Community Trust Bancorp (CTBI) 10-Q 2001 Q3 Quarterly report

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 September 30, 2001
	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.

Yesü No

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

Common stock - 11,420,891 shares outstanding at October 31, 2001

PART I - FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

The accompanying information has not been audited by independent 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 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, 2000 for further information in this regard.

Condensed Consolidated Balance Sheets

(dollars in thousands)			September 30 2001		December 31 2000
			(unaudited)
Assets:
Cash and due from banks		$	65,102	$	72,725
Federal funds sold			113,323		96,990
Securities available-for-sale at fair value
	(amortized cost of $356,942 and $236,252, respectively)		364,293		236,620
Securities held-to-maturity at amortized cost
	(fair value of $39,456 and $47,053, respectively)		38,760		48,976
Loans			1,724,389		1,694,525
	Allowance for loan losses		(24,059)		(25,886)
	Net loans		1,700,330		1,668,639
Premises and equipment, net			48,425		49,029
Excess of cost over net assets acquired
	(net of accumulated amortization of $17,840 and $15,096, respectively)		63,153		56,320
Other assets			29,019		32,676
	Total Assets	$	2,422,405	$	2,261,975
Liabilities and Shareholders' Equity:
Deposits
	Noninterest bearing	$	276,055	$	254,642
	Interest bearing		1,793,530		1,689,274
Total deposits			2,069,585		1,943,916
Federal funds purchased and other short-term borrowings			78,641		58,951
Advances from Federal Home Loan Bank			10,496		13,326
Long-term debt			47,944		48,060
Other liabilities			24,940		15,818
	Total Liabilities		2,231,606		2,080,071
Shareholders' Equity:
Preferred stock, 300,000 shares authorized and unissued
Common stock, $5 par value, shares authorized 25,000,000;
	shares outstanding 2001 - 11,413,704; 2000 - 11,700,895		57,068		58,352
Capital surplus			51,026		54,892
Retained earnings			77,927		68,421
Accumulated other comprehensive income, net of tax			4,778		239
	Total Shareholders' Equity		190,799		181,904
	Total Liabilities and Shareholders' Equity	$	2,422,405	$	2,261,975

Condensed Consolidated Statements of Income

(unaudited)

		Three months ended				Nine months ended
		September 30				September 30
(in thousands except per share data)		2001		2000		2001		2000
Interest Income:
Interest and fees on loans		$	37,243	$	39,669	$	116,728	$	115,081
Interest and dividends on securities
	Taxable		4,280		3,564		11,155		11,425
	Tax exempt		709		768		2,154		2,155
Other, including interest on fed funds sold			1,304		653		5,437		1,126
	Total Interest Income		43,536		44,654		135,474		129,787
Interest Expense:
Interest on deposits			21,253		21,588		67,977		60,283
Interest on federal funds purchased and other short-term borrowings			703		745		2,627		2,232
Interest on advances from Federal Home Loan Bank			155		209		505		667
Interest on long-term debt			1,062		1,070		3,198		3,221
	Total Interest Expense		23,173		23,612		74,307		66,403
	Net interest income		20,363		21,042		61,167		63,384
Provision for loan and lease losses			2,428		2,487		6,345		6,637
	Net interest income after provision for loan losses		17,935		18,555		54,822		56,747
Noninterest Income:
Service charges on deposit accounts			2,738		2,448		8,112		7,222
Gains on sales of loans, net			645		181		1,675		446
Trust income			624		663		1,907		1,796
Securities gains, net			0		53		637		53
Other			1,505		1,467		5,283		4,564
	Total Noninterest Income		5,512		4,812		17,614		14,081
Noninterest Expense:
Salaries and employee benefits			7,315		7,239		22,949		22,384
Occupancy, net			1,327		1,269		4,040		3,946
Equipment			883		835		2,810		2,986
Data processing			1,048		918		3,036		2,760
Stationery, printing, and office supplies			306		322		1,052		936
Taxes other than payroll, property, and income			538		539		1,634		1,528
FDIC insurance			96		95		291		285
Other			4,179		4,121		12,461		11,872
	Total Noninterest Expense		15,692		15,338		48,273		46,697
	Income before income taxes		7,755		8,029		24,163		24,131
Income taxes			2,482		2,365		7,734		7,539
	Net Income		5,273		5,664		16,429		16,592
Other comprehensive income, net of tax:
	Unrealized holding gains arising during period		3,001		1,127		4,539		1,292
Comprehensive income		$	8,274	$	6,791	$	20,968	$	17,884
Basic earnings per share		$	0.46	$	0.48	$	1.42	$	1.38
Diluted earnings per share		$	0.46	$	0.48	$	1.42	$	1.38
Average shares outstanding			11,420		11,778		11,548		12,023

