
|
Real
estate construction
|
5 | 1 | 0 | 20 | 0 | |||||||||||||||
|
Real
estate mortgage
|
60 | 250 | 210 | 310 | 244 | |||||||||||||||
|
Consumer
|
1,812 | 1,561 | 2,114 | 2,223 | 2,376 | |||||||||||||||
|
Equipment
lease financing
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
Total
recoveries
|
2,613 | 2,420 | 3,145 | 3,413 | 3,304 | |||||||||||||||
|
Net
charge-offs:
|
||||||||||||||||||||
|
Commercial
construction
|
1,466 | 273 | 23 | 56 | 338 | |||||||||||||||
|
Commercial
secured by real estate
|
737 | 926 | 740 | 732 | 834 | |||||||||||||||
|
Commercial
other
|
1,546 | 1,706 | 3,127 | 3,467 | 1,949 | |||||||||||||||
|
Real
estate construction
|
120 | 31 | 56 | (10 | ) | 20 | ||||||||||||||
|
Real
estate mortgage
|
686 | 297 | 362 | 436 | 439 | |||||||||||||||
|
Consumer
|
4,130 | 2,779 | 1,977 | 2,874 | 2,704 | |||||||||||||||
|
Equipment
lease financing
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
Total
net charge-offs
|
8,685 | 6,012 | 6,285 | 7,555 | 6,284 | |||||||||||||||
|
Provisions
charged against operations
|
11,452 | 6,540 | 4,305 | 8,285 | 8,648 | |||||||||||||||
|
Allowance
of acquired bank
|
0 | 0 | 0 | 1,759 | 0 | |||||||||||||||
|
Balance,
end of year
|
$ | 30,821 | $ | 28,054 | $ | 27,526 | $ | 29,506 | $ | 27,017 | ||||||||||
|
Allocation
of allowance, end of year:
|
||||||||||||||||||||
|
Commercial
construction
|
$ | 3,645 | $ | 3,194 | $ | 2,059 | $ | 1,799 | $ | 1,123 | ||||||||||
|
Commercial
secured by real estate
|
11,304 | 9,081 | 7,224 | 10,354 | 8,285 | |||||||||||||||
|
Commercial
other
|
5,782 | 4,817 | 4,335 | 4,693 | 3,745 | |||||||||||||||
|
Real
estate construction
|
281 | 335 | 206 | 159 | 107 | |||||||||||||||
|
Real
estate mortgage
|
3,038 | 2,907 | 2,352 | 1,677 | 1,435 | |||||||||||||||
|
Consumer
|
6,580 | 5,034 | 4,288 | 4,602 | 3,104 | |||||||||||||||
|
Equipment
lease financing
|
191 | 76 | 126 | 232 | 168 | |||||||||||||||
|
Unallocated
|
0 | 2,610 | 6,936 | 5,990 | 9,050 | |||||||||||||||
|
Balance,
end of year
|
$ | 30,821 | $ | 28,054 | $ | 27,526 | $ | 29,506 | $ | 27,017 | ||||||||||
|
Average
loans outstanding, net of unearned interest
|
$ | 2,283,180 | $ | 2,205,431 | $ | 2,131,649 | $ | 2,024,756 | $ | 1,816,146 | ||||||||||
|
Loans
outstanding at end of year, net of unearned interest
|
2,348,651 | 2,227,897 | 2,167,458 | 2,107,344 | 1,902,519 | |||||||||||||||
|
Net
charge-offs to average loan type:
|
||||||||||||||||||||
|
Commercial
construction
|
0.98 | % | 0.19 | % | 0.02 | % | 0.06 | % | 0.47 | % | ||||||||||
|
Commercial
secured by real estate
|
0.11 | 0.14 | 0.11 | 0.11 | 0.14 | |||||||||||||||
|
Commercial
other
|
0.43 | 0.51 | 0.99 | 1.18 | 0.76 | |||||||||||||||
|
Real
estate construction
|
0.19 | 0.05 | 0.11 | (0.03 | ) | 0.06 | ||||||||||||||
|
Real
estate mortgage
|
0.10 | 0.05 | 0.06 | 0.08 | 0.09 | |||||||||||||||
|
Consumer
|
0.91 | 0.64 | 0.48 | 0.71 | 0.70 | |||||||||||||||
|
Equipment
lease financing
|
0.00 | 0.00 | 0.00 | 0.00 | 0.00 | |||||||||||||||
|
Total
|
0.38 | % | 0.27 | % | 0.29 | % | 0.37 | % | 0.35 | % | ||||||||||
|
Other
ratios:
|
||||||||||||||||||||
|
Allowance
to net loans, end of year
|
1.31 | % | 1.26 | % | 1.27 | % | 1.40 | % | 1.42 | % | ||||||||||
|
Provision
for loan losses to average loans
|
0.50 | 0.30 | 0.20 | 0.41 | 0.48 | |||||||||||||||
The allowance for loan and lease losses
balance is maintained 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)
|
2008
|
2007
|
2006
|
|||||||||
|
Deposits:
|
||||||||||||
|
Noninterest
bearing deposits
|
$ | 443,593 | $ | 425,534 | $ | 435,017 | ||||||
|
NOW
accounts
|
19,601 | 18,590 | 18,338 | |||||||||
|
Money
market accounts
|
436,895 | 483,782 | 437,707 | |||||||||
|
Savings
accounts
|
199,081 | 193,957 | 208,914 | |||||||||
|
Certificates
of deposit of $100,000 or more
|
443,020 | 456,483 | 417,671 | |||||||||
|
Certificates
of deposit < $100,000 and other time deposits
|
761,530 | 774,556 | 776,738 | |||||||||
|
Total
deposits
|
2,303,720 | 2,352,902 | 2,294,385 | |||||||||
|
Other
borrowed funds:
|
||||||||||||
|
Repurchase
agreements and federal funds purchased
|
170,231 | 174,697 | 185,098 | |||||||||
|
Advances
from Federal Home Loan Bank
|
49,001 | 67,452 | 108,355 | |||||||||
|
Long-term
debt
|
61,341 | 61,830 | 61,341 | |||||||||
|
Total
other borrowed funds
|
280,573 | 303,979 | 354,794 | |||||||||
|
Total
deposits and other borrowed funds
|
$ | 2,584,293 | $ | 2,656,881 | $ | 2,649,179 | ||||||
The maximum balance for federal funds
purchased and repurchase agreements at any month-end during 2008 occurred at May
31, 2008, with a month-end balance of $182.7 million. The maximum
balance for federal funds purchased and repurchase agreements at any month-end
during 2007 occurred at August 31, 2007, with a month-end balance of $203.6
million. The maximum balance for federal funds purchased and
repurchase agreements at any month-end during 2006 occurred at May 31, 2006,
with a month-end balance of $220.2 million.
Maturities and/or repricing of time
deposits of $100,000 or more outstanding at December 31, 2008 are summarized as
follows:
|
(in
thousands)
|
Certificates
of Deposit
|
Other
Time Deposits
|
Total
|
|||||||||
|
Three
months or less
|
$ | 124,914 | $ | 8,790 | $ | 133,704 | ||||||
|
Over
three through six months
|
88,825 | 7,913 | 96,738 | |||||||||
|
Over
six through twelve months
|
223,667 | 13,842 | 237,509 | |||||||||
|
Over
twelve through sixty months
|
26,567 | 7,283 | 33,850 | |||||||||
|
Over
sixty months
|
0 | 200 | 200 | |||||||||
| $ | 463,973 | $ | 38,028 | $ | 502,001 | |||||||
Our 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 CTBI
and its subsidiaries as of December 31, 2008:
|
Location
|
Owned
|
Leased
|
Total
|
||
|
Banking
locations:
|
|||||
|
Community
Trust Bank, Inc.
|
|||||
|
*
|
Pikeville
Market (lease land to 3 owned locations)
|
9
|
1
|
10
|
|
|
10
locations in Pike County, Kentucky
|
|||||
|
Floyd/Knott/Johnson
Market (lease land to 1 owned location)
|
3
|
1
|
4
|
||
|
2
locations in Floyd County, Kentucky, 1 location in Knott County, Kentucky,
and 1 location in Johnson County, Kentucky
|
|||||
|
Tug
Valley Market (lease land to 1 owned location)
|
2
|
0
|
2
|
||
|
1
location in Pike County, Kentucky, 1 location in Mingo County, West
Virginia
|
|||||
|
Whitesburg
Market
|
4
|
1
|
5
|
||
|
5
locations in Letcher County, Kentucky
|
|||||
|
Hazard
Market (lease land to 2 owned locations)
|
4
|
0
|
4
|
||
|
4
locations in Perry County, Kentucky
|
|||||
|
*
|
Lexington
Market (lease land to 2 owned locations)
|
3
|
2
|
5
|
|
|
5
locations in Fayette County, Kentucky
|
|||||
|
Winchester
Market
|
1
|
1
|
2
|
||
|
2
locations in Clark County, Kentucky
|
|||||
|
Richmond
Market (lease land to 1 owned location)
|
3
|
0
|
3
|
||
|
3
locations in Madison County, Kentucky
|
|||||
|
Mt.
Sterling Market
|
2
|
0
|
2
|
||
|
2
locations in Montgomery County, Kentucky
|
|||||
|
*
|
Versailles
Market (lease land to 2 owned locations)
|
3
|
2
|
5
|
|
|
2
locations in Woodford County, Kentucky, 2 locations in Franklin County,
Kentucky, and 1 location in Scott County, Kentucky
|
|||||
|
Danville
Market (lease land to 1 owned location)
|
3
|
0
|
3
|
||
|
2
locations in Boyle County, Kentucky and 1 location in Mercer County,
Kentucky
|
|||||
|
*
|
Ashland
Market (lease land to 1 owned location)
|
5
|
0
|
5
|
|
|
4
locations in Boyd County, Kentucky and 1 location in Greenup County,
Kentucky
|
|||||
|
Flemingsburg
Market
|
4
|
0
|
4
|
||
|
4
locations in Fleming County, Kentucky
|
|||||
|
Advantage
Valley Market
|
3
|
1
|
4
|
||
|
2
locations in Lincoln County, West Virginia, 1 location in Wayne County,
West Virginia, and 1 location in Cabell County, West
Virginia
|
|||||
|
Summersville
Market
|
1
|
0
|
1
|
||
|
1
location in Nicholas County, West Virginia
|
|||||
|
*
|
Middlesboro
Market (lease land to 1 owned location)
|
3
|
0
|
3
|
|
|
3
locations in Bell County, Kentucky
|
|||||
|
Williamsburg
Market
|
5
|
0
|
5
|
||
|
2
locations in Whitley County, Kentucky and 3 locations in Laurel County,
Kentucky
|
|||||
|
Campbellsville
Market (lease land to 2 owned locations)
|
8
|
0
|
8
|
||
|
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 Market
|
2
|
0
|
2
|
||
|
2
locations in Rockcastle County, Kentucky
|
|||||
|
Total
banking locations
|
68
|
9
|
77
|
||
|
Operational
locations:
|
|||||
|
Community
Trust Bank, Inc.
|
|||||
|
Pikeville
(Pike County, Kentucky) (lease land to 1 location)
|
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
|
||
|
Total
other locations
|
0
|
1
|
1
|
||
|
Total
locations
|
69
|
11
|
80
|
||
*Community
Trust and Investment Company has leased offices in the main office locations in
these markets.
See notes 8 and 14 to the consolidated
financial statements included herein for the year ended December 31, 2008, for
additional information relating to lease commitments and amounts invested in
premises and equipment.
CTBI and subsidiaries, and from time to
time, our officers, are named defendants in legal actions arising from ordinary
business activities. Management, after consultation with legal
counsel, believes any pending actions are without merit or that the ultimate
liability, if any, will not materially affect our consolidated financial
position or results of operations.
There were no matters submitted to a
vote of security holders, through solicitation of proxies or otherwise, during
the fourth quarter of 2008.
Executive
Officers of the Registrant
Set forth below are the executive
officers of CTBI at December 31, 2008, their positions with CTBI, 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; 62
|
Chairman,
President and CEO
|
1992
|
(2)
|
Chairman,
President and CEO of Community Trust Bancorp, Inc.
|
|
Mark
A. Gooch; 50
|
Executive
Vice President and Secretary
|
1997
|
(3)
|
President
and CEO of Community Trust Bank, Inc.
|
|
Tracy
Little; 68
|
Executive
Vice President
|
2003
|
(4)
|
President
and CEO of Community Trust and Investment Company
|
|
Michael
S. Wasson; 57
|
Executive
Vice President
|
2000
|
Executive
Vice President/ Central Kentucky Region President of Community Trust Bank,
Inc.
|
|
|
James
B. Draughn; 49
|
Executive
Vice President
|
2001
|
Executive
Vice President/Operations of Community Trust Bank, Inc.
|
|
|
Kevin
J. Stumbo; 48
|
Executive
Vice President and Treasurer
|
2002
|
(5)
|
Executive
Vice President/ Controller of Community Trust Bank,
Inc.
|
|
Ricky
D. Sparkman; 46
|
Executive
Vice President
|
2002
|
Executive
Vice President/ South Central Region President of Community Trust Bank,
Inc.
|
|
|
Richard
W. Newsom; 54
|
Executive
Vice President
|
2002
|
Executive
Vice President/ Eastern Region President of Community Trust Bank,
Inc.
|
|
|
James
J. Gartner; 67
|
Executive
Vice President
|
2002
|
Executive
Vice President/ Chief Credit Officer of Community Trust Bank,
Inc.
|
|
|
Larry
W. Jones; 62
|
Executive
Vice President
|
2002
|
Executive
Vice President/ Northeast Region President of Community Trust Bank,
Inc.
|
|
|
Steven
E. Jameson; 52
|
Executive
Vice President
|
2004
|
(6)
|
Executive
Vice President/ Chief Internal Audit & Risk
Officer
|
|
(1)
|
The
ages listed for CTBI's executive officers are as of February 28,
2009.
|
|
(2)
|
Ms.
Hale assumed the position of Chairman of the Board effective December 31,
2004.
|
|
(3)
|
Mr.
Gooch was named Secretary of CTBI effective April 26,
2005.
|
|
(4)
|
Mr.
Little began employment with CTBI on August 4, 2003. Prior to
joining CTBI, 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 forty years in the trust and banking
business and has been the executive in charge of five different trust
departments and trust companies.
|
|
(5)
|
Mr.
Stumbo served as Senior Vice President/Controller for the Bank for five
years prior to being promoted to Executive Vice
President/Controller. Mr. Stumbo was named Treasurer of CTBI
effective April 26, 2005. Mr. Stumbo has been a Certified
Public Accountant since 1985.
|
|
(6)
|
Mr.
Jameson is a non-voting member of the Executive Committee. Mr.
Jameson served as Lead Auditing Specialist for The World Bank Group in
Washington, D.C. for one year prior to joining CTBI in April
2004. For the four years prior, Mr. Jameson was employed by The
Institute of Internal Auditors, Inc. in Altamonte Springs, Florida as
Assistant Vice President of the Professional Practices
Group. Mr. Jameson's certifications include Certified Public
Accountant, Certified Internal Auditor, Certified Bank Auditor, Certified
Fraud Examiner, Certified Financial Services Auditor, and Certification in
Control Self-Assessment.
|
Our common stock is listed on The
NASDAQ-Stock Market LLC – Global Select Market under the symbol
CTBI. As of February 28, 2009 there were approximately 4,627
holders of record of our outstanding common shares. Additional
information required by this item is included in the Quarterly Financial Data
below:
Quarterly
Financial Data
(Unaudited)
|
(in
thousands except per share amounts)
|
||||||||||||||||
|
Three
Months Ended
|
December
31
|
September
30
|
June
30
|
March
31
|
||||||||||||
|
2008
|
||||||||||||||||
|
Net
interest income
|
$ | 25,148 | $ | 26,499 | $ | 25,682 | $ | 26,308 | ||||||||
|
Net
interest income, taxable equivalent basis
|
25,463 | 26,841 | 26,027 | 26,675 | ||||||||||||
|
Provision
for loan losses
|
3,560 | 2,875 | 2,648 | 2,369 | ||||||||||||
|
Noninterest
income
|
7,312 | (3,969 | ) | 9,681 | 8,743 | |||||||||||
|
Noninterest
expense
|
20,788 | 21,300 | 20,443 | 20,001 | ||||||||||||
|
Net
income
|
6,485 | (577 | ) | 8,620 | 8,545 | |||||||||||
|
Per
common share:
|
||||||||||||||||
|
Basic
earnings per share
|
$ | 0.43 | $ | (0.04 | ) | $ | 0.58 | $ | 0.57 | |||||||
|
Diluted
earnings per share
|
0.43 | (0.04 | ) | 0.57 | 0.57 | |||||||||||
|
Dividends
declared
|
0.30 | 0.29 | 0.29 | 0.29 | ||||||||||||
|
Common
stock price:
|
||||||||||||||||
|
High
|
$ | 37.22 | $ | 46.32 | $ | 31.96 | $ | 30.87 | ||||||||
|
Low
|
23.05 | 15.99 | 26.25 | 23.38 | ||||||||||||
|
Last
trade
|
36.75 | 34.40 | 26.26 | 29.30 | ||||||||||||
|
Selected
ratios:
|
||||||||||||||||
|
Return
on average assets, annualized
|
0.87 | % | (0.08 | )% | 1.19 | % | 1.18 | % | ||||||||
|
Return
on average common equity, annualized
|
8.44 | (0.74 | ) | 11.22 | 11.20 | |||||||||||
|
Net
interest margin, annualized
|
3.69 | 3.97 | 3.88 | 4.00 | ||||||||||||
|
2007
|
||||||||||||||||
|
Net
interest income
|
$ | 26,939 | $ | 26,592 | $ | 26,611 | $ | 25,890 | ||||||||
|
Net
interest income, taxable equivalent basis
|
27,303 | 26,971 | 26,989 | 26,282 | ||||||||||||
|
Provision
for loan losses
|
2,309 | 1,915 | 1,846 | 470 | ||||||||||||
|
Noninterest
income
|
9,202 | 9,934 | 8,974 | 8,498 | ||||||||||||
|
Noninterest
expense
|
20,297 | 19,324 | 20,938 | 22,496 | ||||||||||||
|
Net
income
|
9,271 | 10,476 | 8,858 | 8,022 | ||||||||||||
|
Per
common share:
|
||||||||||||||||
|
Basic
earnings per share
|
$ | 0.62 | $ | 0.69 | $ | 0.58 | $ | 0.53 | ||||||||
|
Diluted
earnings per share
|
0.61 | 0.68 | 0.57 | 0.52 | ||||||||||||
|
Dividends
declared
|
0.29 | 0.27 | 0.27 | 0.27 | ||||||||||||
|
Common
stock price:
|
||||||||||||||||
|
High
|
$ | 32.50 | $ | 33.46 | $ | 37.98 | $ | 41.50 | ||||||||
|
Low
|
26.09 | 26.47 | 31.40 | 33.87 | ||||||||||||
|
Last
trade
|
27.53 | 30.01 | 32.30 | 36.23 | ||||||||||||
|
Selected
ratios:
|
||||||||||||||||
|
Return
on average assets, annualized
|
1.26 | % | 1.39 | % | 1.18 | % | 1.09 | % | ||||||||
|
Return
on average common equity, annualized
|
12.22 | 14.04 | 12.16 | 11.33 | ||||||||||||
|
Net
interest margin, annualized
|
4.02 | 3.86 | 3.86 | 3.84 | ||||||||||||
Dividends
The annual dividend paid to our
stockholders was increased from $1.10 per share to $1.17 per share during
2008. We have adopted a conservative policy of cash dividends by
maintaining an average annual cash dividend ratio of less than 45%, with
periodic stock dividends. The current year cash dividend ratio was
75.97%. However, the higher dividend ratio reflects the decreased net
income which resulted primarily from the other-than-temporary-impairment charges
of $14.5 million on Freddie Mac and Fannie Mae trust preferred pass-through
auction rate securities and a $4.9 million increase in our allocation to our
reserve for loan losses taken in 2008. Dividends are typically paid
on a quarterly basis. Future dividends are subject to the discretion
of CTBI’s Board of Directors, cash needs, general business conditions, dividends
from our subsidiaries, and applicable governmental regulations and
policies. For information concerning restrictions on dividends from
the subsidiary bank to CTBI, see note 19 to the consolidated financial
statements included herein for the year ended December 31, 2008.
Stock
Repurchases
CTBI repurchased 93,500 shares of its
common stock during 2008, leaving 288,519 shares remaining under CTBI's current
repurchase authorization. We acquired 196,500 shares of stock through
the stock repurchase program during the year 2007. For further
information, see the Liquidity and Market Risk section of Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Common Stock Performance
The following graph shows the
cumulative return experienced by CTBI's shareholders during the last five years
compared to the NASDAQ Stock Market (U.S.) and the NASDAQ Bank Stock
Index. The graph assumes the investment of $100 on December 31, 2003
in CTBI's common stock and in each index and the reinvestment of all dividends
paid during the five-year period.
