SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2008
   
 
Or
   
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
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)
 
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 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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.

Common stock – 14,989,039 shares outstanding at April 30, 2008
 

 
 
 
 

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements
 
The accompanying information has not been audited by independent registered public accountants; however, in the opinion of management such information reflects all adjustments necessary for a fair presentation of the results for the interim period.  All such adjustments are of a normal and recurring nature.
 
The accompanying condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Registrant's annual report on Form 10-K.  Accordingly, the reader of the Form 10-Q should refer to the Registrant's Form 10-K for the year ended December 31, 2007 for further information in this regard.


 
 
 

Community Trust Bancorp, Inc.
Condensed Consolidated Balance Sheets

(dollars in thousands)
  
(unaudited)
March 31
2008
    
December 31
2007
  
Assets:
            
Cash and due from banks
   $ 89,612     $ 105,209  
Federal funds sold
     56,000       32,041  
Cash and cash equivalents
     145,612       137,250  
                 
Securities available-for-sale at fair value
                
(amortized cost of $296,894 and $325,879, respectively)
     299,831       324,153  
Securities held-to-maturity at amortized cost
                
(fair value of $31,384 and $32,350, respectively)
     31,137       32,959  
Loans held for sale
     1,310       2,334  
                 
Loans
     2,251,846       2,227,897  
Allowance for loan losses
     (28,599 )     (28,054 )
Net loans
     2,223,247       2,199,843  
                 
Premises and equipment, net
     52,823       53,391  
Federal Reserve Bank and Federal Home Loan Bank stock
     28,064       28,060  
Goodwill
     65,059       65,059  
Core deposit intangible (net of accumulated amortization of $5,746 and
                
$5,588, respectively)
     1,758       1,917  
Bank owned life insurance
     23,508       23,285  
Mortgage servicing rights
     2,837       3,258  
Other assets
     29,298       31,175  
Total assets
   $ 2,904,484     $ 2,902,684  
                 
Liabilities and shareholders’ equity:
                
Deposits
                
Noninterest bearing
   $ 434,033     $ 449,861  
Interest bearing
     1,871,534       1,843,303  
Total deposits
     2,305,567       2,293,164  
                 
Repurchase agreements
     148,739       158,980  
Federal funds purchased and other short-term borrowings
     8,511       18,364  
Advances from Federal Home Loan Bank
     40,858       40,906  
Long-term debt
     61,341       61,341  
Other liabilities
     32,619       28,574  
Total liabilities
     2,597,635       2,601,329  
                 
Shareholders’ equity:
                
Preferred stock, 300,000 shares authorized and unissued
     -       -  
Common stock, $5 par value, shares authorized 25,000,000;
                
   shares outstanding 2008 – 14,979,336; 2007 – 15,044,124
     74,897       75,221  
Capital surplus
     147,586       149,005  
Retained earnings
     82,457       78,251  
Accumulated other comprehensive income (loss), net of tax
     1,909       (1,122 )
Total shareholders’ equity
     306,849       301,355  
                 
Total liabilities and shareholders’ equity
   $ 2,904,484     $ 2,902,684  


See notes to condensed consolidated financial statements.

 
 
 
 

Community Trust Bancorp, Inc.
Condensed Consolidated Statements of Income and Other Comprehensive Income
(unaudited)

 
Three Months Ended
  
 
March 31
  
(in thousands except per share data)
2008
  
2007
  
Interest income:
        
Interest and fees on loans, including loans held for sale
 $ 39,755   $ 42,187  
Interest and dividends on securities
            
Taxable
   3,412     4,645  
Tax exempt
   474     501  
Interest and dividends on Federal Reserve and Federal Home Loan Bank stock
   509     438  
Other, including interest on federal funds sold
   530     1,407  
Total interest income
   44,680     49,178  
             
Interest expense:
            
