Community Trust Bancorp (CTBI) 10-Q 2003 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, 2003
	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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

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 - 12,224,343 shares outstanding at October 31, 2003

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, 2002 for further information in this regard.

Condensed Consolidated Balance Sheets

(dollars in thousands)			September 30 2003		December 31 2002
			(unaudited)
Assets:
Cash and due from banks		$	72,698	$	92,955
Federal funds sold			980		49,251
Securities available-for-sale at fair value
	(amortized cost of $513,086 and $515,931, respectively)		518,690		527,339
Securities held-to-maturity at amortized cost
	(fair value of $90,222 and $52,673, respectively)		90,846		51,243
Loans held for sale			3,973		2,279
Loans			1,682,346		1,634,607
	Allowance for loan losses		(23,816)		(23,271)
	Net loans		1,658,530		1,611,336
Premises and equipment, net			49,632		50,767
Goodwill			60,122		60,122
Core deposit intangible (net of accumulated amortization of $2,987 and $2,552, respectively)			3,974		4,409
Other assets			40,895		38,210
	Total assets	$	2,500,340	$	2,487,911
Liabilities and shareholders' equity:
Deposits
	Noninterest bearing	$	343,917	$	343,565
	Interest bearing		1,763,702		1,784,151
Total deposits			2,107,619		2,127,716
Federal funds purchased and other short-term borrowings			93,387		68,431
Advances from Federal Home Loan Bank			3,632		5,617
Trust preferred securities			59,500		59,500
Long-term debt			2		1,104
Other liabilities			20,899		16,124
	Total liabilities		2,285,039		2,278,492
Shareholders' equity:
Preferred stock, 300,000 shares authorized and unissued
Common stock, $5 par value, shares authorized 25,000,000;
	shares outstanding 2003 - 12,217,156; 2002 - 12,348,177		61,086		61,741
Capital surplus			70,665		73,723
Retained earnings			79,908		66,540
Accumulated other comprehensive income, net of tax			3,642		7,415
	Total shareholders' equity		215,301		209,419
	Total liabilities and shareholders' equity	$	2,500,340	$	2,487,911

Condensed Consolidated Statements of Income

(unaudited)

		Three months ended				Nine months ended
		September 30				September 30
(in thousands except per share data)		2003		2002		2003		2002
Interest income:
Interest and fees on loans, including loans held for sale		$	26,792	$	29,805	$	81,867	$	92,267
Interest and dividends on securities
	Taxable		3,910		5,139		12,615		16,218
	Tax exempt		540		672		1,642		2,057
Other, including interest on federal funds sold			178		308		651		1,247
	Total interest income		31,420		35,924		96,775		111,789
Interest expense:
Interest on deposits			9,013		11,820		29,483		38,752
Interest on federal funds purchased and other short-term borrowings			241		328		774		1,128
Interest on advances from Federal Home Loan Bank			53		98		184		335
Interest on long-term debt and trust preferred securities			1,337		1,318		4,012		3,994
	Total interest expense		10,644		13,564		34,453		44,209
	Net interest income		20,776		22,360		62,322		67,580
Provision for loan losses			2,085		2,530		7,217		8,416
	Net interest income after provision for loan losses		18,691		19,830		55,105		59,164
Noninterest income:
Service charges on deposit accounts			4,483		3,631		12,645		9,306
Gains on sales of loans, net			1,613		1,016		4,729		2,347
Trust income			604		546		1,851		1,702
Securities gains, net			476		1,528		3,042		1,528
Other			2,917		1,966		5,957		4,840
	Total noninterest income		10,093		8,687		28,224		19,723
Noninterest expense:
Salaries and employee benefits			8,705		8,742		25,604		25,594
Occupancy, net			1,421		1,400		4,368		4,192
Equipment			956		917		2,723		2,657
Data processing			948		939		2,900		2,957
Legal and professional fees			989		803		2,857		2,125
Taxes other than payroll, property, and income			726		614		2,063		1,837
Stationery, printing, and office supplies			316		318		1,048		1,147
FDIC insurance			82		89		250		289
Other			3,968		2,961		10,673		8,692
	Total noninterest expense		18,111		16,783		52,486		49,490
	Income before income taxes		10,673		11,734		30,843		29,397
Income taxes			3,392		3,801		9,505		8,765
	Net income		7,281		7,933		21,338		20,632
Other comprehensive income, net of tax:
	Unrealized holding gains (losses) arising during period		(2,682)		2,070		(3,773)		5,804
Comprehensive income		$	4,599	$	10,003	$	17,565	$	26,436
Basic earnings per share		$	0.60	$	0.64	$	1.74	$	1.65
Diluted earnings per share		$	0.59	$	0.63	$	1.72	$	1.63
Average shares outstanding			12,207		12,452		12,255		12,517

