CTBI Form 10-Q March 31, 2004

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2004

	Or

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _____________ to _____________

Commission file number 0-11129

COMMUNITY TRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)

Kentucky	61-0979818
(State or other jurisdiction of incorporation or organization)	IRS Employer Identification No.

346 North Mayo Trail Pikeville, Kentucky (address of principal executive offices)	41501 (Zip Code)

(606) 432-1414

(Registrant's telephone number)

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

Yes ü

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes ü

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

Common stock - 13,447,067 shares outstanding at April 30, 2004

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 condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Registrant's annual report on Form 10-K. Accordingly, the reader of the Form 10-Q should refer to the Registrant's Form 10-K for the year ended December 31, 2003 for further information in this regard.

Condensed Consolidated Balance Sheets

*(dollars in thousands except share data)*	March 31 2004			December 31 2003

	(unaudited)
Assets:
Cash and due from banks	$	83,229		$	79,907
Federal funds sold		30,103			9,054
Securities available-for-sale at fair value
(amortized cost of $357,582 and $414,404, respectively)		366,869			421,855
Securities held-to-maturity at amortized cost
(fair value of $79,479 and $87,061, respectively)		78,890			87,497
Loans held for sale		680			315

Loans		1,770,332			1,736,260
Allowance for loan losses		(25,151	)		(24,653	)

Net loans		1,745,181			1,711,607

Premises and equipment, net		50,108			49,990
Goodwill		60,122			60,122
Core deposit intangible (net of accumulated amortization of $3,276 and $3,131, respectively)		3,684			3,829
Other assets		41,567			49,863
Total assets	$	2,460,433		$	2,474,039


Liabilities and shareholders' equity:
Deposits
Noninterest bearing	$	370,298		$	359,403
Interest bearing		1,685,305			1,708,212

Total deposits		2,055,603			2,067,615

Federal funds purchased and other short-term borrowings		97,047			105,293
Advances from Federal Home Loan Bank		2,798			3,192
Long-term debt		59,500			59,500
Other liabilities		19,577			17,046
Total liabilities		2,234,525			2,252,646


Shareholders' equity:
Preferred stock, 300,000 shares authorized and unissued
Common stock, $5 par value, shares authorized 25,000,000;
Shares outstanding 2004 - 13,438,429; 2003 - 13,461,600		67,192			67,308
Capital surplus		104,839			105,579
Retained earnings		47,841			43,663
Accumulated other comprehensive income, net of tax		6,036			4,843

Total shareholders' equity		225,908			221,393


Total liabilities and shareholders' equity	$	2,460,433		$	2,474,039

See notes to condensed consolidated financial statements.

Condensed Consolidated Statements of Income

(unaudited)

	Three months ended
	March 31
*(in thousands except per share data)*	2004		2003


Interest income:
Interest and fees on loans, including loans held for sale	$	26,859	$	27,487
Interest and dividends on securities
Taxable		3,696		4,418
Tax exempt		573		566
Other, including interest on federal funds sold		169		196

Total interest income		31,297		32,667

Interest expense:
Interest on deposits		6,879		10,467
Interest on federal funds purchased and other short-term borrowings		383		264
Interest on advances from Federal Home Loan Bank		40		70
Interest on long-term debt		1,314		1,338

Total interest expense		8,616		12,139

Net interest income		22,681		20,528
Provision for loan losses		2,133		1,547

Net interest income after provision for loan losses		20,548		18,981

Noninterest income:
Service charges on deposit accounts		4,237		3,862
Gains on sales of loans, net		459		1,521
Trust income		561		613
Securities gains, net		1		979
Other		2,757		1,571

Total noninterest income		8,015		8,546

Noninterest expense:
Salaries and employee benefits		9,691		9,061
Occupancy, net		1,441		1,506
Equipment		972		794
Data processing		997		1,003
Stationery, printing, and office supplies		326		394
Taxes other than payroll, property, and income		803		667
FDIC insurance		79		85
Other		3,885		4,101

Total noninterest expense		18,194		17,611

Income before income taxes		10,369		9,916
Income taxes		3,089		2,923

Net income		7,280		6,993

Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period		1,193		(765	)

Comprehensive income	$	8,473	$	6,228


Basic earnings per share	$	0.54	$	0.52
Diluted earnings per share	$	0.53	$	0.51


Average shares outstanding		13,467		13,537

See notes to condensed consolidated financial statements.