Interest on deposits
   15,527     19,050  
Interest on repurchase agreements and other short-term borrowings
   1,468     2,158  
Interest on advances from Federal Home Loan Bank
   377     704  
Interest on long-term debt
   1,000     1,376  
Total interest expense
   18,372     23,288  
             
Net interest income
   26,308     25,890  
Provision for loan losses
   2,369     470  
Net interest income after provision for loan losses
   23,939     25,420  
             
Noninterest income:
            
Service charges on deposit accounts
   5,099     4,804  
Gains on sales of loans, net
   546     296  
Trust income
   1,191     1,199  
Loan related fees
   299     1,021  
Bank owned life insurance
   263     232  
Securities losses
   (50
) 
   0  
Other
   1,395     946  
Total noninterest income
   8,743     8,498  
             
Noninterest expense:
            
Salaries and employee benefits
   10,711     11,114  
Occupancy, net
   1,626     1,760  
Equipment
   1,053     1,229  
Data processing
   1,381     1,150  
Bank franchise tax
   890     866  
Legal and professional fees
   713     753  
Other
   3,627     5,624  
Total noninterest expense
   20,001     22,496  
             
Income before income taxes
   12,681     11,422  
Income taxes
   4,136     3,400  
Net income
   8,545     8,022  
             
Other comprehensive income, net of tax:
            
Unrealized holding gains on securities available-for-sale
   3,031     608  
Comprehensive income
 $ 11,576   $ 8,630  
             
Basic earnings per share
 $ 0.57   $ 0.53  
Diluted earnings per share
$
 0.57   $ 0.52  
             
Weighted average shares outstanding-basic
   15,000     15,191  
Weighted average shares outstanding-diluted
   15,116     15,437  
             
Dividends per share
 $ 0.29   $ 0.27  

See notes to condensed consolidated financial statements.

 
 
 
 

Community Trust Bancorp, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)

   
Three months ended
  
   
March 31
  
(in thousands)
  
2008
    
2007
  
             
Cash flows from operating activities:
            
Net income
   $ 8,545     $ 8,022  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation and amortization
     1,292       1,475  
Change in net deferred tax liability
     1,492       (327 )
Stock based compensation
     186       230  
Excess tax benefits of stock-based compensation
     241       197  
Provision for loan and other real estate losses
     2,401       519  
Securities losses
     50       0  
Gains on sale of mortgage loans held for sale
     (547 )     (296 )
(Gains) losses on sale of assets, net
     (37 )     79  
Proceeds from sale of mortgage loans held for sale
     26,056       15,425  
Funding of mortgage loans held for sale
     (24,485 )     (14,591 )
Amortization of securities premiums, net
     (7 )     166  
Change in cash surrender value of bank owned life insurance
     (223 )     (199 )
Fair value adjustments of mortgage servicing rights
     421       (59 )
Amortization/write-off of debt issuance costs
     0       1,950  
Changes in:
                
     Other liabilities
     706       3,385  
     Other assets
     1,422       (688 )
Net cash provided by operating activities
     17,804       15,288  
                 
Cash flows from investing activities:
                
Securities available-for-sale:
                
Proceeds from sales
     29,950       40,000  
Proceeds from prepayments and maturities
     10,425       10,857  
Purchase of securities
     (11,443 )     (64,800 )
Securities held-to-maturity:
                
Proceeds from prepayments and maturities
     1,832       1,829  
Change in loans, net
     (27,383 )     (5,237 )
Purchase of premises, equipment, and other real estate
     (574 )     (800 )
Additional investment in equity securities
     (4 )     (5 )
Investment in unconsolidated subsidiaries
     0       (1,841 )
Proceeds from sale of other real estate and other repossessed assets
     2,155       1,174  
Additional investment in other real estate owned
     (76 )     0  
Net cash provided by (used in) investing activities
     4,882       (18,823 )
                 
Cash flows from financing activities:
                