Condensed Consolidated Statements of Cash Flows

(unaudited)

			Nine months ended
			September 30
(in thousands)			2003		2002
Cash flows from operating activities:
Net income			$	21,338	$	20,632
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			3,324		3,307
	Change in net deferred tax asset, net			(631)		22
	Provision for loan and other real estate losses			7,338		8,475
	Securities gains, net			(3,042)		(1,528)
	Gains on sale of mortgage loans held for sale			(4,729)		(2,347)
	Gains (losses) on sale of assets, net			68		(21)
	Proceeds from sale of mortgage loans held for sale			171,993		82,765
	Amortization of securities premiums, net			1,083		164
	Change in loans held for sale, net			(1,694)		(10,188)
	Changes in:
		Other liabilities		6,806		563
		Other assets		(1,116)		(505)
Net cash provided by operating activities				200,738		101,339
Cash flows from investing activities:
Securities available-for-sale:
	Proceeds from sales			89,426		74,960
	Proceeds from prepayments and maturities			124,538		76,784
	Purchase of securities			(209,087)		(249,515)
Securities held-to-maturity:
	Proceeds from prepayments and maturities			41,385		28,730
	Purchase of securities			(81,061)		(540)
Change in loans, net				(225,336)		(11,587)
Purchase of premises, equipment, and other real estate				(1,759)		(2,325)
Proceeds from sale of premises and equipment				8		0
Proceeds from sale of other real estate				2,531		3,705
Assets acquired net of cash				0		(577)
Net cash used in investing activities				(259,355)		(80,365)
Cash flows from financing activities:
Change in deposits, net				(20,097)		(82,411)
Change in federal funds purchased and other short-term borrowings, net				23,928		(25,859)
Payments on advances from Federal Home Loan Bank				(1,985)		(2,997)
Payments on long-term debt				(74)		12,683
Issuance of common stock				1,375		1,217
Purchase of common stock				(5,089)		(6,113)
Dividends paid				(7,969)		(7,159)
Net cash provided by (used in) financing activities				(9,911)		(110,639)
Net increase (decrease) in cash and cash equivalents				(68,528)		(89,665)
Cash and cash equivalents at beginning of year				142,206		209,796
Cash and cash equivalents at end of period			$	73,678	$	120,131

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 condensed consolidated financial position as of September 30, 2003, the results of operations for the three and nine months ended September 30, 2003 and 2002, and the statements of cash flows for the nine months ended September 30, 2003 and 2002. 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, 2002 has been derived from the audited consolidated financial statements of Community Trust Bancorp, Inc. (the "Corporation"). The results of operations for the three and nine months ende d September 30, 2003 and 2002 and the statements of cash flows for the nine months ended September 30, 2003 and 2002 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, 2002, included in the Corporation'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, Inc. (the "Bank"); Community Trust and Investment Company; CTBI Preferred Capital Trust; and CTBI Preferred Capital Trust II. All significant intercompany transactions have been eliminated in consolidation.

In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based Compensation--Transition and Disclosure. This statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years ending after December 15, 2002. Adoption of SFAS No. 148 did not have a material impact on the Corporation's consolidated financial statements. As permitted by SFAS No. 148, the Corporation will continue to apply the provisions of APB Opinion No . 25, Accounting for Stock-Based Compensation, for all employee stock option grants and has elected to disclose pro forma net income and earnings per share amounts as if the fair-value based method had been applied in measuring compensation costs.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of ARB No. 51, Consolidated Financial Statements, for certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. FIN 46 requires variable interest entities to be consolidated by the primary beneficiary which represents the enterprise that will absorb the majority of the variable interest entities expected losses if they occur, receive a majority of the variable interest entities' residual returns if they occur, or both. Qualifying special purpose entities are exempt from the consolidation requirements of FIN 46. FIN 46 is effective immediately for variable interest entities created after January 31, 2003 and for variable interest entities in which an ente rprise obtains an interest after that date. FIN 46 is effective in the first fiscal year or interim period beginning after June 15, 2003 for variable interest entities in which an enterprise holds a variable interest that was acquired before February 1, 2003, with earlier adoption permitted. The Corporation adopted the provisions of FIN 46 on July 1, 2003. The adoption of FIN 46 had no material impact on the Corporation's consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain embedded derivatives, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement amends SFAS No. 133 to reflect the decisions made as part of the Derivatives Implementation Group (DIG) and in other FASB projects or deliberations. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. SFAS No. 149 was adopted by the Corporation on July 1, 2003. The Corporation has not entered into any contracts or hedging relationships; therefore, adoption of SFAS No. 149 had no effect on the Corporation's consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This Statement establishes standards for how an entity classifies and measures certain financial instruments with characteristics of both liabilities and equity. This Statement requires that an issuer classify a financial instrument that is within its scope as a liability. Many of those instruments were previously classified as equity or in some cases presented between the liabilities section and the equity section of the statement of financial position. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Corporation adopted the provisions of SFAS No. 150 on June 1, 2003. The adoption of SFAS No. 150 had no material effect on the Corporation's consolidated financial statements.

