10-Q 1 ctbi10q0312.htm CTBI MARCH 31, 2012 FORM 10-Q ctbi10q0312.htm

 
 



 
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, 2012
   
 
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
(Registrants telephone number)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes  ü
No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Yes  ü
No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
Accelerated filer  ü
Non-accelerated filer
Smaller reporting company
   
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes
   No ü

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

Common stock – 15,538,293 shares outstanding at April 30, 2012
 
 
 



 
 

 


CAUTIONARY STATEMENT
REGARDING 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. CTBI’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, changes in laws and regulations, competition, and 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 CTBI 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 CTBI’s results.  These statements are representative only on the date hereof, and CTBI undertakes no obligation to update any forward-looking statements made.


PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements
 
The accompanying information has not been audited by independent registered public accountants; however, in the opinion of management such information reflects all adjustments necessary for a fair presentation of the results for the interim period.  All such adjustments are of a normal and recurring nature.
 
The accompanying condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Registrant’s annual report on Form 10-K.  Accordingly, the reader of the Form 10-Q should refer to the Registrant’s Form 10-K for the year ended December 31, 2011 for further information in this regard.


 
 

 

Community Trust Bancorp, Inc.
Condensed Consolidated Balance Sheets

(dollars in thousands)
 
(unaudited)
March 31
2012
   
December 31
2011
 
Assets:
           
Cash and due from banks
  $ 69,240     $ 69,723  
Interest bearing deposits
    170,525       166,057  
Federal funds sold
    3,456       2,701  
Cash and cash equivalents
    243,221       238,481  
                 
Certificates of deposit in other banks
    12,992       11,875  
Securities available-for-sale at fair value (amortized cost of $600,513 and $511,731, respectively)
    613,978       527,398  
Securities held-to-maturity at amortized cost (fair value of $1,664 and $1,661, respectively)
    1,662       1,662  
Loans held for sale
    1,642       536  
                 
Loans
    2,542,168       2,556,548  
Allowance for loan losses
    (33,172 )     (33,171 )
Net loans
    2,508,996       2,523,377  
                 
Premises and equipment, net
    54,725       54,297  
Federal Home Loan Bank stock
    25,674       25,673  
Federal Reserve Bank stock
    4,883       4,883  
Goodwill
    65,490       65,490  
Core deposit intangible (net of accumulated amortization of $7,552 and $7,499, respectively)
    1,063       1,117  
Bank owned life insurance
    43,827       43,483  
Mortgage servicing rights
    2,640       2,282  
Other real estate owned
    59,154       56,965  
Other assets
    34,066       33,660  
Total assets
  $ 3,674,013     $ 3,591,179  
                 
Liabilities and shareholders’ equity:
               
Deposits
               
Noninterest bearing
   $ 629,293     $ 584,735  
Interest bearing
    2,318,260       2,293,624  
Total deposits
    2,947,553       2,878,359  
                 
Repurchase agreements
    225,301       217,177  
Federal funds purchased and other short-term borrowings
    20,753       13,104  
Advances from Federal Home Loan Bank
    1,562       21,609  
Long-term debt
    61,341       61,341  
Other liabilities
    42,507       32,723  
Total liabilities
    3,299,017       3,224,313  
                 
Shareholders’ equity:
               
Preferred stock, 300,000 shares authorized and unissued
    -       -  
Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2012 – 15,526,895; 2011 – 15,429,992
    77,635       77,151  
Capital surplus
    158,092       156,101  
Retained earnings
    130,517       123,431  
Accumulated other comprehensive income, net of tax
    8,752       10,183  
Total shareholders’ equity
    374,996       366,866  
                 
Total liabilities and shareholders’ equity
  $ 3,674,013     $ 3,591,179  

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

   
Three Months Ended
 
   
March 31
 
(in thousands except per share data)
 
2012
   
2011
 
             
Interest income:
           
Interest and fees on loans, including loans held for sale
  $ 35,052     $ 36,686  
Interest and dividends on securities
               
Taxable
    2,771       2,282  
Tax exempt
    477       396  
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock
    364       356  
Other, including interest on federal funds sold
    162       140  
Total interest income
    38,826       39,860  
                 