Change in deposits, net
     12,403       51,865  
Change in repurchase agreements and other short-term borrowings, net
     (20,094 )     8,511  
Payments on advances from Federal Home Loan Bank
     (48 )     (112 )
Additional borrowings
     0       61,341  
Issuance of common stock
     647       1,092  
Purchase of common stock
     (2,631 )     0  
Excess tax benefits of stock-based compensation
     (241 )     (197 )
Dividends paid
     (4,360 )     (4,093 )
Net cash provided by (used in) financing activities
     (14,324 )     118,604  
Net increase in cash and cash equivalents
     8,362       114,872  
Cash and cash equivalents at beginning of period
     137,250       157,538  
Cash and cash equivalents at end of period
   $ 145,612     $ 272,410  
                 
Supplemental disclosures:
                
Income taxes paid
   $ 1,254     $ 2,500  
Interest paid
     16,940       19,108  
Non-cash activities
                
Loans to facilitate the sale of other real estate owned
     281       92  
Common stock dividends accrued, paid in subsequent quarter
     4,339       4,105  

See notes to condensed consolidated financial statements.

 
 
 
 

Community Trust Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1 - Summary of Significant Accounting Policies
 
In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (which consist of normal recurring accruals) necessary, to present fairly the condensed consolidated financial position as of March 31, 2008, the results of operations for the three months ended March 31, 2008 and 2007, and the cash flows for the three months ended March 31, 2008 and 2007.  In accordance with accounting principles generally accepted in the United States of America for interim financial information, these statements do not include certain information and footnote disclosures required by accounting principles generally accepted in the United States of America for complete annual financial statements.  The condensed consolidated balance sheet as of December 31, 2007 has been derived from the audited consolidated financial statements of Community Trust Bancorp, Inc. ("CTBI") for that period.  The results of operations for the three months ended March 31, 2008 and 2007, and the cash flows for the three months ended March 31, 2008 and 2007, are not necessarily indicative of the results to be expected for the full year.  For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2007, included in CTBI's Annual Report on Form 10-K.
 
Principles of Consolidation – The unaudited condensed consolidated financial statements include the accounts of CTBI and its separate and distinct, wholly owned subsidiaries Community Trust Bank, Inc. (the “Bank”) and Community Trust and Investment Company.  All significant intercompany transactions have been eliminated in consolidation.
 
Reclassifications – Certain reclassifications considered to be immaterial have been made in the prior year consolidated financial statements to conform to current year classifications.

New Accounting Standards –

Ø Accounting for Servicing of Financial Assets – Statement of Financial Accounting Standard (“SFAS”) No. 156, Accounting for Servicing of Financial Assets amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of SFAS No. 125, by requiring, in certain situations, an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract.  All separately recognized servicing assets and servicing liabilities are required to be initially measured at fair value.  Subsequent measurement methods include the amortization method, whereby servicing assets or servicing liabilities are amortized in proportion to and over the period of estimated net servicing income or net servicing loss or the fair value method, whereby servicing assets or servicing liabilities are measured at fair value at each reporting date and changes in fair value are reported in earnings in the period in which they occur.  If the amortization method is used, an entity must assess servicing assets or servicing liabilities for impairment or increased obligation based on the fair value at each reporting date.  Adoption of SFAS 156 on January 1, 2007 did not have a significant impact on our consolidated financial statements.

Ø Fair Value Measurements – Effective January 1, 2008, CTBI adopted SFAS No. 157, Fair Value Measurements.  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances.  In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability.  In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.  The fair value hierarchy is as follows:

Level 1 Inputs – Unadjusted quoted process in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Ø  Fair Value Option for Financial Assets and Financial Liabilities – In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure many financial instruments and certain other items at fair value.  The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments.  SFAS 159 is effective for fiscal years beginning after November 15, 2007. CTBI has not elected the fair value option for any financial assets or liabilities at March 31, 2008.