Condensed Consolidated Statements of Cash Flows

(unaudited)

			Nine months ended
			September 30
(in thousands)			2001		2000
Cash flows from operating activities:
Net income			$	16,429	$	16,592
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			5,715		5,350
	Net change in net deferred tax asset			(2,420)		0
	Provision for loan and other real estate losses			6,596		6,769
	Securities gains, net			(637)		(53)
	Gains on sale of mortgage loans held for sale			(1,675)		(446)
	Losses on sale of assets, net			14		220
	Proceeds from sale of mortgage loans held for sale			77,376		18,875
	Net amortization (accretion) of securities premiums			(226)		216
	Net change in mortgage loans held for sale			(1,568)		(469)
	Changes in:
		Other liabilities		9,120		10,992
		Other assets		980		(448)
	Net cash provided by operating activities			109,704		57,598
Cash flows from investing activities:
Securities available-for-sale (AFS):
	Proceeds from sales			20,800		10,500
	Proceeds from prepayments and maturities			82,350		63,290
	Purchase of AFS securities			(222,964)		(38,248)
Securities held-to-maturity (HTM):
	Proceeds from prepayments and maturities			10,203		8,149
	Purchase of HTM securities			0		(390)
Net change in loans				(114,687)		(97,310)
Purchase of premises, equipment, and other real estate				(2,929)		(1,111)
Proceeds from sale of premises and equipment				548		615
Proceeds from sale of other real estate				4,919		1,528
Cash provided from net liabilities acquired				(9,576)		0
	Net cash (used in) investing activities			(231,336)		(52,977)
Cash flows from financing activities:
Net change in deposits				125,668		32,664
Net change in federal funds purchased and other short-term borrowings				19,690		284
Advances from Federal Home Loan Bank				0		89
Payments on advances from Federal Home Loan Bank				(2,829)		(2,763)
Payments on long-term debt				(115)		(114)
Issuance of common stock				1,387		512
Repurchase of common stock				(6,538)		(6,886)
Dividends paid				(6,921)		(6,758)
	Net cash provided by financing activities			130,342		17,028
Net increase in cash and cash equivalents				8,710		21,649
Cash and cash equivalents at beginning of year				169,715		107,457
	Cash and cash equivalents at end of period		$	178,425	$	129,106

Notes to Condensed Consolidated Financial Statements

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 consolidated financial position as of September 30, 2001, the results of operations for the three and nine months ended September 30, 2001 and 2000 and the statements of cash flows for the nine months ended September 30, 2001 and 2000. 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. Financial information as of December 31, 2000 has been derived from the audited Consolidated Financial Statements of Community Trust Bancorp, Inc. (the "Registrant" or "Corporation"). The results of operations for the three and nine months ended September 30, 2001 and 2000 and statements of cash flows for the nine months ended September 30, 2001 and 2000 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, 2000, included in the Registrant's Annual Report on Form 10-K.

Principles of Consolidation - The unaudited condensed consolidated financial statements include the accounts of the Corporation and its separate and distinct, wholly owned subsidiaries Community Trust Bank, National Association; Trust Company of Kentucky, National Association; CTBI Preferred Capital Trust; and Community Trust Funding Corporation. All significant intercompany transactions have been eliminated in consolidation.

On January 1, 2001, the Corporation adopted Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and Certain Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives, including those embedded in other contracts, be recognized as either assets or liabilities and that those financial instruments be measured at fair value. The accounting for changes in the fair value of derivatives depends on their intended use and designation. Management has reviewed the requirements of SFAS No. 133 and has determined that the Corporation has no freestanding or embedded derivatives. All contracts that contain provisions meeting the definition of a derivative also meet the requirements of, and have been designated as, normal purchases or sales. The Corporation's policy is to not use freestanding derivatives and to not enter into contracts with terms that cannot be designated as normal purchases or sales. This statement did not impact the Corporation's financial position or results of operation.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

The Corporation is required to adopt the provisions of SFAS No. 141 immediately and SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any intangible assets determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS No. 142 literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of SFAS No. 142.