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Three months ended
	March 31
*(in thousands)*	2004			2003


Cash flows from operating activities:
Net income	$	7,280		$	6,993
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,091			1,089
Provision for loan and other real estate losses		2,187			1,560
Securities gains, net		(1	)		(979	)
Gains on sale of mortgage loans held for sale		(459	)		(1,521	)
Losses on sale of assets, net		4			43
Proceeds from sale of mortgage loans held for sale		17,652			53,099
Amortization of securities premiums, net		293			398
Change in mortgage loans held for sale, net		(365	)		(1,872	)
Changes in:
Other liabilities		1,888			3,990
Other assets		8,523			(2,455	)

Net cash provided by operating activities		38,093			60,345

Cash flows from investing activities:
Securities available-for-sale:
Proceeds from sales		60,600			27,897
Proceeds from prepayments and maturities		27,728			33,060
Purchase of securities		(31,723	)		(51,162	)
Securities held-to-maturity:
Proceeds from prepayments and maturities		8,532			7,972
Change in loans, net		(53,600	)		(45,811	)
Purchase of premises, equipment, and other real estate		(1,070	)		(353	)
Proceeds from sale of premises and equipment		19			4
Proceeds from sale of other real estate		402			552

Net cash provided by (used in) investing activities		10,888			(27,841	)

Cash flows from financing activities:
Change in deposits, net		(12,012	)		(17,851	)
Change in federal funds purchased and other short-term borrowings, net		(8,246	)		(4,530	)
Payments on advances from Federal Home Loan Bank		(394	)		(871	)
Payments on long-term debt		0			(24	)
Issuance of common stock		543			444
Purchase of common stock		(1,400	)		(2,444	)
Dividends paid		(3,101	)		(2,589	)

Net cash used in financing activities		(24,610	)		(27,865	)

Net increase in cash and cash equivalents		24,371			4,639
Cash and cash equivalents at beginning of year		88,961			142,206

Cash and cash equivalents at end of period	$	113,332		$	146,845

See notes to condensed consolidated financial statements.

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 March 31, 2004 and the results of operations and cash flows for the three months ended March 31, 2004 and 2003. 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, 2003 has been derived from the audited consolidated financial statements of Community Trust Bancorp, Inc. (the “Corporation”). The results of operations and cash flows for the three months ended March 31, 2004 and 2003 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, 2003, 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 ” ) and Community Trust and Investment Company. All significant intercompany transactions have been eliminated in consolidation.

Goodwill and Other Intangible Assets - Effective January 1, 2002, the Corporation adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment.

Accounting for Stock-Based Compensation—Transition and Disclosure - 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 Accounting Principles Board (“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.

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 at March 31, 2004 are summarized as follows:

Available-for-Sale

(i thousands)	Amortized Cost		Fair Value

U.S. Treasury and Government agencies	$	20,058	$	20,171
State and political subdivisions		48,107		51,825
U.S. agency mortgage-backed pass through certificates	190,127			194,724
Collateralized mortgage obligations		3,969		4,136
Other debt securities		30,382		31,025

Total debt securities		292,643		301,881
Marketable equity securities		64,939		64,988

Total available-for-sale securities	$	357,582	$	366,869

Held-to-Maturity

(in thousands)	Amortized Cost		Fair Value

U.S. Treasury and Government agencies	$	4,500	$	4,618
State and political subdivisions		3,001		3,171
U.S. agency mortgage-backed pass through certificates		71,389		71,690

Total held-to-maturity securities	$	78,890	$	79,479

The amortized cost and fair value of securities as of December 31, 2003 are summarized as follows:

Available-for-Sale

(in thousands)	Amortized Cost		Fair Value

U.S. Treasury and Government agencies	$	34,165	$	34,314
State and political subdivisions		89,107		92,072
U.S. agency mortgage-backed pass through certificates		180,236		183,740
Collateralized mortgage obligations		4,197		4,375
Other debt securities		30,538		31,149

Total debt securities		338,243		345,650
Marketable equity securities		76,161		76,205

Total available-for-sale securities	$	414,404	$	421,855

Held-to-Maturity

(in thousands)	Amortized Cost		Fair Value

U.S. Treasury and Government agencies	$	9,499	$	9,667
State and political subdivisions		3,726		3,903
U.S. agency mortgage-backed pass through certificates		74,272		73,491