Note 2 - 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, 2003 are summarized as follows:

(in thousands)		Amortized Cost		Fair Value
U.S. Treasury and government agencies		$	34,333	$	34,535
State and political subdivisions			190,167		192,767
U.S. agency mortgage-backed pass through certificates			192,896		195,349
Collateralized mortgage obligations			4,435		4,642
Other debt securities			15,296		15,399
	Total debt securities		437,127		442,692
Marketable equity securities			75,959		75,998
	Total available-for-sale securities	$	513,086	$	518,690

The amortized cost and fair value of securities held-to-maturity as of September 30, 2003 are summarized as follows:

(in thousands)		Amortized Cost		Fair Value
U.S. Treasury and government agencies		$	9,500	$	9,774
State and political subdivisions			4,443		4,636
U.S. agency mortgage-backed pass through certificates			76,903		75,812
	Total held-to-maturity securities	$	90,846	$	90,222

The amortized cost and fair value of securities available-for-sale as of December 31, 2002 are summarized as follows:

(in thousands)		Amortized Cost		Fair Value
U.S. Treasury and government agencies		$	88,467	$	90,288
State and political subdivisions			186,984		189,346
U.S. agency mortgage-backed pass through certificates			154,916		162,325
Collateralized mortgage obligations			7,685		8,012
Other debt securities			18,811		18,312
	Total debt securities		456,863		468,283
Marketable equity securities			59,068		59,056
	Total available-for-sale securities	$	515,931	$	527,339

The amortized cost and fair value of securities held-to-maturity as of December 31, 2002 are summarized as follows:

(in thousands)		Amortized Cost		Fair Value
U.S. Treasury and government agencies		$	37,318	$	38,370
State and political subdivisions			13,925		14,303
	Total held-to-maturity securities	$	51,243	$	52,673

Note 3 - Loans

Major classifications of loans are summarized as follows:

(in thousands)		September 30 2003		December 31 2002
Commercial construction		$	67,772	$	66,797
Commercial secured by real estate			558,082		509,856
Commercial other			260,353		280,492
Real estate construction			30,143		23,311
Real estate mortgage			388,815		377,109
Consumer			362,690		366,493
Equipment lease financing			14,491		10,549
	Total loans	$	1,682,346	$	1,634,607

Note 4 - Borrowings

Short-term debt consists of the following:

(in thousands)		September 30 2003		December 31 2002
Subsidiaries:
	Federal funds purchased	$	27,915	$	17,080
	Securities sold under agreements to repurchase		64,444		51,351
	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.		1,028		0
	Total short-term debt	$	93,387	$	68,431

On April 29, 2003, the Corporation entered into a 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 April 28, 2004.

All federal funds purchased and the majority of securities sold under agreements to repurchase reprice daily. The average rates paid for federal funds purchased and repurchase agreements on September 30, 2003 were 1.05% and 1.13%, respectively.

Long-term debt consists of the following:

(in thousands)		September 30 2003		December 31 2002
Subsidiaries:
	Capital lease obligations	$	0	$	1,102
Other			2		2
	Total long-term debt	$	2	$	1,104

Note 5 - Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely the Junior Subordinated Debentures of the Corporation

The following table is a summary of the obligated trust preferred securities as of September 30, 2003.