Once adopted, the Corporation expects to have unamortized goodwill in the amount of $57.1 million. The Corporation is evaluating the impact of the adoption of these standards and has not yet determined the effect of adoption on its financial position and results of operations, including whether any impairment charges will result.

Note 2 - Business Combinations

On January 26, 2001, Community Trust Bank, N.A. acquired certain deposits, loans, and fixed assets of The Bank of Mt.Vernon, Inc. The offices acquired had deposits totaling $109.3 million and loans totaling $79 million. The addition of banking offices in Mt. Vernon, Somerset, Richmond, and Berea, Kentucky represents an in-market acquisition and should provide the corresponding synergies normally associated with this type of acquisition.

During the third quarter of 2001, the Company acquired 75.28% of the outstanding shares of Citizens National Bank and Trust of Hazard, Kentucky valued at $15,062,097 in lieu of a debt owed to the Company by a Citizens' shareholder. At that time, Citizens National was under contract to be sold to a third party and, accordingly, the financial results of Citizens National have not been consolidated with the Company at September 30, 2001 since control was deemed likely at that time to be temporary. That contract was subsequently rescinded allowing the Company to enter into a definitive agreement on October 16, 2001 to acquire the remaining 24.72% of Citizens National for $4,944,551. This acquisition is pending regulatory approval. Citizens National has total assets of $139,506,159 and equity capital of $16,563,072 as of September 30, 2001.

Note 3 - Securities

Securities are classified into held-to-maturity and available-for-sale categories. Held-to-maturity securities are those that the Corporation has the positive intent and ability to hold to maturity and are reported at amortized cost. Available-for-sale securities are those that the Corporation 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 available-for-sale as of September 30, 2001 are summarized as follows:

(in thousands)		Amortized Cost		Fair Value
U.S. Treasury and Government agencies		$	44,888	$	45,443
States and political subdivisions			34,814		36,260
Mortgage-backed pass through certificates			218,040		223,065
Collateralized mortgage obligations			11,144		11,401
Other debt securities			5,314		5,421
	Total debt securities		314,200		321,590
Equity securities			42,742		42,703
	Total Securities	$	356,942	$	364,293

The amortized cost and fair value of securities held-to-maturity as of September 30, 2001 are summarized as follows:

(in thousands)		Amortized Cost		Fair Value
U.S. Treasury and Government agencies		$	11,499	$	11,489
States and political subdivisions			23,189		23,866
Mortgage-backed pass through certificates			3,207		3,238
Collateralized mortgage obligations			865		863
	Total Securities	$	38,760	$	39,456

The amortized cost and fair value of securities available-for-sale as of December 31, 2000 are summarized as follows:

(in thousands)		Amortized Cost		Fair Value
U.S. Treasury and Government agencies		$	28,464	$	28,918
States and political subdivisions			33,799		34,037
Mortgage-backed pass through certificates			117,085		116,829
Collateralized mortgage obligations			15,105		15,102
Other debt securities			35,351		35,327
	Total debt securities		229,804		230,213
Equity securities			6,448		6,407
	Total Securities	$	236,252	$	236,620

The amortized cost and fair value of securities held-to-maturity as of December 31, 2000 are summarized as follows:

(in thousands)		Amortized Cost		Fair Value
U.S. Treasury and Government agencies		$	11,499	$	9,168
States and political subdivisions			27,653		28,123
Mortgage-backed pass through certificates			6,545		6,505
Collateralized mortgage obligations			3,279		3,257
	Total Securities	$	48,976	$	47,053

Note 4 - Loans

Major classifications of loans are summarized as follows:

(in thousands)		September 30 2001		December 31 2000
Commercial, secured by real estate		$	497,383	$	469,646
Commercial, other			288,090		303,141
Real estate - commercial construction			76,565		78,487
Real estate - residential construction			19,528		14,704
Real estate mortgage			435,469		435,110
Consumer			400,291		386,504
Equipment lease financing			7,063		6,933
	Total loans	$	1,724,389	$	1,694,525

Note 5 - Borrowings

Short-term debt consists of the following:

(in thousands)		September 30 2001		December 31 2000
Parent Company:
	Revolving line of credit, 4.1875% interest due semiannually. The Corporation has a $14 million revolving line of credit; $6 million is currently available to meet any future cash needs, expires January 31, 2002.	$	8,000	$	5,500
Subsidiaries:
	Federal funds purchased		20,230		13,833
	Securities sold under agreements to repurchase		50,411		39,618
	Total short-term debt	$	78,641	$	58,951

Generally, federal funds purchased and securities sold under agreements to repurchase mature and reprice daily. The average rates paid for federal funds purchased and repurchase agreements on September 30, 2001 were 3.05% and 3.04%, respectively.

