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, 2006
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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.
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, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" 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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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, 2006 was
$492.1 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 28, 2007
was 15,203,174.
TABLE
OF CONTENTS
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PART
I
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1
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3
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7
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8
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16
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17
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17
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PART
II
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19
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22
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23
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35
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36
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40
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64
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68
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68
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70
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PART
III
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70
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70
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71
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71
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72
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73
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75
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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
24, 2007
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Part
III
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i
PART
I
Community
Trust Bancorp, Inc. (the "Corporation") is a bank holding company registered
with the Board of Governors of the Federal Reserve System pursuant to Section
5(a) of the Bank Holding Company Act of 1956, as amended. Our Corporation was
incorporated August 12, 1980, under the laws of the Commonwealth of Kentucky
for
the purpose of becoming a bank holding company. At December 31, 2006, our
Corporation 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, 2006, our Corporation had total
consolidated assets of $3.0 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.
Effective
January 1, 2003, our Bank and Trust Company converted their charters to state
charters from national associations. Our Bank remained a member of the Federal
Reserve System following conversion. Following its conversion, our Trust Company
changed its name from Trust Company of Kentucky, National Association to
Community Trust and Investment Company in order to identify more closely our
Trust Company with our Bank. While the conversions resulted in some reduction
in
expenses, they did not result in any changes in the management or operations
of
our Bank or our Trust Company.
On
June
10, 2005, our Bank completed the acquisition of Heritage Community Bank of
Danville, Kentucky. All former Heritage Community Bank offices now operate
as
branch offices of Community Trust Bank, Inc. Our Corporation obtained loans
totaling approximately $73.7 million, cash and cash equivalents of approximately
$8.1 million, and deposits totaling approximately $69.8 million from this
acquisition. The total cost of the acquisition, including direct acquisition
costs, was $12.4 million. Goodwill and core deposit intangible of approximately
$5.5 million was recorded. Pro forma information has not been presented since
the impact of the acquisition is not significant to the consolidated financial
statements.
Through
its subsidiaries, our Corporation engages in a wide range of commercial and
personal banking and trust activities, which include accepting time and demand
deposits; making secured and unsecured loans to corporations, individuals and
others; providing cash management services to corporate and individual
customers; issuing letters of credit; renting safe deposit boxes; and providing
funds transfer services. The lending activities of our Bank include making
commercial, construction, mortgage, and personal loans. Also available are
lease-financing, lines of credit, revolving lines of credit, term loans, and
other specialized loans including asset-based financing. 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
Our
Corporation’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.
1
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.
EMPLOYEES
As
of
December 31, 2006, our Corporation and subsidiaries had 1,021 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 our Corporation and its subsidiaries also are affected by other
banking legislation and policies and practices of various regulatory
authorities. Such legislation and policies include statutory maximum rates
on
some loans, reserve requirements, domestic monetary and fiscal policy, and
limitations on the kinds of services that may be offered.
2
The
Corporation’s annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports are available
free of charge on 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. The Corporation’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. The Corporation’s actual results may differ materially
from those included in the forward-looking statements. Forward-looking
statements are typically identified by words or phrases such as "believe,"
"expect," "anticipate," "intend," "estimate," "may 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 the
Corporation 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 the Corporation’s results. These
statements are representative only on the date hereof, and the Corporation
undertakes no obligation to update any forward-looking statements
made.
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;
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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.
3
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.
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;
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A
downturn in one or more of the business sectors in which our customers
operate; or
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A
rapid increase in interest rates.
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4
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 continued 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;
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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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Acquisition
Risk
We
may have difficulty in the future continuing to grow through
acquisitions.
Due
to
the 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 the Corporation 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;
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| · |
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
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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.
5
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 the Corporation 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 the Corporation, including the
conversion of the acquired entity’s core operating systems, data systems and
products to those of the Corporation 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 the
Corporation 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;
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| · |
Changes
in analysts' recommendations or
projections;
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| · |
The
Corporation's announcements of developments related to our
businesses;
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| · |
Operating
and stock performance of other companies deemed to be
peers;
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| · |
New
technology used or services offered by traditional and non-traditional
competitors; and
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| · |
News
reports of trends, concerns, and other issues related to the financial
services industry.
|
6
Our
stock
price may fluctuate significantly in the future, and these fluctuations may
be
unrelated to the Corporation'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.
None.
7
The
following tables set forth certain statistical information relating to our
Corporation 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
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2006
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2005
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2004
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(in
thousands)
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Average
Balances
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Interest
|
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Average
Rate
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Average
Balances
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|
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Interest
|
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Average
Rate
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Average
Balances
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|
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Interest
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Average
Rate
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Earning
assets:
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Loans
(1)(2)(3)
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$
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2,131,649
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$
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163,526
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7.67
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%
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$
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2,024,756
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$
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137,602
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6.80
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%
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$
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