(in thousands)

Issuance Trust	Issuance Date	Amount		Rate Amount	Rate Type	Maturity Date	Redemption Date
CTBI Preferred Capital Trust	3/31/97	$	34,500	9.00%	Fixed	3/31/27	3/31/07
CTBI Preferred Capital Trust II	2/1/02		25,000	8.25%	Fixed	3/31/32	3/31/07
		$	59,500

Note 6 - Stock-Based Compensation

The Corporation currently maintains two incentive stock option plans covering key employees; however, only one plan is active. The 1998 Stock Option Plan ("1998 Plan") was approved by the Board of Directors and the shareholders in 1998. All options granted have a maximum term of ten years. Options granted as management retention options vest after five years and all others vest ratably over four years.

As required under the provisions of SFAS 148, the following table discloses the pro forma net income and pro forma basic and diluted earnings per share had the fair value method been applied to all stock awards for the three and nine months ended September 30, 2003 and 2002.

			Three Months Ended September 30				Nine Months Ended September 30
(in thousands except per share amounts)			2003		2002		2003		2002
Net income as reported			$	7,281	$	7,933	$	21,338	$	20,632
	Stock-based compensation expense			0		0		(523)		(292)
	Tax effect			0		0		183		102
Net income pro forma			$	7,281	$	7,933	$	20,998	$	20,442
Basic earnings per share		As reported	$	0.60	$	0.64	$	1.74	$	1.65
		Pro forma		0.60		0.64		1.71		1.63
Diluted earnings per share		As reported	$	0.59	$	0.63	$	1.72	$	1.63
		Pro forma		0.59		0.63		1.69		1.62

Note 7 - Subsequent Events

On October 29, 2003, the Corporation announced the declaration of a 10% stock dividend to shareholders of record on December 1, 2003. The dividend will be distributed on December 15, 2003. The following table shows the impact on earnings per share and average shares outstanding for the three and nine months ended September 30, 2002 and September 30, 2003 as adjusted for this stock dividend.

(in thousands except per share data)	Three Months Ended September 30				Nine Months Ended September 30
	2003		2002		2003		2002
Basic earnings per share	$	0.55	$	0.58	$	1.58	$	1.50
Diluted earnings per share	$	0.53	$	0.57	$	1.56	$	1.49
Average shares outstanding		13,428		13,698		13,481		13,769

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

and Results of Operations

Overview

Community Trust Bancorp, Inc. (the "Corporation") is a bank holding company headquartered in Pikeville, Kentucky. At September 30, 2003, the Corporation owned one commercial bank and one trust company. Through its subsidiaries, the Corporation has seventy-four banking locations in eastern, northeast, central, and south central Kentucky and southern West Virginia. The banking locations are segmented into eighteen markets within four regions. The Corporation had total assets of $2.5 billion and total shareholders' equity of $215.3 million as of September 30, 2003. The Corporation's common stock is listed on NASDAQ under the symbol CTBI. Current market participants are FTN Midwest Research Securities Corp., Cleveland, Ohio; Goldman, Sachs & Co., New York, New York; Howe Barnes Investments, Inc., Chicago, Illinois; J.J.B. Hilliard, W.L. Lyons, Inc., Louisville, Kentucky; Keefe, Bruyette & Woods, Inc., New York, New York; Merrill Lynch, Pierce, Fenner & Smith Incorporated, N ew York, New York; Morgan Stanley & Co., Incorporated, New York, New York; and Sandler O'Neill & Partners, New York, New York.

On October 31, 2003, the Corporation was pleased to announce the addition of James R. Ramsey to its Board of Directors. Dr. Ramsey is currently the president of the University of Louisville and serves as Professor of Economics and Public Administration in the College of Business and Public Administration. He received his Ph.D. in economics from the University of Kentucky and his undergraduate degree from Western Kentucky University.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require the Corporation to make estimates and assumptions about future events and their impact on amounts reported in our consolidated financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements.

We believe application of accounting policies and the estimates required therein are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.

We have identified the following critical accounting policies:

Loans are reported at the carrying value of unpaid principal reduced by unearned interest and an allowance for loan losses. Income is recorded on the level yield basis. Interest accrual is discontinued when management believes, after considering economic and business conditions, collateral value, and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. Any loan greater than 90 days past due must be well secured and in the process of collection to continue accruing interest. Cash payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured. Loans are not reclassified as accruing until principal and interest payments are brought current and future payments appear reasonably certain.