Long-term debt consists of the following:

(in thousands)		September 30 2001		December 31 2000
Parent Company:
	Ten Year Senior Notes, 8.25% interest, due January 1, 2003; interest payable semiannually; redeemable in whole or in part at the option of the Corporation	$	12,230	$	12,230
Subsidiaries:
	Trust Preferred Securities, 9.0% interest, due March 31, 2027; irrevocably and unconditionally guaranteed by the Corporation and subordinate and junior in right of payment to all senior debt. There are no payments due on this debt until maturity on March 31, 2027.		34,500		34,500
	Capital lease obligations, interest at lender's prime rate, payable in quarterly principal and interest installments of $53 thousand, adjusted for prime rate changes through September 2004, secured by real property. The Bank has a purchase option in September 2004 for $921 thousand or a renewal option for five years.		1,212		1,291
Other			2		39
	Total long-term debt	$	47,944	$	48,060

Item 2. Management's Discussion and Analysis of Financial Condition

and Results of Operations

Overview

Community Trust Bancorp, Inc. (the "Corporation") is a multi-bank holding company headquartered in Pikeville, Kentucky. At September 30, 2001, the Corporation owned one commercial bank and one trust company. Through its subsidiaries, the Corporation has sixty-seven banking locations serving 250,000 households in Eastern and Central Kentucky and West Virginia. The Corporation had total assets of $2.422 billion and total shareholders' equity of $190.8 million as of September 30, 2001. The Corporation's common stock is listed on NASDAQ under the symbol CTBI. Market makers are Herzog, Heine, Geduld, Inc., New York, New York; J.J.B. Hilliard, W.L. Lyons, Inc., Louisville, Kentucky; Morgan, Keegan and Company, Inc., Memphis, Tennessee; Keefe, Bruyette & Woods, Inc., New York, New York; Sandler O'Neill & Partners, New York, New York; Sherwood Securities Corp., New York, New York; Spear, Leeds & Kellogg, New York, New York; and Midwest Securities, Nashville, Tennessee.

Dividends

Regular quarterly cash dividends were paid on (1) July 1, 2000 of 19 cents per share for shareholders of record on June 15, 2000, (2) October 1, 2000 of 19 cents per share for shareholders of record on September 15, 2000, (3) January 1, 2001 of 19 cents per share for shareholders of record on December 15, 2000, (4) April 1, 2001 of 20 cents per share for shareholders of record on March 15, 2001, (5) July 1, 2001 of 20 cents per share for shareholders of record on June 15, 2001, and (6) October 1, 2001 of 20 cents per share for shareholders of record on September 15, 2001. A quarterly cash dividend of $0.21 per share was approved on October 23, 2001 to be paid January 1, 2002 to shareholders of record on December 15, 2001.

Mergers and Acquisitions

On January 26, 2001, Community Trust Bank, N.A. acquired certain deposits, loans, and fixed assets of The Bank of Mt.Vernon, Inc. The offices acquired had deposits totaling $109.3 million and loans totaling $79 million. The addition of banking offices in Mt. Vernon, Somerset, Richmond, and Berea, Kentucky represents an in-market acquisition and should provide the corresponding synergies normally associated with this type of acquisition.

During the third quarter of 2001, the Company acquired 75.28% of the outstanding shares of Citizens National Bank and Trust of Hazard, Kentucky valued at $15,062,097 in lieu of a debt owed to the Company by a Citizens' shareholder. At that time, Citizens National was under contract to be sold to a third party. That contract was subsequently rescinded allowing the Company to enter into a definitive agreement on October 16, 2001 to acquire the remaining 24.72% of Citizens National for $4,944,551. This acquisition is pending regulatory approval. Citizens National has total assets of $139,506,159 and equity capital of $16,563,072 as of September 30, 2001. The addition of Hazard, Perry and surrounding counties is consistent with the Company's expansion plans to add banking locations within contiguous markets to gain in-market synergies and efficiencies of operation.