Comparison
of 5 Year Cumulative Total Return
among
Community Trust Bancorp, Inc., NASDAQ Stock Market (U.S.),
and
NASDAQ Bank Stocks
|
Fiscal
Year Ending December 31 ($)
|
||||||
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
|
|
Community
Trust Bancorp, Inc.
|
100.00
|
121.02
|
118.67
|
164.32
|
113.28
|
156.03
|
|
NASDAQ
Stock Market (U.S.)
|
100.00
|
108.84
|
111.16
|
122.11
|
132.42
|
63.80
|
|
NASDAQ
Bank Stocks
|
100.00
|
114.44
|
111.80
|
125.47
|
99.45
|
72.51
|
|
(in
thousands except per share amounts and # of employees)
|
||||||||||||||||||||
|
Year
Ended December 31
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Interest
income
|
$ | 167,611 | $ | 196,864 | $ | 189,305 | $ | 160,322 | $ | 130,561 | ||||||||||
|
Interest
expense
|
63,974 | 90,832 | 81,538 | 57,117 | 37,349 | |||||||||||||||
|
Net
interest income
|
103,637 | 106,032 | 107,767 | 103,205 | 93,212 | |||||||||||||||
|
Provision
for loan losses
|
11,452 | 6,540 | 4,305 | 8,285 | 8,648 | |||||||||||||||
|
Noninterest
income
|
21,767 | 36,608 | 32,559 | 33,467 | 33,917 | |||||||||||||||
|
Noninterest
expense
|
82,532 | 83,055 | 80,407 | 78,569 | 74,595 | |||||||||||||||
|
Income
before income taxes
|
31,420 | 53,045 | 55,614 | 49,818 | 43,886 | |||||||||||||||
|
Income
taxes
|
8,347 | 16,418 | 16,550 | 15,406 | 12,936 | |||||||||||||||
|
Net
income
|
$ | 23,073 | $ | 36,627 | $ | 39,064 | $ | 34,412 | $ | 30,950 | ||||||||||
|
Per
common share:
|
||||||||||||||||||||
|
Basic
earnings per share
|
$ | 1.54 | $ | 2.42 | $ | 2.59 | $ | 2.31 | $ | 2.09 | ||||||||||
|
Cash
dividends declared-
|
$ | 1.17 | $ | 1.10 | $ | 1.05 | $ | 0.98 | $ | 0.87 | ||||||||||
|
As
a % of net income
|
75.97 | % | 45.45 | % | 40.54 | % | 42.42 | % | 41.63 | % | ||||||||||
|
Book
value, end of year
|
$ | 20.46 | $ | 20.03 | $ | 18.63 | $ | 16.93 | $ | 15.91 | ||||||||||
|
Market
price, end of year
|
$ | 36.75 | $ | 27.53 | $ | 41.53 | $ | 30.75 | $ | 32.36 | ||||||||||
|
Market
to book value, end of year
|
1.80 | x | 1.37 | x | 2.23 | x | 1.82 | x | 2.03 | x | ||||||||||
|
Price/earnings
ratio, end of year
|
23.86 | x | 11.38 | x | 16.03 | x | 13.31 | x | 15.48 | x | ||||||||||
|
Cash
dividend yield, end of year
|
3.18 | % | 4.00 | % | 2.53 | % | 3.19 | % | 2.69 | % | ||||||||||
|
At
year-end:
|
||||||||||||||||||||
|
Total
assets
|
$ | 2,954,531 | $ | 2,902,684 | $ | 2,969,761 | $ | 2,851,053 | $ | 2,710,935 | ||||||||||
|
Long-term
debt
|
61,341 | 61,341 | 61,341 | 61,341 | 61,341 | |||||||||||||||
|
Shareholders’
equity
|
308,206 | 301,355 | 282,375 | 253,945 | 236,169 | |||||||||||||||
|
Averages:
|
||||||||||||||||||||
|
Assets
|
$ | 2,921,217 | $ | 2,980,713 | $ | 2,942,892 | $ | 2,817,549 | $ | 2,545,133 | ||||||||||
|
Deposits
|
2,303,720 | 2,352,902 | 2,294,385 | 2,217,735 | 2,078,691 | |||||||||||||||
|
Earning
assets
|
2,703,054 | 2,760,014 | 2,717,325 | 2,601,304 | 2,339,401 | |||||||||||||||
|
Loans
|
2,283,180 | 2,205,431 | 2,131,649 | 2,024,756 | 1,816,146 | |||||||||||||||
|
Shareholders’
equity
|
308,401 | 294,106 | 269,202 | 246,119 | 229,561 | |||||||||||||||
|
Profitability
ratios:
|
||||||||||||||||||||
|
Return
on average assets
|
0.79 | % | 1.23 | % | 1.33 | % | 1.22 | % | 1.22 | % | ||||||||||
|
Return
on average equity
|
7.48 | 12.45 | 14.51 | 13.98 | 13.48 | |||||||||||||||
|
Capital
ratios:
|
||||||||||||||||||||
|
Equity
to assets, end of year
|
10.43 | % | 10.38 | % | 9.51 | % | 8.91 | % | 8.71 | % | ||||||||||
|
Average
equity to average assets
|
10.56 | 9.87 | 9.15 | 8.74 | 9.02 | |||||||||||||||
|
Risk
based capital ratios:
|
||||||||||||||||||||
|
Tier
1 capital
|
||||||||||||||||||||
|
(to
average assets)
|
10.37 | % | 10.32 | % | 9.58 | % | 8.94 | % | 8.78 | % | ||||||||||
|
Tier
1 capital
|
||||||||||||||||||||
|
(to
risk weighted assets)
|
13.05 | 13.24 | 12.21 | 11.52 | 11.82 | |||||||||||||||
|
Total
capital
|
||||||||||||||||||||
|
(to
risk weighted assets)
|
14.30 | 14.49 | 13.43 | 12.76 | 13.07 | |||||||||||||||
|
Other
significant ratios:
|
||||||||||||||||||||
|
Allowance
to net loans, end of year
|
1.31 | % | 1.26 | % | 1.27 | % | 1.40 | % | 1.42 | % | ||||||||||
|
Allowance
to nonperforming loans, end of year
|
59.06 | 88.00 | 193.54 | 137.87 | 134.41 | |||||||||||||||
|
Nonperforming
assets to loans and foreclosed properties, end of year
|
2.65 | 1.78 | 0.86 | 1.27 | 1.30 | |||||||||||||||
|
Net
interest margin
|
3.88 | % | 3.90 | % | 4.02 | % | 4.02 | % | 4.06 | % | ||||||||||
|
Other
statistics:
|
||||||||||||||||||||
|
Average
common shares outstanding
|
15,017 | 15,150 | 15,086 | 14,908 | 14,811 | |||||||||||||||
|
Number
of full-time equivalent employees, end of year
|
986 | 1,011 | 1,021 | 1,003 | 954 |
Overview
The following Management's Discussion
and Analysis of Financial Condition and Results of Operations (“MD&A”) is
intended to help the reader understand Community Trust Bancorp, Inc., our
operations, and our present business environment. The MD&A is
provided as a supplement to—and should be read in conjunction with—our
consolidated financial statements and the accompanying notes thereto contained
in Item 8 of this annual report. The MD&A includes the following
sections:
|
v
|
Our
Business
|
|
v
|
Critical
Accounting Policies and Estimates
|
|
v
|
Results
of Operations
|
|
v
|
Liquidity
and Market Risk
|
|
v
|
Stock
Repurchase Program
|
|
v
|
Interest
Rate Risk
|
|
v
|
Capital
Resources
|
|
v
|
Recent
Regulatory Developments
|
|
v
|
Impact
of Inflation, Changing Prices, and Economic
Conditions
|
|
v
|
Contractual
Obligations and Commitments
|
Our
Business
Community Trust Bancorp, Inc. (“CTBI”)
is a bank holding company headquartered in Pikeville, Kentucky. At
December 31, 2008, CTBI owned one commercial bank and one trust
company. Through its subsidiaries, CTBI has seventy-seven banking
locations in eastern, northeastern, central, and south central Kentucky and
southern West Virginia, and five trust offices across Kentucky. At
December 31, 2008, CTBI had total consolidated assets of $3.0 billion and total
consolidated deposits, including repurchase agreements, of $2.5 billion, making
it the largest bank holding company headquartered in the Commonwealth of
Kentucky. Total shareholders’ equity at December 31, 2008 was $308.2
million.
Through its subsidiaries, CTBI 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; and providing funds transfer services. The lending
activities of our Bank include making commercial, construction, mortgage, and
personal loans. Lease-financing, lines of credit, revolving lines of
credit, term loans, and other specialized loans, including asset-based
financing, are also available. Our 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 full service
brokerage services. For further information, see Item 1 of this
annual report.
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 the 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:
Available-for-Sale Securities –
Available-for-sale securities are valued using the following valuation
techniques:
Securities Available-for-Sale –
Level 2 Inputs. For these securities, CTBI obtains fair value
measurements from an independent pricing service. The fair value measurements
consider observable data that may include dealer quotes, market spreads, cash
flows, the U.S. Treasury yield curve, live trading levels, trade execution data,
market consensus prepayment speeds, credit information and the bond's terms and
conditions, among other things.
Securities Available-for-Sale –
Level 3 Inputs. The securities owned by CTBI that were
measured using Level 3 criteria are auction rate securities issued by FNMA and
FHLMC. These securities were valued using an independent third
party. For these securities, the valuation methods used were (1) a
discounted cash flow model valuation, where the expected cash flows of the
securities are discounted to the present using a yield that incorporates
compensation for illiquidity and (2) a market comparables method, where the
securities are valued based on indications, from the secondary market, of what
discounts buyers demand when purchasing similar securities. Using
these methods, the auction rate securities are classified as Level
3.
Loans – Loans with the ability
and the intent to be held until maturity and/or payoff are reported at the
carrying value of unpaid principal reduced by unearned interest and an allowance
for loan and lease 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.
Loan origination and commitment fees
and certain direct loan origination costs are deferred and the net amount
amortized over the estimated life of the related loans, leases, or commitments
as a yield adjustment.
Allowance for Loan and Lease Losses
– We
maintain an allowance for loan and lease losses (“ALLL”) at a level that is
appropriate to cover estimated credit losses on individually evaluated loans
determined to be impaired, as well as estimated credit losses inherent in the
remainder of the loan and lease portfolio. Since arriving at an
appropriate ALLL involves a high degree of management judgment, we use an
ongoing quarterly analysis to develop a range of estimated losses. In
accordance with accounting principles generally accepted in the United States,
we use our best estimate within the range of potential credit loss to determine
the appropriate ALLL. Credit losses are charged and recoveries are
credited to the ALLL.
We utilize an internal risk grading
system for commercial credits. Those larger commercial credits that
exhibit probable or observed credit weaknesses are subject to individual
review. The borrower’s cash flow, adequacy of collateral coverage,
and other options available to CTBI, including legal remedies, are
evaluated. The review of individual loans includes those loans that
are impaired as SFAS 114, Accounting by Creditors for
Impairment of a Loan. We evaluate the collectability of both
principal and interest when assessing the need for loss
provision. Historical loss rates are applied to other commercial
loans not subject to specific allocations. The ALLL allocation for
this pool of commercial loans is established based on the historical average,
maximum, minimum, and median loss ratios.
Homogenous loans, such as consumer
installment, residential mortgages, and home equity lines are not individually
risk graded. The associated ALLL for these loans is measured under
SFAS 5, Accounting for
Contingencies. The ALLL allocation for these pools of loans is
established based on the average, maximum, minimum, and median loss ratios over
the previous eight quarters.
Historical loss rates for commercial
and retail loans are adjusted for significant factors that, in management’s
judgment, reflect the impact of any current conditions on loss
recognition. Factors that we consider include delinquency trends,
current economic conditions and trends, strength of supervision and
administration of the loan portfolio, levels of underperforming loans, level of
recoveries to prior year's charge offs, trend in loan losses, industry
concentrations and their relative strengths, amount of unsecured loans and
underwriting exceptions. These factors are reviewed quarterly and a
weighted range developed with a “most likely” scenario
determined. The total of each of these weighted factors is then
applied against the applicable portion of the portfolio and the ALLL is adjusted
accordingly.
Loans Held for Sale – 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.
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. Premises and
equipment are evaluated for impairment on a quarterly basis.
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. Other real estate owned by CTBI included
in other assets at December 31, 2008 and 2007 was $10.4 million and $7.9
million, respectively.
Goodwill and Core Deposit Intangible
– We
evaluate total goodwill and core deposit intangible for impairment, based upon
SFAS 142, Goodwill and Other
Intangible Assets and SFAS 147, Acquisitions of Certain Financial
Institutions, using fair value techniques including multiples of
price/equity. Goodwill and core deposit intangible are evaluated for
impairment on an annual basis or as other events may warrant.
Amortization of core deposit intangible
is estimated at approximately $0.6 million annually for year one, approximately
$0.4 million in year two, and approximately $0.1 million in years three and
four.
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”) –
Basic EPS is calculated by dividing net income available to common shareholders
by the weighted average number of common shares outstanding, excluding
restricted shares.
Diluted EPS adjusts the number of
weighted average shares of common stock outstanding by the dilutive effect of
stock options, including restricted shares, as prescribed in SFAS
123R.
Segments – Management analyzes
the operation of CTBI assuming one operating segment, community banking
services. CTBI, through its operating subsidiaries, offers a wide
range of consumer and commercial community banking services. These
services include: (i) residential and commercial real estate loans; (ii)
checking accounts; (iii) regular and term savings accounts and savings
certificates; (iv) full service securities brokerage services; (v) consumer
loans; (vi) debit cards; (vii) annuity and life insurance products; (viii)
Individual Retirement Accounts and Keogh plans; (ix) commercial loans; (x) trust
services; and (xi) commercial demand deposit accounts.
Bank Owned Life Insurance –
CTBI's bank owned life insurance policies are carried at their cash
surrender value. We recognize tax-free income from the periodic
increases in cash surrender value of these policies and from death
benefits.
Mortgage Servicing Rights –
Mortgage servicing rights (“MSRs”) are carried at fair market value with the
implementation of SFAS 156 in January 2007. MSRs are valued using
Level 3 inputs as defined in SFAS 157. The fair value is determined
quarterly based on an independent third-party valuation using a discounted cash
flow analysis and calculated using a computer pricing model. The
computer valuation is based on key economic assumptions including the prepayment
speeds of the underlying loans, the weighted-average life of the loan, the
discount rate, the weighted-average coupon, and the weighted-average default
rate, as applicable. MSRs are a component of other
assets. Along with the gains received from the sale of loans, fees
are received for servicing loans. These fees include late fees, which
are recorded in interest income, and ancillary fees and monthly servicing fees,
which are recorded in noninterest income. Costs of servicing loans
are charged to expense as incurred. Changes in fair market value of
the MSRs are reported as an increase or decrease to mortgage banking
income.
Stock Options – At December
31, 2008 and 2007, CTBI had a share-based employee compensation plan, which is
described more fully in note 13. CTBI accounts for this plan under
the recognition and measurement principles of SFAS 123R, Share-Based
Payment.
New Accounting Standards
–
Ø Determining the Fair Value of a
Financial Asset When the Market For That Asset is Not Active – FASB Staff
Position (“FSP”) No. FAS 157-3 clarifies the application of FASB No. 157, Fair Value Measurements, in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. This FSP was effective
October 10, 2008.
Ø Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities –
This FASB Staff Position No. EITF 03-6-1 addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share under the two-class method described in paragraphs
60 and 61 of FASB Statement No. 128, Earnings Per
Share. This FSP is effective January 1, 2009, and is not
expected to have a significant impact on our consolidated financial
statements.
Ø Fair Value Option for Financial
Assets and Financial Liabilities – In February 2007, the FASB issued SFAS
159, The Fair Value Option for
Financial Assets and Financial Liabilities, which permits entities to
choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement is expected to expand the
use of fair value measurement, which is consistent with the FASB’s long-term
measurement objectives for accounting for financial instruments. SFAS 159
is effective for fiscal years beginning after November 15, 2007. CTBI has not
elected the fair value option for any financial assets or
liabilities.
Ø Accounting for Income Tax Benefits of
Dividends on Share-Based Payment Awards – On June 14, 2007, the Emerging
Issues Task Force (“EITF”) reached a final consensus on Issue No. 06-11, Accounting for Income Tax Benefits
of Dividends on Share-Based Payment Awards. This consensus was
ratified by FASB on June 27, 2007. This issue states that tax
benefits received on dividends paid to employees associated with their unvested
stock compensation awards should be recorded in additional paid-in capital
(“APIC”) for awards expected to vest. Currently, such dividends are
accounted for as a permanent tax deduction reducing the annual effective income
tax rate. This issue is to be applied prospectively to dividends
declared in fiscal years beginning after December 15,
2007. Retrospective application of this Issue is
prohibited. Issue No. 06-11 did not have a material effect on our
consolidated financial statements.
Ø Business
Combinations (Revised 2007) – The FASB recently issued
SFAS 141(R), which replaces FAS 141, Business Combinations, and
applies to all transactions and other events in which one entity obtains control
over one or more other businesses. SFAS 141R requires an acquirer,
upon initially obtaining control of another entity, to recognize the assets,
liabilities, and any non-controlling interest in the acquiree at fair value as
of the acquisition date. Contingent consideration is required to be
recognized and measured at fair value on the date of acquisition rather than at
a later date when the amount of that consideration may be determinable beyond a
reasonable doubt. This fair value approach replaces the
cost-allocation process required under SFAS 141 whereby the cost of an
acquisition was allocated to the individual assets acquired and liabilities
assumed based on their estimated fair value. SFAS 141R requires
acquirers to expense acquisition-related costs as incurred rather than
allocating such costs to the assets acquired and liabilities assumed as was
previously the case under SFAS 141. Under SFAS 141R, the requirements
of SFAS 146, Accounting for
Costs Associated with Exit or Disposal Activities, would have to be met
in order to accrue for a restructuring plan in purchase
accounting. Pre-acquisition contingencies are to be recognized at
fair value, unless it is a non-contractual contingency that is not likely to
materialize, in which case, nothing should be recognized in purchase accounting,
and instead, that contingency would be subject to the probable and estimable
recognition criteria of SFAS 5, Accounting for
Contingencies. This Statement defines a bargain purchase as a
business combination in which the total acquisition date fair value of the
identifiable net assets acquired exceeds the fair value of the consideration
transferred plus any noncontrolling interest in the acquiree, and it requires
the acquirer to recognize that excess in earnings as a gain attributable to the
acquirer. In contrast, Statement 141 required the “negative goodwill” amount to
be allocated as a pro rata reduction of the amounts that otherwise would have
been assigned to particular assets acquired. SFAS 141R is expected to
have a significant impact on our accounting for business combinations closing on
or after January 1, 2009.
Ø Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance
Arrangements – EITF Issue
No. 06-4, Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split
Dollar Life Insurance Arrangements requires, effective January 1, 2008,
the recognition of a liability and related compensation expense for endorsement
split-dollar life insurance policies that provide a benefit to an employee that
extends to post-retirement periods. Under EITF 06-4, life insurance
policies purchased for the purpose of providing such benefits do not effectively
settle an entity’s obligation to the employee. Accordingly, the entity
must recognize a liability and related compensation expense during the
employee’s active service period based on the future cost of insurance to be
incurred during the employee’s retirement. If the entity has agreed to
provide the employee with a death benefit, then the liability for the future
death benefit should be recognized by following the guidance in SFAS 106,
Employer’s Accounting for
Postretirement Benefits Other Than Pensions. CTBI adopted
EITF 06-4 as a change in accounting principle through a $1.8 million
cumulative-effect adjustment to retained earnings based on the cost of
insurance.
Results of Operations
2008
Compared to 2007
CTBI reported earnings of $23.1 million
or $1.54 per basic share for the year 2008 compared to $36.6 million or $2.42
per basic share for the year 2007. Average shares outstanding
decreased from 15.2 million for the year ended December 31, 2007 to 15.0 million
for the year ended December 31, 2008.
During 2008, CTBI recorded other than
temporary impairment charges of $14.5 million, $1.1 million of which was
recorded in the fourth quarter 2008, based upon the current market value of
Freddie Mac and Fannie Mae trust preferred pass-through auction rate
securities. CTBI held $14.9 million of these securities on June 30,
2008. The current market value of all auction rate securities held by
CTBI is $0.5 million. CTBI also recorded a $1.5 million decline in
the fair value of its mortgage servicing rights during 2008, $1.1 million of
which occurred in the fourth quarter 2008, and increased its provision for loan
losses by $4.9 million year over year. Additionally, current economic
conditions combined with the current interest rate environment continue to put
pressure on CTBI’s net interest margin and impact its asset quality contributing
to lower earnings for the fourth quarter and year 2008.
|
v
|
CTBI's
basic earnings per share decreased $0.88 from prior year, primarily as a
result of other than temporary impairment charges during the third and
fourth quarters 2008 and a $4.9 million increase in our allocation to our
reserve for losses on loans.
|
|
v
|
Pressure
continued on our net interest margin due to the current interest rate
environment and economic conditions. Our net interest margin
for the year ended December 31, 2008 decreased 2 basis points from prior
year, and net interest income decreased $2.4 million from prior year as
average earning assets decreased by $57.0
million.
|
|
v
|
Noninterest
income was impacted by $14.5 million in other than temporary impairment
(OTTI) charges for auction rate securities. Core noninterest
income showed slight increases from prior year with increases in gains on
sales of loans, deposit service charges, and trust revenue; however these
increases were offset by a decrease in the fair value of mortgage
servicing rights.
|
|
v
|
Noninterest
expense controls were positive during 2008 as we experienced a decline in
total noninterest expense which was driven by decreases in both personnel
and occupancy and equipment
expenses.
|
|
v
|
Our
efficiency ratio for the year 2008 increased 77 basis points from 2007 to
58.39%.
|
|
v
|
Nonperforming
loans increased to $52.2 million at December 31, 2008 compared to $31.9
million at prior year-end.
|
|
v
|
Our
loan portfolio increased 5.4% during the year with $120.8 million in
growth.
|
|
v
|
Our
investment portfolio decreased $64.1 million year over year primarily
resulting from the use of the liquidity in the portfolio to fund loan
growth and manage the net interest margin and the OTTI charges for auction
rate securities.
|
|
v
|
CTBI’s
effective income tax rate was 26.44% for the year ended December 31, 2008,
compared to 31.18% for the year ended December 31, 2007. The
reduced income tax rate was driven by the increase in the ratio of tax
exempt income to total income and the adjustment of a tax deferred item in
the fourth quarter 2008 which had a positive impact to earnings of $0.04
per share.
|
|
v
|
Return
on average assets for the year was 0.79% compared to 1.23% for the year
2007. Return on average equity was 7.48% compared to
12.45%.
|
Net
Interest Income:
Our net interest margin for the year
ended December 31, 2008 decreased 2 basis points compared to the same period in
2007. Net interest income for the year ended December 31, 2008
decreased $2.4 million from prior year as the cost of interest bearing funds
decreased 108 basis points while the yield on average earning assets decreased
94 basis points and average earning assets declined $57.0 million.