The adequacy of the allowance is reviewed quarterly by management using a methodology that includes several key factors. The Corporation utilizes an internal risk grading system for commercial credits, and those larger commercial credits identified through this grading system as having weaknesses are individually reviewed for the customer's ability and potential to repay their loans. The borrower's cash flow, adequacy of collateral held for the loan, and other considerations including legal avenues are all evaluated. Based upon this individual credit evaluation, a specific allocation to the allowance may be made for the loan. For other commercial loans that are not individually evaluated, an allowance allocation is determined by applying an eight-quarter moving average historical loss rate for this group of loans. Consumer installment and residential mortgage loans are not individually risk graded. Allowance allocations are provided for these pools of loans based upon an eight-quarter moving average historical loss rate for each of these categories of loans.

An unallocated portion of the allowance is also determined in recognition of the inherent inability to precisely determine the loss potential in any particular loan or pool of loans. The factors considered by management in determining this amount of inherent risk include delinquency trends, current economic conditions and trends, strength of the supervision and administration of the loan portfolio, level of nonperforming loans, trend in loan losses, recovery rates associated with previously charged-off loans, concentrations within commercial credits, problem loan identification strengths and weaknesses, collateral evaluation strengths and weaknesses, and level of financial statement exceptions. These factors are reviewed quarterly and weighted for risk as deemed appropriate by management. The total of these weighted factors is then applied against the total loan portfolio and the allowance is adjusted accordingly.

Since January 1, 2002, the Corporation has not substantively changed any aspect of its overall approach in the determination of the allowance for loan losses. There have been no material changes in assumptions or estimation techniques as compared to prior years that impacted the determination of the current year allowance.

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses, if any, are recognized in a separate valuation allowance for loans held for sale by charges to income.

Securities are classified as held-to-maturity or available-for-sale on the date of purchase. Only those securities classified as held-to-maturity, and which management has the intent and ability to hold to maturity, are reported at amortized cost. Available-for-sale securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in accumulated other comprehensive income. The fair value of a security is determined based on quoted market prices. If quoted market prices are not available, fair value is determined based on quoted prices of similar instruments. Realized securities gains or losses would be reported within noninterest income in the condensed consolidated statements of income. The cost of securities sold is based on the specific identification method. Held-to-maturity and available-for-sale securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circu mstances of each individual investment such as the length of time the fair value has been below cost, the expectation for that security's performance, the credit worthiness of the issuer and the Corporation's ability to hold the security to maturity.

The Corporation evaluates total goodwill for impairment, based upon Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets and SFAS No. 147, Acquisitions of Certain Financial Institutions, using fair value techniques including multiples of price/equity. Goodwill is evaluated for impairment on an annual basis.

Dividends

The following schedule shows the quarterly cash dividends paid for the past six quarters:

Pay Date	Record Date	Amount Per Share
October 1, 2003	September 15, 2003	$0.23
July 1, 2003	June 15, 2003	$0.21
April 1, 2003	March 15, 2003	$0.21
January 1, 2003	December 15, 2002	$0.21
October 1, 2002	September 15, 2002	$0.19
July 1, 2002	June 15, 2002	$0.19

On October 29, 2003, the Corporation announced the declaration of a 10% stock dividend to shareholders of record on December 1, 2003. The dividend will be distributed on December 15, 2003. This dividend is in addition to the quarterly cash dividend of $0.23 per share that will be paid on January 1, 2004, to shareholders of record on December 15, 2003. This represents an increase of 10% in the quarterly cash dividend after adjusting for the stock dividend.

Income Statement Review

The Corporation's net income for the three months ended September 30, 2003 was $7.3 million or $0.60 basic earnings per sharecompared to $7.1 million or $0.58 per share earned during the second quarter of 2003 and $7.9 million or $0.64 per share earned during the third quarter of 2002. Third quarter 2002 earnings of $0.64 per share included $0.08 per share due to gains on sale of securities compared to $0.03 per share for the third quarter 2003. Earnings for the nine months ended September 30, 2003 were $21.3 million or $1.74 per share, a 5.5% increase from the $20.6 million or $1.65 per share earned during the first nine months of 2002.

The Corporation had average shares outstanding of 12.2 million and 12.5 million for the three months ended September 30, 2003 and 2002, respectively, and 12.3 million and 12.5 million for the nine months ended September 30, 2003 and 2002, 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 ended September 30, 2003 and 2002:

	Three months ended				Nine months ended
	September 30				September 30
	2003		2002		2003		2002
Return on average shareholders' equity	13.45	%	15.32	%	13.37	%	13.74	%
Return on average assets	1.15	%	1.30	%	1.15	%	1.12	%

