CTBI Form 10-K December 31, 2005

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
 
For the fiscal year ended December 31, 2005
 
Or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
 
For the transition period from _____________ to _____________
   

Commission file number 0-11129
COMMUNITY TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)

Kentucky
61-0979818
(State or other jurisdiction of incorporation or organization)
IRS Employer Identification No.
346 North Mayo Trail
Pikeville, Kentucky
(address of principal executive offices)
41501
(Zip Code)
(606) 432-1414
(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $5.00 par value
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes
No ü

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

Yes
No ü

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ü
No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated file. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer ü
Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes
No ü

Based upon the closing price of the Common Shares of the Registrant on the NASDAQ National Market, the aggregate market value of voting stock held by non-affiliates of the Registrant as of June 30, 2005 was $487,175,475. The number of shares outstanding of the Registrant’s Common Stock as of February 28, 2006 was 15,009,954. For the purpose of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates.
 

 
 
 

DOCUMENTS INCORPORATED BY REFERENCE

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

Document
Form 10-K
(1) Proxy statement for the annual meeting of shareholders to be held April 25, 2006
Part III



 
 


PART I

Item 1. Business

Community Trust Bancorp, Inc. (the "Corporation") is a bank holding company registered with the Board of Governors of the Federal Reserve System pursuant to Section 5(a) of the Bank Holding Company Act of 1956, as amended. The Corporation was incorporated August 12, 1980, under the laws of the Commonwealth of Kentucky for the purpose of becoming a bank holding company. At December 31, 2005, the Corporation owned all the capital stock of one commercial bank and one trust company, serving small and mid-sized communities in eastern, northeast, central, and south central Kentucky and southern West Virginia. The commercial bank is Community Trust Bank, Inc., Pikeville, Kentucky (the "Bank"). The trust company, Community Trust and Investment Company, Lexington, Kentucky (the "Trust Company"), has offices in Lexington, Pikeville, Ashland, Middlesboro, and Versailles, Kentucky. At December 31, 2005, the Corporation had total consolidated assets of $2.8 billion and total consolidated deposits of $2.4 billion, making it the largest bank holding company headquartered in the Commonwealth of Kentucky.

Effective January 1, 2003, the Bank and the Trust Company converted their charters to state charters from national associations. The Bank remained a member of the Federal Reserve System following conversion. Following its conversion, the Trust Company changed its name from Trust Company of Kentucky, National Association to Community Trust and Investment Company in order to identify more closely the Trust Company with the Bank. While the conversions resulted in some reduction in expenses, they did not result in any changes in the management or operations of the Bank or the Trust Company.

On June 10, 2005, the Bank completed the acquisition of Heritage Community Bank of Danville, Kentucky. All former Heritage Community Bank offices now operate as branch offices of Community Trust Bank, Inc. The Corporation obtained loans totaling approximately $73.7 million, cash and cash equivalents of approximately $8.1 million, and deposits totaling approximately $69.8 million from this acquisition. The total cost of the acquisition, including direct acquisition costs, was $12.4 million. Goodwill and core deposit intangible of approximately $3.9 million was recorded.

Through its subsidiaries, the Corporation engages in a wide range of commercial and personal banking and trust activities, which include accepting time and demand deposits; making secured and unsecured loans to corporations, individuals and others; providing cash management services to corporate and individual customers; issuing letters of credit; renting safe deposit boxes; and providing funds transfer services. The lending activities of the Bank include making commercial, construction, mortgage, and personal loans. Also available are lease-financing, lines of credit, revolving lines of credit, term loans, and other specialized loans including asset-based financing. The corporate subsidiaries act as trustees of personal trusts, as executors of estates, as trustees for employee benefit trusts, as registrars, transfer agents, and paying agents for bond and stock issues, as depositories for securities, and as providers of full service brokerage operations.

COMPETITION

The Corporation’s subsidiaries face substantial competition for deposit, credit, and trust relationships, as well as other sources of funding in the communities they serve. Competing providers include state banks, national banks, thrifts, trust companies, insurance companies, mortgage banking operations, credit unions, finance companies, brokerage companies, and other financial and non-financial companies which may offer products functionally equivalent to those offered by the Corporation’s subsidiaries. Many of these providers offer services within and outside the market areas served by the Corporation’s subsidiaries. The Corporation’s subsidiaries strive to offer competitively priced products along with quality customer service to build customer relationships in the communities they serve.

Since July 1989, banking legislation in Kentucky places no limits on the number of banks or bank holding companies that a bank holding company may acquire. Interstate acquisitions are allowed where reciprocity exists between the laws of Kentucky and the home state of the bank or bank holding company to be acquired. Bank holding companies continue to be limited to control of less than 15% of deposits held by banks in the states where they do business (exclusive of inter-bank and foreign deposits).

The Gramm-Leach-Bliley Act of 1999 (the "Gramm Act") has expanded the permissible activities of a bank holding company. The Gramm Act allows qualifying bank holding companies to elect to be treated as financial holding companies. A financial holding company may engage in activities that are financial in nature or are incidental or complementary to financial activities. The Corporation has not yet elected to be treated as a financial holding company. The Gramm Act also eliminated restrictions imposed by the Glass-Steagall Financial Services Law, adopted in the 1930s, which prevented banking, insurance, and securities firms from fully entering each other’s business. This legislation has resulted in further consolidation in the financial services industry. In addition, removal of these restrictions has increased the number of entities providing banking services and thereby created additional competition.