Interest expense:
               
Interest on deposits
    4,471       5,830  
Interest on repurchase agreements and other short-term borrowings
    338       428  
Interest on advances from Federal Home Loan Bank
    11       28  
Interest on long-term debt
    1,000       1,000  
Total interest expense
    5,820       7,286  
                 
Net interest income
    33,006       32,574  
Provision for loan losses
    1,160       4,387  
Net interest income after provision for loan losses
    31,846       28,187  
                 
Noninterest income:
               
Service charges on deposit accounts
    5,872       5,880  
Gains on sales of loans, net
    617       381  
Trust income
    1,613       1,616  
Loan related fees
    1,287       883  
Bank owned life insurance
    428       410  
Other noninterest income
    1,370       1,568  
Total noninterest income
    11,187       10,738  
                 
Noninterest expense:
               
Officer salaries and employee benefits
    2,356       2,173  
Other salaries and employee benefits
    10,457       9,911  
Occupancy, net
    1,853       2,097  
Equipment
    918       868  
Data processing
    1,579       1,792  
Bank franchise tax
    1,155       1,164  
Legal fees
    601       930  
Professional fees
    260       406  
FDIC insurance
    657       1,124  
Other real estate owned provision and expense
    790       846  
Other noninterest expense
    5,124       5,236  
Total noninterest expense
    25,750       26,547  
                 
Income before income taxes
    17,283       12,378  
Income taxes
    5,414       3,074  
Net income
    11,869       9,304  
                 
Other comprehensive income:
               
Unrealized holding gains (losses) on securities available-for-sale
    (2,202 )     1,027  
Deferred tax expense (benefit)
    (771 )     359  
Other comprehensive income, net of tax
    (1,431 )     668  
Comprehensive income
  $ 10,438     $ 9,972  
                 
Basic earnings per share
  $ 0.77     $ 0.61  
Diluted earnings per share
  $ 0.77     $ 0.61  
                 
Weighted average shares outstanding-basic
    15,407       15,294  
Weighted average shares outstanding-diluted
    15,456       15,324  
                 
Dividends declared per share
  $ 0.31     $ 0.305  

See notes to condensed consolidated financial statements.

 
 

 

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

   
Three Months Ended
 
   
March 31
 
(in thousands)
 
2012
   
2011
 
             
Cash flows from operating activities:
           
Net income
  $ 11,869     $ 9,304  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,061       1,007  
Deferred taxes
    771       (337 )
Stock-based compensation
    146       154  
Excess tax benefits of stock-based compensation
    336       16  
Provision for loan losses
    1,160       4,387  
Write-downs of other real estate owned and other repossessed assets
    179       418  
Gains on sale of mortgage loans held for sale
    (617 )     (381 )
(Gains)/losses on sale of assets, net
    (35 )     37  
Proceeds from sale of mortgage loans held for sale
    26,731       18,181  
Funding of mortgage loans held for sale
    (27,220 )     (18,296 )
Amortization of securities premiums and discounts, net
    1,287       656  
Change in cash surrender value of bank owned life insurance
    (344 )     (332 )
Mortgage servicing rights:
               
Fair value adjustments
    (207 )     46  
New servicing assets created
    (151 )     (136 )
Changes in:
               
Other assets
    (392 )     (2,785 )
Other liabilities
    10,090       (224 )
Net cash provided by operating activities
    24,664       11,715  
                 
Cash flows from investing activities:
               
Certificates of deposit in other banks:
               
Maturity of certificates of deposit
    (1,117 )     3,973  
Securities available-for-sale (AFS):
               
Purchase of AFS securities
    (123,695 )     (90,186 )
Proceeds from prepayments and maturities of AFS securities
    33,626       18,902  
Change in loans, net
    8,803       8,752  
Purchase of premises and equipment
    (1,436 )     (1,774 )
Proceeds from sale of premises and equipment
    73       0  
Additional investment in Federal Home Loan Bank stock
    (1 )     (34 )
Proceeds from sale of other real estate and other repossessed assets
    2,089       1,169  
Additional investment in other real estate and other repossessed assets
    (90 )     (14 )
Net cash used in investing activities
    (81,748 )     (59,212 )
                 