Income Statement Review

The Corporation's net income for the three months ended September 30, 2001 was $5.273 million or $0.46 per share as compared to $5.664 million or $0.48 per share for the three months ended September 30, 2000. Net income for the nine months ended September 30, 2001 was $16.429million or $1.42per share as compared to $16.592million or $1.38 per share for the nine months ended September 30, 2000. The Corporation had average shares outstanding of 11,548,000 and 12,023,000 for the nine months ended September 30, 2001 and September 30, 2000, respectively. The following table sets forth on an annualized basis the return on average assets and return on average shareholders' equity for the three and nine month periods ending September 30, 2001 and 2000:

	Three months ended				Nine months ended
	September 30				September 30
	2001		2000		2001		2000
Return on average shareholders' equity	11.10	%	12.75	%	11.78	%	12.60	%
Return on average assets	0.86	%	1.03	%	0.91	%	1.02	%

The Corporation's net income for the third quarter of 2001 represents a 2 cents per share decrease in earnings compared to the same period last year. The decrease in earnings per share is primarily attributable to the impact on the net interest margin caused by rate declines, as discussed further below.

Net Interest Income

Net interest income decreased $679 thousand or 3.2% to $20.363 million for the third quarter of 2001 from $21.042 million for the third quarter of 2000. Interest income decreased $1.118 million or 2.5% for the quarter ending September 30, 2001 as compared to the same period in 2000, and interest expense decreased $439 thousand or 1.9%.

Although a decline in the Corporation's net interest margin was anticipated as the economy began to weaken during 2000 and interest rates began to decline in January 2001, the magnitude of the decrease in interest rates was not anticipated. CTBI's net interest margin continued to be negatively impacted by the repricing of assets quicker than liabilities through the first eight months of 2001. The Company was seeing some relief on its margin during September 200l when the national disaster of September 11, 2001 prompted an additional lowering of interest rates by the Federal Open Market Committee. The 400 basis point decline in market interest rates has resulted in a 58 basis point decline in our net interest margin from 4.27% for the three months ended September 30, 2000 to 3.69% for the three months ended September 30, 2001. Some of the pressure on our net interest margin has been offset by a 78 basis point increase in our average earning assets as a percentage of total assets which w ere 92.39% for the three months ended September 30, 2001 compared to 91.61% for the three months ended September 30, 2000. During this period of rate reductions, more of the Company's assets have repriced than liabilities. Management believes the next four to six months present an opportunity for an improved net interest margin.

The following table summarizes the annualized net interest spread and net interest margin for the three and nine months ended September 30, 2001 and 2000.

	Three months ended				Nine months ended
	September 30				September 30
	2001		2000		2001		2000
Yield on interest earning assets	7.79	%	8.93	%	8.22	%	8.84	%
Cost of interest bearing funds	4.74	%	5.36	%	5.13	%	5.11	%
Net interest spread	3.05	%	3.57	%	3.09	%	3.73	%
Net interest margin	3.69	%	4.27	%	3.76	%	4.37	%

Provision for Loan Losses

The analysis of the changes in the allowance for loan losses and selected ratios is set forth below:

		Nine months ended
		September 30
(in thousands)		2001		2000
Allowance balance at January 1		$	25,886	$	25,102
	Additions to allowance charged against operations		6,345		6,637
	Recoveries credited to allowance		3,010		4,136
	Losses charged against allowance		(11,182)		(10,116)
Allowance balance at September 30		$	24,059	$	25,759
Allowance for loan losses to period-end loans		1.40		%	1.53	%
Average loans, net of unearned income		$	1,751,856	$	1,655,434
Provision for loan losses to average loans, annualized		0.48		%	0.54	%
Loan charge-offs net of recoveries, to average loans, annualized		0.62		%	0.48	%

Net charge-offs for the nine months ending September 30, 2001 were $8.2 million, a 37% increase from the $6.0 million experienced during the first nine months of 2000. As was discussed in our June 30, 2001 earnings release, $2.25 million of the increase in net charge-offs is the result of the Bank's recognition of the loss on one large commercial credit for which a specific reserve had been established. Normalized for this charge-off, the Company would have experienced a net decrease in charge-offs. Our reserve for losses on loans and leases as a percentage of total loans was 1.40% on September 30, 2001 compared to 1.53% on September 30, 2000. The decline in loan loss reserve as a percentage of total loans is primarily the result of the addition of $79 million in loans from the Mt. Vernon acquisition and the charge to the specific reserve mentioned above. Since the terms of the Mt. Vernon acquisition provided for due diligence and put of substandard loans back to the seller, no increase in the allowance was booked and charged to current provision expense impacting the change in the reserve for loan losses to total loans by 6 basis points.