Net Interest Income

Our net interest margin of 3.62% for the quarter ended September 30, 2003 is a 13 basis point decrease from the 3.75% for the quarter ended June 30, 2003 and a 44 basis point decrease from the 4.06% for the quarter ended September 30, 2002. After the June 25, 2003 reduction in interest rates by the Federal Reserve, the Corporation's loans repriced more quickly than its deposits, resulting in pressure on the net interest margin during the third quarter of 2003. Management expects some improvement in its net interest margin during the fourth quarter of 2003 as deposits continue to reprice. Interest income decreased $4.5 million or 12.5% for the quarter ending September 30, 2003, and $15.0 million or 13.4% for the nine months ended September 30, 2003 as compared to the same periods in 2002. Interest expense decreased $2.9 million or 21.5% for the quarter ending September 30, 2003, and $9.8 million or 22.1% for the nine months ended September 30, 2003 as compared to the same period s in 2002.

The following table summarizes the annualized net interest spread and net interest margin for the three and nine months ended September 30, 2003 and 2002.

	Three months ended				Nine months ended
	September 30				September 30
	2003		2002		2003		2002
Yield on interest earning assets	5.45	%	6.47	%	5.72	%	6.67	%
Cost of interest bearing funds	2.18	%	2.84	%	2.39	%	3.04	%
Net interest spread	3.27	%	3.63	%	3.33	%	3.63	%
Net interest margin	3.62	%	4.06	%	3.71	%	4.06	%

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)		2003		2002
Allowance balance at January 1		$	23,271	$	23,648
	Additions to allowance charged against operations		7,217		8,416
	Recoveries credited to allowance		2,785		2,875
	Losses charged against allowance		(9,457)		(11,245)
Allowance balance at September 30		$	23,816	$	23,694
Allowance for loan losses to period-end loans		1.42		%	1.46	%
Average loans, net of unearned income		$	1,641,067	$	1,668,194
Provision for loan losses to average loans, annualized		0.59		%	0.67	%
Loan charge-offs net of recoveries, to average loans, annualized		0.54		%	0.67	%

Net charge-offs for the nine months ended September 30, 2003 were $6.7 million, an annualized rate of 0.54% of average loans, compared to the $8.4 million or 0.67% of average loans for the same period in 2002.

Noninterest Income

Noninterest income increased 16.2% for the quarter ended September 30, 2003 to $10.1 million from the $8.7 million earned during the same period in 2002. The change in noninterest income from prior year is primarily the result of increased gains on sales of residential real estate loans due to increased refinancing activity, increased deposit service charge revenue due to the Overdraft Honor Program implemented in September 2002 and an increase in our overdraft fee effective June 2003, and increased other noninterest income consisting primarily of sold loan servicing fee income. These increases were offset by decreased securities gains. This resulted in a positive after-tax impact on quarter and year-to-date 2003 earnings of $0.9 million or $0.07 per share and $5.5 million or $0.45 per share, respectively. Gains on the sale of securities contributed $0.3 million or $0.03 per share to earnings for the third quarter 2003 and $2.0 million or $0.16 per share year-to-date compared t o $1.0 million or $0.08 per share for the same periods in 2002. Gains on sales of loans increased for the third quarter and year-to-date 2003

contributing $1.0 million or $0.09 per share and $3.1 million or $0.25 per share, respectively, to net income, compared to $0.7 million or $0.06 per share and $1.5 million or $0.12 per share for the same periods in 2002. The increase in sold loan servicing fee income is due to the recapture of $0.7 million pre-tax from our valuation reserve because of the improvement in the fair market value of our capitalized mortgage servicing rights. The impact to earnings per share for the quarter ended September 30, 2003 was $0.04 per share.

Noninterest Expense

Noninterest expense increased 7.9% from the $16.8 million for the third quarter 2002 to $18.1 million for the third quarter 2003. The increase in noninterest expense from prior year was primarily attributable to increases in professional fees, operating losses, and other noninterest expense.

Balance Sheet Review

The Corporation continues to meet the challenges of operating in an unpredictable economic environment with the accompanying uncertainties that restrain growth in its banking operations. Total assets remained relatively flat at $2.5 billion on September 30, 2003 compared to December 31, 2002. The Corporation's largest liability, deposits, remained relatively flat to December 31, 2002 as well at $2.1 billion on September 30, 2003. Noninterest bearing deposits remained flat and interest-bearing deposits decreased 1.1%. The Corporation continues to have a high level of liquidity since investment opportunities are limited with interest rates at 45-year lows.

Loans

The Corporation experienced an increase of $47.7 million in loans outstanding during the first nine months of 2003as growth has occurred in both the commercial and residential loan portfolios from December 31, 2002.