No material portion of the business of the Corporation is seasonal. The business of the Corporation is not dependent upon any one customer or a few customers, and the loss of any one or a few customers would not have a material adverse effect on the Corporation. See note 18 to the consolidated financial statements for additional information regarding concentrations of credit.

The Corporation engages in no operations in foreign countries.

EMPLOYEES

As of December 31, 2005, the Corporation and its subsidiaries had 1,003 full-time equivalent employees. Employees are provided with a variety of employee benefits. A retirement plan, an employee stock ownership plan, group life insurance, major medical insurance, a cafeteria plan, and annual management and employee incentive compensation plans are available to eligible personnel.

SUPERVISION AND REGULATION

The Corporation, as a registered bank holding company, is restricted to those activities permissible under the Bank Holding Company Act of 1956, as amended, and is subject to actions of the Board of Governors of the Federal Reserve System thereunder. It is required to file an annual report with the Federal Reserve Board and is subject to an annual examination by the Board.

The Bank is a state-chartered bank subject to state and federal banking laws and regulations and to periodic examination by the Kentucky Office of Financial Institutions and to the restrictions, including dividend restrictions, thereunder. The Bank is also a member of the Federal Reserve System and is subject to certain restrictions imposed by and to examination and supervision under the Federal Reserve Act. The Trust Company is also regulated by the Kentucky Office of Financial Institutions and the Federal Reserve.

Deposits of the Bank are insured by the Federal Deposit Insurance Corporation, which subjects banks to regulation and examination under the provisions of the Federal Deposit Insurance Act.

The operations of the Corporation and its subsidiaries also are affected by other banking legislation and policies and practices of various regulatory authorities. Such legislation and policies include statutory maximum rates on some loans, reserve requirements, domestic monetary and fiscal policy, and limitations on the kinds of services that may be offered.

The Corporation’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on the Corporation’s website at www.ctbi.com as soon as reasonably practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission. The Corporation’s Code of Business Conduct and Ethics is also available on the Corporation’s website. Copies of the Corporation’s annual report will be made available free of charge upon written request.

CAUTIONARY STATEMENT

Certain of the statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The Corporation’s actual results may differ materially from those included in the forward-looking statements. Forward-looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "intend," "estimate," "may increase," "may fluctuate," and similar expressions or future or conditional verbs such as "will," "should," "would," and "could." These forward-looking statements involve risks and uncertainties including, but not limited to, economic conditions, portfolio growth, the credit performance of the portfolios, including bankruptcies, and seasonal factors; changes in general economic conditions including the performance of financial markets, prevailing inflation and interest rates, realized gains from sales of investments, gains from asset sales, and losses on commercial lending activities; results of various investment activities; the effects of competitors’ pricing policies, 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 a Federal Financial Institutions Examination Council (FFIEC) policy that provides guidance on the reporting of delinquent consumer loans and the timing of associated credit charge-offs for financial institution subsidiaries; and the resolution of legal proceedings and related matters. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation, and state regulators, whose policies and regulations could affect the Corporation’s results. These statements are representative only on the date hereof, and the Corporation undertakes no obligation to update any forward-looking statements made.
 
Item 1A. Risk Factors

Interest Rate Risk
Changes in interest rates could adversely affect our earnings and financial condition.

Our earnings and financial condition are dependent to a large degree upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest-rate spreads, meaning the difference between the interest rates earned on loans and investments and the interest rates paid on deposits and borrowings, could adversely affect our earnings and financial condition. Interest rates are highly sensitive to many factors, including:
·  
The rate of inflation;
·  
The rate of economic growth;
·  
Employment levels;
·  
Monetary policies; and
·  
Instability in domestic and foreign financial markets.

Changes in market interest rates will also affect the level of voluntary prepayments on our loans and the receipt of payments on our mortgage-backed securities resulting in the receipt of proceeds that may be reinvested at a lower rate than the loan or mortgage-backed security being prepaid.

We originate residential loans for sale and for our portfolio. The origination of loans for sale is designed to meet client financing needs and earn fee income. The origination of loans for sale is highly dependent upon the local real estate market and the level and trend of interest rates. Increasing interest rates may reduce the origination of loans for sale and consequently the fee income we earn. While our commercial banking, construction, and income property business lines are an increasing portion of our activities, high interest rates may reduce our mortgage-banking activities and thereby our income. In contrast, decreasing interest rates have the effect of causing clients to refinance mortgage loans faster than anticipated. This causes the value of assets related to the servicing rights on loans sold to be lower than originally anticipated. If this happens, we may need to write down our servicing assets faster, which would accelerate our expense and lower our earnings.

Management considers interest rate risk one of the Corporation’s most significant market risks. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of the Corporation’s net interest revenue is largely dependent upon the effective management of interest rate risk. The Corporation employs a variety of measurement techniques to identify and manage its interest rate risk including the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain, and as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

Government Policies
Our business may be adversely affected by changes in government policies.

The earnings of banks and bank holding companies such as Community Trust Bancorp, Inc. are affected by the policies of regulatory authorities, including the Federal Reserve Board, which regulates the money supply. Among the methods employed by the Federal Reserve Board are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial and savings banks in the past and are expected to continue to do so in the future.

The banking industry is highly regulated and changes in federal and state banking regulations as well as policies and administration guidelines may affect the Corporation’s practices and growth prospects.