Total held-to-maturity securities	$	87,497	$	87,061

Note 3 - Loans

Major classifications of loans are summarized as follows:

(in thousands)	March 31 2004		December 31 2003

Commercial construction	$	72,351	$	67,147
Commercial secured by real estate		600,030		583,924
Commercial other		243,343		256,837
Real estate construction		30,752		32,495
Real estate mortgage		434,846		413,939
Consumer		375,728		368,578
Equipment lease financing		13,282		13,340

Total loans	$	1,770,332	$	1,736,260

Note 4 - Borrowings

Short-term debt consists of the following:

(in thousands)	March 31 2004		December 31 2003

Subsidiaries:
Federal funds purchased	$	8,545	$	7,785
Securities sold under agreements to repurchase		87,526		96,506
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 intends to exercise the purchase option that becomes available in September 2004 for $921 thousand.		976		1,002

Total short-term debt	$	97,047	$	105,293

On April 29, 2004, 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, 2005.

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 March 31, 2004 were 1.00% and 1.44%, respectively.

Long-term debt consists of the following:

(in thousands)	March 31 2004		December 31 2003

Parent:
Junior subordinated debentures, 9.00%, due 3/31/27	$	34,500	$	34,500
Junior subordinated debentures, 8.25%, due 3/31/32		25,000		25,000

Total long-term debt	$	59,500	$	59,500

Note 5 - 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 No. 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 months ended March 31, 2004 and 2003.

		Three Months Ended March 31
(in thousands except per share amounts)		2004			2003

Net income as reported		$	7,280		$	6,993
Stock-based compensation expense			(272	)		(523	)
Tax effect			95			183

Net income pro forma		$	7,103		$	6,653


Basic earnings per share	As reported	$	0.54		$	0.52
Pro forma			0.53			0.49

Diluted earnings per share	As reported	$	0.53		$	0.51
Pro forma			0.52			0.48

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 March 31, 2004, the Corporation owned one commercial bank and one trust company. Through its subsidiaries, the Corporation has seventy-five 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 $225.9 million as of March 31, 2004. 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, New York, New York; Morgan Stanley & Co., Incorporated, New York, New York; and Sandler O'Neill & Partners, New York, New York.

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 us 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.

Our accounting policies are more fully described in note 1 to the consolidated financial statements incorporated in the Annual Report on Form 10-K for the year ended December 31, 2003. We have identified the following critical accounting policies:

Loans - 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.

Allowance for Loan Losses - 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 options available to the Corporation 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 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.

Investments - Management determines the classification of securities at purchase. In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, the Corporation classifies securities into held-to-maturity or available-for-sale categories. Held-to-maturity securities are those which the Corporation has the positive intent and ability to hold to maturity and are reported at amortized cost. Available-for-sale securities are those 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 and losses included as a separate component of shareholders’ equity, net of tax. If declines in fair value are not temporary, the carrying value of the securities is written down to fair value as a realized loss.

Gains or losses on disposition of securities are computed by specific identification for all securities except for shares in mutual funds, which are computed by average cost. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings.

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 valuation allowance by charges to income.

Goodwill - The Corporation evaluates total goodwill for impairment, based upon 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.

Effects of Accounting Changes

Accounting for Stock-Based Compensation - Transition and Disclosure - In December 2002, FASB issued 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.

Dividends

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

Pay Date	Record Date	Amount Per Share

April 1, 2004	March 15, 2004	$0.23
January 1, 2004	December 15, 2003	$0.23
October 1, 2003	September 15, 2003	$0.21
July 1, 2003	June 15, 2003	$0.19
April 1, 2003	March 15, 2003	$0.19
January 1, 2003	December 15, 2002	$0.19

Statement of Income Review

The Corporation’s first quarter 2004 earnings were $7.3 million or $0.54 per share compared to $7.0 million or $0.52 per share earned during the first quarter of 2003 and $7.6 million or $0.56 per share earned during the fourth quarter of 2003.

The Corporation had average shares outstanding of 13.5 million for both the three months ended March 31, 2004 and March 31, 2003. The following table sets forth on an annualized basis the return on average assets and return on average shareholders’ equity for the three-month periods ended March 31, 2004 and 2003:

	Three months ended
	March 31
	2004			2003

Return on average shareholders' equity		12.97	%		13.38	%
Return on average assets		1.18	%		1.15	%

Net Interest Income

Our net interest margin of 4.09% for the quarter ended March 31, 2004 is a 35 basis point increase from the 3.74% for the quarter ended March 31, 2003 and a 16 basis point increase from the 3.93% for the quarter ended December 31, 2003. Management expects its net interest margin to stabilize as loan growth and the reallocation of earning assets from the investment portfolio to the higher yielding loan portfolio continue.