Provision
for Loan Losses and Allowance for Loan and Lease Losses:
The provision for loan losses that was
added to the allowance for 2008 increased $4.9 million from the year
2007. This provision represented a charge against current earnings in
order to maintain the allowance at an appropriate level determined using the
accounting estimates described in the Critical Accounting Policies and Estimates
section. Our loan loss reserve as a percentage of total loans
outstanding at December 31, 2008 increased to 1.31% compared to 1.26% at
December 31, 2007. The adequacy of our loan loss reserve is analyzed
quarterly and adjusted as necessary.
Nonperforming loans increased during
the year by $20.3 million with increases in all of our
regions. CTBI's total nonperforming loans at December 31, 2008 were
$52.2 million compared to $31.9 million at December 31, 2007. Our
loan portfolio management processes focus on maintaining appropriate reserves
for potential losses.
An increase in nonperforming loans does
not necessitate a corollary increase in the amount of loan loss reserves.
Nonperforming loans include loans that are 90 days, or more, past due as well as
nonaccrual loans and restructured debt. A loan that is 90 days, or more,
past due must be placed on nonaccrual unless it is well secured and in the
process of collection. If it has not been placed on nonaccrual it has met
both criteria, especially that of "well secured", and thereby would require no
specific reserve. A loan is placed on nonaccrual when, by definition, the
bank does not anticipate collecting all of its principal and/or interest.
CTBI has several loans that are secured by real estate that we do not anticipate
collecting all of the interest owed but, with current appraisals performed, do
anticipate collecting all of the principal. In this instance, while the
interest accrued would have been reversed, and the loan placed on nonaccrual, no
additional specific reserve would be required because we anticipate collecting
all of the principal.
Foreclosed properties increased during
2008 to $10.4 million from the $7.9 million at December 31,
2007. Sales of foreclosed properties during 2008 totaled $5.0 million
while new foreclosed properties totaled $7.7 million. Our
nonperforming loans and foreclosed properties remain concentrated in our Central
Kentucky Region. The increase in the Central Kentucky Region is
primarily attributable to borrowers adversely impacted by the continuing
weakness in the housing market and the resulting increase in time required by
the legal process for movement from foreclosure to liquidation. The
Central Kentucky Region continues to experience the most stress from the current
housing crisis.
Net loan charge-offs for the year
increased from $6.0 million for 2007 to $8.7 million for 2008 with most losses
derived from our Central Kentucky Region as we continue to work through the
region’s overbuilt housing market.
Noninterest
Income:
The significant decline in noninterest
income year over year occurred as a result of the $14.5 million other than
temporary impairment charges for auction rate securities, as well as the $1.5
million decline in the fair value of mortgage servicing rights. We
experienced increases year over year in the core banking noninterest income
areas of gains on sales of loans, deposit service charges, and trust revenue
which were partially offset by the decline in loan fees driven by the decline in
the fair value of mortgage servicing rights.
Noninterest
Expense:
Noninterest expense controls were
positive during 2008 as we experienced a decline in total noninterest expense
which was driven by decreases in both personnel and occupancy and equipment
expenses. Commensurate with the U.S. Treasury placing Freddie Mac and
Fannie Mae into conservatorship, noninterest expense for the year 2008 was
impacted by a $0.8 million charge relative to trust activity for which CTBI had
financial responsibility. The decrease in expenses would have been
larger except for this $0.8 million charge.
Balance
Sheet Review:
CTBI’s total assets at $3.0 billion
increased 1.8% from prior year. Loans outstanding at December 31,
2008 were $2.3 billion reflecting a 5.4% growth from December 31,
2007. CTBI's investment portfolio, however, decreased 18.0% from
prior year as a result of the use of the liquidity in our investment portfolio
to fund loan growth and the other than temporary impairment charges for auction
rate securities. Deposits, including repurchase agreements, at $2.5
billion increased 1.5% from prior year. The deposit (including
repurchase agreements) to FTE (full-time equivalent) ratio increased to $2.5
million at December 31, 2008 from $2.4 million at December 31,
2007.
Shareholders’ equity at December 31,
2008 was $308.2 million compared to $301.4 at December 31,
2007. CTBI's annualized dividend yield to shareholders as of December
31, 2008 was 3.27%.
2007
Compared to 2006
Community Trust Bancorp, Inc. reported
earnings for the year ended December 31, 2007 of $36.6 million or $2.42 per
basic share compared to $39.1 million or $2.59 per basic share earned for the
year 2006. The decrease in net income was primarily driven by a $1.7
million decrease in net interest income and a $2.2 million increase in provision
for loan losses. CTBI's basic earnings per share for the year
decreased 6.6% from the year ended December 31, 2006. Our average
shares outstanding increased from 15.1 million shares at December 31, 2006 to
15.2 million shares at December 31, 2007.
|
v
|
Core
earnings for the year 2007 reflected the pressure on our net interest
income as CTBI operated within an inverted yield curve through most of
2007.
|
|
v
|
Nonperforming
loans at December 31, 2007 were $31.9 million, an increase of $17.7
million from 2006.
|
|
v
|
Our
loan portfolio increased 2.8% from December 31, 2006. The
market remained highly competitive and CTBI continued to focus on asset
quality and loan yield.
|
|
v
|
Our
investment portfolio declined 23.4% from prior year, resulting from the
payment of a $40 million FHLB advance and a decline in deposits which were
funded through the sale of auction rate
securities.
|
|
v
|
Our
efficiency ratio improved during the year 2007 primarily resulting from
the 2007 receipt of a $1.2 million acquisition termination fee and the
2006 inclusion of a performance based employee incentive in the amount of
$3.0 million which was not paid in
2007.
|
|
v
|
Return
on average assets for the year was 1.23% compared to 1.33% for the year
2006. Return on average equity was 12.45% compared to
14.51%.
|
Net
Interest Income:
Our net interest margin declined 12
basis points year over year. Net interest income decreased $1.7 million
from prior year. The yield on average earnings assets for the year
2007 increased 17 basis points from 2006 in comparison to the 39 basis point
increase in the cost of interest bearing funds. Average earning
assets increased 1.6% from prior year-end.
Provision
for Loan Losses and Allowance for Loan and Lease Losses:
The provision for loan losses that was
added to the allowance for 2007 increased $2.2 million from the year
2006. This provision represented a charge against current earnings in
order to maintain the allowance at an appropriate level determined using the
accounting estimates described in the Critical Accounting Policies and Estimates
section.
Nonperforming loans at December 31,
2007 were $31.9 million compared to $14.2 million at December 31,
2006. All nonperforming loans were individually reviewed with
specific reserves established when appropriate. The increase in
nonperforming loans was driven primarily by the increased inventory and the
number of days on the market of residential real estate developments in Central
Kentucky. We anticipated nonperforming loans to remain higher than
recent history as the normal legal collection time period for real estate
secured assets was slowed due to increased volumes in the
industry. Our loan portfolio management processes focused on
maintaining appropriate reserves for potential losses.
While we do not have subprime lending
programs (i.e. Hybrid ARMs, Alt-A, Payment Option Loans, etc.), we do make loans
that have subprime characteristics by regulatory definition; however, each loan
is individually underwritten based on its creditworthiness. The
industry experienced significant losses and increases in nonperforming loans in
this area. Although CTBI showed an increase in residential
nonperforming loans between year-end 2006 and 2007, we also showed a decrease in
30-89 day past dues, and loan losses for 2007 represented only 0.09% in the
residential portfolio.
Foreclosed properties at December 31,
2007 of $7.9 million were an approximate $3.4 million increase from the $4.5
million on December 31, 2006. The year over year increase was driven
by a $2.6 million increase in single family residential properties from our
Central Kentucky Region where the market has softened.
Net loan charge-offs for the year ended
December 31, 2007 of 0.27% of average loans annualized was a decrease from the
0.29% for 2006. Our reserve for losses on loans as a percentage of
total loans outstanding at December 31, 2007 was 1.26% compared to 1.27% at
December 31, 2006. The adequacy of our reserve for losses on loans is
analyzed quarterly and adjusted as necessary.
Noninterest
Income:
Noninterest income, after normalizing
for the receipt of the $1.2 million fee associated with the termination of the
Eagle Fidelity, Inc. acquisition in the third quarter, increased 8.8% from the
year ended December 31, 2006, with increases in gains on sales of loans, deposit
service charges, trust revenue, and loan related fees.
Noninterest
Expense:
Noninterest expense increased 3.3% as a
$1.2 million charge related to unamortized debt issuance costs with the
redemption of trust preferred securities was offset by a decrease in personnel
expense associated with the $3.0 million payment of a performance based employee
incentive in 2006 which was not paid in 2007.
Balance
Sheet Review:
CTBI’s total assets decreased $67.1
million or 2.3% from prior year. The year over year decrease resulted
from the payoff of a $40 million FHLB advance and a decline in deposits which
were funded through the sale of auction rate securities. Loans
outstanding at December 31, 2007 were $2.2 billion reflecting a $60.4 million or
2.8% increase year over year. CTBI's investment portfolio decreased
$109.2 million from prior year-end. Deposits, including repurchase
agreements, declined $50.7 million or 2.0% during the year as CTBI focused on
managing deposit growth and pricing controls due to its liquidity
position. The deposit (including repurchase agreements) to FTE
(full-time equivalent) ratio decreased to $2.4 million at December 31, 2007 from
$2.5 million at December 31, 2006. Shareholders’ equity of $301.4
million on December 31, 2007 was an increase of 6.7% from December 31,
2006.
Liquidity
and Market Risk
The objective of CTBI’s Asset/Liability
management function is to maintain consistent growth in net interest income
within our policy limits. This objective is accomplished through management of
our 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 deposit withdrawals. This is
accomplished by maintaining liquid assets in the form of cash and cash
equivalents and investment securities, maintaining sufficient unused borrowing
capacity, and growth in core deposits. As of December 31, 2008, we had
approximately $141.0 million in cash and cash equivalents and approximately
$267.4 million in securities valued 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. In addition
to core deposit funding, we also have a variety of other short-term and
long-term funding sources available. We also rely on Federal Home
Loan Bank advances for both liquidity and management of our asset/liability
position. Federal Home Loan Bank advances were $60.7 million at
December 31, 2008 compared to $40.9 million at December 31, 2007. As
of December 31, 2008, we had a $330.7 million available borrowing position with
the Federal Home Loan Bank. We generally rely upon net inflows of
cash from financing activities, supplemented by net inflows of cash from
operating activities, to provide cash for our investing
activities. As is typical of many financial institutions, significant
financing activities include deposit gathering, use of short-term borrowing
facilities such as repurchase agreements and federal funds purchased, and
issuance of long-term debt. At December 31, 2008, we had a $12
million revolving line of credit, all of which is currently available to meet
any future cash needs. Our primary investing activities include
purchases of securities and loan originations. We do not rely on any
one source of liquidity and manage availability in response to changing
consolidated balance sheet needs.
Stock
Repurchase Program
CTBI’s stock repurchase program began
in December 1998 with the authorization to acquire up to 500,000 shares and was
increased by an additional 1,000,000 shares in July 2000. CTBI issued
a press release on May 13, 2003 announcing its intention to repurchase up to
1,000,000 additional shares. During the years 2007 and 2008, we
repurchased 196,500 and 93,500 shares, respectively. As of December
31, 2008, a total of 2,211,481 shares have been repurchased through this
program. The following table shows Board authorizations and
repurchases made through the stock repurchase program for the years 1998 through
2008:
|
Board
Authorizations
|
Repurchases*
|
Shares
Available for Repurchase
|
||
|
Average
Price ($)
|
#
of Shares
|
|||
|
1998
|
500,000
|
-
|
0
|
|
|
1999
|
0
|
15.89
|
131,517
|
|
|
2000
|
1,000,000
|
11.27
|
694,064
|
|
|
2001
|
0
|
14.69
|
444,945
|
|
|
2002
|
0
|
19.48
|
360,287
|
|
|
2003
|
1,000,000
|
21.58
|
235,668
|
|
|
2004
|
0
|
25.45
|
55,000
|
|
|
2005
|
0
|
-
|
0
|
|
|
2006
|
0
|
-
|
0
|
|
|
2007
|
0
|
31.42
|
196,500
|
|
|
2008
|
0
|
28.08
|
93,500
|
|
|
Total
|
2,500,000
|
17.52
|
2,211,481
|
288,519
|
*Repurchased
shares and average prices have been restated to reflect stock dividends that
have occurred; however, board authorized shares have not been
adjusted.
Interest
Rate Risk
We consider interest rate risk one of
our most significant market risks. Interest rate risk is the exposure to adverse
changes in net interest income due to changes in interest
rates. Consistency of our net interest revenue is largely dependent
upon the effective management of interest rate risk. We employ a
variety of measurement techniques to identify and manage our 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 changes 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.
CTBI’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. Our current exposure to interest
rate risks is determined by measuring the anticipated change in net interest
income spread evenly over the twelve-month period.
The following table shows our estimated
earnings sensitivity profile as of December 31, 2008:
|
Change
in Interest Rates
(basis
points)
|
Percentage
Change in Net Interest Income
(12
Months)
|
|
+300
|
7.12%
|
|
+200
|
4.54%
|
|
+100
|
2.21%
|
|
-25
|
(0.64)%
|
The following table shows CTBI’s
estimated earnings sensitivity profile as of December 31, 2007:
|
Change
in Interest Rates
(basis
points)
|
Percentage
Change in Net Interest Income
(12
Months)
|
|
+300
|
6.75%
|
|
+200
|
4.58%
|
|
+100
|
2.35%
|
|
-100
|
(2.46)%
|
|
-200
|
(5.05)%
|
|
-300
|
(7.76)%
|
The simulation model used the yield
curve spread evenly over a twelve-month period. The measurement at
December 31, 2008 estimates that our net interest income in an up-rate
environment would increase by 7.12% at a 300 basis point change, 4.54% increase
at a 200 basis point change, and a 2.21% increase at a 100 basis point
change. In a down-rate environment, a 25 basis point decrease in
interest rates would decrease net interest income by 0.64% over one
year. In order to reduce the exposure to interest rate fluctuations
and to manage liquidity, we have developed sale procedures for several types of
interest-sensitive assets. Virtually 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 2008 and 2007, $83.7 million and $74.6 million,
respectively, was realized on the sale of fixed rate residential
mortgages. We focus our efforts on consistent net interest revenue
and net interest margin growth through each of the retail and wholesale business
lines. We do not currently engage in trading activities.
The preceding analysis was prepared
using a rate ramp analysis which attempts to spread changes evenly over a
specified time period as opposed to a rate shock which measures the impact of an
immediate change. Had these measurements been prepared using the rate
shock method, the results would vary.
Our Static Repricing GAP as of December
31, 2008 is presented below. In the 12 month repricing GAP, rate
sensitive liabilities (“RSL”) exceeded rate sensitive assets (“RSA”) by $100.5
million.
|
1-3
Months
|
4-6
Months
|
7-9
Months
|
10-12
Months
|
2-3
Years
|
4-5
Years
|
>
5
Years
|
||||||||||||||||||||||
|
Assets
|
$ | 1,278,426 | $ | 201,196 | $ | 153,860 | $ | 136,052 | $ | 586,295 | $ | 182,178 | $ | 416,524 | ||||||||||||||
|
Liabilities
and
equity
|
682,546 | 286,849 | 321,370 | 579,314 | 672,273 | 17,943 | 394,236 | |||||||||||||||||||||
|
Repricing
difference
|
595,880 | (85,654 | ) | (167,510 | ) | (443,262 | ) | (85,977 | ) | 164,235 | 22,288 | |||||||||||||||||
|
Cumulative
GAP
|
595,880 | 510,227 | 342,716 | (100,546 | ) | (186,523 | ) | (22,288 | ) | 0 | ||||||||||||||||||
|
RSA/RSL
|
1.87 | x | 0.70 | x | 0.48 | x | 0.23 | x | 0.87 | x | 10.15 | x | 1.06 | x | ||||||||||||||
|
Cumulative
GAP to total assets
|
20.17 | % | 17.27 | % | 11.60 | % | (3.40 | )% | (6.31 | )% | (0.75 | )% | 0.00 | % | ||||||||||||||
Capital
Resources
We continue to grow our shareholders’
equity while also providing an average annual dividend yield during 2008 of
3.18% to shareholders. Shareholders’ equity increased 3.2% from
December 31, 2007 to $308.2 million at December 31, 2008. Our primary
source of capital growth is the retention of earnings. Cash dividends
were $1.17 per share for 2008 and $1.10 per share for 2007. We
retained 24.0% of our earnings in 2008 compared to 54.5% in 2007.
Regulatory guidelines require bank
holding companies, commercial banks, and savings banks to maintain certain
minimum capital ratios and define companies as “well-capitalized” that
sufficiently exceed the minimum ratios. The banking regulators may
alter minimum capital requirements as a result of revising their internal
policies and their ratings of individual institutions. To be
“well-capitalized” banks and bank holding companies must maintain a Tier 1
leverage ratio of no less than 5.0%, a Tier 1 risk based ratio of no less than
6.0%, and a total risk based ratio of no less than 10.0%. Our ratios
as of December 31, 2008 were 10.37%, 13.05%, and 14.30%, respectively, all
exceeding the threshold for meeting the definition of
“well-capitalized.” See note 19 to the consolidated financial
statements for further information.
As of December 31, 2008 we are 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 our liquidity, capital resources, or operations,
except as noted in the Recent Regulatory Developments section
below.
Recent
Regulatory Developments
The following is a summary of recently
enacted laws and regulations that could materially impact CTBI's results of
operations or financial condition. This discussion is qualified in
its entirety by reference to such laws and regulation.
On October 3, 2008, President Bush
signed into law the Emergency Economic Stabilization Act of 2008 (the “EESA”)
enacted by the U.S. Congress in response to the financial crises affecting the
banking system and financial markets and going concern threats to investment
banks and other financial institutions. Pursuant to the EESA, the
U.S. Department of Treasury (“U.S. Treasury”) has the authority to, among other
things, purchase up to $700 billion of mortgages, mortgage-backed
securities, and certain other financial instruments from financial institutions
for the purpose of stabilizing and providing liquidity to the U.S. financial
markets. The EESA also included a provision to increase the amount of
deposits insured by the Federal Deposit Insurance Corporation (“FDIC”) to
$250,000.
On October 14, 2008, the U.S
Treasury announced the Troubled Asset Relief Program Capital Purchase Program
(the “TARP Capital Purchase Program”). This
program would make $250 billion of capital available to U.S. financial
institutions from the $700 billion authorized by the EESA in the form of
preferred stock investments by the U.S. Treasury under the following general
terms:
|
Ø
|
the
preferred stock issued to the U.S. Treasury (“Treasury Preferred Stock”)
would pay 5% dividends for the first five years, and then 9% dividends
thereafter;
|
|
Ø
|
in
connection with the purchase of preferred stock, the U.S. Treasury will
receive warrants entitling the U.S. Treasury to buy the participating
institution’s common stock with a market price equal to 15% of the
Treasury Preferred Stock;
|
|
Ø
|
the
Treasury Preferred Stock may not be redeemed for a period of three years,
except with proceeds from high-quality private capital;
|
|
Ø
|
the
consent of the U.S. Treasury will be required to increase common dividends
per share or any share repurchases, with limited exceptions, during the
first three years, unless the Treasury Preferred Stock has been redeemed
or transferred to third parties; and
|
|
Ø
|
participating
companies must adopt the U.S Treasury’s standards for executive
compensation and corporate governance for the period during which the U.S.
Treasury holds the equity issued under the TARP Capital
Purchase Program.
|
CTBI announced on January 16, 2009 that
it had elected not to participate in the Treasury Department’s Capital Purchase
Program. CTBI had received preliminary approval on December 17,
2008 from the U. S. Department of Treasury to receive $68 million by
participating in the Treasury’s Capital Purchase Program. The
Treasury’s Capital Purchase Program is a voluntary program designed to help
institutions build capital to support the U. S. economy. CTBI
currently maintains a capital level significantly exceeding regulatory
guidelines for a well-capitalized institution and is meeting the lending needs
of our customers. Considering our current capital position and the
requirements the program would impose on our business, we believe that our
participation in the program would not be in the best interests of our
shareholders.
Also on October 14, 2008, the FDIC
announced a new program – the Temporary Liquidity Guarantee Program – that
provides unlimited deposit insurance on funds in non-interest-bearing
transaction deposit accounts not otherwise covered by the existing deposit
insurance limit of $250,000, as well as a 100% guarantee of the senior debt of
all FDIC-insured institutions and their holding companies. All eligible
institutions were covered under the program for the first 30 days without
incurring any costs. After the initial period, participating
institutions have been assessed a charge of 10 basis points per annum for the
additional insured deposits and a charge of 75 basis points per annum for
guaranteed senior unsecured debt.
CTBI elected to participate in the
unlimited deposit insurance for noninterest bearing deposits beyond the initial
30-day period and opt out of the coverage for senior unsecured
debt.
Proposed legislation may create an
environment that will unreasonably delay the collection of past due amounts,
result in restructurings and collection of less than the full amount due to CTBI
and impede our ability to make new residential loans. In addition, as
a result of the weakness of certain financial institutions, the FDIC has taken
action that will result in increased FDIC insurance assessments for United
States FDIC-insured financial institutions, including CTBI. Under the
deposit insurance restoration plan approved by the FDIC in October 2008, the
Board set a rate schedule to raise the insurance reserve ratio to 1.15 percent
within five years. On February 27, 2009, the FDIC announced that the
restoration plan horizon has been extended to seven years in light of the
current significant strains on banks and the financial system and the likelihood
of a severe recession. In addition, the FDIC announced a special assessment of
up to 20 basis points to be collected on September 30, 2009. The FDIC
may also impose an emergency special assessment after June 30, 2009 of up to 10
basis points if the FDIC deems that an additional special assessment in
necessary to maintain public confidence in federal deposit
insurance. Based on the FDIC insurance premium schedule for
2009, we anticipate our premiums, exclusive of the special assessment of up to
20 basis points, to be $2.2 million for 2009 compared to $0.3 million for
2008. The special assessment at the maximum 20 basis points based on
our deposit base at December 31, 2008 would be $4.6 million.
Impact
of Inflation, Changing Prices, and Economic Conditions
The majority of our assets and
liabilities are monetary in nature. Therefore, CTBI differs greatly from most
commercial and industrial companies that have significant investment in
nonmonetary assets, such as fixed assets and inventories. However,
inflation does have an important impact on the growth of assets in the banking
industry and on the resulting need to increase equity capital at higher than
normal rates in order to maintain an appropriate equity to assets
ratio. Inflation also affects other expenses, which tend to rise
during periods of general inflation.