Ø Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards – On June 14, 2007, the Emerging Issues Task Force (“EITF”) reached a final consensus on Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.  This consensus was ratified by FASB on June 27, 2007.  This issue states that tax benefits received on dividends paid to employees associated with their unvested stock compensation awards should be recorded in additional paid-in capital (“APIC”) for awards expected to vest.  Currently, such dividends are accounted for as a permanent tax deduction reducing the annual effective income tax rate.  This issue is to be applied prospectively to dividends declared in fiscal years beginning after December 15, 2007.  Retrospective application of this Issue is prohibited.  Issue No. 06-11 did not have a material effect on our consolidated financial statements.

Ø Business Combinations (Revised 2007) – The FASB recently issued SFAS 141(R), which replaces FAS 141, Business Combinations, and applies to all transactions and other events in which one entity obtains control over one or more other businesses.  SFAS 141R requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities, and any non-controlling interest in the acquiree at fair value as of the acquisition date.  Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt.  This fair value approach replaces the cost-allocation process required under SFAS 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value.  SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed as was previously the case under SFAS 141.  Under SFAS 141R, the requirements of SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, would have to be met in order to accrue for a restructuring plan in purchase accounting.  Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting, and instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS 5, Accounting for Contingencies.  SFAS 141R is expected to have a significant impact on our accounting for business combinations closing on or after January 1, 2009.
 
 
 
 

Ø Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements – EITF Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements requires the recognition of a liability and related compensation expense for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to post-retirement periods.  Under EITF 06-4, life insurance policies purchased for the purpose of providing such benefits do not effectively settle an entity’s obligation to the employee.  Accordingly, the entity must recognize a liability and related compensation expense during the employee’s active service period based on the future cost of insurance to be incurred during the employee’s retirement.  If the entity has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS 106, Employer’s Accounting for Postretirement Benefits Other Than Pensions.  CTBI adopted EITF 06-4 effective as of January 1, 2008 as a change in accounting principle through a $1.8 million cumulative-effect adjustment to retained earnings based on the cost of insurance.

Note 2 – Stock-Based Compensation
 
CTBI’s compensation expense related to stock option grants was $175 thousand and $230 thousand, respectively, for the three months ended March 31, 2008 and 2007, respectively.  Restricted stock expense for the first quarter 2008 was $11 thousand.  There were no restricted stock grants made prior to the first quarter of 2008.  As of March 31, 2008, there was a total of $1.6 million of unrecognized compensation expense related to unvested stock option awards that will be recognized as expense as the awards vest over a weighted average period of 1.6 years.
 
There were options to purchase 74,776 shares of CTBI common stock and 11,076 shares of restricted stock granted during the first quarter of 2008.  The options were granted pursuant to the terms of the 2006 Stock Ownership Incentive Plan, with an exercise price per share of $28.32 (equal to fair market value on date of grant), a term of 10 years, and vesting in five years.   The restrictions on the restricted stock will lapse at the end of five years.  However, in the event of a change in control of CTBI or the death of the participant, the restrictions will lapse.  In the event of the disability of the participant, the restrictions will lapse on a pro rata basis (with respect to 20% of the participant’s restricted stock for each year since the date of award). The Compensation Committee of the Board of Directors will have discretion to review and revise restrictions applicable to a participant’s restricted stock in the event of the participant’s retirement.  There were options to purchase 109,304 shares of CTBI common stock granted during the three months ended March 31, 2007.
 
The fair values of options granted during the three months ended March 31, 2008 and 2007, were established at the date of grant using a Black-Scholes option pricing model with the weighted average assumptions as follows:

   
Three Months Ended
   
March 31
   
2008
  
2007
Expected dividend yield
     4.10
%
     2.77
%
Risk-free interest rate
     3.23
%
     4.81
%
Expected volatility
     31.01
%
     33.50
%
Expected term (in years)
     7.5       7.5  
Weighted average fair value of options
  
$
 6.41    
$
 12.74  

Note 3 – Securities
 
Securities are classified into held-to-maturity and available-for-sale categories.  Held-to-maturity securities are those that CTBI has the positive intent and ability to hold to maturity and are reported at amortized cost.  Available-for-sale securities are those that CTBI may decide to sell if needed for liquidity, asset-liability management or other reasons.  Available-for-sale securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax.
 