Noninterest Income

Non-interest income for the quarter ending September 30, 2001 of $5.5 million was a 15% increase from the $4.8 million earned during the same period in 2000. The increase in non-interest income is primarily the result of an increase in gains on sale of residential real estate loans due to current refinancing activity of $460 thousand and an increase in deposit account fees of $290 thousand.

Noninterest Expense

Non-interest expense was $15.7 million for the quarter ending September 30, 2001, a 2.3% increase from the $15.3 million for quarter ending September 30, 2000. The increase in non-interest expense is primarily attributable to the operating expenses associated with the addition of the five banking offices acquired from The Bank of Mount Vernon, Inc. on January 26, 2001. The additional expenses are also reflected in our efficiency ratio, which increased 132 basis points from 58.21% for the quarter ended September 30, 2000 to 59.53% for the current quarter. Management expects the efficiency ratio to show continuing improvement during the remainder of 2001 as the ratio decreased 137 basis points during the third quarter of 2001 compared to the second quarter of 2001.

Cash Basis Income

		Three months ended
		September 30, 2001
				Amortization
(in thousands)		Reported Earnings		Goodwill		Core Deposit Intangible		"Cash" Earnings
Income before income tax expense		$	7,755	$	806	$	145	$	8,706
	Income taxes		2,482		215		51		2,748
Net income		$	5,273	$	591	$	94	$	5,958

Cash Basis Income

		Nine months ended
		September 30, 2001
				Amortization
(in thousands)		Reported Earnings		Goodwill		Core Deposit Intangible		"Cash" Earnings
Income before income tax expense		$	24,163	$	2,308	$	435	$	26,906
	Income taxes		7,734		605		152		8,491
Net income		$	16,429	$	1,703	$	283	$	18,415

These calculations were specifically formulated by the Corporation and may not be comparable to similarly titled measures reported by other companies.

Balance Sheet Review

The Corporation's assets grew 7.1% from December 31, 2000 to September 30, 2001 increasing from $2.262 billion to $2.422 billion. The Corporation's largest liability, deposits, grew 6.5% to $2.07 billion from the $1.94 billion of December 31, 2000. Noninterest bearing deposits increased from $255 million at December 31, 2000 to $276 at September 30, 2001. Interest bearing deposits increased from $1.689 billion at December 31, 2000 to $1.794 billion at September 30, 2001. Approximately 68% of the deposit growth resulted from the Bank of Mt.Vernon, Inc. transaction that closed on January 26, 2001 with the remainder being internal growth.

Loans

The loan portfolio grew at an annualized rate of 2.36% to $1.72 billion from the $1.69 billion of December 31, 2000. All of the loan growth resulted from the Bank of Mt. Vernon, Inc. transaction that closed on January 26, 2001. The impact of current economic conditions on the Company's balance sheet is evidenced by the small loan growth resulting from a significant softening in commercial loan demand and the migration of portfolio residential real estate loans to long term fixed rate secondary market loans, while internal growth in interest bearing deposits has been strong. Our net interest margin has been adversely impacted as current market conditions provide limited higher yielding investment opportunities other than loans.

Foreclosed properties on September 30, 200l were $2.0 million, a decline of $2.6 million from the $4.6 million reported at December 31, 2000. The reduction from the December 31, 2000 total is primarily the result of the successful liquidation, as was anticipated, of one commercial property during June 2001 at no additional loss.

Loans on non-accrual or 90 days past due amounted to 1.68% of total loans outstanding as of September 30, 2001 and 1.52% of total loans outstanding as of December 31, 2000. Not included in the non-performing loan ratios at September 30, 2001 are two additional commercial relationships aggregating $5.6 million of which $3.4 million has been placed on non-accrual. These borrowers filed bankruptcy and are in the early stages of liquidation and workout. These two commercial relationships are not linked to any one industry but are due to the cash flow problems of the particular borrowers. Specific reserves are established for all large loans where a loss may occur; therefore, no significant losses are anticipated except for those loans with specific reserve allocations.