Cash flows from financing activities:
               
Change in deposits, net
    69,194       86,118  
Change in repurchase agreements, federal funds purchased, and other short-term borrowings, net
    15,773       11,102  
Advances from Federal Home Loan Bank
    0       570  
Payments on advances from Federal Home Loan Bank
    (20,047 )     (49 )
Issuance of common stock
    1,993       396  
Excess tax benefits of stock-based compensation
    (336 )     (16 )
Dividends paid
    (4,753 )     (4,660 )
Net cash provided by financing activities
    61,824       93,461  
Net increase in cash and cash equivalents
    4,740       45,964  
Cash and cash equivalents at beginning of period
    238,481       158,983  
Cash and cash equivalents at end of period
  $ 243,221     $ 204,947  
                 
Supplemental disclosures:
               
Income taxes paid
  $ 3,800     $ 3,600  
Interest paid
    5,290       6,808  
Non-cash activities:
               
Loans to facilitate the sale of other real estate and other repossessed assets
    952       40  
Common stock dividends accrued, paid in subsequent quarter
    4,783       4,695  
Real estate acquired in settlement of loans
    5,370       6,322  

See notes to condensed consolidated financial statements.

 
 

 

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


Note 1 - Summary of Significant Accounting Policies
 
In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (which consist of normal recurring accruals) necessary, to present fairly the condensed consolidated financial position as of March 31, 2012, the results of operations for the three months ended March 31, 2012 and 2011, and the cash flows for the three months ended March 31, 2012 and 2011.  In accordance with accounting principles generally accepted in the United States of America for interim financial information, these statements do not include certain information and footnote disclosures required by accounting principles generally accepted in the United States of America for complete annual financial statements.  The results of operations for the three months ended March 31, 2012 and 2011, and the cash flows for the three months ended March 31, 2012 and 2011, are not necessarily indicative of the results to be expected for the full year.  The condensed consolidated balance sheet as of December 31, 2011 has been derived from the audited consolidated financial statements of Community Trust Bancorp, Inc. (“CTBI”) for that period.  For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2011, included in our annual report on Form 10-K.
 
Principles of Consolidation – The unaudited condensed consolidated financial statements include the accounts of CTBI and its separate and distinct, wholly owned subsidiaries Community Trust Bank, Inc. (the “Bank”) and Community Trust and Investment Company.  All significant intercompany transactions have been eliminated in consolidation.
 
Reclassifications – Certain reclassifications considered to be immaterial have been made in the prior year condensed consolidated financial statements to conform to current year classifications.  These reclassifications had no effect on net income.

New Accounting Standards

Ø Reconsideration of Effective Control for Repurchase Agreements – In April 2011, the FASB issued ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements.  The main objective in developing this ASU was to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion.  Other criteria applicable to the assessment of effective control were not changed by the amendments in this Update.  The guidance in this Update is effective for the first interim or annual period beginning on or after December 15, 2011.  The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date.  The adoption of ASU No. 2011-03 did not have a material impact on CTBI’s consolidated financial statements.

Ø Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs – In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed.  This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs.

The amendments in this ASU are to be applied prospectively.  For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.  The adoption of this ASU did not have a material effect on our financial position or results of operations.

Ø Amendments to Topic 220, Comprehensive Income – In June 2011, the FASB issued ASU No. 2011-05, Amendments to Topic 220, Comprehensive Income.  Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity.  The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.

The amendments in this ASU should be applied retrospectively.  For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The amendments do not require any transition disclosures.  In October 2011, the FASB decided that the specific requirement to present items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income will be deferred.  Therefore, those requirements will not be effective for public entities for fiscal years and interim periods within those years beginning after December 15, 2011.  The adoption of ASU 2011-05 did not have a material impact on our consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05.  The amendments in this ASU supersede certain pending paragraphs in ASU No. 2011-05 to effectively defer only those changes that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income.  The amendments will be temporary to allow the FASB time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private, and non-profit entities.