 
 
 

The amortized cost and fair value of securities at March 31, 2008 are summarized as follows:

Available-for-Sale

(in thousands)
  
Amortized
Cost
    
Fair
Value
  
U.S. Treasury and government agencies
   $ 20,311     $ 21,050  
State and political subdivisions
     42,841       43,772  
U.S. government sponsored agencies and mortgage-backed pass through certificates
     198,691       200,510  
Collateralized mortgage obligations
     1       1  
Other debt securities     20,000                   19,911  
Total debt securities
     281,844       285,244  
Marketable equity securities
     15,050       14,587  
Total available-for-sale securities
   $ 296,894     $ 299,831  

Held-to-Maturity

 (in thousands)
  
Amortized
Cost
    
Fair
Value
  
State and political subdivisions
   $ 1,900     $ 1,943  
U.S. government sponsored agencies and mortgage-backed pass through certificates
     29,237       29,441  
Total held-to-maturity securities
   $ 31,137     $ 31,384  

The amortized cost and fair value of securities as of December 31, 2007 are summarized as follows:

Available-for-Sale

(in thousands)
  
Amortized
Cost
    
Fair
Value
  
U.S. Treasury and government agencies
   $ 20,307     $ 20,736  
State and political subdivisions
     40,472       41,137  
U.S. government sponsored agencies and mortgage-backed pass through certificates
     205,049       202,542  
Collateralized mortgage obligations
     1       1  
Other debt securities
     20,000       19,687  
Total debt securities
     285,829       284,103  
Marketable equity securities
     40,050       40,050  
Total available-for-sale securities
   $ 325,879     $ 324,153  

Held-to-Maturity

(in thousands)
  
Amortized
Cost
    
Fair
Value
  
State and political subdivisions
   $ 1,901     $ 1,914  
U.S. government sponsored agencies and mortgage-backed pass through certificates
     31,058       30,436  
Total held-to-maturity securities
   $ 32,959     $ 32,350  
 
 
 
 

Note 4 – Loans

Major classifications of loans, net of unearned income and deferred loan origination costs, are summarized as follows:

(in thousands)
  
March 31
2008
    
December 31
2007
  
Commercial construction
   $ 148,231     $ 143,773  
Commercial secured by real estate
     644,787       640,574  
Commercial other
     357,425       333,774  
Real estate construction
     64,280       69,021  
Real estate mortgage
     597,375       599,665  
Consumer
     433,203       435,273  
Equipment lease financing
     6,545       5,817  
Total loans
   $ 2,251,846     $ 2,227,897  

Activity in the allowance for loan and lease losses was as follows:

   
Three Months Ended
  
   
March 31
  
(in thousands)
  
2008
    
2007
  
Allowance balance at January 1
   $ 28,054     $ 27,526  
Additions to allowance charged against operations
     2,369       470  
Recoveries credited to allowance
     586       731  
Losses charged against allowance
     (2,410 )     (1,650 )
Allowance balance at March 31, 2008
   $ 28,599     $ 27,077  

Note 5 – Mortgage Servicing Rights

The following table presents the components of mortgage banking income:

   
Three Months Ended
  
   
March 31
  
(in thousands)
  
2008
    
2007
  
Net gain on sale of loans held for sale
   $ 546     $ 296  
Net loan servicing income (expense)
                
Servicing fees
     213       219  
Late fees
     17       16  
Ancillary fees
     71       50  
Fair value adjustments
     (535 )     (18 )
Net loan servicing income (expense)
     (234 )     267  
Mortgage banking income
   $ 312     $ 563  

Mortgage loans serviced for others are not included in the accompanying balance sheets.  Loans serviced for the benefit of others (primarily FHLMC) remained relatively flat at $352 million at March 31, 2008 compared to $351 million at December 31, 2007.  Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and processing foreclosures.  Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $679 thousand at March 31, 2008 compared to $539 thousand at December 31, 2007.
 