Credit Risk
Our earnings and reputation may be adversely affected if we fail to effectively manage our credit risk.

Originating and underwriting loans are integral to the success of our business. This business requires us to take “credit risk,” which is the risk of losing principal and interest income because borrowers fail to repay loans. Collateral values and the ability of borrowers to repay their loans may be affected at any time by factors such as:
·  
A downturn in the local economies in which we operate or the national economy;
·  
A downturn in one or more of the business sectors in which our customers operate; or
·  
A rapid increase in interest rates.

Competition
Strong competition within our market area may reduce our ability to attract and retain deposits and originate loans.

We face competition both in originating loans and in attracting deposits. Competition in the financial services industry is intense. We compete for clients by offering excellent service and competitive rates on our loans and deposit products. The type of institutions we compete with include commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms. As a result of their size and ability to achieve economies of scale, certain of our competitors offer a broader range of products and services than we offer. In addition, to stay competitive in our markets we may need to adjust the interest rates on our products to match the rates offered by our competitors, which could adversely affect our net interest margin. As a result, our profitability depends upon our continued ability to successfully compete in our market areas while achieving our investment objectives.

Economy
Our business may be adversely affected by downturns in the local economies on which we depend.

Our loan portfolio is concentrated primarily in eastern, northeast, central, and south central Kentucky and southern West Virginia. Our profits depend on providing products and services to clients in these local regions. An increase in unemployment, a decrease in real estate values, or continued increases in interest rates could weaken the local economies in which we operate. Weakness in our market area could depress our earnings and consequently our financial condition because:
·  
Clients may not want or need our products and services;
·  
Borrowers may not be able to repay their loans;
·  
The value of the collateral securing our loans to borrowers may decline; and
·  
The quality of our loan portfolio may decline.

Acquisition Risk
We may have difficulty in the future continuing to grow through acquisitions.

Due to the consolidation within the banking industry, the number of suitable acquisition targets has decreased and there is intense competition for attractive acquisitions. As a result, the Corporation may experience difficulty in making acquisitions on acceptable terms.

Any future acquisitions or mergers by the Corporation or its banking subsidiary are subject to approval by the appropriate federal and state banking regulators. The banking regulators evaluate a number of criteria in making their approval decisions, such as:
·  
Safety and soundness guidelines;
·  
Compliance with all laws including the USA Patriot Act of 2001, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, the Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated under such Act or the Exchange Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, and all other applicable fair lending laws and other laws relating to discriminatory business practices; and
·  
Anti-competitive concerns with the proposed transaction.

If the banking regulators or a commenter on our regulatory application raise concerns about any of these criteria at the time a regulatory application is filed, the banking regulators may deny, delay, or condition their approval of a proposed transaction.

We have grown, and intend to continue to grow, through acquisitions of banks and other financial institutions. After these acquisitions, we may experience adverse changes in results of operations of acquired entities, unforeseen liabilities, asset quality problems of acquired entities, loss of key personnel, loss of clients because of change of identity, difficulties in integrating data processing and operational procedures, and deterioration in local economic conditions. These various acquisition risks can be heightened in larger transactions.

Integration Risk
We may not be able to achieve the expected integration and cost savings from our ongoing bank acquisition activities.

We have a long history of acquiring financial institutions and we expect this acquisition activity to continue in the future. Difficulties may arise in the integration of the business and operations of the financial institutions that agree to merge with and into the Corporation and, as a result, we may not be able to achieve the cost savings and synergies that we expect will result from the merger activities. Achieving cost savings is dependent on consolidating certain operational and functional areas, eliminating duplicative positions and terminating certain agreements for outside services. Additional operational savings are dependent upon the integration of the banking businesses of the acquired financial institution with that of the Corporation, including the conversion of the acquired entity’s core operating systems, data systems and products to those of the Corporation and the standardization of business practices. Complications or difficulties in the conversion of the core operating systems, data systems, and products of these other banks to those of the Corporation may result in the loss of clients, damage to our reputation within the financial services industry, operational problems, one-time costs currently not anticipated by us, and/or reduced cost savings resulting from the merger activities.

Operational Risk
An extended disruption of vital infrastructure could negatively impact our business, results of operations, and financial condition.

Our operations depend upon, among other things, our infrastructure, including equipment and facilities. Extended disruption of vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking or viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of our control could have a material adverse impact on the financial services industry as a whole and on our business, results of operations, cash flows, and financial condition in particular. Our business recovery plan may not work as intended or may not prevent significant interruption of our operations. The occurrence of any failures, interruptions, or security breaches of the Corporation's information systems could damage the Corporation's reputation, result in the loss of customer business, subject the Corporation to additional regulatory scrutiny or expose the Corporation to civil litigation and possible financial liability, any of which could have an adverse effect on the Corporation's financial condition and results of operation.

Market Risk
Community Trust Bancorp, Inc.'s stock price is volatile.

The Corporation's stock price has been volatile in the past, and several factors could cause the price to fluctuate substantially in the future. These factors include:
·  
Actual or anticipated variations in earnings;
·  
Changes in analysts' recommendations or projections;
·  
The Corporation's announcements of developments related to its businesses;
·  
Operating and stock performance of other companies deemed to be peers;
·  
New technology used or services offered by traditional and non-traditional competitors; and
·  
News reports of trends, concerns, and other issues related to the financial services industry.

The Corporation's stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to the Corporation's performance. General market price declines or market volatility in the future could adversely affect the price of its common stock, and the current market price may not be indicative of future market prices.