Nonperforming loans decreased 12.6% from prior year, but increased 9.7% from December 31, 2002. Nonperforming loans on September 30, 2003 were $24.9 million compared to $22.7 million at December 31, 2002 and $28.5 million at September 30, 2002. Specific reserves are established for all large loans where management believes a loss may occur; therefore, no significant losses are anticipated except for those loans with specific reserve allocations.

Foreclosed properties on September 30, 2003 were $3.7 million, an increase from the $2.8 million at December 31, 2002. Foreclosed properties consist primarily of 1-4 family residential real estate.

The allowance for loan losses as a percentage of total loans outstanding as of September 30, 2003 remained flat to December 31, 2002 at 1.42%. The allowance for loan losses as a percentage of nonperforming loans was 95.5% at September 30, 2003 and 102.3% at December 31, 2002.

The following tables summarize the Corporation's nonperforming loans as of September 30, 2003 and December 31, 2002.

(in thousands)		Nonaccrual loans		As a % of Loan Balances by Category		Restructured Loans		As a % of Loan Balances by Category		Accruing Loans Past Due 90 Days or More		As a % of Loan Balances by Category		Loan Portfolio Balances
September 30, 2003
Commercial construction		$	629	0.93	%	$	0	0.00	%	$	0	0.00	%	$	67,772
Commercial secured by real estate			8,256	1.48			364	0.07			1,490	0.27			558,082
Commercial other			3,926	1.51			1,142	0.44			2,490	0.96			260,353
Consumer real estate construction			0	0.00			0	0.00			152	0.50			30,143
Consumer real estate secured			4,123	1.06			0	0.00			1,953	0.50			388,815
Consumer loans other			39	0.01			0	0.00			383	0.11			362,690
Equipment lease financing			0	0.00			0	0.00			0	0.00			14,491
	Total	$	16,973	1.01	%	$	1,506	0.09	%	$	6,468	0.38	%	$	1,682,346

(in thousands)		Nonaccrual loans		As a % of Loan Balances by Category		Restructured Loans		As a % of Loan Balances by Category		Accruing Loans Past Due 90 Days or More		As a % of Loan Balances by Category		Loan Portfolio Balances
December 31, 2002
Commercial construction		$	891	1.33	%	$	0	0.00	%	$	0	0.00	%	$	66,797
Commercial secured by real estate			11,467	2.25			276	0.05			591	0.12			509,856
Commercial other			2,167	0.77			0	0.00			344	0.12			280,492
Consumer real estate construction			0	0.00			0	0.00			0	0.00			23,311
Consumer real estate secured			5,040	1.34			0	0.00			1,143	0.30			377,109
Consumer loans other			84	0.02			0	0.00			736	0.20			366,493
Equipment lease financing			0	0.00			0	0.00			0	0.00			10,549
	Total	$	19,649	1.20	%	$	276	0.02	%	$	2,814	0.17	%	$	1,634,607

Accruing loans past due 90 days or more increased $3.7 million from December 31, 2002 to September 30, 2003. Management routinely reviews these loans to determine that they are all well secured and/or government guaranteed and are in the legal process of collection and/or foreclosure before continuing to accrue income.

Allowance for Loan Losses

The allowance for loan losses balance is maintained by management at a level considered adequate to cover anticipated probable losses based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time. This analysis is completed quarterly and forms the basis for allocation of the loan loss reserve and what charges to the provision may be required. For further discussion of the allowance for loan losses, see the Critical Accounting Policies and Estimates section of Item 2.

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. Securities available-for-sale reported at fair value decreased from $527.3 million as of December 31, 2002 to $518.7 million at September 30, 2003; the excess of market over cost decreased from $11.4 million to $5.6 million. Securities held-to-maturity increased from $51.2 million to $90.8 million during the same period. Total securities as a percentage of total assets were 23.3% as of December 31, 2002 and 24.4% as of September 30, 2003.

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 has available the sale of securities under repurchase agreements, securities available-for-sale, and Federal Home Loan Bank borrowings as secondary sources of liquidity.

Due to the nature of the markets served by the subsidiary bank, management believes that the majority of its certificates of deposit 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, an arrangement has been made with a correspondent bank for the purchase of federal funds on an unsecured basis, up to $20 million, if necessary, to meet the Corporation's liquidity needs.