We believe one of the most significant
impacts on financial and operating results is our ability to react to changes in
interest rates. We seek to maintain an essentially balanced position
between interest rate sensitive assets and liabilities in order to protect
against the effects of wide interest rate fluctuations.
Our success is dependent on the general
economic conditions of the communities we serve. Unlike larger banks
that are more geographically diversified, we provide financial and banking
services primarily to eastern, northeastern, central, and south central Kentucky
and southern West Virginia. The economic conditions in these areas have a
significant impact on loan demand, the ability of borrowers to repay loans, and
the value of the collateral securing loans. A significant decline in
general economic conditions 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.
The national and global economic
downturn has resulted in unprecedented levels of financial market volatility and
has in general adversely impacted the market value of financial institutions,
limited access to capital and had an adverse effect on the financial condition
and results of operations of banking companies in general, including
CTBI. Although CTBI operated at a profit last year, CTBI is a part of
the financial system and a continuation of systemic lack of available credit,
lack of confidence in the financial sector, increased volatility in the
financial markets, and reduced business activity could materially and adversely
impact CTBI’s business, financial condition and results of
operations.
Contractual
Obligations and Commitments
As disclosed in the notes to the
consolidated financial statements, we have certain obligations and commitments
to make future payments under contracts. At December 31, 2008, 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
|
$ | 1,087,140 | $ | 1,087,140 | $ | 0 | $ | 0 | ||||||||
|
Certificates
of deposit and other time deposits
|
1,244,694 | 1,141,492 | 101,845 | 1,357 | ||||||||||||
|
Repurchase
agreements and other short-term borrowings
|
168,914 | 161,562 | 7,352 | 0 | ||||||||||||
|
Advances
from Federal Home Loan Bank
|
60,727 | 60,056 | 641 | 30 | ||||||||||||
|
Interest
on advances from Federal Home Loan Bank*
|
1,428 | 1,419 | 6 | 3 | ||||||||||||
|
Long-term
debt
|
61,341 | 0 | 0 | 61,341 | ||||||||||||
|
Interest
on long-term debt*
|
113,984 | 3,999 | 15,998 | 93,987 | ||||||||||||
|
Annual
rental commitments under leases
|
11,335 | 1,692 | 5,025 | 4,618 | ||||||||||||
|
Total
|
$ | 2,749,563 | $ | 2,457,360 | $ | 130,867 | $ | 161,336 | ||||||||
*The
amounts provided as interest on advances from Federal Home Loan Bank and
interest on long-term debt assume the liabilities will not be prepaid and
interest is calculated to their individual maturities.
|
Other
Commitments:
|
Amount
of Commitment - Expiration by Period
|
|||||||||||||||
|
(in
thousands)
|
Total
|
1
Year
|
2-5
Years
|
After
5 Years
|
||||||||||||
|
Standby
letters of credit
|
$ | 57,493 | $ | 52,066 | $ | 5,427 | $ | 0 | ||||||||
|
Commitments
to extend credit
|
424,258 | 334,020 | 85,101 | 5,137 | ||||||||||||
|
Total
|
$ | 481,751 | $ | 386,086 | $ | 90,528 | $ | 5,137 | ||||||||
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.
CTBI currently does not engage in any
hedging activity or any derivative activity which management considers
material. Analysis of CTBI’s interest rate sensitivity can be found
in the Liquidity and Market Risk section of Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
Community
Trust Bancorp, Inc.
Consolidated
Balance Sheets
|
(dollars
in thousands)
December
31
|
2008
|
2007
|
||||||
|
Assets:
|
||||||||
|
Cash
and due from banks
|
$ | 95,098 | $ | 105,209 | ||||
|
Federal
funds sold
|
45,880 | 32,041 | ||||||
|
Cash
and cash equivalents
|
140,978 | 137,250 | ||||||
|
Securities
available-for-sale at fair value
|
||||||||
|
(amortized
cost of $265,999 and $325,879, respectively)
|
267,376 | 324,153 | ||||||
|
Securities
held-to-maturity at amortized cost
|
||||||||
|
(fair
value of $25,496 and $32,350, respectively)
|
25,597 | 32,959 | ||||||
|
Loans
held for sale
|
623 | 2,334 | ||||||
|
Loans
|
2,348,651 | 2,227,897 | ||||||
|
Allowance
for loan losses
|
(30,821 | ) | (28,054 | ) | ||||
|
Net
loans
|
2,317,830 | 2,199,843 | ||||||
|
Premises
and equipment, net
|
51,590 | 53,391 | ||||||
|
Federal
Reserve Bank and Federal Home Loan Bank stock
|
29,040 | 28,060 | ||||||
|
Goodwill
|
65,059 | 65,059 | ||||||
|
Core
deposit intangible (net of accumulated amortization of $6,222
and
|
||||||||
|
$5,588,
respectively)
|
1,282 | 1,917 | ||||||
|
Bank
owned life insurance
|
24,135 | 23,285 | ||||||
|
Mortgage
servicing rights
|
2,168 | 3,258 | ||||||
|
Other
assets
|
28,853 | 31,175 | ||||||
|
Total
assets
|
$ | 2,954,531 | $ | 2,902,684 | ||||
|
Liabilities
and shareholders’ equity:
|
||||||||
|
Deposits
|
||||||||
|
Noninterest
bearing
|
$ | 450,360 | $ | 449,861 | ||||
|
Interest
bearing
|
1,881,474 | 1,843,303 | ||||||
|
Total
deposits
|
2,331,834 | 2,293,164 | ||||||
|
Repurchase
agreements
|
157,422 | 158,980 | ||||||
|
Federal
funds purchased and other short-term borrowings
|
11,492 | 18,364 | ||||||
|
Advances
from Federal Home Loan Bank
|
60,727 | 40,906 | ||||||
|
Long-term
debt
|
61,341 | 61,341 | ||||||
|
Other
liabilities
|
23,509 | 28,574 | ||||||
|
Total
liabilities
|
2,646,325 | 2,601,329 | ||||||
|
Shareholders’
equity:
|
||||||||
|
Preferred
stock, 300,000 shares authorized and unissued
|
- | - | ||||||
|
Common
stock, $5 par value, shares authorized 25,000,000;
|
||||||||
|
shares
outstanding 2008 – 15,066,248; 2007 – 15,044,124
|
75,331 | 75,221 | ||||||
|
Capital
surplus
|
150,037 | 149,005 | ||||||
|
Retained
earnings
|
81,943 | 78,251 | ||||||
|
Accumulated
other comprehensive income (loss), net of tax
|
895 | (1,122 | ) | |||||
|
Total
shareholders’ equity
|
308,206 | 301,355 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 2,954,531 | $ | 2,902,684 | ||||
See notes
to consolidated financial statements.
Consolidated
Statements of Income
|
(in
thousands except per share data)
Year
Ended December 31
|
2008
|
2007
|
2006
|
|||||||||
|
Interest
income:
|
||||||||||||
|
Interest
and fees on loans, including loans held for sale
|
$ | 150,221 | $ | 171,307 | $ | 163,194 | ||||||
|
Interest
and dividends on securities
|
||||||||||||
|
Taxable
|
12,635 | 17,384 | 18,916 | |||||||||
|
Tax
exempt
|
1,869 | 1,915 | 2,064 | |||||||||
|
Interest
and dividends on Federal Reserve Bank and Federal Home
|
||||||||||||
|
Loan
Bank stock
|
1,559 | 1,794 | 1,588 | |||||||||
|
Other,
including interest on federal funds sold
|
1,327 | 4,464 | 3,543 | |||||||||
|
Total
interest income
|
167,611 | 196,864 | 189,305 | |||||||||
|
Interest
expense:
|
||||||||||||
|
Interest
on deposits
|
53,849 | 75,637 | 63,856 | |||||||||
|
Interest
on repurchase agreements and other short-term borrowings
|
4,424 | 8,429 | 8,620 | |||||||||
|
Interest
on advances from Federal Home Loan Bank
|
1,701 | 2,402 | 3,648 | |||||||||
|
Interest
on long-term debt
|
4,000 | 4,364 | 5,414 | |||||||||
|
Total
interest expense
|
63,974 | 90,832 | 81,538 | |||||||||
|
Net
interest income
|
103,637 | 106,032 | 107,767 | |||||||||
|
Provision
for loan losses
|
11,452 | 6,540 | 4,305 | |||||||||
|
Net
interest income after provision for loan losses
|
92,185 | 99,492 | 103,462 | |||||||||
|
Noninterest
income:
|
||||||||||||
|
Service
charges on deposit accounts
|
21,886 | 21,003 | 20,162 | |||||||||
|
Gains
on sales of loans, net
|
1,583 | 1,338 | 1,265 | |||||||||
|
Trust
income
|
4,929 | 4,859 | 3,743 | |||||||||
|
Loan
related fees
|
2,045 | 3,196 | 2,473 | |||||||||
|
Bank
owned life insurance
|
1,008 | 1,108 | 1,035 | |||||||||
|
Securities
losses/other than temporary impairment
|
(14,564 | ) | 0 | 0 | ||||||||
|
Other
|
4,880 | 5,104 | 3,881 | |||||||||
|
Total
noninterest income
|
21,767 | 36,608 | 32,559 | |||||||||
|
Noninterest
expense:
|
||||||||||||
|
Salaries
and employee benefits
|
42,223 | 42,298 | 44,145 | |||||||||
|
Occupancy,
net
|
6,787 | 6,713 | 6,420 | |||||||||
|
Equipment
|
4,356 | 4,896 | 5,047 | |||||||||
|
Data
processing
|
5,634 | 4,951 | 3,733 | |||||||||
|
Bank
franchise tax
|
3,596 | 3,464 | 3,261 | |||||||||
|
Legal
and professional fees
|
3,066 | 3,178 | 2,816 | |||||||||
|
Other
|
16,870 | 17,555 | 14,985 | |||||||||
|
Total
noninterest expense
|
82,532 | 83,055 | 80,407 | |||||||||
|
Income
before income taxes
|
31,420 | 53,045 | 55,614 | |||||||||
|
Income
taxes
|
8,347 | 16,418 | 16,550 | |||||||||
|
Net
income
|
$ | 23,073 | $ | 36,627 | $ | 39,064 | ||||||
|
Basic
earnings per share
|
$ | 1.54 | $ | 2.42 | $ | 2.59 | ||||||
|
Diluted
earnings per share
|
1.52 | 2.38 | 2.55 | |||||||||
See notes
to consolidated financial statements.
Consolidated
Statements of Changes in Shareholders’ Equity
|
(in
thousands except per share and share amounts)
|
Common
Shares
|
Common
Stock
|
Capital
Surplus
|
Retained
Earnings
|
Accumulated
Other Comprehensive Income (Loss), Net of Tax
|
Total
|
||||||||||||||||||
|
Balance,
January 1, 2006
|
14,997,369 | $ | 74,987 | $ | 147,626 | $ | 35,667 | $ | (4,335 | ) | $ | 253,945 | ||||||||||||
|
Net
income
|
39,064 | 39,064 | ||||||||||||||||||||||
|
Net
change in unrealized gain/loss on securities available-for-sale, net of
tax of ($579)
|
1,075 | 1,075 | ||||||||||||||||||||||
|
Comprehensive
income
|
40,139 | |||||||||||||||||||||||
|
Cash
dividends declared ($1.05 per share)
|
(15,852 | ) | (15,852 | ) | ||||||||||||||||||||
|
Issuance
of common stock
|
160,807 | 804 | 2,378 | 3,182 | ||||||||||||||||||||
|
Stock-based
compensation and related excess tax benefits
|
961 | 961 | ||||||||||||||||||||||
|
Balance,
December 31, 2006
|
15,158,176 | 75,791 | 150,965 | 58,879 | (3,260 | ) | 282,375 | |||||||||||||||||
|
Net
income
|
36,627 | 36,627 | ||||||||||||||||||||||
|
Net
change in unrealized gain/loss on securities available-for-sale, net of
tax of ($1,152)
|
2,138 | 2,138 | ||||||||||||||||||||||
|
Comprehensive
income
|
38,765 | |||||||||||||||||||||||
|
Cumulative
effect – application of new accounting standards (SFAS 156 and FIN
48)
|
(621 | ) | (621 | ) | ||||||||||||||||||||
|
Cash
dividends declared ($1.10 per share)
|
(16,634 | ) | (16,634 | ) | ||||||||||||||||||||
|
Issuance
of common stock
|
82,448 | 412 | 2,348 | 2,760 | ||||||||||||||||||||
|
Purchase
of common stock
|
(196,500 | ) | (982 | ) | (5,203 | ) | (6,185 | ) | ||||||||||||||||
|
Stock-based
compensation and related excess tax benefits
|
895 | 895 | ||||||||||||||||||||||
|
Balance,
December 31, 2007
|
15,044,124 | 75,221 | 149,005 | 78,251 | (1,122 | ) | 301,355 | |||||||||||||||||
|
Net
income
|
23,073 | 23,073 | ||||||||||||||||||||||
|
Net
change in unrealized gain/loss on securities available-for-sale, net of
tax of ($1,086)
|
2,017 | 2,017 | ||||||||||||||||||||||
|
Comprehensive
income
|
25,090 | |||||||||||||||||||||||
|
Cumulative
effect – application of new accounting standards (EITF
06-4)
|
(1,820 | ) | (1,820 | ) | ||||||||||||||||||||
|
Cash
dividends declared ($1.17 per share)
|
(17,561 | ) | (17,561 | ) | ||||||||||||||||||||
|
Issuance
of common stock
|
115,624 | 578 | 2,153 | 2,731 | ||||||||||||||||||||
|
Purchase
of common stock
|
(93,500 | ) | (468 | ) | (2,163 | ) | (2,631 | ) | ||||||||||||||||
|
Stock-based
compensation and related excess tax benefits
|
1,042 | 1,042 | ||||||||||||||||||||||
|
Balance,
December 31, 2008
|
15,066,248 | $ | 75,331 | $ | 150,037 | $ | 81,943 | $ | 895 | $ | 308,206 | |||||||||||||
See notes
to consolidated financial statements.
Consolidated
Statements of Cash Flows
|
(in
thousands)
Year
Ended December 31
|
2008
|
2007
|
2006
|
|||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 23,073 | $ | 36,627 | $ | 39,064 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
5,106 | 5,665 | 5,819 | |||||||||
|
Change
in net deferred tax liability
|
(5,329 | ) | 955 | 4,193 | ||||||||
|
Stock-based
compensation
|
712 | 649 | 711 | |||||||||
|
Excess
tax benefits of stock-based compensation
|
330 | 245 | 250 | |||||||||
|
Provision
for loan and other real estate losses
|
11,718 | 6,979 | 4,616 | |||||||||
|
Securities
losses/other than temporary impairment charges
|
14,564 | 0 | 0 | |||||||||
|
Gains
on sale of mortgage loans held for sale
|
(1,584 | ) | (1,338 | ) | (1,265 | ) | ||||||
|
Gains
(losses) on sale of assets, net
|
370 | 65 | (5 | ) | ||||||||
|
Proceeds
from sale of mortgage loans held for sale
|
83,678 | 74,578 | 64,943 | |||||||||
|
Funding
of mortgage loans held for sale
|
(80,383 | ) | (74,143 | ) | (64,974 | ) | ||||||
|
Amortization
of securities premiums, net
|
(156 | ) | 518 | 957 | ||||||||
|
Change
in cash surrender value of bank owned life insurance
|
(850 | ) | (957 | ) | (868 | ) | ||||||
|
Amortization/impairment
of mortgage servicing rights
|
0 | 0 | 591 | |||||||||
|
Fair
value adjustments of mortgage servicing rights
|
1,503 | 558 | 0 | |||||||||
|
Amortization/write-off
of debt issuance costs
|
0 | 1,950 | 87 | |||||||||
|
Changes
in:
|
||||||||||||
|
Other
liabilities
|
(2,471 | ) | (504 | ) | 4,401 | |||||||
|
Other
assets
|
4,481 | (851 | ) | (2,787 | ) | |||||||
|
Net
cash provided by operating activities
|
54,762 | 50,996 | 55,733 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Securities
available-for-sale:
|
||||||||||||
|
Proceeds
from sales
|
30,100 | 130,400 | 128,900 | |||||||||
|
Proceeds
from prepayments and maturities
|
72,597 | 48,315 | 58,754 | |||||||||
|
Purchase
of securities
|
(57,271 | ) | (74,177 | ) | (218,446 | ) | ||||||
|
Securities
held-to-maturity:
|
||||||||||||
|
Proceeds
from prepayments and maturities
|
7,408 | 7,481 | 7,800 | |||||||||
|
Proceeds
from sale of loans
|
0 | 0 | 105 | |||||||||
|
Change
in loans, net
|
(136,464 | ) | (73,690 | ) | (68,573 | ) | ||||||
|
Purchase
of premises, equipment, and other real estate
|
(3,184 | ) | (2,757 | ) | (3,197 | ) | ||||||
|
Proceeds
from sale of premises and equipment
|
14 | 18 | 378 | |||||||||
|
Additional
investment in equity securities
|
(980 | ) | (33 | ) | 0 | |||||||
|
Redemption
of investment in unconsolidated subsidiaries
|
0 | 1,841 | 0 | |||||||||
|
Investment
in unconsolidated subsidiaries
|
0 | (1,841 | ) | 0 | ||||||||
|
Proceeds
from sale of other real estate and repossessed assets
|
4,447 | 3,173 | 2,821 | |||||||||
|
Additions
in other real estate owned
|
(130 | ) | (21 | ) | (73 | ) | ||||||
|
Additional
investment in bank owned life insurance
|
0 | (1,391 | ) | 0 | ||||||||
|
Net
cash provided by (used in) investing activities
|
(83,463 | ) | 37,318 | (91,636 | ) | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Change
in deposits, net
|
38,670 | (48,003 | ) | 94,616 | ||||||||
|
Change
in repurchase agreements and other short-term borrowings,
net
|
(8,430 | ) | (226 | ) | 30,929 | |||||||
|
Advances
from Federal Home Loan Bank
|
20,000 | 0 | 0 | |||||||||
|
Payments
on advances from Federal Home Loan Bank
|
(179 | ) | (40,339 | ) | (41,589 | ) | ||||||
|
Payment
for redemption of junior subordinated debentures
|
0 | (61,341 | ) | 0 | ||||||||
|
Issuance
of junior subordinated debentures
|
0 | 61,341 | 0 | |||||||||
|
Issuance
of common stock
|
2,731 | 2,760 | 3,182 | |||||||||
|
Purchase
of common stock
|
(2,631 | ) | (6,185 | ) | 0 | |||||||
|
Excess
tax benefits of stock-based compensation
|
(330 | ) | (245 | ) | (250 | ) | ||||||
|
Dividends
paid
|
(17,402 | ) | (16,364 | ) | (15,658 | ) | ||||||
|
Net
cash provided by (used in) financing activities
|
32,429 | (108,602 | ) | 71,230 | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
3,728 | (20,288 | ) | 35,327 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
137,250 | 157,538 | 122,211 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 140,978 | $ | 137,250 | $ | 157,538 | ||||||
|
Supplemental
disclosures:
|
||||||||||||
|
Income
taxes paid
|
$ | 16,428 | $ | 10,913 | $ | 13,763 | ||||||
|
Interest
paid
|
65,240 | 91,237 | 79,624 | |||||||||
|
Non-cash
activities
|
||||||||||||
|
Loans
to facilitate the sale of other real estate owned and other repossessed
assets
|
970 | 730 | 713 | |||||||||
|
Common
stock dividends accrued, paid in subsequent quarter
|
4,523 | 4,363 | 4,093 | |||||||||
|
Real
estate acquired in settlement of loans
|
7,995 | 7,488 | 2,784 | |||||||||
|
Other
than temporary impairment of investment securities
|
14,514 | 0 | 0 | |||||||||
See notes
to consolidated financial statements.
1. Accounting
Policies
Basis of Presentation – The
consolidated financial statements include Community Trust Bancorp, Inc. (“CTBI”)
and its subsidiaries, including its principal subsidiary, Community Trust Bank,
Inc. (the “Bank”). Intercompany transactions and accounts have been
eliminated in consolidation.
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, full service brokerage operations, and other
financing activities. All of our business offices and the majority of
our business are located in eastern, northeastern, central, and south central
Kentucky and southern West Virginia.
Use of Estimates – 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 and lease losses, fair value of securities and
mortgage servicing rights, and goodwill (the excess of cost over net assets
acquired).
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.
Investments – Management determines
the classification of securities at purchase. We classify securities
into held-to-maturity, trading, or available-for-sale
categories. Held-to-maturity securities are those which we have the
positive intent and ability to hold to maturity and are reported at amortized
cost. In accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 115, Accounting
for Certain Investments in Debt and Equity Securities, investments in
debt securities that are not classified as held-to-maturity and equity
securities that have readily determinable fair values shall be classified in one
of the following categories and measured at fair value in the statement of
financial position:
a. Trading securities.
Securities that are bought and held principally for the purpose of selling them
in the near term (thus held for only a short period of time) shall be classified
as trading securities.
Trading generally reflects active and frequent buying and selling, and trading
securities are generally used with the objective of generating profits on
short-term differences in price.
b. Available-for-sale
securities. Investments not classified as trading securities (nor as
held-to-maturity securities) shall be classified as available-for-sale
securities.
We do not
have any securities that are classified as trading
securities. Available-for-sale securities are reported at fair value,
with unrealized gains and losses included as a separate component of
shareholders’ equity, net of tax. If declines in fair value are not
temporary, the carrying value of the securities is written down to fair value as
a realized loss.
Gains or losses on disposition of
securities are computed by specific identification for all securities except for
shares in mutual funds, which are computed by average cost. Interest
and dividend income, adjusted by amortization of purchase premium or discount,
is included in earnings.
Available-for-Sale Securities –
Available-for-sale securities are valued using the following valuation
techniques:
Securities Available-for-Sale –
Level 2 Inputs. For these securities, CTBI obtains fair value
measurements from an independent pricing service. The fair value measurements
consider observable data that may include dealer quotes, market spreads, cash
flows, the U.S. Treasury yield curve, live trading levels, trade execution data,
market consensus prepayment speeds, credit information and the bond's terms and
conditions, among other things.