Item 1B. Unresolved Staff Comments

None.

 
 

SELECTED STATISTICAL INFORMATION

The following tables set forth certain statistical information relating to the Corporation and its subsidiaries on a consolidated basis and should be read together with the consolidated financial statements of the Corporation.

Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates

   
2005
  
2004
  
2003
  
(in thousands)
    
Average Balances
 
 
Interest
 
 
Average Rate
 
 
Average Balances
 
 
Interest
 
 
Average Rate
 
 
Average Balances
 
 
Interest
 
 
Average Rate
  
Earning assets:
                                                        
Loans, net of unearned income (1)(2)(3)
  
$
2,024,756
  
$
137,602
    
6.80
%
$
1,816,146
  
$
111,417
    
6.13
%
$
1,658,289
  
$
108,827
    
6.56
%
Loans held for sale
    
1,135
    
131
    
11.54
%
  
1,498
    
151
    
10.08
%
  
5,456
    
460
    
8.43
%
Securities:
                                                        
U.S. Treasury and agencies
    
391,810
    
15,984
    
4.08
%
  
333,654
    
13,520
    
4.05
%
  
284,980
    
12,378
    
4.34
%
Tax exempt state and political subdivisions (3)
    
50,995
    
3,237
    
6.35
%
  
53,179
    
3,391
    
6.38
%
  
50,419
    
3,408
    
6.76
%
Other securities
    
72,433
    
2,909
    
4.02
%
  
87,251
    
2,889
    
3.31
%
  
226,505
    
4,289
    
1.89
%
Federal funds sold
    
57,394
    
1,849
    
3.22
%
  
44,960
    
596
    
1.33
%
  
66,499
    
746
    
1.12
%
Interest bearing deposits
    
993
    
26
    
2.62
%
  
852
    
11
    
1.29
%
  
103
    
1
    
0.97
%
Total earning assets
    
2,599,516
  
$
161,738
    
6.22
%
  
2,337,540
  
$
131,975
    
5.65
%
  
2,292,251
  
$
130,109
    
5.68
%
Allowance for loan losses
    
(29,236
)
              
(26,380
)
              
(23,966
)
            
     
2,570,280
                
2,311,160
                
2,268,285
              
Nonearning assets:
                                                        
Cash and due from banks
    
78,251
                
74,112
                
69,111
              
Premises and equipment, net
    
55,480
                
50,941
                
49,956
              
Other assets
    
111,677
                
107,059
                
104,934
              
Total assets
  
$
2,815,688
              
$
2,543,272
              
$
2,492,286
              
                                                         
Interest bearing liabilities:
                                                        
Deposits:
                                                        
Savings and demand deposits
  
$
624,908
  
$
8,787
    
1.41
%
$
621,543
  
$
5,360
    
0.86
%
$
631,424
  
$
6,309
    
1.00
%
Time deposits
    
1,169,680
    
34,225
    
2.93
%
  
1,077,795
    
23,100
    
2.14
%
  
1,139,419
    
30,901
    
2.71
%
Repurchase agreements and federal funds purchased
    
118,906
    
3,819
    
3.21
%
  
93,281
    
1,496
    
1.60
%
  
83,270
    
1,108
    
1.33
%
Other short-term borrowings
    
0
    
0
    
0.00
%
  
688
    
72
    
10.47
%
  
262
    
24
    
9.16
%
Advances from Federal Home Loan Bank
    
152,823
    
4,872
    
3.19
%
  
63,546
    
1,907
    
3.00
%
  
4,123
    
230
    
5.58
%
Long-term debt
    
59,500
    
5,254
    
8.83
%
  
59,500
    
5,254
    
8.83
%
  
60,304
    
5,323
    
8.83
%
Total interest bearing liabilities
    
2,125,817
  
$
56,957
    
2.68
%
  
1,916,353
  
$
37,189
    
1.94
%
  
1,918,802
  
$
43,895
    
2.29
%
Noninterest bearing liabilities:
                                                        
Demand deposits
    
423,147
                
379,353
                
338,909
              
Other liabilities
    
20,605
                
18,005
                
19,489
              
Total liabilities
    
2,569,569
                
2,313,711
                
2,277,200
              
                                                         
Shareholders’ equity
    
246,119
                
229,561
                
215,086
              
Total liabilities and shareholders’ equity
  
$
2,815,688
              
$
2,543,272
              
$
2,492,286
              
                                                         
Net interest income
        
$
104,781
              
$
94,786
              
$
86,214
        
Net interest spread
                
3.54
%
              
3.71
%
              
3.39
%
Benefit of interest free funding
                
0.49
%
              
0.34
%
              
0.37
%
Net interest margin
                
4.03
%
              
4.05
%
              
3.76
%

(1) Interest includes fees on loans of $2,841, $2,646, and $3,267 in 2005, 2004, and 2003, respectively.
(2) Loan balances include principal balances on nonaccrual loans.
(3) Tax exempt income on securities and loans is reported on a fully taxable equivalent basis using a 35% rate.

Net Interest Differential

The following table illustrates the approximate effect of volume and rate changes on net interest differentials between 2005 and 2004 and also between 2004 and 2003.