 
 
 

Activity for capitalized mortgage servicing rights using the fair value method was as follows:

(in thousands)
  
Three Months Ended
March 31
2008
Fair value, beginning of period
  
$
 3,258  
New servicing assets created
     113  
Change in fair value during the period due to:
        
Time decay (1)
     (42 )
Payoffs (2)
     (72 )
Changes in valuation inputs or assumptions (3)
     (420 )
Fair value, end of period
  
$
 2,837  

(1)  
Represents decrease in value due to regularly scheduled loan principal payments and partial loan paydowns.
(2)  
Represents decrease in value due to loans that paid off during the period.
(3)  
Represents change in value resulting from market-driven changes in interest rates and prepayment speeds.
 
The fair values of capitalized mortgage servicing rights were $2.8 million and $3.3 million at March 31, 2008 and December 31, 2007, respectively.  Fair values for the quarters ended March 31, 2008 and December 31, 2007 were determined by third-party valuations using discount rates of 10.59% and 10.10%, respectively, and weighted average default rates of 1.4% and 1.6%, respectively.  Prepayment speeds averaged 16.4% at March 31, 2008 compared to 13.7% at December 31, 2007.  MSR values are very sensitive to movement in interest rates as expected future net servicing income depends on the projected balance of the underlying loans, which can be greatly impacted by the level of prepayments.  CTBI does not currently hedge against changes in the fair value of its MSR portfolio.

Note 6 – Borrowings

Short-term debt consists of the following:

(in thousands)
  
March 31
2008
    
December 31
2007
  
Subsidiaries:
            
Repurchase agreements
   $ 148,739     $ 158,980  
Federal funds purchased
     8,511       18,364  
Total short-term debt
   $ 157,250     $ 177,344  
 
Effective April 30, 2008, CTBI extended its revolving note agreement for a line of credit in the amount of $12 million, all of which is currently available to meet any future cash needs.  The agreement will mature on July 30, 2008.
 
All federal funds purchased and the majority of repurchase agreements mature and reprice daily.  The average rates paid for federal funds purchased and repurchase agreements on March 31, 2008 were 2.53% and 2.85%, respectively.

Federal Home Loan Bank advances consisted of the following monthly amortizing and term borrowings:

 
(in thousands)
  
March 31
2008
    
December 31
2007
  
Monthly amortizing
   $ 858     $ 906  
Term
     40,000       40,000  
    $ 40,858     $ 40,906  
 
 
 
 

The advances from the Federal Home Loan Bank that require monthly principal payments were due for repayment as follows:

   
Principal Payments Due by Period at March 31, 2008
  
(in thousands)
  
Total
    
Within 1 Year
    
2 Years
    
3 Years
    
4 Years
    
5 Years
    
After 5 Years
  
Outstanding advances, weighted average interest rate – 3.99%
   $ 858     $ 154     $ 644     $ 8     $ 8     $ 8     $ 36  

The term advances that require the total payment to be made at maturity follow:

 
(in thousands)
  
March 31
2008
    
December 31
2007
  
Advance #146, 3.70%, due 8/30/08
   $ 40,000     $ 40,000  
 
The advances are collateralized by Federal Home Loan Bank stock of $23.7 million and certain first mortgage loans totaling $55.2 million as of March 31, 2008.  Advances totaling $41 million at March 31, 2008 had fixed interest rates ranging from 1.00% to 6.20% with a weighted average rate of 3.71%.  The advances are subject to restrictions or penalties in the event of prepayment.