The allowance for loan losses decreased from 1.53% of total loans outstanding as of December 31, 2000 to 1.40% as of September 30, 2001. The decline in loan loss reserve as a percentage of average loans is primarily the result of the addition of $79 million in loans from the Mt. Vernon acquisition and the charge to the specific reserve mentioned above. Since the terms of the Mt. Vernon acquisition provided for due diligence and put back of substandard loans to the seller, no increase in the allowance was booked and charged to current provision expense impacting the change in the reserve for loan losses to total loans by 6 basis points. The allowance for loan losses as a percentage of non-performing loans was 99.3% at December 31, 2000 and 81.9% at September 30, 2001.

The following table summarizes the Corporation's loans that are non-accrual or past due 90 days or more as of September 30, 2001 and December 31, 2000.

(in thousands)			Non-accrual loans			As a % of loan balances by category			Accruing loans past due 90 days or more			As a % of loan balances by category
September 30, 2001
Commercial loans secured by real estate		$		7,767	1.35		%	$		1,413	0.25		%
Commercial loans, other				7,030	2.38					1,111	0.38
Mortgage loans secured by real estate				7,526	1.65					2,505	0.55
Consumer loans, other				401	0.10					1,140	0.28
	Total	$		22,724	1.32		%	$		6,169	0.36		%

December 31, 2000
Commercial loans secured by real estate		$	7,646	1.39	%	$	463	0.08	%
Commercial loans, other			7,322	2.36			66	0.02
Mortgage loans secured by real estate			7,589	1.69			1,550	0.34
Consumer loans, other			174	0.05			921	0.24
	Total	$	22,731	1.34	%	$	3,000	0.18	%

Allowance for loan losses

Management analyzes the adequacy of its allowance for loan losses on a quarterly basis. The loan portfolio of each market region is analyzed by each major loan category, with a review of the following areas: (i) specific allocations based upon a review of selected loans for loss potential; (ii) an allocation which estimates reserves based upon the remaining pool of loans in each category derived from historical net charge-off data; and (iii) an unallocated portion of the allowance using delinquency trends and other relevant factors which provides for a margin of error in estimating the allocations described above and provides for risks inherent in the portfolio which may not be specifically addressed elsewhere.

Off-balance sheet risk is addressed by including letters of credit in the Corporation's allowance adequacy analysis and through a monthly review of all letters of credit outstanding. The Corporation's loan review and problem loan analysis includes evaluation of deteriorating letters of credit. Volume and trends in delinquencies are monitored monthly by management and the boards of directors of the Bank and the Corporation quarterly.

Securities

The Corporation uses its securities held-to-maturity for production of income and to manage cash flow needs through expected maturities. The Corporation uses its securities available-for-sale for income and balance sheet liquidity management. The book value of securities available-for-sale increased from $237 million as of December 31, 2000 to $364 million as of September 30, 2001. Securities held-to-maturity declined from $49 million to $39 million during the same period. Total securities as a percentage of total assets were 12.6% as of December 31, 2000 and 16.6% as of September 30, 2001.

Liquidity and Capital Resources

The Corporation's liquidity objectives are to ensure that funds are available for the subsidiary bank to meet deposit withdrawals and credit demands without unduly penalizing profitability, and to ensure that funding is available for the Corporation to meet ongoing cash needs while maximizing profitability. The Corporation continues to identify ways to provide for liquidity on both a current and long-term basis. The subsidiary bank relies mainly on core deposits, certificates of deposits of $100,000 or more, repayment of principal and interest on loans and securities and federal funds sold and purchased to create long-term liquidity. The subsidiary bank also relies on the sale of securities under repurchase agreements, securities available-for-sale and Federal Home Loan Bank borrowings.

Due to the nature of the markets served by the subsidiary banks, management believes that the majority of its certificates of deposits of $100,000 or more are no more volatile than its core deposits. During periods of interest rate volatility, these deposit balances have remained stable as a percentage of total deposits. In addition, arrangements have been made with correspondent banks for the purchase of federal funds on an unsecured basis, up to an aggregate of nearly $100 million, if necessary, to meet the Corporation's liquidity needs.

The Corporation owns $364 million of securities valued at market price that are designated as available-for-sale and available to meet liquidity needs on a continuing basis. The Corporation also relies on Federal Home Loan Bank advances for both liquidity and management of its asset/liability position. Federal Home Loan Bank advances decreased from $13.3 million as of December 31, 2000 to $10.5 million as of September 30, 2001.