Securities Available-for-Sale –
Level 3 Inputs. The securities owned by CTBI that were
measured using Level 3 criteria are auction rate securities issued by FNMA and
FHLMC. These securities were valued using an independent third
party. For these securities, the valuation methods used were (1) a
discounted cash flow model valuation, where the expected cash flows of the
securities are discounted to the present using a yield that incorporates
compensation for illiquidity and (2) a market comparables method, where the
securities are valued based on indications, from the secondary market, of what
discounts buyers demand when purchasing similar securities. Using
these methods, the auction rate securities are classified as Level
3.
Loans – Loans with the ability
and the intent to be held until maturity and/or payoff are reported at the
carrying value of unpaid principal reduced by unearned interest and an allowance
for loan and lease 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.
Loan origination and commitment fees
and certain direct loan origination costs are deferred and the net amount
amortized over the estimated life of the related loans, leases, or commitments
as a yield adjustment.
Allowance for Loan and Lease Losses
– We
maintain an allowance for loan and lease losses (“ALLL”) at a level that is
appropriate to cover estimated credit losses on individually evaluated loans
determined to be impaired, as well as estimated credit losses inherent in the
remainder of the loan and lease portfolio. Since arriving at an
appropriate ALLL involves a high degree of management judgment, we use an
ongoing quarterly analysis to develop a range of estimated losses. In
accordance with accounting principles generally accepted in the United States,
we use our best estimate within the range of potential credit loss to determine
the appropriate ALLL. Credit losses are charged and recoveries are
credited to the ALLL.
We utilize an internal risk grading
system for commercial credits. Those larger commercial credits that
exhibit probable or observed credit weaknesses are subject to individual
review. The borrower’s cash flow, adequacy of collateral coverage,
and other options available to CTBI, including legal remedies, are
evaluated. The review of individual loans includes those loans that
are impaired as SFAS 114, Accounting by Creditors for
Impairment of a Loan. We evaluate the collectibility of both
principal and interest when assessing the need for loss
provision. Historical loss rates are applied to other commercial
loans not subject to specific allocations. The ALLL allocation for
this pool of commercial loans is established based on the historical average,
maximum, minimum, and median loss ratios.
Homogenous loans, such as consumer
installment, residential mortgages, and home equity lines are not individually
risk graded. The associated ALLL for these loans is measured under
SFAS 5, Accounting for
Contingencies. The ALLL allocation for these pools of loans is
established based on the average, maximum, minimum, and median loss ratios over
the previous eight quarters.
Historical loss rates for commercial
and retail loans are adjusted for significant factors that, in management’s
judgment, reflect the impact of any current conditions on loss
recognition. Factors that we consider include delinquency trends,
current economic conditions and trends, strength of supervision and
administration of the loan portfolio, levels of underperforming loans, level of
recoveries to prior year's charge offs, trend in loan losses, industry
concentrations and their relative strengths, amount of unsecured loans and
underwriting exceptions. These factors are reviewed quarterly and a
weighted range developed with a “most likely” scenario
determined. The total of each of these weighted factors is then
applied against the applicable portion of the portfolio and the ALLL is adjusted
accordingly.
Loans Held for Sale – 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.
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. Premises and
equipment are evaluated for impairment on a quarterly basis.
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. Other real estate owned by CTBI included
in other assets at December 31, 2008 and 2007 was $10.4 million and $7.9
million, respectively.
Goodwill and Core Deposit Intangible
– We
evaluate total goodwill and core deposit intangible for impairment, based upon
SFAS 142, Goodwill and Other
Intangible Assets and SFAS 147, Acquisitions of Certain Financial
Institutions, using fair value techniques including multiples of
price/equity. Goodwill and core deposit intangible are evaluated for
impairment on an annual basis or as other events may warrant.
Amortization of core deposit intangible
is estimated at approximately $0.6 million annually for year one, approximately
$0.4 million in year two, and approximately $0.1 million in years three and
four.
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”) –
Basic EPS is calculated by dividing net income available to common shareholders
by the weighted average number of common shares outstanding, excluding
restricted shares.
Diluted EPS adjusts the number of
weighted average shares of common stock outstanding by the dilutive effect of
stock options, including restricted shares, as prescribed in SFAS
123R.
Segments – Management analyzes
the operation of CTBI assuming one operating segment, community banking
services. CTBI, through its operating subsidiaries, offers a wide
range of consumer and commercial community banking services. These
services include: (i) residential and commercial real estate loans; (ii)
checking accounts; (iii) regular and term savings accounts and savings
certificates; (iv) full service securities brokerage services; (v) consumer
loans; (vi) debit cards; (vii) annuity and life insurance products; (viii)
Individual Retirement Accounts and Keogh plans; (ix) commercial loans; (x) trust
services; and (xi) commercial demand deposit accounts.
Bank Owned Life Insurance –
CTBI's bank owned life insurance policies are carried at their cash
surrender value. We recognize tax-free income from the periodic
increases in cash surrender value of these policies and from death
benefits.
Mortgage Servicing Rights – Mortgage servicing
rights (“MSRs”) are carried at fair market value with the implementation of SFAS
156 in January 2007. MSRs are valued using Level 3 inputs as defined
in SFAS 157. The fair value is determined quarterly based on an
independent third-party valuation using a discounted cash flow analysis and
calculated using a computer pricing model. The computer valuation is
based on key economic assumptions including the prepayment speeds of the
underlying loans, the weighted-average life of the loan, the discount rate, the
weighted-average coupon, and the weighted-average default rate, as
applicable. MSRs are a component of other assets. Along
with the gains received from the sale of loans, fees are received for servicing
loans. These fees include late fees, which are recorded in interest
income, and ancillary fees and monthly servicing fees, which are recorded in
noninterest income. Costs of servicing loans are charged to expense
as incurred. Changes in fair market value of the MSRs are reported as
an increase or decrease to mortgage banking income.
Stock Options – At December
31, 2008 and 2007, CTBI had a share-based employee compensation plan, which is
described more fully in note 13. CTBI accounts for this plan under
the recognition and measurement principles of SFAS 123R, Share-Based
Payment.
Reclassifications – Certain
reclassifications considered to be immaterial have been made in the prior year
consolidated financial statements to conform to current year
classifications. These reclassifications had no effect on net
income.
New Accounting Standards
–
Ø Determining the Fair Value of a
Financial Asset When the Market For That Asset is Not Active – FASB Staff
Position (“FSP”) No. FAS 157-3 clarifies the application of FASB No. 157, Fair Value Measurements, in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. This FSP was effective
October 10, 2008.
Ø Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities –
This FASB Staff Position No. EITF 03-6-1 addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share under the two-class method described in paragraphs
60 and 61 of FASB Statement No. 128, Earnings Per
Share. This FSP is effective January 1, 2009, and is not
expected to have a significant impact on our consolidated financial
statements.
Ø Fair Value Option for Financial
Assets and Financial Liabilities – In February 2007, the FASB issued SFAS
159, The Fair Value Option for
Financial Assets and Financial Liabilities, which permits entities to
choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement is expected to expand the
use of fair value measurement, which is consistent with the FASB’s long-term
measurement objectives for accounting for financial instruments. SFAS 159
is effective for fiscal years beginning after November 15, 2007. CTBI has not
elected the fair value option for any financial assets or
liabilities.
Ø Accounting for Income Tax Benefits of
Dividends on Share-Based Payment Awards – On June 14, 2007, the Emerging
Issues Task Force (“EITF”) reached a final consensus on Issue No. 06-11, Accounting for Income Tax Benefits
of Dividends on Share-Based Payment Awards. This consensus was
ratified by FASB on June 27, 2007. This issue states that tax
benefits received on dividends paid to employees associated with their unvested
stock compensation awards should be recorded in additional paid-in capital
(“APIC”) for awards expected to vest. Currently, such dividends are
accounted for as a permanent tax deduction reducing the annual effective income
tax rate. This issue is to be applied prospectively to dividends
declared in fiscal years beginning after December 15,
2007. Retrospective application of this Issue is
prohibited. Issue No. 06-11 did not have a material effect on our
consolidated financial statements.
Ø Business
Combinations (Revised 2007) – The FASB recently issued
SFAS 141(R), which replaces FAS 141, Business Combinations, and
applies to all transactions and other events in which one entity obtains control
over one or more other businesses. SFAS 141R requires an acquirer,
upon initially obtaining control of another entity, to recognize the assets,
liabilities, and any non-controlling interest in the acquiree at fair value as
of the acquisition date. Contingent consideration is required to be
recognized and measured at fair value on the date of acquisition rather than at
a later date when the amount of that consideration may be determinable beyond a
reasonable doubt. This fair value approach replaces the
cost-allocation process required under SFAS 141 whereby the cost of an
acquisition was allocated to the individual assets acquired and liabilities
assumed based on their estimated fair value. SFAS 141R requires
acquirers to expense acquisition-related costs as incurred rather than
allocating such costs to the assets acquired and liabilities assumed as was
previously the case under SFAS 141. Under SFAS 141R, the requirements
of SFAS 146, Accounting for
Costs Associated with Exit or Disposal Activities, would have to be met
in order to accrue for a restructuring plan in purchase
accounting. Pre-acquisition contingencies are to be recognized at
fair value, unless it is a non-contractual contingency that is not likely to
materialize, in which case, nothing should be recognized in purchase accounting,
and instead, that contingency would be subject to the probable and estimable
recognition criteria of SFAS 5, Accounting for
Contingencies. This Statement defines a bargain purchase as a
business combination in which the total acquisition date fair value of the
identifiable net assets acquired exceeds the fair value of the consideration
transferred plus any noncontrolling interest in the acquiree, and it requires
the acquirer to recognize that excess in earnings as a gain attributable to the
acquirer. In contrast, Statement 141 required the “negative goodwill” amount to
be allocated as a pro rata reduction of the amounts that otherwise would have
been assigned to particular assets acquired. SFAS 141R is expected to
have a significant impact on our accounting for business combinations closing on
or after January 1, 2009.
Ø Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance
Arrangements – EITF Issue
No. 06-4, Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split
Dollar Life Insurance Arrangements requires, effective January 1, 2008,
the recognition of a liability and related compensation expense for endorsement
split-dollar life insurance policies that provide a benefit to an employee that
extends to post-retirement periods. Under EITF 06-4, life insurance
policies purchased for the purpose of providing such benefits do not effectively
settle an entity’s obligation to the employee. Accordingly, the entity
must recognize a liability and related compensation expense during the
employee’s active service period based on the future cost of insurance to be
incurred during the employee’s retirement. If the entity has agreed to
provide the employee with a death benefit, then the liability for the future
death benefit should be recognized by following the guidance in SFAS 106,
Employer’s Accounting for
Postretirement Benefits Other Than Pensions. CTBI adopted
EITF 06-4 as a change in accounting principle through a $1.8 million
cumulative-effect adjustment to retained earnings based on the cost of
insurance.
2. 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 $41.3 million and $38.6
million at December 31, 2008 and 2007, respectively.
3. Securities
Amortized cost and fair value of
securities at December 31, 2008 are as follows:
Available-for-Sale
|
(in
thousands)
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
||||||||||||
|
U.S.
Treasury and government agencies
|
$ | 18,330 | $ | 576 | $ | 0 | $ | 18,906 | ||||||||
|
State
and political subdivisions
|
39,738 | 757 | (651 | ) | 39,844 | |||||||||||
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
187,390 | 1,305 | (390 | ) | 188,305 | |||||||||||
|
Collateralized
mortgage obligations
|
1 | 0 | 0 | 1 | ||||||||||||
|
Other
debt securities
|
20,000 | 0 | (220 | ) | 19,780 | |||||||||||
|
Total
debt securities
|
265,459 | 2,638 | (1,261 | ) | 266,836 | |||||||||||
|
Marketable
equity securities
|
540 | 0 | 0 | 540 | ||||||||||||
| $ | 265,999 | $ | 2,638 | $ | (1,261 | ) | $ | 267,376 | ||||||||
Held-to-Maturity
|
(in
thousands)
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
||||||||||||
|
State
and political subdivisions
|
$ | 1,576 | $ | 9 | $ | 0 | $ | 1,585 | ||||||||
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
24,021 | 0 | (110 | ) | 23,911 | |||||||||||
| $ | 25,597 | $ | 9 | $ | (110 | ) | $ | 25,496 | ||||||||
Amortized cost and fair value of
securities at December 31, 2007 are as follows:
Available-for-Sale
|
(in
thousands)
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
||||||||||||
|
U.S.
Treasury and government agencies
|
$ | 20,307 | $ | 429 | $ | 0 | $ | 20,736 | ||||||||
|
State
and political subdivisions
|
40,472 | 707 | (42 | ) | 41,137 | |||||||||||
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
205,049 | 446 | (2,953 | ) | 202,542 | |||||||||||
|
Collateralized
mortgage obligations
|
1 | 0 | 0 | 1 | ||||||||||||
|
Other
debt securities
|
20,000 | 0 | (313 | ) | 19,687 | |||||||||||
|
Total
debt securities
|
285,829 | 1,582 | (3,308 | ) | 284,103 | |||||||||||
|
Marketable
equity securities
|
40,050 | 0 | 0 | 40,050 | ||||||||||||
| $ | 325,879 | $ | 1,582 | $ | (3,308 | ) | $ | 324,153 | ||||||||
Held-to-Maturity
|
(in
thousands)
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
||||||||||||
|
State
and political subdivisions
|
$ | 1,901 | $ | 13 | $ | 0 | $ | 1,914 | ||||||||
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
31,058 | 0 | (622 | ) | 30,436 | |||||||||||
| $ | 32,959 | $ | 13 | $ | (622 | ) | $ | 32,350 | ||||||||
The amortized cost and fair value of
securities at December 31, 2008 by contractual maturity are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
|
Available-for-Sale
|
Held-to-Maturity
|
|||||||||||||||
|
(in
thousands)
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
||||||||||||
|
Due
in one year or less
|
$ | 16,473 | $ | 16,797 | $ | 0 | $ | 0 | ||||||||
|
Due
after one through five years
|
30,864 | 31,764 | 394 | 403 | ||||||||||||
|
Due
after five through ten years
|
2,663 | 2,571 | 0 | 0 | ||||||||||||
|
Due
after ten years
|
8,068 | 7,618 | 1,182 | 1,182 | ||||||||||||
|
Mortgage-backed
securities and collateralized mortgage obligations
|
187,390 | 188,305 | 24,021 | 23,911 | ||||||||||||
|
Other
securities
|
20,001 | 19,781 | 0 | 0 | ||||||||||||
|
Total
debt securities
|
265,459 | 266,836 | 25,597 | 25,496 | ||||||||||||
|
Marketable
equity securities
|
540 | 540 | 0 | 0 | ||||||||||||
| $ | 265,999 | $ | 267,376 | $ | 25,597 | $ | 25,496 | |||||||||
There was a combined loss of $14.5
million realized in 2008 due to other than temporary impairment charges on
auction rate securities and one $50 thousand loss on the sale of auction rate
securities. There were no pre-tax gains or losses realized on sales
and calls in 2007 or 2006.
Securities in the amount of $276
million and $333 million at December 31, 2008 and 2007, respectively, were
pledged to secure public deposits, trust funds, repurchase agreements, and
advances from the Federal Home Loan Bank.
CTBI evaluates its investment portfolio
on a quarterly basis for impairment. The analysis performed as of
December 31, 2008 indicates that all impairment is considered temporary, market
driven, and not credit-related, excluding the other-than-temporary-impairment
charges on auction rate securities which were recorded during
2008. The following tables provide the amortized cost, gross
unrealized losses, and fair market value, aggregated by investment category and
length of time the individual securities have been in a continuous unrealized
loss position as of December 31, 2008.
Available-for-Sale
|
(in
thousands)
|
Amortized
Cost
|
Gross
Unrealized Losses
|
Fair
Value
|
|||||||||
|
Less
Than 12 Months
|
||||||||||||
|
States
and political subdivision
|
$ | 8,929 | $ | (453 | ) | $ | 8,476 | |||||
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
76,984 | (321 | ) | 76,663 | ||||||||
|
Other
debt securities
|
20,000 | (220 | ) | 19,780 | ||||||||
|
Total
securities
|
105,913 | (994 | ) | 104,919 | ||||||||
|
12
Months or More
|
||||||||||||
|
States
and political subdivision
|
1,385 | (198 | ) | 1,187 | ||||||||
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
22,299 | (69 | ) | 22,230 | ||||||||
|
Other
debt securities
|
0 | 0 | 0 | |||||||||
|
Total
securities
|
23,684 | (267 | ) | 23,417 | ||||||||
|
Total
|
||||||||||||
|
States
and political subdivision
|
10,314 | (651 | ) | 9,663 | ||||||||
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
99,283 | (390 | ) | 98,893 | ||||||||
|
Other
debt securities
|
20,000 | (220 | ) | 19,780 | ||||||||
|
Total
securities
|
$ | 129,597 | $ | (1,261 | ) | $ | 128,336 | |||||
Held-to-Maturity
|
(in
thousands)
|
Amortized
Cost
|
Gross
Unrealized Losses
|
Fair
Value
|
|||||||||
|
Less
Than 12 Months
|
||||||||||||
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
$ | 24,021 | $ | (110 | ) | $ | 23,911 | |||||
The analysis performed as of December
31, 2007 indicated that all impairment was considered temporary, due to
fluctuations in interest rates, and not credit-related. The following
tables provide the amortized cost, gross unrealized losses, and fair value,
aggregated by investment category and length of time the individual securities
have been in a continuous unrealized loss position as of December 31,
2007.
Available-for-Sale
|
(in
thousands)
|
Amortized
Cost
|
Gross
Unrealized Losses
|
Fair
Value
|
|||||||||
|
Less
Than 12 Months
|
||||||||||||
|
States
and political subdivision
|
$ | 245 | $ | (3 | ) | $ | 242 | |||||
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
27,000 | (126 | ) | 26,874 | ||||||||
|
Other
debt securities
|
0 | 0 | 0 | |||||||||
| 27,245 | (129 | ) | 27,116 | |||||||||
|
12
Months or More
|
||||||||||||
|
States
and political subdivision
|
1,385 | (39 | ) | 1,346 | ||||||||
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
145,171 | (2,827 | ) | 142,344 | ||||||||
|
Other
debt securities
|
20,000 | (313 | ) | 19,687 | ||||||||
| 166,556 | (3,179 | ) | 163,377 | |||||||||
|
Total
|
||||||||||||
|
States
and political subdivision
|
1,630 | (42 | ) | 1,588 | ||||||||
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
172,171 | (2,953 | ) | 169,218 | ||||||||
|
Other
debt securities
|
20,000 | (313 | ) | 19,687 | ||||||||
| $ | 193,801 | $ | (3,308 | ) | $ | 190,493 | ||||||
Held-to-Maturity
|
(in
thousands)
|
Amortized
Cost
|
Gross
Unrealized Losses
|
Fair
Value
|
|||||||||
|
12
Months or More
|
||||||||||||
|
U.S.
government sponsored agencies and mortgage-backed pass through
certificates
|
$ | 31,058 | $ | (622 | ) | $ | 30,437 | |||||
4. Loans
Major classifications of loans, net of
unearned income and deferred loan origination costs and fees, are summarized as
follows:
|
(in
thousands)
December
31
|
2008
|
2007
|
||||||
|
Commercial
construction
|
$ | 156,425 | $ | 143,773 | ||||
|
Commercial
secured by real estate
|
663,663 | 640,574 | ||||||
|
Commercial
other
|
365,685 | 333,774 | ||||||
|
Real
estate construction
|
56,298 | 69,021 | ||||||
|
Real
estate mortgage
|
609,394 | 599,665 | ||||||
|
Consumer
|
484,843 | 435,273 | ||||||
|
Equipment
lease financing
|
12,343 | 5,817 | ||||||
| $ | 2,348,651 | $ | 2,227,897 | |||||
Not included in the loan balances above
were loans held for sale in the amount of $0.6 million and $2.3 million at
December 31, 2008 and 2007, respectively. The amount of capitalized
fees and costs under SFAS 91, Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases, included in the above loan totals were $1.4 million and
$2.0 million at December 31, 2008 and 2007, respectively.
The amount of loans on a non-accruing
income status was $40.9 million, $22.2 million, and $9.9 million at December 31,
2008, December 31, 2007, and December 31, 2006, respectively. The
total of loans on nonaccrual that were in homogeneous pools and not evaluated
individually for impairment were $4.3 million, $3.4 million, and $2.6
million at December 31, 2008, December 31, 2007, and December 31, 2006,
respectively. Additional interest which would have been recorded
during 2008, 2007, and 2006 if such loans had been accruing interest was
approximately $3.5 million, $2.3 million, and $1.0 million,
respectively. Any loan greater than 90 days past due must be well
secured and in the process of collection to continue accruing
interest. The amount of loans 90 days past due and still accruing
interest was $11.2 million, $9.6 million, and $4.3 million at December 31, 2008,
December 31, 2007, and December 31, 2006, respectively.
At
December 31, 2008, 2007, and 2006, the recorded investment in impaired loans was
$36.6 million, $13.2 million, and $7.3 million,
respectively. Included in these amounts at December 31, 2008, 2007,
and 2006, respectively, were $22.1 million, $8.1 million, and $4.4 million of
impaired loans for which specific reserves for loan losses were carried in the
amounts of $8.4 million, $3.2 million, and $1.5 million. The average
investment in impaired loans for 2008, 2007, and 2006 was $37.2 million, $13.3
million, and $7.4 million, respectively, while interest income of $0.7 million,
$0.3 million, and $0.2 million was recognized on cash payments of $2.7 million,
$11.0 million, and $0.9 million. Of the cash payments received in
2007, $10.2 million was related to receivable payments on one revolving line of
credit that was placed on nonaccrual in 2007.