Ø Testing Goodwill for Impairment – In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment.  The amendments in this ASU will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.  The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment.  ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued.  CTBI will adopt this ASU by the date required and does not anticipate that it will have a material effect on our consolidated financial statements.

Note 2 – Stock-Based Compensation
 
CTBI’s compensation expense related to stock option grants was $19 thousand and $24 thousand for the three months ended March 31, 2012 and 2011, respectively.  Restricted stock expense for the first three months of 2012 and 2011 was $157 thousand and $160 thousand, respectively, including $30 thousand in dividends paid for each quarter.  As of March 31, 2012, there was a total of $0.1 million of unrecognized compensation expense related to unvested stock option awards that will be recognized as expense as the awards vest over a weighted average period of 0.6 years and a total of $1.5 million of unrecognized compensation expense related to restricted stock grants that will be recognized as expense as the awards vest over a weighted average period of 1.8 years.
 
There were 331 shares of restricted stock granted during the three months ended March 31, 2012, and 45,542 shares granted during the three months ended March 31, 2011.  The restrictions on the restricted stock will lapse at the end of five years.  However, in the event of a change in control of CTBI or the death of the participant, the restrictions will lapse.  In the event of the disability of the participant, the restrictions will lapse on a pro rata basis (with respect to 20% of the participant’s restricted stock for each year since the date of award). The Compensation Committee of the Board of Directors will have discretion to review and revise restrictions applicable to a participant’s restricted stock in the event of the participant’s retirement.  There were no options granted to purchase shares of CTBI common stock during the three months ended March 31, 2012 or 2011.

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

The amortized cost and fair value of securities at March 31, 2012 are summarized as follows:

Available-for-Sale

(in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
U.S. Treasury and government agencies
  $ 31,270     $ 783     $ (3 )   $ 32,050  
State and political subdivisions
    77,959       3,354       (187 )     81,126  
U.S. government sponsored agency mortgage-backed securities
    470,250       9,583       (610 )     479,223  
Collateralized mortgage obligations
    452       12       0       464  
Total debt securities
    579,931       13,732       (800 )     592,863  
Marketable equity securities
    20,582       625       (92 )     21,115  
Total available-for-sale securities
  $ 600,513     $ 14,357     $ (892 )   $ 613,978  

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
State and political subdivisions
  $ 1,182     $ 2     $ 0     $ 1,184  
Other debt securities
    480       0       0       480  
Total held-to-maturity securities
  $ 1,662     $ 2     $ 0     $ 1,664  

The amortized cost and fair value of securities as of December 31, 2011 are summarized as follows:

Available-for-Sale

(in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
U.S. Treasury and government agencies
  $ 32,077     $ 1,171     $ 0     $ 33,248  
State and political subdivisions
    68,358       3,816       (30 )     72,144  
U.S. government sponsored agency mortgage-backed securities
    390,213       10,180       (57 )     400,336  
Collateralized mortgage obligations
    501       6       0       507  
Total debt securities
    491,149       15,173       (87 )     506,235  
Marketable equity securities
    20,582       718       (137 )     21,163  
Total available-for-sale securities
  $ 511,731     $ 15,891     $ (224 )   $ 527,398  

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
State and political subdivisions
  $ 1,182     $ 0     $ 0     $ 1,182  
Other debt securities
    480       0       (1 )     479  
Total held-to-maturity securities
  $ 1,662     $ 0     $ (1 )   $ 1,661  

The amortized cost and fair value of securities at March 31, 2012 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Available-for-Sale
   
Held-to-Maturity
 
(in thousands)
 
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
Due in one year or less
  $ 4,744     $ 4,791     $ 0     $ 0  
Due after one through five years
    22,717       23,444       0       0  
Due after five through ten years
    44,651       46,008       1,182       1,184  
Due after ten years
    37,117       38,933       0       0  
U.S. government sponsored agency mortgage-backed securities
    470,250       479,223       0       0  
Collateralized mortgage obligations
    452       464       0       0  
Other securities
    0       0       480       480  
Total debt securities
    579,931       592,863       1,662       1,664  
Marketable equity securities
    20,582       21,115       0       0  
Total securities
  $ 600,513     $ 613,978     $ 1,662     $ 1,664  

There were no pre-tax gains or losses as of March 31, 2012 or 2011.