The Corporation owns $518.7 million of securities valued at estimated fair value that are designated as available-for-sale and available to meet liquidity needs on a continuing basis. The Corporation also has available Federal Home Loan Bank advances for both liquidity and management of its asset/liability position. Federal Home Loan Bank advances decreased from $5.6 million at December 31, 2002 to $3.6 million at September 30, 2003. Long-term debt decreased by $1.1 million from September 30, 2002 to September 30, 2003. On September 30, 2003, a long-term capital lease was reclassified to a short-term obligation as it is the Corporation's intention to exercise its purchase option on September 30, 2004.

During the third quarter of 2003, the Corporation pre-funded investment maturities by investing $65 million in available-for-sale securities to take advantage of the increase in the yield curve during that time. This pre-funding made the Corporation a net purchaser of federal funds at quarter-end. The Corporation put Municipal ARC securities totaling $30 million during the first week of October 2003 to eliminate its net federal funds purchased position.

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 $12 million revolving line of credit, all of which is currently available to meet any future cash needs. The Corporation's primary investing activities include purchases of securities and loan originations.

During the first nine months of 2003, the Corporation continued its stock repurchase program, acquiring 194,767 shares of the Corporation's stock. The Corporation's stock repurchase program began in December 1998 with the authorization to acquire up to 500,000 shares and was increased by an additional 1,000,000 shares in July 2000. The Corporation issued a press release on May 13, 2003 announcing its intention to repurchase up to 1,000,000 additional shares. The Corporation's stock repurchase program continues to be accretive to shareholder value. As of September 30, 2003, a total of 1,542,546 shares have been repurchased through this program.

In conjunction with maintaining a satisfactory level of liquidity, management monitors the degree of interest rate risk assumed on the consolidated 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 Corporation uses the Sendero system to monitor its interest rate risk. 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 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 remainder of 2003, approximately $20.3 million plus any remaining 2003 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 $0.65 per share during the first nine months of 2003 and $0.57 per share the first nine months of 2002. Basic earnings per share for the same periods were $1.74 and $1.65, respectively. The Corporation retained 63% of earnings for the first nine months of 2003.

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 8.46%, 11.17%, and 12.42%, respectively as of September 30, 2003.

As of September 30, 2003, 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; industry changes in information technology systems on which we are highly dependent; failure of acquisitions to produce revenue enhancements or cost savings at levels or within the time frames originally anticipated or unforeseen integration difficulties; the adoption by the Corporation of 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 Federal Depos it 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

Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Corporation uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. Given a 200 basis point increase to the yield curve used in the simulation model, it is estimated net interest income for the Corporation would increase by 6.62 percent over one year and increase by 6.94 percent over two years. A 25 basis point decrease in the yield curve would decrease net interest income by an estimated 0.92 percent over one year and by 0.75 percent over two years. For further discussion of the Corporation's market risk, see the Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Market Risk included in the Annual Report on Form 10-K for the year ended December 31, 2002.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Corporation performed an evaluation, under the supervision and with the participation of the Corporation's management, including the Corporation's Principal Executive Officer and Principal Financial Officer, of the effectiveness and the design and operation of the Corporation's disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that the Corporation's disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation required to be included in the Corporation's periodic SEC filings. Since the date of the Corporation's most recent evaluation, there were no significant changes in the Corporation's internal controls or in other factors that could significantly affect these controls, including any corrective actions with re gard to significant deficiencies and material weaknesses.

Disclosure controls and procedures are corporate controls and other procedures that are designed to ensure that information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.

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:
	The Corporation's principal executive officer and principal financial officer have furnished to the SEC the certifications with respect to this Form 10-Q that are required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002
Item 6.	a. Exhibits:
	(1) Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Exhibit 31.1 Exhibit 31.2
	(2) Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Exhibit 32.1 Exhibit 32.2
	b. Reports on Form 8-K:
	(1) On July 16, 2003, the Corporation issued a Form 8-K with respect to the issuance of its June 30, 2003 earnings release
	(2) On July 23, 2003, the Corporation issued a Form 8-K with respect to the issuance of a press release announcing an increase in its quarterly cash dividend, pursuant to Regulation FD, with respect to a slide presentation made at the annual shareholders' meeting
	(3) On September 22, 2003, the Corporation issued a Form 8-K, pursuant to Regulation FD, with respect to a slide presentation being used in connection with analysts' meetings

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, 2003	/s/ Jean R. Hale
	Jean R. Hale
	Vice Chairman, President, and
	Chief Executive Officer
	/s/ Kevin J. Stumbo
	Kevin J. Stumbo
	Executive Vice President/Controller