5. Mortgage
Banking Activities
Mortgage banking activities primarily
include residential mortgage originations and servicing. As discussed
in note 1 above, mortgage servicing rights (“MSRs”) are carried at fair market
value with the implementation of SFAS 156 in January 2007. The
cumulative effect of applying the provisions of this statement was recognized as
a $26 thousand adjustment to the beginning balance of retained
earnings. The fair value is determined quarterly based on an
independent third-party valuation using a discounted cash flow analysis and
calculated using a computer pricing model. The computer valuation is
based on key economic assumptions including the prepayment speeds of the
underlying loans, the weighted-average life of the loan, the discount rate, the
weighted-average coupon, and the weighted-average default rate, as
applicable. Along with the gains received from the sale of loans,
fees are received for servicing loans. These fees include late fees,
which are recorded in interest income, and ancillary fees and monthly servicing
fees, which are recorded in noninterest income. Costs of servicing
loans are charged to expense as incurred. Changes in fair market
value of the MSRs are reported as an increase or decrease to mortgage banking
income.
The following table presents the
components of mortgage banking income:
|
(in
thousands)
Year
Ended December 31
|
2008
|
2007
|
2006
|
|||||||||
|
Net
gain on sale of loans held for sale
|
$ | 1,583 | $ | 1,338 | $ | 1,265 | ||||||
|
Net
loan servicing income (expense)
|
||||||||||||
|
Servicing
fees
|
888 | 868 | 892 | |||||||||
|
Late
fees
|
59 | 64 | 56 | |||||||||
|
Ancillary
fees
|
165 | 147 | 131 | |||||||||
|
Amortization/impairment
(prior to 2007)
|
0 | 0 | (591 | ) | ||||||||
|
Fair
value adjustments
|
(1,503 | ) | (558 | ) | 0 | |||||||
|
Net
loan servicing income (expense)
|
(391 | ) | 521 | 488 | ||||||||
|
Mortgage
banking income
|
$ | 1,192 | $ | 1,859 | $ | 1,753 | ||||||
Mortgage loans serviced for others are
not included in the accompanying balance sheets. At December 31,
2008, 2007, and 2006, loans serviced for the benefit of others (primarily FHLMC)
totaled $349 million, $351 million, and $362 million,
respectively. Servicing loans for others generally consists of
collecting mortgage payments, maintaining escrow accounts, disbursing payments
to investors, and processing foreclosures. Custodial escrow balances
maintained in connection with the foregoing loan servicing, and included in
demand deposits, were approximately $445 thousand, $539 thousand, and $480
thousand at December 31, 2008, 2007, and 2006, respectively.
Activity for capitalized mortgage
servicing rights using the fair value method in 2008 and 2007 is as
follows:
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Fair
value, beginning of period
|
$ | 3,258 | $ | 3,416 | ||||
|
New
servicing assets created
|
413 | 400 | ||||||
|
Change
in fair value during the period due to:
|
||||||||
|
Time
decay (1)
|
(117 | ) | (182 | ) | ||||
|
Payoffs
(2)
|
(352 | ) | (284 | ) | ||||
|
Changes
in valuation inputs or assumptions (3)
|
(1,034 | ) | (92 | ) | ||||
|
Fair
value, end of period
|
$ | 2,168 | $ | 3,258 | ||||
|
(1)
|
Represents
decrease in value due to regularly scheduled loan principal payments and
partial loan paydowns.
|
|
(2)
|
Represents
decrease in value due to loans that paid off during the
period.
|
|
(3)
|
Represents
change in value resulting from market-driven changes in interest
rates.
|
Activity for capitalized mortgage
servicing rights using the amortization method in 2006 is as
follows:
|
(in
thousands)
|
2006
|
|||
|
Balance,
beginning of year
|
$ | 3,660 | ||
|
Additions
|
321 | |||
|
Amortization
to expense
|
(591 | ) | ||
|
Valuation
adjustments
|
0 | |||
|
Balance,
end of year
|
$ | 3,390 | ||
The fair values of capitalized mortgage
servicing rights were $2.2 million, $3.3 million, and $3.4 million at December
31, 2008, 2007, and 2006, respectively. Fair values for the years
ended December 31, 2008, 2007, and 2006 were determined by third-party
valuations using discount rates of 10.0%, 10.10%, and 10.61%, respectively, and
weighted average default rates of 1.7%, 1.6%, and 1.3%,
respectively. The prepayment speeds applied in 2008 and 2007 were
generated by the Andrew Davidson Prepayment Model. The speeds ranged
from 7.2% to 31.7% and 7.1% and 26.4%, respectively, depending on the
stratifications of the specific rights. In 2006, Bloomberg PSA speeds
ranged from 135% to 389%, depending on the stratifications of the specific
rights. MSR values are very sensitive to movement in interest rates
as expected future net servicing income depends on the projected balance of the
underlying loans, which can be greatly impacted by the level of
prepayments. CTBI does not currently hedge against changes in the
fair value of its MSR portfolio.
6. Related
Party Transactions
In the ordinary course of business, our
banking subsidiary has made extensions of credit and had transactions with
certain directors and executive officers of CTBI or our subsidiaries, including
their associates (as defined by the Securities and Exchange
Commission). We believe such extensions of credit and transactions
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 related party extensions
of credit at January 1, 2008 was $20.1 million. During 2008, activity
with respect to these extensions of credit included new loans of $8.0 million
and repayment of $7.4 million. As a result of these activities, the
aggregate balance of related party extensions of credit was $20.7 million at
December 31, 2008. The aggregate balances of related party deposits
at December 31, 2008 and 2007 were $19.4 million and $22.2 million,
respectively.
7. Allowance
for Loan and Lease Losses
Activity in the allowance for loan and
lease losses was as follows:
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Balance,
beginning of year
|
$ | 28,054 | $ | 27,526 | $ | 29,506 | ||||||
|
Provision
charged to operations
|
11,452 | 6,540 | 4,305 | |||||||||
|
Recoveries
|
2,613 | 2,420 | 3,145 | |||||||||
|
Charge-offs
|
(11,298 | ) | (8,432 | ) | (9,430 | ) | ||||||
|
Balance,
end of year
|
$ | 30,821 | $ | 28,054 | $ | 27,526 | ||||||
8. Premises
and Equipment
Premises and equipment are summarized
as follows:
|
(in
thousands)
December
31
|
2008
|
2007
|
||||||
|
Land
and buildings
|
$ | 66,119 | $ | 66,246 | ||||
|
Leasehold
improvements
|
5,601 | 5,726 | ||||||
|
Furniture,
fixtures, and equipment
|
41,630 | 40,140 | ||||||
|
Construction
in progress
|
817 | 1,173 | ||||||
| 114,167 | 113,285 | |||||||
|
Less
accumulated depreciation and amortization
|
(62,577 | ) | (59,894 | ) | ||||
| $ | 51,590 | $ | 53,391 | |||||
Depreciation and amortization of
premises and equipment for 2008, 2007, and 2006 was $4.5 million, $5.0 million,
and $5.2 million, respectively.
9. Deposits
Major classifications of deposits are
categorized as follows:
|
(in
thousands)
December
31
|
2008
|
2007
|
||||||
|
Noninterest
bearing deposits
|
$ | 450,360 | $ | 449,861 | ||||
|
NOW
accounts
|
21,739 | 18,663 | ||||||
|
Money
market deposits
|
412,866 | 447,665 | ||||||
|
Savings
|
202,175 | 188,491 | ||||||
|
Certificates
of deposit of $100,000 or more
|
463,973 | 429,756 | ||||||
|
Certificates
of deposit less than $100,000 and other time deposits
|
780,721 | 758,728 | ||||||
| $ | 2,331,834 | $ | 2,293,164 | |||||
Interest expense on deposits is
categorized as follows:
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Savings,
NOW, and money market accounts
|
$ | 7,885 | $ | 17,457 | $ | 15,399 | ||||||
|
Certificates
of deposit of $100,000 or more
|
17,400 | 21,762 | 17,663 | |||||||||
|
Certificates
of deposit less than $100,000 and other time deposits
|
28,564 | 36,418 | 30,794 | |||||||||
| $ | 53,849 | $ | 75,637 | $ | 63,856 | |||||||
Maturities of certificates of deposits
and other time deposits are presented below:
|
Maturities
by Period at December 31, 2008
|
||||||||||||||||||||||||||||
|
(in
thousands)
|
Total
|
Within
1 Year
|
2
Years
|
3
Years
|
4
Years
|
5
Years
|
After
5 Years
|
|||||||||||||||||||||
|
Certificates
of deposits of $100,000 or more
|
$ | 463,973 | $ | 437,416 | $ | 20,595 | $ | 4,956 | $ | 607 | $ | 399 | $ | 0 | ||||||||||||||
|
Certificates
of deposit less than $100,000 and other time deposits
|
780,721 | 704,076 | 48,753 | 14,906 | 7,805 | 3,824 | 1,357 | |||||||||||||||||||||
| $ | 1,244,694 | $ | 1,141,492 | $ | 69,348 | $ | 19,862 | $ | 8,412 | $ | 4,223 | $ | 1,357 | |||||||||||||||
10. Advances
from Federal Home Loan Bank
Federal Home Loan Bank (“FHLB”)
advances consisted of the following monthly amortizing and term borrowings at
December 31:
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Monthly
amortizing
|
$ | 727 | $ | 906 | ||||
|
Term
|
60,000 | 40,000 | ||||||
| $ | 60,727 | $ | 40,906 | |||||
The advances from the FHLB that require
monthly principal payments were due for repayment as follows:
|
Principal
Payments Due by Period at December 31, 2008
|
||||||||||||||||||||||||||||
|
(in
thousands)
|
Total
|
Within
1 Year
|
2
Years
|
3
Years
|
4
Years
|
5
Years
|
After
5 Years
|
|||||||||||||||||||||
|
Outstanding
advances, weighted average interest rate – 3.76%
|
$ | 727 | $ | 56 | $ | 617 | $ | 8 | $ | 8 | $ | 8 | $ | 30 | ||||||||||||||
|
Principal
Payments Due by Period at December 31, 2007
|
||||||||||||||||||||||||||||
|
(in
thousands)
|
Total
|
Within
1 Year
|
2
Years
|
3
Years
|
4
Years
|
5
Years
|
After
5 Years
|
|||||||||||||||||||||
|
Outstanding
advances, weighted average interest rate – 4.06%
|
$ | 906 | $ | 188 | $ | 51 | $ | 613 | $ | 8 | $ | 8 | $ | 38 | ||||||||||||||
The term advances that require the
total payment to be made at maturity follow:
|
(in
thousands)
December
31
|
2008
|
2007
|
||||||
|
Advance
#146, 3.70%, due 8/30/08
|
$ | 0 | $ | 40,000 | ||||
|
Advance
#154, 3.17%, due 8/04/09
|
20,000 | 0 | ||||||
|
Advance
#155, 3.18%, due 9/02/09
|
40,000 | 0 | ||||||
| $ | 60,000 | $ | 40,000 | |||||
Advances totaling $60.7 million at
December 31, 2008 were collateralized by FHLB stock of $24.7 million and a
blanket lien on first mortgage loans. As of December 31, 2008, CTBI
had a $455 million FHLB borrowing capacity, leaving $341 million available for
additional advances. The advances had fixed interest rates ranging
from 1.00% to 6.20% with a weighted average rate of 3.18%. The
advances are subject to restrictions or penalties in the event of
prepayment.
11. Borrowings
Short-term debt is categorized as
follows:
|
(in
thousands)
December
31
|
2008
|
2007
|
||||||
|
Subsidiaries:
|
||||||||
|
Repurchase
agreements
|
$ | 157,422 | $ | 158,980 | ||||
|
Federal
funds purchased
|
11,492 | 18,364 | ||||||
| $ | 168,914 | $ | 177,344 | |||||
On July 28, 2008, we 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 July 29, 2009. We expect to renew this
agreement upon maturity.
All federal funds purchased and the
majority of repurchase agreements mature and reprice daily. The
average rates paid for federal funds purchased and repurchase agreements on
December 31, 2008 were 0.15% and 1.87%, respectively.
The maximum balance for federal funds
purchased and repurchase agreements at any month-end during 2008 occurred at May
31, 2008, with a month-end balance of $182.7 million.
Long-term debt is categorized as
follows:
|
(in
thousands)
December
31
|
2008
|
2007
|
||||||
|
Parent:
|
||||||||
|
Junior
subordinated debentures, 6.52%, due 6/1/37
|
$ | 61,341 | $ | 61,341 | ||||
On March 31, 2007, CTBI issued $61.3
million in junior subordinated debentures to a newly formed unconsolidated
Delaware statutory trust subsidiary which in turn issued $59.5 million of
capital securities in a private placement to institutional
investors. The debentures, which mature in 30 years but are
redeemable at par at CTBI's option after five years, were issued at a rate of
6.52% until June 1, 2012, and thereafter at a floating rate based on the
three-month LIBOR plus 1.59%. The underlying capital securities were
issued at the equivalent rates and terms. The proceeds of the
debentures were used to fund the redemption on April 2, 2007 of all CTBI's
outstanding 9.0% and 8.25% junior subordinated debentures in the total amount of
$61.3 million.
12. Federal
Income Taxes
The components of the provision for
income taxes, exclusive of tax effect of unrealized securities gains, are as
follows:
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Current
income taxes
|
$ | 13,676 | $ | 15,463 | $ | 12,357 | ||||||
|
Deferred
income taxes
|
(5,329 | ) | 955 | 4,193 | ||||||||
| $ | 8,347 | $ | 16,418 | $ | 16,550 | |||||||
A reconciliation of income tax expense
at the statutory rate to our actual income tax expense is shown
below:
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||||||||||||||
|
Computed
at the statutory rate
|
$ | 11,049 | 35.00 | % | $ | 18,428 | 35.00 | % | $ | 19,465 | 35.00 | % | ||||||||||||
|
Increase
(decrease) resulting from
|
||||||||||||||||||||||||
|
Tax-exempt
interest
|
(771 | ) | (2.44 | ) | (818 | ) | (1.55 | ) | (869 | ) | (1.56 | ) | ||||||||||||
|
Housing
and new markets credits
|
(532 | ) | (1.68 | ) | (448 | ) | (0.85 | ) | (437 | ) | (0.79 | ) | ||||||||||||
|
Dividends
received deduction
|
(422 | ) | (1.34 | ) | (1,310 | ) | (2.49 | ) | (1,313 | ) | (2.36 | ) | ||||||||||||
|
Bank
owned life insurance
|
(277 | ) | (0.88 | ) | (339 | ) | (0.64 | ) | (362 | ) | (0.65 | ) | ||||||||||||
|
Other,
net
|
(700 | ) | (2.22 | ) | 905 | 1.71 | 66 | 0.12 | ||||||||||||||||
|
Total
|
$ | 8,347 | 26.44 | % | $ | 16,418 | 31.18 | % | $ | 16,550 | 29.76 | % | ||||||||||||
The components of the net deferred tax
liability as of December 31 are as follows:
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Deferred
tax assets
|
||||||||
|
Allowance
for loan and lease losses
|
$ | 10,787 | $ | 9,209 | ||||
|
Interest
on nonperforming loans
|
2,119 | 797 | ||||||
|
Accrued
expenses
|
285 | 439 | ||||||
|
Capitalized
lease obligations
|
0 | 446 | ||||||
|
Dealer
reserve valuation
|
950 | 701 | ||||||
|
Unrealized
losses on available-for-sale securities
|
0 | 606 | ||||||
|
Other
than temporary impairment charge for auction rate
securities
|
5,080 | 0 | ||||||
|
Other
|
735 | 503 | ||||||
|
Total
deferred tax assets
|
19,956 | 12,701 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Depreciation
and amortization
|
(12,438 | ) | (11,129 | ) | ||||
|
FHLB
stock dividends
|
(4,767 | ) | (4,430 | ) | ||||
|
Loan
fee income
|
(2,728 | ) | (2,703 | ) | ||||
|
Mortgage
servicing rights
|
(759 | ) | (1,140 | ) | ||||
|
Capitalized
lease obligations
|
(1,184 | ) | 0 | |||||
|
Unrealized
gains on available-for-sale securities
|
(482 | ) | 0 | |||||
|
Other
|
(460 | ) | (402 | ) | ||||
|
Total
deferred tax liabilities
|
(22,818 | ) | (19,804 | ) | ||||
|
Net
deferred tax liability
|
$ | (2,862 | ) | $ | (7,103 | ) | ||
CTBI adopted the provisions of FIN 48
on January 1, 2007. The cumulative effect of applying the provisions
of this statement was recognized as a $0.6 million adjustment to the beginning
balance of retained earnings. The FIN 48 liability is carried in
other liabilities in the condensed consolidated balance sheet as of December 31,
2008. Approximately $0.2 million in FIN 48 liability is relative to
state nexus issues. As of December 31, 2007, we reported resolution
of these issues would be completed by December 31, 2008. However, due
to ongoing communications with the jurisdiction involved, we now anticipate the
filing of these returns by June 30, 2009. CTBI is subject to taxation
in the United States and various state and local jurisdictions. For
federal tax purposes, CTBI’s tax years for 2005 through 2008 are subject to
examination by the tax authorities. For state and local tax purposes,
CTBI’s tax years for 2003 through 2008 are subject to examination by the tax
authorities. CTBI currently recognizes interest and penalties accrued
related to unrecognized tax benefits in income tax expense. As of
December 31, 2008, no interest or penalties have been recognized.
CTBI is currently under examination by
the Internal Revenue Service for the 2006 tax year. The examination
is expected to be completed by the end of June 2009. There have been
no significant issues raised by the agents.
A reconciliation of the beginning and
ending amounts of unrecognized tax benefits under FIN 48 is shown
below:
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Balance
at January 1
|
$ | 672 | $ | 638 | ||||
|
Additions
based on tax positions related to current year
|
83 | 104 | ||||||
|
Additions
for tax positions of prior years
|
0 | 25 | ||||||
|
Reductions
for tax positions of prior years
|
(93 | ) | (95 | ) | ||||
|
Balance
at December 31
|
$ | 662 | $ | 672 | ||||
13. Employee
Benefits
On January 1, 2007, CTBI amended its
KSOP Retirement Plan, creating a separate 401(k) Plan and a separate Employee
Stock Ownership Plan (“ESOP”).
The 401(k) Plan is available to all
employees (age 21 and over) with one year of service and who work at least 1,000
hours per year. Participants in the plan have the option to
contribute from 1% to 15% of their annual compensation. CTBI matches
50% of participant contributions up to 4% of gross pay. CTBI may at its
discretion, contribute an additional percentage of covered employees’
compensation. CTBI’s matching contributions were $0.9 million for
each of the years ended December 31, 2008, 2007, and 2006. The 401(k)
Plan owned 504,722, 525,938, and 553,758 shares of CTBI’s common stock at
December 31, 2008, 2007, and 2006, respectively. Substantially all
shares owned by the 401(k) were allocated to employee accounts on those dates.
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 ESOP Plan has the same entrance
requirements as the 401(k) Plan above. CTBI currently contributes 4%
of covered employees’ gross compensation to the ESOP. The ESOP uses
the contributions to acquire shares of CTBI’s common stock. CTBI’s
contributions to the ESOP were $1.2 million, $1.3 million, and $1.2 million for
the years ending December 31, 2008, 2007, and 2006, respectively. The
ESOP owned 573,297, 569,755, and 520,970 shares of CTBI’s common stock at
December 31, 2008, 2007, and 2006, respectively. Substantially all
shares owned by the ESOP were allocated to employee accounts on those
dates. The market price of the shares at the date of allocation is
essentially the same as the market price at the date of purchase.
Stock-Based
Compensation:
We currently maintain one active and
one inactive incentive stock ownership plan covering key
employees. The 2006 Stock Ownership Incentive Plan (“2006 Plan”) was
approved by the Board of Directors and our Shareholders in 2006. The
1998 Stock Option Plan (“1998 Plan”) was approved by the Board of Directors and
the Shareholders in 1998. The 1998 Plan was rendered inactive as of
April 26, 2006. As of December 31, 2008, the 1998 Plan had 1,046,831
shares authorized, 154,287 of which were transferred to the 2006
Plan. The 1989 Stock Option Plan (“1989 Plan”) was approved by the
Board of Directors in 1989. The 1989 Plan was inactive during 2007
and the remaining outstanding shares were exercised during 2007. The
1989 Plan is now terminated. The following table provides detail of
the number of shares to be issued upon exercise of outstanding stock-based
awards and remaining shares available for future issuance under all of CTBI’s
equity compensation plans as of December 31, 2008:
|
Plan
Category (shares
in thousands)
|
Number
of Shares to Be Issued Upon Exercise/Vesting
|
Weighted
Average Price
|
Shares
Available for Future Issuance
|
|
|
Equity
compensation plans approved by shareholders
|
||||
|
Stock
options
|
666
|
$
26.70
|
1,478
(a)
|
|
|
Restricted
stock
|
11
(c)
|
28.32
|
(a)
|
|
|
Performance
units
|
(d)
|
(b)
|
(a)
|
|
|
Stock
appreciation rights (“SARs”)
|
(e)
|
(b)
|
(a)
|
|
|
Total
|
1,478
|
|||
|
(a)
|
Under
the 2006 Plan, 1.5 million shares (plus any shares reserved for issuance
under the 1998 Stock Option Plan) were authorized for issuance as
nonqualified and incentive stock options, SARS, restricted stock and
performance units. As of December 31, 2008, the above shares
remained available for issuance.
|
|
(b)
|
Not
applicable
|
|
(c)
|
The
maximum number of shares of Restricted Stock that may be granted to a
participant during any calendar year is 40,000
shares.
|
|
(d)
|
No
performance units have been issued. The maximum payment that
can be made pursuant to Performance Units granted to any one Participant
in any calendar year shall be
$250,000.
|
|
(e)
|
No SARS have been
issued. The maximum number of shares
with respect to which SARs may be granted to a Participant during any
calendar year shall be 100,000
shares.
|
The following table details the shares
available for future issuance under the 2006 Plan at December 31,
2008.
|
Plan
Category (shares
in thousands)
|
Shares
Available for Future Issuance
|
|||
|
Shares
available at January 1, 2008
|
1,543,716 | |||
|
1998
Plan forfeitures in 2008
|
2,976 | |||
|
2006
Plan stock option issuances in 2008
|
(63,700 | ) | ||
|
2006
Plan restricted stock issuances in 2008
|
(11,076 | ) | ||
|
2006
Plan forfeitures in 2008
|
5,617 | |||
|
Shares
available for future issuance
|
1,477,533 | |||
CTBI uses a Black-Scholes option
pricing model with the following weighted average assumptions, which are
evaluated and revised as necessary, in estimating the grant-date fair value of
each option grant for the year end:
|
2008
|
2007
|
2006
|
||||||||||
|
Expected
option life (in years)
|
7.5 | 7.5 | 7.5 | |||||||||
|
Expected
volatility
|
0.310 | 0.335 | 0.364 | |||||||||
|
Expected
Dividend yield
|
4.10 | % | 2.77 | % | 3.21 | % | ||||||
|
Risk-free
interest rate
|
3.23 | % | 4.81 | % | 4.53 | % | ||||||
The expected option life is derived
from the “safe-harbor” rules for estimating option life in SFAS
123(R). The expected volatility is based on historical volatility of
the stock using a historical look back that approximates the expected life of
the option grant. The interest rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of the grant. CTBI’s stock-based compensation
expense for the years 2008, 2007, and 2006 was $0.7 million, $0.6 million, and
$0.7 million, respectively.
