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, 2008
 
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.

Yes
   No ü

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes
   No ü
 
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.

Yes  ü
No
 
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).

Yes
   No ü
 
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


 
   
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
   
 
 
   
 
   
 

 
 

 

DOCUMENTS INCORPORATED BY REFERENCE

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

Document
Form 10-K
(1)  Proxy statement for the annual meeting of shareholders to be held April 28, 2009
Part III


 
 

 

PART I

Item 1.  Business

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.

 
Item 1A. Risk Factors

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:
·  
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.

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 inflation;
·  
The rate of economic growth;
·  
Employment levels;
·  
Monetary policies; and
·  
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.

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:
·  
The length and severity of downturns in the local economies in which we operate or the national economy;
·  
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
·  
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, 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:
·  
Safety and soundness guidelines;
·  
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
·  
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.

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.


Item 1B. Unresolved Staff Comments

None.

 
 

 

SELECTED STATISTICAL INFORMATION
 
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