The Corporation generally relies upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash for its investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, use of short-term borrowing facilities such as federal funds purchased and securities sold under repurchase agreements, and issuance of long-term debt. The Corporation currently has a $14 million revolving line of credit; $6 million is currently available to meet any future cash needs. The Corporation's primary investing activities include purchases of securities and loan originations.

During the third quarter of 2001, the Corporation continued its stock repurchase program, acquiring 39,367 shares of the Corporation's stock. The Corporation's stock repurchase program continues to be accretive to shareholder value. The Corporation began a program of stock repurchase in December 1998 with the authorization to acquire up to 500,000 shares. The Corporation issued a press release in July 2000 announcing its intention to repurchase up to an additional 1,000,000 shares.

In conjunction with maintaining a satisfactory level of liquidity, management monitors the degree of interest rate risk assumed on the balance sheet. The Corporation monitors its interest rate risk by use of the static gap model and dynamic gap model at the one-year interval. The static gap model monitors the difference in interest rate sensitive assets and interest rate sensitive liabilities as a percentage of total assets that mature within the specified time frame. The dynamic gap model goes further in that it assumes that interest rate sensitive assets and liabilities will be reinvested. The Corporation uses the Sendero system to monitor its interest rate risk. The Corporation desires an interest sensitivity gap of not more than fifteen percent of total assets at the one-year interval.

The Corporation's principal source of funds used to pay dividends to shareholders and service long-term debt is the dividends it receives from the subsidiary bank. Various federal statutory provisions, in addition to regulatory policies and directives, limit the amount of dividends that subsidiary banks can pay without prior regulatory approval. These restrictions have had no major impact on the Corporation's dividend policy or its ability to service long-term debt, nor is it anticipated that they would have any major impact in the foreseeable future. During the fourth quarter of 2001, approximately $20.3 million plus any fourth quarter 2001 net profits can be paid by the Corporation's banking subsidiary without prior regulatory approval.

The primary source of capital for the Corporation is retained earnings. The Corporation paid cash dividends of $0.60 per share for the first nine months of 2001 and $0.56 per share for the first nine months of 2000. Earnings per share for the same periods were $1.42 and $1.38, respectively. The Corporation retained 58% of earnings for the first nine months of 2001.

Under guidelines issued by banking regulators, the Corporation and its subsidiary bank are required to maintain a minimum Tier 1 risk-based capital ratio of 4% and a minimum total risk-based ratio of 8%. Risk-based capital ratios weight the relative risk factors of all assets and consider the risk associated with off-balance sheet items. The Corporation must also maintain a minimum Tier 1 leverage ratio of 4%. The Corporation's Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios were 6.66%, 9.06%, and 10.30%, respectively as of September 30, 2001.

As of September 30, 2001, management is not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or would be reasonably likely to have, a material adverse impact on the Corporation's liquidity, capital resources, or operations.

Impact of Inflation and Changing Prices

The majority of the Corporation's assets and liabilities are monetary in nature. Therefore, the Corporation differs greatly from most commercial and industrial companies that have significant investment in nonmonetary assets, such as fixed assets and inventories. However, inflation does have an important impact on the growth of assets in the banking industry and on the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other expenses, which tend to rise during periods of general inflation.

Management believes the most significant impact on financial and operating results is the Corporation's ability to react to changes in interest rates. Management seeks to maintain an essentially balanced position between interest rate sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations.

FORWARD-LOOKING STATEMENTS

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, the performance of coal and coal related industries, prevailing inflation and interest rates, realized gains from sales of investme nts, gains from asset sales, and losses on commercial lending activities; results of various investment activities; the effects of competitors' pricing policies, of changes in laws and regulations on competition and of demographic changes on target market populations' savings and financial planning needs; the adoption by the Corporation of an 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 Office of the Comptroller of Currency, 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Corporation currently does not engage in any derivative or hedging activity. Refer to the Corporation's 2000 Form 10-K for analysis of the interest rate sensitivity.

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	None
Item 2.	Changes in Securities	None
Item 3.	Defaults Upon Senior Securities	None
Item 4.	Submission of Matters to a Vote of Security Holders	None
Item 5.	Other Information	None
Item 6.	Exhibits and Reports on Form 8-K	None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	COMMUNITY TRUST BANCORP, INC.
	By:
Date: November 14, 2001	/s/ Jean R. Hale
	Jean R. Hale
	Vice Chairman, President, and
	Chief Executive Officer
	/s/ Kevin Stumbo
	Kevin Stumbo
	Chief Accounting Officer