CTBI’s stock option activity for the
2006 Plan for the years ended December 31, 2008 and 2007 is summarized as
follows:
|
December
31
|
2008
|
2007
|
||||||||||||||
|
Options
|
Weighted
Average Exercise Price
|
Options
|
Weighted
Average Exercise Price
|
|||||||||||||
|
Outstanding
at beginning of year
|
107,595 | $ | 38.95 | 0 | $ | -- | ||||||||||
|
Granted
|
63,700 | 28.32 | 113,998 | 38.95 | ||||||||||||
|
Exercised
|
0 | -- | 0 | -- | ||||||||||||
|
Forfeited/expired
|
(5,617 | ) | 31.38 | 6,403 | 38.95 | |||||||||||
|
Outstanding
at end of year
|
165,678 | $ | 35.12 | 107,595 | $ | 38.95 | ||||||||||
|
Exercisable
at end of year
|
26,488 | $ | 38.95 | 0 | $ | -- | ||||||||||
A summary of the status of CTBI’s 2006
Plan for nonvested shares as of December 31, 2008, and changes during the year
ended December 31, 2008, is presented as follows:
|
Nonvested
Shares
|
Shares
|
Weighted
Average Grant Date Fair Value
|
||||||
|
Nonvested
at January 1, 2008
|
107,595 | $ | 12.74 | |||||
|
Granted
|
63,700 | 6.41 | ||||||
|
Vested
|
26,488 | 12.74 | ||||||
|
Forfeited
|
5,617 | 8.23 | ||||||
|
Nonvested
at December 31, 2008
|
139,190 | $ | 10.02 | |||||
The 2006 Plan had options with the
following remaining lives at December 31, 2008:
|
2006
Option Plan
|
||||||||
|
Remaining
Life
|
Outstanding
Options
|
Weighted
Average Price
|
||||||
|
Eight
Years
|
105,978 | $ | 38.95 | |||||
|
Nine
Years
|
59,700 | 28.32 | ||||||
|
Total
outstanding
|
165,678 | |||||||
|
Weighted
average price
|
$ | 35.12 | ||||||
The weighted-average fair value of
options granted from the 2006 Plan during the year 2008 and 2007 was $0.4
million or $6.41 per share and $1.5 million or $12.74 per share,
respectively.
The following table shows the intrinsic
values of options exercised, exercisable, and outstanding for the years ended
December 31, 2008 and 2007 in the 2006 Plan:
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Options
exercised
|
$ | 0 | $ | 0 | ||||
|
Options
exercisable
|
0 | 0 | ||||||
|
Outstanding
options
|
503 | 0 | ||||||
CTBI’s stock option activity for the
1998 Plan for the years ended December 31, 2008, 2007, and 2006 is summarized as
follows:
|
December
31
|
2008
|
2007
|
2006
|
|||||||||||||||||||||
|
Options
|
Weighted
Average Exercise Price
|
Options
|
Weighted
Average Exercise Price
|
Options
|
Weighted
Average Exercise Price
|
|||||||||||||||||||
|
Outstanding
at beginning of year
|
581,413 | $ | 23.52 | 632,864 | $ | 23.44 | 621,493 | $ | 20.77 | |||||||||||||||
|
Granted
|
0 | -- | 0 | -- | 116,900 | 32.44 | ||||||||||||||||||
|
Exercised
|
(77,983 | ) | 20.79 | (45,717 | ) | 21.37 | (96,030 | ) | 16.73 | |||||||||||||||
|
Forfeited/expired
|
(2,976 | ) | 31.54 | (5,734 | ) | 30.38 | (9,499 | ) | 27.65 | |||||||||||||||
|
Outstanding
at end of year
|
500,454 | $ | 23.91 | 581,413 | $ | 23.52 | 632,864 | $ | 23.44 | |||||||||||||||
|
Exercisable
at end of year
|
350,113 | $ | 21.24 | 380,409 | $ | 19.85 | 170,407 | $ | 17.36 | |||||||||||||||
The 1998 Plan had options with the
following remaining lives at December 31, 2008:
|
1998
Option Plan
|
||||||||
|
Remaining
Life
|
Outstanding
Options
|
Weighted
Average Price
|
||||||
|
One
year
|
43,923 | $ | 15.37 | |||||
|
Two
years
|
20,252 | 13.23 | ||||||
|
Three
years
|
41,594 | 11.83 | ||||||
|
Four
years
|
101,937 | 19.19 | ||||||
|
Five
years
|
41,452 | 20.99 | ||||||
|
Six
years
|
70,950 | 27.82 | ||||||
|
Seven
years
|
79,112 | 30.88 | ||||||
|
Eight
years
|
101,234 | 32.44 | ||||||
|
Total
outstanding
|
500,454 | |||||||
|
Weighted
average price
|
$ | 23.91 | ||||||
The weighted-average fair value of
options granted from the 1998 Plan during the year 2006 was $1.2 million or
$10.51 per share.
The following table shows the intrinsic
values of options exercised, exercisable, and outstanding for the years ended
December 31, 2008, 2007, and 2006:
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Options
exercised
|
$ | 1,073 | $ | 701 | $ | 2,460 | ||||||
|
Options
exercisable
|
5,431 | 2,922 | 4,119 | |||||||||
|
Outstanding
options
|
6,433 | 2,329 | 11,449 | |||||||||
A summary of the status of CTBI’s 1998
Plan nonvested shares as of December 31, 2008 and changes during the year ended
December 31, 2008 is presented below:
|
Nonvested
Shares
|
Shares
|
Weighted
Average Grant Date Fair Value
|
||||||
|
Nonvested
at January 1, 2008
|
201,004 | $ | 8.62 | |||||
|
Granted
|
0 | -- | ||||||
|
Vested
|
49,493 | 8.10 | ||||||
|
Forfeited
|
1,170 | 8.95 | ||||||
|
Nonvested
at December 31, 2008
|
150,341 | $ | 8.68 | |||||
The 1989 Plan has no remaining options
available for grant and terminated during 2007. CTBI’s stock option
activity for the 1989 Plan for the years ended December 31, 2007 and 2006 is
summarized as follows:
|
December
31
|
2007
|
2006
|
||||||||||||||
|
Options
|
Weighted
Average Exercise Price
|
Options
|
Weighted
Average Exercise Price
|
|||||||||||||
|
Outstanding
at beginning of year
|
4,832 | $ | 19.33 | 36,619 | $ | 14.65 | ||||||||||
|
Exercised
|
(4,832 | ) | 19.33 | (31,787 | ) | 13.94 | ||||||||||
|
Forfeited/expired
|
0 | -- | 0 | -- | ||||||||||||
|
Outstanding
at end of year
|
0 | $ | -- | 4,832 | $ | 19.33 | ||||||||||
|
Exercisable
at end of year
|
0 | $ | -- | 4,832 | $ | 19.33 | ||||||||||
The following table shows the intrinsic
values of options exercised, exercisable, and outstanding for the years ended
December 31, 2007 and 2006 in the 1989 Plan:
|
(in
thousands)
|
2007
|
2006
|
||||||
|
Options
exercised
|
$ | 100 | $ | 704 | ||||
|
Options
exercisable
|
0 | 107 | ||||||
|
Outstanding
options
|
0 | 107 | ||||||
As of December 31, 2008, there was $1.1
million of total unrecognized compensation cost related to nonvested share-based
compensation arrangements granted under the plans. That cost is
expected to be recognized over a weighted-average period of 1.4
years. The total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted as of December 31, 2007 and 2006,
respectively, was $1.3 million and $1.0 million. The total grant-date
fair value of shares vested during the years ended December 31, 2008, 2007, and
2006, was $0.8 million, $1.3 million and $0.5 million,
respectively. Cash received from option exercises under all
share-based payment arrangements for the years ended December 31, 2008, 2007,
and 2006 was $1.6 million, $1.1 million, and $2.0 million,
respectively. The actual tax benefit realized for the tax deductions
from option exercises of the share-based payment arrangements totaled $0.3
million, $0.3 million, and $0.9 million, respectively, for the years ended
December 31, 2008, 2007, and 2006.
14. Operating
Leases
Certain premises and equipment are
leased under operating leases. Additionally, certain premises are
leased or subleased to third parties. Minimum non-cancellable rental
payments and rental receipts are as follows:
|
(in
thousands)
|
Payments
|
Receipts
|
||||||
|
2009
|
$ | 1,692 | $ | 615 | ||||
|
2010
|
1,422 | 473 | ||||||
|
2011
|
1,401 | 414 | ||||||
|
2012
|
1,217 | 230 | ||||||
|
2013
|
985 | 34 | ||||||
|
Thereafter
|
4,618 | 17 | ||||||
| $ | 11,335 | $ | 1,783 | |||||
Rental expense net of rental income
under operating leases was $0.7 million in 2008, $0.7 million in 2007, and $0.8
million in 2006.
15. 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 (net of the allowance for loan
and lease losses) – 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.
Loans
Held for Sale – The fair value is predetermined based on sale
price.
Federal Reserve Bank Stock – The
carrying value of Federal Reserve Bank stock approximates fair value based on
the redemption provisions of the Federal Reserve Bank.
Federal Home Loan Bank Stock – The
carrying value of Federal Home Loan Bank stock approximates fair value based on
the redemption provisions of the Federal Home Loan Bank.
Accrued Interest Receivable – The
carrying amount approximates fair value.
Capitalized Mortgage Servicing Rights –
The fair value is obtained by use of an independent third party.
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.
Long-term Debt – The fair value is
estimated by discounting future cash flows using current rates.
Accrued Interest Payable – The carrying
amount approximates fair value.
Other Financial Instruments – The
estimated fair value for other financial instruments and off-balance sheet loan
commitments approximates cost at December 31, 2008 and
2007. Off-balance sheet loan commitments at December 31, 2008 and
2007 were $481.8 million and $445.6 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 we are 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.
|
(in
thousands)
December
31
|
2008
|
2007
|
||||||||||||||
|
Carrying
Amount
|
Estimated
Fair Value
|
Carrying
Amount
|
Estimated
Fair Value
|
|||||||||||||
|
Financial
assets
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 140,978 | $ | 140,978 | $ | 137,250 | $ | 137,250 | ||||||||
|
Securities
|
292,973 | 292,872 | 357,112 | 356,503 | ||||||||||||
|
Loans
(net of ALLL)
|
2,317,830 | 2,329,044 | 2,199,843 | 2,190,123 | ||||||||||||
|
Loans
held for sale
|
623 | 638 | 2,334 | 2,346 | ||||||||||||
|
Federal
Reserve Bank stock
|
4,340 | 4,340 | 4,323 | 4,323 | ||||||||||||
|
Federal
Home Loan Bank stock
|
24,700 | 24,700 | 23,737 | 23,737 | ||||||||||||
|
Accrued
interest receivable
|
12,926 | 12,926 | 16,732 | 16,732 | ||||||||||||
|
Capitalized
mortgage servicing rights
|
2,168 | 2,168 | 3,258 | 3,258 | ||||||||||||
| $ | 2,796,538 | $ | 2,807,666 | $ | 2,744,589 | $ | 2,734,272 | |||||||||
|
Financial
liabilities
|
||||||||||||||||
|
Deposits
|
$ | 2,331,834 | $ | 2,342,136 | $ | 2,293,164 | $ | 2,289,822 | ||||||||
|
Short-term
borrowings
|
168,914 | 168,866 | 177,344 | 178,347 | ||||||||||||
|
Advances
from Federal Home Loan Bank
|
60,727 | 61,245 | 40,906 | 40,364 | ||||||||||||
|
Long-term
debt
|
61,341 | 29,424 | 61,341 | 55,608 | ||||||||||||
|
Accrued
interest payable
|
5,570 | 5,570 | 6,836 | 6,836 | ||||||||||||
| $ | 2,628,386 | $ | 2,607,241 | $ | 2,579,591 | $ | 2,570,977 | |||||||||
Assets Measured on a
Recurring Basis
The following table presents
information about CTBI’s assets measured at fair value on a recurring basis as
of December 31, 2008, and indicates the fair value hierarchy of the valuation
techniques utilized by CTBI to determine such fair value.
|
(in
thousands)
|
Fair
Value Measurements at
December
31, 2008 Using
|
|||||||||||||||
|
Fair
Value
December
31
2008
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
Other
Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
|||||||||||||
|
Available-for-sale
securities
|
$ | 267,376 | $ | 0 | $ | 266,836 | $ | 540 | ||||||||
|
Mortgage
servicing rights
|
2,168 | 0 | 0 | 2,168 | ||||||||||||
|
Total
recurring assets measured at fair value
|
$ | 269,544 | $ | 0 | $ | 266,836 | $ | 2,708 | ||||||||
Securities Available-for-Sale –
Level 2 Inputs. For these securities, CTBI obtains fair value
measurements from an independent pricing service. The fair value measurements
consider observable data that may include dealer quotes, market spreads, cash
flows, the U.S. Treasury yield curve, live trading levels, trade execution data,
market consensus prepayment speeds, credit information and the bond's terms and
conditions, among other things.
Securities Available-for-Sale –
Level 3 Inputs. The securities owned by CTBI that were
measured using Level 3 criteria are auction rate securities issued by FNMA and
FHLMC. These securities were valued using an independent third
party. For these securities, the valuation methods used were (1) a
discounted cash flow model valuation, where the expected cash flows of the
securities are discounted to the present using a yield that incorporates
compensation for illiquidity and (2) a market comparables method, where the
securities are valued based on indications, from the secondary market, of what
discounts buyers demand when purchasing similar securities. Using
these methods, the auction rate securities are classified as Level
3.
Mortgage Servicing Rights – Level 3
Inputs. CTBI records MSRs at fair value on a recurring basis
with subsequent remeasurement of MSRs based on change in fair value. In
determining fair value, CTBI utilizes the expertise of an independent third
party. An estimate of the fair value of CTBI’s MSRs is determined by the
independent third party utilizing assumptions about factors such as mortgage
interest rates, discount rates, mortgage loan prepayment speeds, market trends
and industry demand. All of CTBI’s MSRs are classified as Level
3.
Following is a reconciliation of the
beginning and ending balances of recurring fair value measurements using
significant unobservable (Level 3) inputs:
|
(in
thousands)
|
Available-for-Sale
Securities
|
Mortgage
Servicing Rights
|
||||||
|
Beginning
balance, January 1, 2008
|
$ | 40,050 | $ | 3,258 | ||||
|
Total
realized and unrealized gains and losses
|
||||||||
|
Included
in net income
|
(14,514 | ) | (1,034 | ) | ||||
|
Included
in other comprehensive income
|
0 | |||||||
|
Purchases,
issuances, and settlements
|
(24,996 | ) | (56 | ) | ||||
|
Ending
balance, December 31, 2008
|
$ | 540 | $ | 2,168 | ||||
Assets Measured on a
Non-Recurring Basis
Assets measured at fair value on a
non-recurring basis are summarized below:
|
(in
thousands)
|
Fair
Value Measurements at
December
31, 2008 Using
|
|||||||||||||||
|
Fair
Value
December
31
2008
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
Other
Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
|||||||||||||
|
Impaired
loans
|
$ | 10,285 | $ | 0 | $ | 0 | $ | 10,285 | ||||||||
Impaired Loans – Level 3
Inputs. Loans considered impaired under SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for
Impairment of a Loan — Income Recognition and Disclosure, are loans for
which, based on current information and events, it is probable that the creditor
will be unable to collect all amounts due according to the contractual terms of
the loan agreement. Impaired loans are subject to nonrecurring fair value
adjustments to reflect (1) partial write-downs that are based on the observable
market price or current appraised value of the collateral or (2) the full
charge-off of the loan carrying value.
16. 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 off-balance sheet financial instruments, whose approximate contract
amounts represent additional credit risk to CTBI:
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Standby
letters of credit
|
$ | 57,493 | $ | 57,241 | ||||
|
Commitments
to extend credit
|
424,258 | 388,404 | ||||||
|
Total
|
$ | 481,751 | $ | 445,645 | ||||
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, 2008, we maintained a
credit loss reserve of approximately $6 thousand relating to these financial
standby letters of credit. The reserve coverage calculation was
determined using essentially the same methodology as used for the allowance for
loan and lease losses. Approximately 93% of the total standby letters
of credit are secured, with $46.0 million of the total $57.5 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. At December 31, 2008, a credit loss reserve of $268
thousand was maintained relating to these commitments. 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, 2008 of
$22.9 million had interest rates and terms ranging predominantly from 6.00% to
7.99% 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, 2008.
17. Concentrations
of Credit Risk
CTBI’s banking subsidiary grants
commercial, residential, and consumer loans to customers primarily located in
eastern, northeastern, central, and south central Kentucky, northeastern
Tennessee and southern West Virginia. The Bank is continuing to
manage all components of its portfolio mix in a manner to reduce risk from
changes in economic conditions. 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 and lease losses are not exceeded. At December 31, 2008 and
2007, our concentrations of hotel/motel industry credits were 39% and 40% of
Tier 1 Capital plus the allowance for loan and lease losses,
respectively. Coal mining and related support industries
credits were 32% and 22%, respectively. Lessors of residential
buildings and dwellings credits were 31% and 30%,
respectively. Floorplan credits were 24% and 23% of Tier 1 Capital
plus the allowance for loan and lease losses, respectively. These
percentages are within our internally established limits regarding
concentrations of credit.
18. Commitments
and Contingencies
CTBI and our subsidiaries, and from
time to time, our officers, are named defendants in legal actions arising from
ordinary business activities. Management, after consultation with
legal counsel, believes any pending actions are without merit or that the
ultimate liability, if any, will not materially affect our consolidated
financial position or results of operations.
19. Regulatory
Matters
Our principal source of funds is
dividends received from our subsidiary bank. Regulations limit the
amount of dividends that may be paid by our banking subsidiary without prior
approval. During 2009, approximately $20.5 million plus any 2009 net
profits can be paid by our banking subsidiary without prior regulatory
approval.
The Federal 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 a minimum
Tier 1 (core capital) leverage ratio of 4% of adjusted quarterly average assets,
Tier 1 capital of at least 4% of risk-weighted assets, and total capital of at
least 8% of risk-weighted 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, 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 our consolidated financial statements. The
regulations also define well-capitalized levels of Tier 1 leverage, Tier 1, and
total capital as 5%, 6%, and 10%, respectively. We had Tier 1
leverage, Tier 1, and total capital ratios above the well-capitalized levels at
December 31, 2008 and 2007. We believe, as of December 31, 2008, CTBI
meets all capital adequacy requirements for which it is subject to be defined as
well-capitalized under the regulatory framework for prompt corrective
action.