The following table summarizes the annualized net interest spread and net interest margin for the three months ended March 31, 2004 and 2003.

	Three months ended
	March 31
	2004			2003

Yield on interest earning assets		5.62	%		5.91	%
Cost of interest bearing funds		1.86	%		2.57	%

Net interest spread		3.76	%		3.34	%

Net interest margin		4.09	%		3.74	%

Provision for Loan Losses

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

	Three months ended
	March 31
*(in thousands)*	2004			2003


Allowance balance at January 1	$	24,653		$	23,271
Additions to allowance charged against operations		2,133			1,547
Recoveries credited to allowance		929			1,027
Losses charged against allowance		(2,564	)		(2,837	)

Allowance balance at March 31, 2004	$	25,151		$	23,008


Allowance for loan losses to period-end loans		1.42	%		1.42	%
Average loans, net of unearned income	$	1,744,992		$	1,622,672
Provision for loan losses to average loans, annualized		0.49	%		0.39	%
Loan charge-offs net of recoveries, to average loans, annualized		0.38	%		0.45	%

Net charge-offs for the three months ended March 31, 2004 were $1.6 million, an annualized rate of 0.38% of average loans, compared to the $1.8 million or 0.45% of average loans for the same period in 2003.

Noninterest Income

Noninterest income decreased 6.2% for the quarter ended March 31, 2004 compared to March 31, 2003 and 1.6% compared to December 31, 2003. Noninterest income for the quarter ended March 31, 2003 included approximately $1.0 million in securities gains. Also, as residential mortgage refinancing slowed, the Corporation had a decrease in gains on sales of loans of $1.1 million from prior year and $0.5 million from prior quarter. Noninterest income was also negatively impacted by a charge to our valuation reserve for capitalized mortgage servicing rights of $0.6 million for the quarter ended March 31, 2004 compared to $0.4 million for the quarter ended March 31, 2003. Increases in deposit service charges of $0.4 million and other noninterest income of $1.2 million offset part of the decrease from prior year. Other noninterest income for the quarter ended March 31, 2004 includes $0.8 million derived from the adjustment of the carrying value of loans acquired as part of the 2002 acquisition of Citizens National Bank of Hazard to the net realizable value. These loans were recorded at acquisition at an amount estimated to be their net realizable value; however, the repayment experience on these loans has been better than expected and the carrying value of these loans has been increased to reflect the higher net value.

Noninterest Expense

Noninterest expense of $18.2 million increased 3.3% from the $17.6 million for the first quarter 2003 and remained relatively flat to the fourth quarter 2003. The increase in noninterest expense from prior year was primarily attributable to increased personnel 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 March 31, 2004 compared to December 31, 2003. The Corporation's largest liability, deposits, remained relatively flat to December 31, 2003 as well at $2.1 billion on March 31, 2004. Noninterest bearing deposits increased 3.0% and interest-bearing deposits decreased 1.3%.

Loans

The Corporation experienced an increase of $34.1 million in loans outstanding during the first three months of 2004 as growth has occurred in all loan three loan categories--commercial, residential real estate, and consumer.

Nonperforming loans decreased 29.9% to $17.9 million from the $25.6 million at March 31, 2003, but increased 6.1% from the $16.9 million at December 31, 2003.

Foreclosed properties on March 31, 2004 were $6.8 million, an increase from the $3.7 million reported at March 31, 2003 and the $6.6 million at December 31, 2003.

The allowance for loan losses as a percentage of total loans outstanding as of March 31, 2004 remained flat to December 31, 2003 at 1.42%. The allowance for loan losses as a percentage of nonperforming loans was 140.4% at March 31, 2004 and 145.9% at December 31, 2003.

The following tables summarize the Corporation’s nonperforming loans as of March 31, 2004 and December 31, 2003.