   
Total Change
  
Change Due to
  
Total Change
  
Change Due to
  
(in thousands)
    
2005/2004
 
 
Volume
 
 
Rate
 
 
2004/2003
 
 
Volume
 
 
Rate
  
Interest income
                                      
Loans
  
$
26,185
  
$
13,509
  
$
12,676
  
$
2,590
  
$
9,959
  
$
(7,369
)
Loans held for sale
    
(20
)
  
(33
)
  
13
    
(309
)
  
(282
)
  
(27
)
U.S. Treasury and federal agencies
    
2,464
    
2,372
    
92
    
1,142
    
2,012
    
(870
)
Tax exempt state and political subdivisions
    
(154
)
  
(140
)
  
(14
)
  
(17
)
  
181
    
(198
)
Other securities
    
20
    
(444
)
  
464
    
(1,400
)
  
(1,747
)
  
347
  
Federal funds sold
    
1,253
    
203
    
1,050
    
(150
)
  
(214
)
  
64
  
Interest bearing deposits
    
15
    
2
    
13
    
10
    
10
    
0
  
Total interest income
    
29,763
    
15,469
    
14,294
    
1,866
    
9,919
    
(8,053
)
                                       
Interest expense
                                      
Savings and demand deposits
    
3,427
    
29
    
3,398
    
(949
)
  
(100
)
  
(849
)
Time deposits
    
11,125
    
2,105
    
9,020
    
(7,801
)
  
(1,743
)
  
(6,058
)
Repurchase agreements and federal funds purchased
    
2,323
    
500
    
1,823
    
388
    
143
    
245
  
Other short-term borrowings
    
(72
)
  
0
    
(72
)
  
48
    
44
    
4
  
Advances from Federal Home Loan Bank
    
2,965
    
2,839
    
126
    
1,677
    
1,831
    
(154
)
Long-term debt
    
0
    
0
    
0
    
(69
)
  
(71
)
  
2
  
Total interest expense
    
19,768
    
5,473
    
14,295
    
(6,706
)
  
104
    
(6,810
)
                                       
Net interest income
  
$
9,995
  
$
9,996
  
$
(1
)
$
8,572
  
$
9,815
  
$
(1,243
)

For purposes of the above table, changes which are due to both rate and volume are allocated based on a percentage basis, using the absolute values of rate and volume variance as a basis for percentages. Income is stated at a fully taxable equivalent basis, assuming a 35% tax rate.

Investment Portfolio

The maturity distribution and weighted average interest rates of securities at December 31, 2005 are as follows:

   
Estimated Maturity at December 31, 2005
  
   
Within 1 Year
 
1-5 Years
 
5-10 Years
 
After 10 Years
 
Total Fair Value
 
Amortized Cost
 
(in thousands)
    
Amount
 
 
Yield
 
 
Amount
 
 
Yield
 
 
Amount
 
 
Yield
 
 
Amount
 
 
Yield
 
 
Amount
 
 
Yield
 
Amount
 
Available-for-sale and other
                                                            
U.S. Treasury and government agencies
 
$
3,087
    
2.24
%
$
247,743
    
4.41
%
$
38,317
    
4.76
%
$
1,490
    
5.62
%
$
290,637
    
4.44
%
$
297,827
  
State and municipal obligations
    
1,564
    
6.94
%
  
26,886
    
6.72
%
  
18,481
    
6.32
%
  
0
    
0.00
%
  
46,931
    
6.57
%
  
45,911
  
Other securities
    
21,012
    
3.64
%
  
16,991
    
3.88
%
  
0
    
0.00
%
  
46,682
    
4.70
%
  
84,685
    
4.27
%
  
85,185
  
Total
  
$
25,663
    
3.68
%
$
291,620
    
4.59
%
$
56,798
    
5.27
%
$
48,172
    
4.73
%
$
422,253
    
4.64
%
$
428,923
  
 
   
Estimated Maturity at December 31, 2005
  
   
Within 1 Year
 
1-5 Years
 
5-10 Years
 
After 10 Years
 
Total
Amortized Cost
 
Fair Value
  
(in thousands)
    
Amount
 
 
Yield
 
 
Amount
 
 
Yield
 
 
Amount
 
 
Yield
 
 
Amount
 
 
Yield
 
 
Amount
 
 
Yield
 
Amount
  
Held-to-maturity
                                                            
U.S. Treasury and government agencies
  
$
0
    
0.00
%
$
45,311
    
3.71
%
$
0
    
0.00
%
$
0
    
0.00
%
$
45,311
    
3.71
%
$
43,547
  
State and municipal obligations
    
0
    
0.00
%
  
1,390
    
6.65
%
  
199
    
6.64
%
  
1,544
    
5.96
%
  
3,133
    
6.31
%
  
2,981
  
Total
  
$
0
    
0.00
%
$
46,701
    
3.80
%
$
199
    
6.64
%
$
1,544
    
5.96
%
$
48,444
    
3.88
%
$
46,528
  
                                                                     
Total securities
  
$
25,663
    
3.68
%
$
338,321
    
4.48
%
$
56,997
    
5.27
%
$
49,716
    
4.77
%
$
470,697
    
4.57
%
      

The calculations of the weighted average interest rates for each maturity category are based upon yield weighted by the respective costs of the securities. The weighted average rates on state and political subdivisions are computed on a taxable equivalent basis using a 35% tax rate. For purposes of the above presentation, maturities of mortgage-backed pass through certificates and collateralized mortgage obligations are based on estimated maturities.

Excluding those holdings of the investment portfolio in U.S. Treasury securities and other agencies of the U.S. Government, there were no securities of any one issuer that exceeded 10% of the shareholders’ equity of the Corporation at December 31, 2005.

