UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
|
[X]
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (NO FEE REQUIRED)
|
|
|
For
the fiscal year ended December 31, 2007
|
|
|
Or
|
|
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (NO FEE REQUIRED)
|
|
|
For
the transition period from _____________ to
_____________
|
|
|
|
Commission
file number 0-11129
COMMUNITY
TRUST BANCORP, INC.
(Exact
name of registrant as specified in its charter)
|
Kentucky
|
61-0979818
|
|
(State
or other jurisdiction of incorporation or organization)
|
IRS
Employer Identification No.
|
|
346
North Mayo Trail
Pikeville,
Kentucky
(address
of principal executive offices)
|
41501
(Zip
Code)
|
(606)
432-1414
(Registrant’s
telephone number)
Securities
registered pursuant to Section 12(b) of the Act:
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.
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.
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.
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.
|
Large
accelerated filer
|
Accelerated
filer ü
|
Non-accelerated
filer
|
Smaller
reporting company
|
|
|
|
(Do
not check if a smaller reporting company)
|
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
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, 2007 was $456.1 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 29, 2008 was
14,961,336.
TABLE
OF CONTENTS
|
|
i
|
| |
|
|
|
|
| |
|
|
|
1
|
| |
|
|
|
3
|
| |
|
|
|
5
|
| |
|
|
|
6
|
| |
|
|
|
14
|
| |
|
|
|
14
|
| |
|
|
|
15
|
| |
|
|
|
|
| |
|
|
|
16
|
| |
|
|
|
18
|
| |
|
|
|
19
|
| |
|
|
|
26
|
| |
|
|
|
27
|
| |
|
|
|
31
|
| |
|
|
|
49
|
| |
|
|
|
51
|
| |
|
|
|
51
|
| |
|
|
|
51
|
| |
|
|
|
|
| |
|
|
|
52
|
| |
|
|
|
52
|
| |
|
|
|
52
|
| |
|
|
|
52
|
| |
|
| PART IV |
|
| |
|
|
|
53
|
| |
|
|
|
54
|
| |
|
|
|
56
|
Portions of the following documents are
incorporated by reference into the Form 10-K part indicated:
|
Document
|
Form 10-K
|
|
(1) Proxy
statement for the annual meeting of shareholders to be held April 22,
2008
|
Part
III
|
i
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, 2007, 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, 2007, CTBI had total consolidated assets of $2.9 billion and total
consolidated deposits, including repurchase agreements, of $2.5 billion, making
it the second 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, and trust relationships, as well as other
sources of funding 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.
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 18 to the consolidated financial
statements for additional information regarding concentrations of
credit.
We do not engage in any operations in
foreign countries.
1
EMPLOYEES
As of December 31, 2007, CTBI and
subsidiaries had 1,011 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 Office 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.
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.
2
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.
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:
|
·
|
The
rate of economic growth;
|
|
·
|
Instability
in domestic and foreign financial
markets.
|
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.
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.
3
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.
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:
|
·
|
A
downturn in the local economies in which we operate or the national
economy;
|
|
·
|
A
downturn in one or more of the business sectors in which our customers
operate; or
|
|
·
|
A
rapid increase in interest rates.
|
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 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. 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.
Economy
Our
business may 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. An increase in
unemployment, a decrease 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:
|
·
|
Clients
may not want or need our products and
services;
|
|
·
|
Borrowers
may not be able to repay their
loans;
|
|
·
|
The
value of the collateral securing our loans to borrowers may decline;
and
|
|
·
|
The
quality of our loan portfolio may
decline.
|
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:
|
·
|
Safety
and soundness guidelines;
|
|
·
|
Compliance
with all laws including the USA Patriot Act of 2001, the International
Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, the
Sarbanes-Oxley Act of 2002 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
|
|
·
|
Anti-competitive
concerns with the proposed
transaction.
|
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.
4
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.
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. 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.
None.
5
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
|
|
|
2007
|
|
2006
|
|
2005
|
|
(in
thousands)
|
|
Average
Balances
|
|
Interest
|
|
Average
Rate
|
|
Average
Balances
|
|
Interest
|
|
Average
Rate
|
|
Average
Balances
|
|
Interest
|
|
Average
Rate
|
|
Earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|