(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

March 31, 2004
Commercial construction	$	92		0.13	%	$	0		0.00	%	$	51		0.07	%	$	72,351
Commercial secured by real estate		4,526		0.75			451		0.08			2,336		0.39			600,030
Commercial other		2,649		1.09			1,066		0.45			613		0.25			243,343
Consumer real estate construction		134		0.44			0		0.00			50		0.16			30,752
Consumer real estate secured		3,988		0.92			0		0.00			1,640		0.38			434,846
Consumer other		34		0.01			0		0.00			290		0.08			375,728
Equipment lease financing		0		0.00			0		0.00			0		0.00			13,282

Total	$	11,423		0.65	%	$	1,517		0.09	%	$	4,980		0.28	%	$	1,770,332

(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, 2003
Commercial construction	$	84		0.13	%	$	0		0.00	%	$	0		0.00	%	$	67,147
Commercial secured by real estate		4,165		0.71			637		0.11			1,824		0.31			583,924
Commercial other		2,269		0.88			1,089		0.42			1,076		0.42			256,837
Consumer real estate construction		134		0.41			0		0.00			0		0.00			32,495
Consumer real estate secured		3,013		0.73			0		0.00			1,984		0.48			413,939
Consumer other		40		0.01			0		0.00			579		0.16			368,578
Equipment lease financing		0		0.00			0		0.00			0		0.00			13,340

Total	$	9,705		0.56	%	$	1,726		0.10	%	$	5,463		0.31	%	$	1,736,260

Accruing loans past due 90 days or more decreased $0.5 million from December 31, 2003 to March 31, 2004. 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 $421.9 million as of December 31, 2003 to $366.9 million at March 31, 2004; the excess of market over cost increased from $7.5 million to $9.3 million. Securities held-to-maturity decreased from $87.5 million to $78.9 million during the same period. Total securities as a percentage of total assets were 20.6% as of December 31, 2003 and 18.1% as of March 31, 2004.

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 ("FHLB") 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 $366.9 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. FHLB advances decreased from $3.2 million at December 31, 2003 to $2.8 million at March 31, 2004. FHLB borrowing capacity is $306 million. Long-term debt remained at $59,500 from December 31, 2003 to March 31, 2004. At March 31, 2004, the Corporation had $30.1 million in federal funds sold. Management projects deposits, repurchase agreements, and loans to increase during the next three months. Additionally, management projects cash flows from the Corporation's investment portfolio to generate additional liquidity over the next 90 days.

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.

The investment portfolio continues to consist of conservative, high-quality short-term issues. The majority of the investment portfolio is in U.S. Government and agency issuances. The average life of the portfolio is six years. Available-for-sale ("AFS") securities comprise 82% of the total investment portfolio. At the end of the first quarter, the AFS portfolio was $367 million or 162% of equity capital. Seventy-five percent of the pledge eligible portfolio is pledged; however, the bank has entered into an arrangement with the Federal Home Loan Bank to issue Letters of Credit to public fund accounts in lieu of pledging. This will free up the Corporation’s investment portfolio and provide more flexibility in investment and deposit gathering decisions.

During the first three months of 2004, the Corporation continued its stock repurchase program, acquiring 50,000 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 March 31, 2004, a total of 1,746,801 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 2004, approximately $30.3 million plus any remaining 2004 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 $0.23 per share during the first three months of 2004 and $0.19 per share the first three months of 2003. Basic earnings per share for the same periods were $0.54 and $0.52, respectively. The Corporation retained 57.4% of earnings for the first three months of 2004.

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 8.97%, 11.63%, and 12.88%, respectively as of March 31, 2004.

As of March 31, 2004, 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 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 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 Deposit Insurance Corporation, and state regulators, whose policies and regulations could affect the Corporation’s results. These statements are representative only on the date hereof, and the Corporation undertakes no obligation to update any forward-looking statements made.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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 decrease by 1.97 percent over one year and decrease by 13.87 percent over two years. A 25 basis point decrease in the yield curve would increase net interest income by an estimated 0.20 percent over one year and by 1.46 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, 2003.

Item 4. Controls and Procedures

As of the end of the quarter ended March 31, 2004, 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 regard 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

(e) The following table shows shares of the Corporation's stock acquired through the stock repurchase program during the first quarter of 2004:

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

January 2004	0	-	0	803,199
February 2004	0	-	0	803,199
March 2004	50,000	28.00	50,000	753,199

Total	50,000	28.00	50,000	753,199

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 January 14, 2004, the Corporation issued a Form 8-K with respect to the issuance of its December 31, 2003 earnings release

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.

Date: May 7, 2004	By:	/s/ Jean R. Hale

		Vice Chairman, President and CEO