The book values of securities available-for-sale and securities held-to-maturity as of December 31, 2005 and 2004 are presented in note 4 to the consolidated financial statements.

The book value of securities at December 31, 2003 is presented below:

(in thousands)
    
Available-for-Sale
 
 
Held-to-Maturity
 
U.S. Treasury and government agencies
  
$
34,314
  
$
9,499
  
State and political subdivisions
    
92,072
    
3,726
  
U.S. agency and mortgage-backed pass through certificates
    
183,740
    
74,272
  
Collateralized mortgage obligations
    
4,375
    
0
  
Other debt securities
    
31,149
    
0
  
Total debt securities
    
345,650
    
87,497
  
Marketable equity securities
    
24,241
    
0
  
Federal Reserve and Federal Home Loan Bank stock
    
51,964
    
0
  
Total securities
  
$
421,855
  
$
87,497
  

Loan Portfolio

(in thousands)
    
2005
 
 
2004
 
 
2003
 
 
2002
 
 
2001
  
Commercial:
                                
Construction
  
$
115,721
  
$
75,078
  
$
67,147
  
$
66,797
  
$
78,508
  
Secured by real estate
    
665,911
    
613,059
    
583,924
    
509,856
    
496,790
  
Other
    
301,828
    
276,921
    
256,837
    
280,492
    
293,502
  
Total commercial
    
1,083,460
    
965,058
    
907,908
    
857,145
    
868,800
  
                                 
Real estate construction
    
51,232
    
30,456
    
32,495
    
23,311
    
19,932
  
Real estate mortgage
    
542,809
    
499,410
    
413,939
    
377,109
    
423,953
  
Consumer
    
414,920
    
395,588
    
368,578
    
366,493
    
390,311
  
Equipment lease financing
    
14,923
    
12,007
    
13,340
    
10,549
    
6,830
  
Total loans
  
$
2,107,344
  
$
1,902,519
  
$
1,736,260
  
$
1,634,607
  
$
1,709,826
  
                                 
Percent of total year-end loans
                                
Commercial:
                                
Construction
    
5.49
%
  
3.95
%
  
3.87
%
  
4.08
%
  
4.59
%
Secured by real estate
    
31.60
    
32.22
    
33.63
    
31.19
    
29.06
  
Other
    
14.32
    
14.56
    
14.79
    
17.16
    
17.17
  
Total commercial
    
51.41
    
50.73
    
52.29
    
52.43
    
50.82
  
                                 
Real estate construction
    
2.43
    
1.60
    
1.87
    
1.43
    
1.16
  
Real estate mortgage
    
25.76
    
26.25
    
23.84
    
23.07
    
24.80
  
Consumer
    
19.69
    
20.79
    
21.23
    
22.42
    
22.82
  
Equipment lease financing
    
0.71
    
0.63
    
0.77
    
0.65
    
0.40
  
Total loans
    
100.00
%
  
100.00
%
  
100.00
%
  
100.00
%
  
100.00
%

The total loans above are net of unearned income.

The following table shows the amounts of loans (excluding residential mortgages of 1-4 family residences, consumer loans, and lease financing) which, based on the remaining scheduled repayments of principal are due in the periods indicated. Also, the amounts are classified according to sensitivity to changes in interest rates (fixed, variable).

   
Maturity at December 31, 2005
  
(in thousands)
    
Within One Year
 
 
After One but Within Five Years
 
 
After Five Years
 
 
Total
 
Commercial secured by real estate and commercial other
  
$
210,627
  
$
347,476
  
$
409,636
  
$
967,739
  
Commercial and real estate construction
    
110,520
    
24,189
    
32,244
    
166,953
  
   
$
321,147
  
$
371,665
  
$
441,880
  
$
1,134,692
  
                           
Rate sensitivity:
                          
Predetermined rate
  
$
66,252
  
$
84,405
  
$
21,500
  
$
172,157
  
Adjustable rate
    
254,895
    
287,260
    
420,380
    
962,535
  
   
$
321,147
  
$
371,665
  
$
441,880
  
$
1,134,692
  

Nonperforming Assets

(in thousands)
 
