CTBI

Business Context and Reporting Period

Company: Community Trust Bancorp, Inc. (formerly Pikeville National Corporation)

Reporting Period: Fiscal year ended December 31, 1997

Overview: A Kentucky-based bank holding company owning one commercial bank, one thrift, and one trust company. The Corporation serves small and mid-sized communities in eastern, central, and south-central Kentucky. In 1997, the Corporation changed its name and consolidated seven commercial bank subsidiaries into its lead bank, Community Trust Bank, NA. It also sold a subsidiary, Commercial Bank, West Liberty, in July 1997.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income: Increased slightly to $19.1 million from $18.8 million. This includes a one-time extraordinary gain of $3.1 million (net of tax) from a settlement with a former software vendor.
• Provision for Loan Losses: Increased significantly from $7.3 million to $11.2 million. Management attributes this to higher charge-offs associated with the growth in indirect consumer loans.
• Noninterest Income: Rose 27.7% to $18.4 million, driven by a $3.0 million gain on the sale of the West Liberty subsidiary and the reclassification of certain loan fees from interest income.
• Noninterest Expense: Increased 8.4% to $59.9 million due to branch expansion, marketing for the name change, and increased training costs.
• Asset Growth: Total assets grew 0.7% to $1.85 billion, while loans grew 9.2%. Deposits declined marginally, adjusted for the sale of the West Liberty subsidiary.

Guidance, Outlook, and Risks

• Acquisition Strategy: In December 1997, the Corporation announced an agreement to acquire 17 branches in West Virginia from Banc One (approx. $565 million in deposits). Concurrently, it agreed to sell 10 of these branches to other entities, retaining 7 branches (approx. $220 million in deposits) to enter the West Virginia market. Transactions are subject to regulatory approval.
• Year 2000 Compliance: The Corporation is undertaking projects to ensure Y2K compliance. Estimated costs are $450,000 in 1998 and $1.4 million in 1999. Management does not view these costs as material.
• Interest Rate Risk: Management monitors interest rate sensitivity using gap models. As of December 31, 1997, a 100 basis point change in rates was projected to have a negligible impact on net interest income. A 200 basis point increase would increase income by 3.0%, while a decrease would lower it by 3.6%.
• Capital Position: The Corporation and its subsidiaries met the criteria to be classified as "well capitalized" under regulatory guidelines.
• Legal Proceedings: The Corporation is a defendant in various legal actions arising from normal business activities. Management believes these will not materially affect financial position.

Investor Verification Checklist

• Extraordinary Gain Impact: Verify the sustainability of earnings by excluding the $3.1 million one-time software settlement gain.
• Loan Loss Provisions: Monitor the trend in the provision for loan losses ($11.2M in 1997) relative to the growth in indirect consumer loans, which carry higher risk.
• West Virginia Acquisition: Confirm regulatory approval and final terms of the Banc One branch acquisition and subsequent divestitures.
• Nonperforming Assets: Track the increase in nonperforming assets from 1.35% to 1.64% of loans to ensure the allowance for loan losses remains adequate.
• Y2K Costs: Verify that actual Year 2000 remediation costs align with the estimated $1.85 million total budget.