Long-term debt consists of the following:

(in thousands)
  
March 31
2008
    
December 31
2007
  
Junior subordinated debentures, 6.52%, due 6/1/37
   $ 61,341     $ 61,341  
 
On March 31, 2007, CTBI issued $61.3 million in junior subordinated debentures to a newly formed unconsolidated Delaware statutory trust subsidiary which in turn issued $59.5 million of capital securities in a private placement to institutional investors.  The debentures, which mature in 30 years but are redeemable at par at CTBI's option after five years, were issued at a rate of 6.52% until June 1, 2012, and thereafter at a floating rate based on the three-month LIBOR plus 1.59%.  The underlying capital securities were issued at the equivalent rates and terms.  The proceeds of the debentures were used to fund the redemption on April 2, 2007 of all CTBI's outstanding 9.0% and 8.25% junior subordinated debentures in the total amount of $61.3 million.

Note 7 – Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

   
Three Months Ended
  
   
March 31
  
(in thousands)
  
2008
    
2007
  
Numerator:
            
Net income
   $ 8,545     $ 8,022  
                 
Denominator:
                
Basic earnings per share:
                
Weighted average shares
     15,000       15,191  
Diluted earnings per share:
                
Effect of dilutive stock options
     116       246  
Adjusted weighted average shares
     15,116       15,437  
                 
Earnings per share:
                
Basic earnings per share
   $ 0.57     $ 0.53  
Diluted earnings per share
   $ 0.57     $ 0.52  
 
Options to purchase 405,445 common shares were excluded from the diluted calculation above for the three months ended March 31, 2008 because the exercise prices on the options were greater than the average market price for the period.  Options to purchase 109,304 common shares were excluded from the calculations for the three months ended March 31, 2007.
 
 
Note 8 – Fair Value of Financial Assets and Liabilities

Assets Measured on a Recurring Basis
 
The following table presents information about CTBI’s assets measured at fair value on a recurring basis as of March 31, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by CTBI to determine such fair value.

(in thousands)
        
Fair Value Measurements at March 31, 2008 Using
  
   
Fair Value
March 31
2008
    
Quoted Prices in Active Markets for Identical Assets
(Level 1)
    
Other Observable Inputs
(Level 2)
    
Significant Unobservable Inputs
(Level 3)
  
Available-for-sale securities
   $ 299,831     $ 0     $ 285,244     $ 14,587  
Mortgage servicing rights
     2,837       0       0       2,837  
Total recurring assets measured at fair value
   $ 302,668     $ 0     $ 285,244     $ 17,424  

Securities Available-for-Sale – Level 2 Inputs.  For these securities, CTBI obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.

Securities Available-for-Sale – Level 3 Inputs.  The securities owned by CTBI that were measured using Level 3 criteria are auction rate securities issued by FNMA ($10,050,000) and FHLMC ($5,000,000). These securities were valued using Level 3 inputs because the market for auction rate securities essentially shut down during the first quarter of 2008, making Level 1 or Level 2 observations unavailable.  For these securities, CTBI determined a fair value by calculating a net present value of future cash flows.  Several key assumptions were used to determine this net present value.  The first was a discount rate of 8.5%, representing the current average default rate for auction rate securities.  The second was a term of 18 months, representing management’s best estimate of how long these securities would remain illiquid. The last was the contractual cash flows, which were derived from the contractual default rates of the individual securities.  Using these assumptions, the net present value of the cash flows for these securities was determined to be $14.6 million, resulting in an unrealized loss of $0.5 million recorded through other comprehensive income.
 
Mortgage Servicing Rights – Level 3 Inputs.  CTBI records MSRs at fair value on a recurring basis with subsequent remeasurement of MSRs based on change in fair value.  In determining fair value, CTBI utilizes the expertise of an independent third party.  An estimate of the fair value of CTBI’s MSRs is determined by the independent third party utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand.  All of CTBI’s MSRs are classified as Level 3.
 
Following is a reconciliation of the beginning and ending balances of recurring fair value measurements using significant unobservable (Level 3) inputs:

(in thousands)
  
Available-for-Sale Securities
    
Mortgage Servicing Rights