 
2005
 
 
2004
 
 
2003
 
 
2002
 
 
2001
 
Nonaccrual loans
  
$
12,219
  
$
13,808
  
$
9,705
  
$
19,649
  
$
30,496
  
Restructured loans
    
899
    
974
    
1,726
    
276
    
518
  
90 days or more past due and still accruing interest
    
8,284
    
5,319
    
5,463
    
2,814
    
2,640
  
Total nonperforming loans
    
21,402
    
20,101
    
16,894
    
22,739
    
33,654
  
                                 
Foreclosed properties
    
5,410
    
4,756
    
6,566
    
2,761
    
1,982
  
Total nonperforming assets
  
$
26,812
  
$
24,857
  
$
23,460
  
$
25,500
  
$
35,636
  
                                 
Nonperforming assets to total loans and foreclosed properties
    
1.27
%
  
1.30
%
  
1.35
%
  
1.56
%
  
2.08
%
Allowance to nonperforming loans
    
137.87
%
  
134.41
%
  
145.93
%
  
102.34
%
  
70.27
%

Nonaccrual, Past Due, and Restructured Loans

(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
 
 
Balances
 
December 31, 2005
                                            
Commercial construction
  
$
0
    
0.00
%
$
0
    
0.00
%
$
0
    
0.00
%
$
115,721
  
Commercial secured by real estate
    
4,150
    
0.62
    
0
    
0.00
    
4,706
    
0.71
    
665,911
  
Commercial other
    
3,918
    
1.30
    
80
    
0.03
    
858
    
0.28
    
301,828
  
Consumer real estate construction
    
112
    
0.22
    
819
    
1.60
    
172
    
0.34
    
51,232
  
Consumer real estate secured
    
4,032
    
0.74
    
0
    
0.00
    
1,970
    
0.36
    
542,809
  
Consumer other
    
7
    
0.00
    
0
    
0.00
    
578
    
0.14
    
414,920
  
Equipment lease financing
    
0
    
0.00
    
0
    
0.00
    
0
    
0.00
    
14,923
  
Total
  
$
12,219
    
0.58
%
$
899
    
0.04
%
$
8,284
    
0.39
%
$
2,107,344
  
                                             
December 31, 2004
                                            
Commercial construction
  
$
271
    
0.36
%
$
0
    
0.00
%
$
650
    
0.87
%
$
75,078
  
Commercial secured by real estate
    
5,093
    
0.83
    
858
    
0.14
    
2,603
    
0.42
    
613,059
  
Commercial other
    
3,473
    
1.25
    
116
    
0.04
    
569
    
0.21
    
276,921
  
Consumer real estate construction
    
114
    
0.37
    
0
    
0.00
    
0
    
0.00
    
30,456
  
Consumer real estate secured
    
4,828
    
0.97
    
0
    
0.00
    
1,131
    
0.23
    
499,410
  
Consumer other
    
29
    
0.01
    
0
    
0.00
    
366
    
0.09
    
395,588
  
Equipment lease financing
    
0
    
0.00
    
0
    
0.00
    
0
    
0.00
    
12,007
  
Total
  
$
13,808
    
0.73
%
$
974
    
0.05
%
$
5,319
    
0.28
%
$
1,902,519
  

In 2005, gross interest income that would have been recorded on nonaccrual loans had the loans been current in accordance with their original terms amounted to $1.3 million. Interest income actually received and included in net income for the period was $0.1 million, leaving $1.3 million of interest income not recognized during the period.

Discussion of the Nonaccrual Policy

The accrual of interest income on loans is discontinued when the collection of interest and principal in full is not expected. When interest accruals are discontinued, interest income accrued in the current period is reversed and interest income accrued in prior periods is charged to the allowance for loan losses. Any loans past due 90 days or more must be well secured and in the process of collection to continue accruing interest.

Potential Problem Loans

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.

Foreign Outstandings

None

Loan Concentrations

The Corporation had no concentration of loans exceeding 10% of total loans at December 31, 2005. See note 18 to the consolidated financial statements for further information.

Analysis of the Allowance for Loan Losses

(in thousands)
    
2005
 
 
2004
 
 
2003
 
 
2002
 
 
2001
  
Allowance for loan losses, beginning of year
  
$
27,017
  
$
24,653
  
$
23,271
  
$
23,648
  
$
25,886
  
Loans charged off:
                                
Commercial construction
    
56
    
339
    
164
    
662
    
275
  
Commercial secured by real estate
    
826
    
1,135
    
773
    
2,386
    
3,252
  
Commercial other
    
4,233
    
2,331
    
4,085
    
3,393
    
2,406
  
Real estate construction
    
10
    
20
    
0
    
0
    
0
  
Real estate mortgage
    
746
    
683
    
957
    
1,098
    
1,061
  
Consumer
    
5,097
    
5,080
    
5,725
    
6,598
    
8,452
  
Equipment lease financing
    
0
    
0
    
0
    
0
    
0
  
Total charge-offs
    
10,968
    
9,588
    
11,704
    
14,137
    
15,446
  
                                 
Recoveries of loans previously charged off:
                                
Commercial construction
    
0
    
1
    
32
    
0
    
25
  
Commercial secured by real estate
    
94
    
301
    
243
    
156
    
105
  
Commercial other
    
766
    
382
    
450
    
207
    
224
  
Real estate construction
    
20
    
0
    
0
    
0
    
0
  
Real estate mortgage
    
310
    
244
    
159
    
107
    
76
  
Consumer
    
2,223
    
2,376
    
2,870
    
3,204
    
3,593
  
Equipment lease financing
    
0
    
0
    
0
    
0
    
0
  
Total recoveries
    
3,413
    
3,304
    
3,754
    
3,674
    
4,023
  
                                 
Net charge-offs:
                                
Commercial construction
    
56
    
338
    
132
    
662
    
250
  
Commercial secured by real estate
    
732
    
834
    
530
    
2,230
    
3,147
  
Commercial other
    
3,467
    
1,949
    
3,635
    
3,186
    
2,182
  
Real estate construction
    
(10
)
  
20
    
0
    
0
    
0
  
Real estate mortgage
    
436
    
439
    
798
    
991
    
985
  
Consumer
    
2,874
    
2,704
    
2,855
    
3,394
    
4,859
  
Equipment lease financing
    
0
    
0
    
0
    
0
    
0
  
Total net charge-offs
    
7,555
    
6,284
    
7,950
    
10,463
    
11,423
  
                                 
Provisions charged against operations
    
8,285
    
8,648
    
9,332
    
10,086
    
9,185
  
                                 
Allowance of acquired bank
    
1,759
    
0
    
0
    
0
    
0
  
Balance, end of year
  
$
29,506
  
$
27,017
  
$
24,653
  
$
23,271
  
$
23,648
  
                                 
Allocation of allowance, end of year:
                                