Under the current Federal Reserve
Board’s regulatory framework, certain capital securities offered by wholly owned
unconsolidated trust preferred entities of CTBI are included as Tier 1
regulatory capital. On March 1, 2005, the Federal Reserve Board
adopted a final rule that allows the continued limited inclusion of trust
preferred securities in the Tier 1 capital of bank holding companies
(“BHCs”). Under the final rule, trust preferred securities and other
restricted core capital elements are subject to stricter quantitative
limits. The Board's final rule limits restricted core capital
elements to 25 percent of all core capital elements, net of goodwill less any
associated deferred tax liability. Internationally active BHCs,
defined as those with consolidated assets greater than $250 billion or
on-balance sheet foreign exposure greater than $10 billion, are subject to a 15
percent limit, but they may include qualifying mandatory convertible preferred
securities up to the generally applicable 25 percent limit. Amounts
of restricted core capital elements in excess of these limits generally may be
included in Tier 2 capital. The final rule provides a five-year
transition period, ending March 31, 2009, for application of the quantitative
limits. The requirement for trust preferred securities to include a
call option has been eliminated, and standards for the junior subordinated debt
underlying trust preferred securities eligible for Tier 1 capital treatment have
been clarified. The final rule addresses supervisory concerns,
competitive equity considerations, and the accounting for trust preferred
securities. The final rule also strengthens the definition of regulatory capital
by incorporating longstanding Board policies regarding the acceptable terms of
capital instruments included in banking organizations' Tier 1 or Tier 2
capital. The final rule did not have a material impact on our
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, 2008:
|
||||||||||||||||||||||||
|
Tier
1 capital
|
||||||||||||||||||||||||
|
(to
average assets)
|
$ | 300,111 | 10.37 | % | $ | 115,761 | 4.00 | % | $ | 144,702 | 5.00 | % | ||||||||||||
|
Tier
1 capital
|
||||||||||||||||||||||||
|
(to
risk weighted assets)
|
300,111 | 13.05 | 91,988 | 4.00 | 137,982 | 6.00 | ||||||||||||||||||
|
Total
capital
|
||||||||||||||||||||||||
|
(to
risk weighted assets)
|
328,842 | 14.30 | 183,968 | 8.00 | 229,959 | 10.00 | ||||||||||||||||||
|
As
of December 31, 2007:
|
||||||||||||||||||||||||
|
Tier
1 capital
|
||||||||||||||||||||||||
|
(to
average assets)
|
$ | 294,472 | 10.32 | % | $ | 114,136 | 4.00 | % | $ | 142,671 | 5.00 | % | ||||||||||||
|
Tier
1 capital
|
||||||||||||||||||||||||
|
(to
risk weighted assets)
|
294,472 | 13.24 | 88,964 | 4.00 | 133,447 | 6.00 | ||||||||||||||||||
|
Total
capital
|
||||||||||||||||||||||||
|
(to
risk weighted assets)
|
322,243 | 14.49 | 177,912 | 8.00 | 222,390 | 10.00 | ||||||||||||||||||
Community
Trust Bank, Inc.'s 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, 2008:
|
||||||||||||||||||||||||
|
Tier
1 capital
|
||||||||||||||||||||||||
|
(to
average assets)
|
$ | 289,221 | 10.02 | % | $ | 115,457 | 4.00 | % | $ | 144,322 | 5.00 | % | ||||||||||||
|
Tier
1 capital
|
||||||||||||||||||||||||
|
(to
risk weighted assets)
|
289,221 | 12.60 | 91,816 | 4.00 | 137,724 | 6.00 | ||||||||||||||||||
|
Total
capital
|
||||||||||||||||||||||||
|
(to
risk weighted assets)
|
317,952 | 13.85 | 183,655 | 8.00 | 229,568 | 10.00 | ||||||||||||||||||
|
As
of December 31, 2007:
|
||||||||||||||||||||||||
|
Tier
1 capital
|
||||||||||||||||||||||||
|
(to
average assets)
|
$ | 285,211 | 10.02 | % | $ | 113,857 | 4.00 | % | $ | 142,321 | 5.00 | % | ||||||||||||
|
Tier
1 capital
|
||||||||||||||||||||||||
|
(to
risk weighted assets)
|
285,211 | 12.84 | 88,851 | 4.00 | 133,276 | 6.00 | ||||||||||||||||||
|
Total
capital
|
||||||||||||||||||||||||
|
(to
risk weighted assets)
|
312,982 | 14.09 | 177,704 | 8.00 | 222,131 | 10.00 | ||||||||||||||||||
20. Parent
Company Financial Statements
Condensed
Balance Sheets
|
(in
thousands)
December
31
|
2008
|
2007
|
||||||
|
Assets:
|
||||||||
|
Cash
on deposit
|
$ | 5,701 | $ | 5,823 | ||||
|
Investment
in and advances to subsidiaries
|
360,974 | 353,848 | ||||||
|
Excess
of cost over net assets acquired (net of accumulated
amortization)
|
4,973 | 4,973 | ||||||
|
Other
assets
|
256 | 154 | ||||||
|
Total
assets
|
$ | 371,904 | $ | 364,798 | ||||
|
Liabilities
and shareholders’ equity:
|
||||||||
|
Subordinated
debt
|
$ | 61,341 | $ | 61,341 | ||||
|
Other
liabilities
|
2,357 | 2,102 | ||||||
|
Total
liabilities
|
63,698 | 63,443 | ||||||
|
Shareholders’
equity
|
308,206 | 301,355 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 371,904 | $ | 364,798 | ||||
Condensed
Statements of Income
|
(in
thousands)
Year
Ended December 31
|
2008
|
2007
|
2006
|
|||||||||
|
Income:
|
||||||||||||
|
Dividends
from subsidiary banks
|
$ | 20,620 | $ | 23,380 | $ | 14,410 | ||||||
|
Other
income
|
41 | 1,207 | 42 | |||||||||
|
Total
income
|
20,661 | 24,587 | 14,452 | |||||||||
|
Expenses:
|
||||||||||||
|
Interest
expense
|
4,000 | 4,364 | 5,414 | |||||||||
|
Other
expenses
|
1,084 | 3,163 | 848 | |||||||||
|
Total
expenses
|
5,084 | 7,527 | 6,262 | |||||||||
|
Income
before income taxes and equity in undistributed income of
subsidiaries
|
15,577 | 17,060 | 8,190 | |||||||||
|
Applicable
income taxes
|
(1,725 | ) | (2,184 | ) | (2,123 | ) | ||||||
|
Income
before equity in undistributed income of subsidiaries
|
17,302 | 19,244 | 10,313 | |||||||||
|
Equity
in undistributed income of subsidiaries
|
5,771 | 17,383 | 28,751 | |||||||||
|
Net
income
|
$ | 23,073 | $ | 36,627 | $ | 39,064 | ||||||
Condensed
Statements of Cash Flows
|
(in
thousands)
Year
Ended December 31
|
2008
|
2007
|
2006
|
|||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 23,073 | $ | 36,627 | $ | 39,064 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Equity
in undistributed earnings of subsidiaries
|
(5,771 | ) | (17,383 | ) | (28,751 | ) | ||||||
|
Excess
tax benefit of stock-based compensation
|
343 | 245 | 250 | |||||||||
|
Change
in other assets and liabilities, net
|
1,036 | 2,646 | 601 | |||||||||
|
Net
cash provided by operating activities
|
18,681 | 22,135 | 11,358 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Repayment
of investments in and advances to subsidiaries
|
(1,158 | ) | (1,228 | ) | (711 | ) | ||||||
|
Redemption
of investment in unconsolidated subsidiaries
|
0 | 1,841 | 0 | |||||||||
|
Investment
in unconsolidated subsidiaries
|
0 | (1,841 | ) | 0 | ||||||||
|
Other
|
0 | 0 | 2,356 | |||||||||
|
Net
cash provided by investing activities
|
(1,158 | ) | (1,228 | ) | 1,645 | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Repayments
of purchased funds and other short-term borrowings
|
0 | (9 | ) | 0 | ||||||||
|
Payment
for redemption of junior subordinated debentures
|
0 | (61,341 | ) | 0 | ||||||||
|
Issuance
of junior subordinated debentures
|
0 | 61,341 | 0 | |||||||||
|
Issuance
of common stock
|
2,731 | 2,760 | 3,182 | |||||||||
|
Purchase
of common stock
|
(2,631 | ) | (6,185 | ) | 0 | |||||||
|
Excess
tax benefit of stock-based compensation
|
(343 | ) | (245 | ) | (250 | ) | ||||||
|
Dividends
paid
|
(17,402 | ) | (16,364 | ) | (15,658 | ) | ||||||
|
Net
cash used in financing activities
|
(17,645 | ) | (20,043 | ) | (12,920 | ) | ||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(122 | ) | 864 | 83 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
5,823 | 4,959 | 4,876 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 5,701 | $ | 5,823 | $ | 4,959 | ||||||
21. Earnings
Per Share
The following table sets forth the
computation of basic and diluted earnings per share:
|
Year
Ended December 31
|
2008
|
2007
|
2006
|
|||||||||
|
Numerator:
|
||||||||||||
|
Net income (in
thousands)
|
$ | 23,073 | $ | 36,627 | $ | 39,064 | ||||||
|
Denominator:
|
||||||||||||
|
Basic
earnings per share:
|
||||||||||||
|
Weighted
average shares
|
15,016,606 | 15,150,029 | 15,086,478 | |||||||||
|
Diluted
earnings per share:
|
||||||||||||
|
Effect
of dilutive securities - stock options
|
143,796 | 222,391 | 213,420 | |||||||||
|
Adjusted
weighted average shares
|
15,160,402 | 15,372,420 | 15,299,898 | |||||||||
|
Earnings
per share:
|
||||||||||||
|
Basic
earnings per share
|
$ | 1.54 | $ | 2.42 | $ | 2.59 | ||||||
|
Diluted
earnings per share
|
1.52 | 2.38 | 2.55 | |||||||||
At December 31, 2008, 286,324 stock
options at a weighted average price of $34.42 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, 2007, 107,595 stock options at a price of $38.95 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, 2006, all outstanding stock options were used
in the computation of diluted earnings per share.
22. Accumulated
Other Comprehensive Income
CTBI has elected to present the
disclosure required by SFAS No. 130, Reporting Comprehensive
Income, in the consolidated Statements of Changes in 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)
|
2008
|
2007
|
2006
|
|||||||||
|
Reclassification
adjustment, pretax:
|
||||||||||||
|
Change
in unrealized net gains (losses) arising during year
|
$ | (11,461 | ) | $ | 3,290 | $ | 1,654 | |||||
|
Reclassification
adjustment for net losses included in net income
|
14,564 | 0 | 0 | |||||||||
|
Change
in unrealized gains on securities available-for-sale
|
$ | 3,103 | $ | 3,290 | $ | 1,654 | ||||||
|
Related
tax effects:
|
||||||||||||
|
Change
in unrealized net gains (losses) arising during year
|
$ | (4,011 | ) | $ | 1,152 | $ | 579 | |||||
|
Reclassification
adjustment for net losses included in net income
|
5,097 | 0 | 0 | |||||||||
|
Change
in net deferred tax liability
|
$ | 1,086 | $ | 1,152 | $ | 579 | ||||||
|
Reclassification
adjustment, net of tax:
|
||||||||||||
|
Change
in unrealized net gains (losses) arising during year
|
$ | (7,450 | ) | $ | 2,138 | $ | 1,075 | |||||
|
Reclassification
adjustment for net losses included in net income
|
9,467 | 0 | 0 | |||||||||
|
Change
in other comprehensive income
|
$ | 2,017 | $ | 2,138 | $ | 1,075 | ||||||
23. FDIC
One-Time Assessment Credit
Effective November 17, 2006, the FDIC
implemented a one-time credit of $4.7 billion to eligible
institutions. The purpose of the credit was to recognize
contributions made by certain institutions to capitalize the Bank Insurance Fund
and Savings Association Insurance Fund, which have now been merged into the
Deposit Insurance Fund. The Bank was an eligible institution and
received notice from the FDIC that its share of the credit was approximately
$2.2 million. As of December 31, 2008, the credit was fully
absorbed.
24. Subsequent
Events
The FDIC has taken action that will
result in increased FDIC insurance assessments for United States FDIC-insured
financial institutions, including CTBI. Under the deposit insurance
restoration plan approved by the FDIC in October 2008, the Board set a rate
schedule to raise the insurance reserve ratio to 1.15 percent within five
years. On February 27, 2009, the FDIC announced that the restoration
plan horizon has been extended to seven years in light of the current
significant strains on banks and the financial system and the likelihood of a
severe recession. In addition, the FDIC announced a special assessment of up to
20 basis points to be collected on September 30, 2009. The FDIC may
also impose an emergency special assessment after June 30, 2009 of up to 10
basis points if the FDIC deems that an additional special assessment in
necessary to maintain public confidence in federal deposit
insurance.
Audit
Committee, Board of Directors and Shareholders
Community
Trust Bancorp, Inc.
Pikeville,
Kentucky
We
have audited Community Trust Bancorp, Inc.’s (Company) internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying management report
on internal control. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company,
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
In
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
criteria established in COSO.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of the Company and our report dated March 13, 2009, expressed an
unqualified opinion thereon.
/s/
BKD, LLP
Louisville,
Kentucky
March
13, 2009
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit
Committee, Board of Directors and Shareholders
Community
Trust Bancorp, Inc.
Pikeville,
Kentucky
We
have audited the accompanying consolidated balance sheets of Community Trust
Bancorp, Inc. (Company) as of December 31, 2008 and 2007, and the related
consolidated statements of income, changes in stockholders’ equity and cash
flows for each of the years in the three-year period ended December 31,
2008. The Company’s management is responsible for these consolidated
financial statements. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. Our audits included examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2008 and 2007, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2008, in
conformity with accounting principles generally accepted in the Unites States of
America.
As
discussed in Note 15, in 2008 the Company changed its method of accounting for
fair value measurements in accordance with Statement of Financial Accounting
Standards No. 157.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company’s internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March
13, 2009, expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
/s/
BKD, LLP
Louisville,
Kentucky
March
13, 2009
None.
CTBI's management is responsible for
establishing and maintaining effective disclosure controls and procedures, as
defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934. As of December 31, 2008, an evaluation was performed under the
supervision and with the participation of management, including the Chief
Executive Officer and the Executive Vice President/Treasurer, of the
effectiveness of the design and operation of CTBI's disclosure controls and
procedures. Based on that evaluation, management concluded that
disclosure controls and procedures as of December 31, 2008 were effective in
ensuring material information required to be disclosed in this annual report on
Form 10-K was recorded, processed, summarized, and reported on a timely
basis. Additionally, there were no changes in CTBI's internal control
over financial reporting that occurred during the year ended December 31, 2008
that have materially affected, or are reasonably likely to materially affect,
CTBI's internal control over financial reporting.
Management's responsibilities related
to establishing and maintaining effective disclosure controls and procedures
include maintaining effective internal controls over financial reporting that
are designed to produce reliable financial statements in accordance with
accounting principles generally accepted in the United States. There
have been no significant changes in CTBI's internal controls or in other factors
that could significantly affect internal controls subsequent to December 31,
2008.
MANAGEMENT
REPORT ON INTERNAL CONTROL
We, as management of Community Trust
Bancorp, Inc. and its subsidiaries (“CTBI”), are responsible for establishing
and maintaining adequate internal control over financial
reporting. Pursuant to the rules and regulations of the Securities
and Exchange Commission, internal control over financial reporting is a process
designed by, or under the supervision of, the company’s principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company’s board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
company;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company’s assets that
could have a material effect on the financial
statements.
|
All internal control systems, no matter
how well designed, have inherent limitations, including the possibility of human
error and the circumvention of overriding controls. Accordingly, even
effective internal control can provide only reasonable assurance with respect to
financial statement preparation. Further, because of changes in
conditions, the effectiveness of internal control may vary over
time.
Because of the inherent limitations,
any system of internal control over financial reporting, no matter how well
designed, may not prevent or detect misstatements due to the possibility that a
control can be circumvented or overridden or that misstatements due to error or
fraud may occur that are not detected. Also, projections of the
effectiveness to future periods are subject to the risk that the internal
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies and procedures included in such controls
may deteriorate.
Management has evaluated the
effectiveness of its internal control over financial reporting as of December
31, 2008 based on the control criteria established in a report entitled Internal Control—Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on such evaluation, we have concluded that CTBI’s
internal control over financial reporting is effective as of December 31,
2008.
The effectiveness of CTBI’s internal
control over financial reporting as of December 31, 2008 has been audited by
BKD, LLP, an independent registered public accounting firm that audited the
CTBI’s consolidated financial statements included in this annual
report.
|
Date:
March 13, 2009
|
By:
|
/s/ Jean R. Hale | |
| Jean R. Hale | |||
| Chairman, President and Chief Executive Officer | |||
|
|
By:
|
/s/ Kevin J. Stumbo | |
| Kevin J. Stumbo | |||
| Executive Vice President and Treasurer | |||
| (Principal Financial Officer) |
None
The information required by these Items
other than the information set forth above under Part I, “Executive Officers of
the Registrant,” is omitted because CTBI 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 CTBI’s proxy
statement is incorporated herein by reference.
The information required by this Item
other than the information provided below is omitted because CTBI 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 CTBI’s
proxy statement is incorporated herein by reference.
Equity
Compensation Plan Information
The following table provides
information as of December 31, 2008, with respect to compensation plans under
which common shares of CTBI are authorized for issuance to officers or employees
in exchange for consideration in the form of services provided to CTBI and/or
its subsidiaries. We currently maintain one active and one inactive
incentive stock option plans covering key employees. The 2006 Stock
Ownership Incentive Plan (“2006 Plan”) was approved by the Board of Directors
and the Shareholders in 2006. The 2006 Plan had 1,500,000 shares
authorized, 1,477,533 of
which were available at December 31, 2008 for future grants. In
addition, any shares reserved for issuance under the 1998 Stock Option Plan
(“1998 Plan”) in excess of the number of shares as to which options or other
benefits are awarded thereunder, plus any shares as to which options or other
benefits granted under the 1998 Plan may lapse, expire, terminate or be
canceled, shall also be reserved and available for issuance or reissuance under
the 2006 Plan. The 1998 Plan was approved by the Board of Directors
and the Shareholders in 1998. As of December 31, 2008, the 1998 Plan
had 1,046,831 shares authorized, 154,287 of which were transferred to the 2006
Plan. The 1989 Stock Option Plan (“1989 Plan”) was approved by the
Board of Directors and the Shareholders in 1989. The 1989 Stock
Option Plan (“1989 Plan”) has no remaining options available for
grant.
|
A
|
B
|
C
|
||
|
Plan
Category
|
Number
of Common Shares to be Issued Upon Exercise/Vesting
|
Weighted
Average Price
|
Number
of Securities Available for Future Issuance Under Equity Compensation
Plans (excluding securities reflected in Column A)
|
|
|
Equity
compensation plans approved by shareholders:
|
||||
|
Stock
options
|
666
|
$
26.70
|
1,478
|
|
|
Restricted
stock
|
11
|
28.32
|
||
|
Equity
compensation plans not approved by shareholders
|
0
|
--
|
0
|
|
|
Total
|
677
|
$
26.73
|
1,478
|
|
Additional information regarding CTBI’s
stock option plans can be found in notes 1 and 13 to the consolidated financial
statements.
The information required by this Item
is omitted because CTBI 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 CTBI’s proxy statement is incorporated herein by
reference.
The information required by this Item
is omitted because CTBI 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 CTBI’s proxy statement is incorporated herein by
reference.
(a) The
following documents are filed as a part of this report:
Financial
Statements and Financial Statement Schedules
|
Exhibit
No.
|
Description
of Exhibits
|
|
3.1
|
Articles
of Incorporation and all amendments thereto {incorporated by reference to
registration statement no. 33-35138}
|
|
3.2
|
By-laws
of CTBI as amended July 25, 1995 {incorporated by reference to
registration statement no. 33-61891}
|
|
3.3
|
By-laws
of CTBI as amended January 29, 2008 {incorporated by reference to current
report on Form 8-K filed January 30, 2008}
|
|
10.1
|
Community
Trust Bancorp, Inc. Employee Stock Ownership Plan (effective January 1,
2007) {incorporated herein by reference to Form 10-K for the fiscal year
ended December 31, 2006 under SEC file no. 000-111-29}
|
|
10.2
|
Community
Trust Bancorp, Inc. Savings and Employee Stock Ownership Plan (Amendment
Number One effective January 1, 2002, Amendment Number Two effective
January 1, 2004, Amendment Number Three effective March 28, 2005, and
Amendment Number Four effective January 1, 2006) {incorporated herein by
reference to Form 10-K for the fiscal year ended December 31, 2006 under
SEC file no. 000-111-29}
|
|
10.3
|
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}
|
|
10.4
|
Community
Trust Bancorp, Inc. 1998 Stock Option Plan {incorporated by reference to
registration statement no. 333-74217}
|
|
10.5
|
Community
Trust Bancorp, Inc. 2006 Stock Ownership Incentive Plan {incorporated by
reference to Proxy Statement dated March 24, 2006}
|
|
10.6
|
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}
|
|
10.7
|
Senior
Management Incentive Compensation Plan (2009) {incorporated herein by
reference to current report on Form 8-K dated January 27,
2009}
|
|
10.8
|
Restricted
Stock Agreement {incorporated herein by reference to current report on
Form 8-K dated January 29, 2008}
|
(b)Exhibits
The
response to this portion of Item 15 is submitted as a separate section of this
report.
(c)Financial
Statement Schedules
None
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 13, 2009
|
By:
|
/s/ Jean R. Hale | |
| Jean R. Hale | |||
| Chairman, President and Chief Executive Officer | |||
|
|
By:
|
/s/ Kevin J. Stumbo | |
| Kevin J. Stumbo | |||
| Executive Vice President and Treasurer | |||
| (Principal Financial Officer) |
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
13, 2009
|
/s/
Jean R. Hale
|
Chairman,
President, and Chief Executive Officer
|
|
Jean
R. Hale
|
||
|
March
13, 2009
|
/s/
Kevin J. Stumbo
|
Executive
Vice President and Treasurer
(Principal
Financial Officer)
|
|
Kevin
J. Stumbo
|
||
|
March
13, 2009
|
/s/
Charles J. Baird
|
Director
|
|
Charles
J. Baird
|
||
|
March
13, 2009
|
/s/
Nick Carter
|
Director
|
|
Nick
Carter
|
||
|
March
13, 2009
|
/s/
Nick A. Cooley
|
Director
|
|
Nick
A. Cooley
|
||
|
March
13, 2009
|
/s/
James E. McGhee, II
|
Director
|
|
James
E. McGhee II
|
||
|
March
13, 2009
|
/s/
M. Lynn Parrish
|
Director
|
|
M.
Lynn Parrish
|
||
|
March
13, 2009
|
/s/
Paul E. Patton
|
Director
|
|
Paul
E. Patton
|
||
|
March
13, 2009
|
/s/
James R. Ramsey
|
Director
|
|
James
R. Ramsey
|
COMMUNITY
TRUST BANCORP, INC. AND SUBSIDIARIES
|
Exhibit
No.
|
Description
of Exhibits
|
|
3.1
|
Articles
of Incorporation for CTBI {incorporated herein by
reference}
|
|
3.2
|
By-laws
of CTBI as amended July 25, 1995 {incorporated herein by
reference}
|
|
3.3
|
By-laws
of CTBI as amended January 29, 2008 {incorporated herein by
reference}
|
|
10.1
|
Community
Trust Bancorp, Inc. Employee Stock Ownership Plan (effective January 1,
2007) {incorporated herein by reference}
|
|
10.2
|
Community
Trust Bancorp, Inc. Savings and Employee Stock Ownership Plan (Amendment
Number One effective January 1, 2002, Amendment Number Two effective
January 1, 2004, Amendment Number Three effective March 28, 2005, and
Amendment Number Four effective January 1, 2006) {incorporated herein by
reference}
|
|
10.3
|
Second
restated Pikeville National Corporation 1989 Stock Option Plan (commonly
known as Community Trust Bancorp, Inc. 1989 Stock Option Plan)
{incorporated herein by reference}
|
|
10.4
|
Community
Trust Bancorp, Inc. 1998 Stock Option Plan {incorporated herein by
reference}
|
|
10.5
|
Community
Trust Bancorp, Inc. 2006 Stock Ownership Incentive Plan {incorporated
herein by reference}
|
|
10.6
|
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}
|
|
10.7
|
Senior
Management Incentive Compensation Plan (2009) {incorporated herein by
reference}
|
|
10.8
|
Restricted
Stock Agreement {incorporated herein by reference}
|