Commercial construction
  
$
1,799
  
$
1,123
  
$
2,623
  
$
615
  
$
853
  
Commercial secured by real estate
    
10,354
    
8,285
    
7,010
    
4,109
    
5,994
  
Commercial other
    
4,693
    
3,745
    
1,392
    
2,088
    
3,077
  
Real estate construction
    
159
    
107
    
1,034
    
124
    
146
  
Real estate mortgage
    
1,677
    
1,435
    
741
    
1,592
    
2,247
  
Consumer
    
4,602
    
3,104
    
3,341
    
3,987
    
8,382
  
Equipment lease financing
    
232
    
168
    
160
    
88
    
95
  
Unallocated
    
5,990
    
9,050
    
8,352
    
10,668
    
2,854
  
Balance, end of year
  
$
29,506
  
$
27,017
  
$
24,653
  
$
23,271
  
$
23,648
  
                                 
Average loans outstanding, net of unearned interest
  
$
2,024,756
  
$
1,816,146
  
$
1,658,289
  
$
1,660,912
  
$
1,748,241
  
Loans outstanding at end of year, net of unearned interest
  
$
2,107,344
  
$
1,902,519
  
$
1,736,260
  
$
1,634,607
  
$
1,709,826
  
                                 
Net charge-offs to average loan type:
                                
Commercial construction
    
0.06
%
  
0.47
%
  
0.19
%
  
0.94
%
  
0.32
%
Commercial secured by real estate
    
0.11
    
0.14
    
0.10
    
0.44
    
0.63
  
Commercial other
    
1.18
    
0.76
    
1.29
    
1.12
    
0.70
  
Real estate construction
    
(0.03
)
  
0.06
    
0.00
    
0.00
    
0.00
  
Real estate mortgage
    
0.08
    
0.09
    
0.20
    
0.25
    
0.22
  
Consumer
    
0.71
    
0.70
    
0.79
    
0.90
    
1.22
  
Equipment lease financing
    
0.00
    
0.00
    
0.00
    
0.00
    
0.00
  
Total
    
0.37
%
  
0.35
%
  
0.48
%
  
0.63
%
  
0.65
%
                                 
Other ratios:
                                
Allowance to net loans, end of year
    
1.40
%
  
1.42
%
  
1.42
%
  
1.42
%
  
1.38
%
Provision for loan losses to average loans
    
0.41
%
  
0.48
%
  
0.56
%
  
0.61
%
  
0.53
%

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. See note 1 to the consolidated financial statements for further information.

Average Deposits and Other Borrowed Funds

(in thousands)
    
2005
 
 
2004
 
 
2003
 
Deposits:
                    
Noninterest bearing deposits
  
$
423,147
  
$
379,353
  
$
338,909
  
NOW accounts
    
16,486
    
15,374
    
15,852
  
Money market accounts
    
383,900
    
382,147
    
403,314
  
Savings accounts
    
224,522
    
224,022
    
212,258
  
Certificates of deposit of $100,000 or more
    
409,866
    
357,994
    
361,037
  
Certificates of deposit < $100,000 and other time deposits
    
759,814
    
719,801
    
778,382
  
Total deposits
    
2,217,735
    
2,078,691
    
2,109,752
  
                     
Other borrowed funds:
                    
Repurchase agreements and federal funds purchased
    
118,906
    
93,281
    
83,270
  
Other short-term borrowings
    
0
    
688
    
262
  
Advances from Federal Home Loan Bank
    
152,823
    
63,546
    
4,123
  
Long-term debt
    
59,500
    
59,500
    
60,304
  
Total other borrowed funds
    
331,229
    
217,015
    
147,959
  
Total deposits and other borrowed funds
  
$
2,548,964
  
$
2,295,706
  
$
2,257,711
  

The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2005 occurred at December 31, 2005, with a month-end balance of $146.6 million. The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2004 occurred at February 29, 2004, with a month-end balance of $117.1 million. The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2003 occurred at November 30, 2003, with a month-end balance of $112.7 million.

Maturities and/or repricing of time deposits of $100,000 or more outstanding at December 31, 2005 are summarized as follows:

(in thousands)
    
Certificates of Deposit
 
 
Other Time Deposits
 
 
Total
  
Three months or less
  
$
152,282
  
$
4,811
  
$
157,093
  
Over three through six months
    
54,654
    
3,461
    
58,115
  
Over six through twelve months
    
160,407
    
6,957
    
167,364
  
Over twelve through sixty months
    
44,305
    
7,348
    
51,653
  
Over sixty months
    
101
    
0
    
101
  
   
$
411,749
  
$
22,577
  
$
434,326
  

Item 2. Properties

The Corporation’s main office, which is owned by the Bank, is located at 346 North Mayo Trail, Pikeville, Kentucky 41501. Following is a schedule of properties owned and leased by the Corporation and its subsidiaries as of December 31, 2005:

Location
Owned
Leased
Total
Banking locations:
      
Community Trust Bancorp, Inc.
      
*
Tug Valley Market
1
0
1
   
1 location in Mingo County, West Virginia
      
*
Advantage Valley Market
3
0
3
   
2 locations in Lincoln County, West Virginia and 1 location in Wayne County, West Virginia
      
*
Summersville Market
1
0
1