The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $188.2 million at March 31, 2012 and $198.6 million at December 31, 2011.

The amortized cost of securities sold under agreements to repurchase amounted to $239.7 million at March 31, 2012 and $217.2 million at December 31, 2011.
 
Certain investments in debt and marketable equity securities are reported in the financial statements at amounts less than their historical costs.  CTBI evaluates its investment portfolio on a quarterly basis for impairment.  The analysis performed as of March 31, 2012 indicates that all impairment is considered temporary, market driven, and not credit-related. The percentage of total investments with unrealized losses as of March 31, 2012 was 20.2% compared to 4.8% as of December 31, 2011.  The following tables provide the amortized cost, gross unrealized losses, and fair market value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of March 31, 2012 that are not deemed to be other-than-temporarily impaired.

Available-for-Sale

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
Less Than 12 Months
                 
U.S. Treasury and government agencies
  $ 1,977     $ (3 )   $ 1,974  
State and political subdivisions
    11,917       (186 )     11,731  
U.S. government sponsored agency mortgage-backed securities
    110,833       (610 )     110,223  
Collateralized mortgage obligations
    0       0       0  
Total debt securities
    124,727       (799 )     123,928  
Marketable equity securities
    0       0       0  
Total <12 months temporarily impaired AFS securities
    124,727       (799 )     123,928  
                         
12 Months or More
                       
U.S. Treasury and government agencies
    0       0       0  
State and political subdivisions
    106       (1 )     105  
U.S. government sponsored agency mortgage-backed securities
    0       0       0  
Collateralized mortgage obligations
    0       0       0  
Total debt securities
    106       (1 )     105  
Marketable equity securities
    329       (92 )     237  
Total ≥12 months temporarily impaired AFS securities
    435       (93 )     342  
                         
Total
                       
U.S. Treasury and government agencies
    1,977       (3 )     1,974  
State and political subdivisions
    12,023       (187 )     11,836  
U.S. government sponsored agency mortgage-backed securities
    110,833       (610 )     110,223  
Collateralized mortgage obligations
    0       (0 )     0  
Total debt securities
    124,833       (800 )     124,033  
Marketable equity securities
    329       (92 )     237  
Total temporarily impaired AFS securities
  $ 125,162     $ (892 )   $ 124,270  

As of March 31, 2012, there were no held-to-maturity securities with unrealized losses.
 
The analysis performed as of December 31, 2011 indicated that all impairment was considered temporary, market driven, and not credit-related.  The following tables provide the amortized cost, gross unrealized losses, and fair market value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of December 31, 2011 that are not deemed to be other-than-temporarily impaired.

Available-for-Sale

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
Less Than 12 Months
                 
U.S. Treasury and government agencies
  $ 0     $ 0     $ 0  
State and political subdivisions
    6,173       (25 )     6,148  
U.S. government sponsored agency mortgage-backed securities
    17,900       (57 )     17,843  
Total debt securities
    24,073       (82 )     23,991  
Marketable equity securities
    0       0       0  
Total <12 months temporarily impaired AFS securities
    24,073       (82 )     23,991  
                         
12 Months or More
                       
U.S. Treasury and government agencies
    0       0       0  
State and political subdivisions
    613       (5 )     608  
U.S. government sponsored agency mortgage-backed securities
    0       0       0  
Total debt securities
    613       (5 )     608  
Marketable equity securities
    329       (137 )     192  
Total ≥12 months temporarily impaired AFS securities
    942       (142 )     800  
                         
Total
                       
U.S. Treasury and government agencies
    0       0       0  
State and political subdivisions
    6,786       (30 )     6,756  
U.S. government sponsored agency mortgage-backed securities
    17,900       (57 )     17,843  
Total debt securities
    24,686       (87 )     24,599  
Marketable equity securities
    329       (137 )     192  
Total temporarily impaired AFS securities
  $ 25,015     $ (224 )   $ 24,791  

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
Less Than 12 Months
                 
State and political subdivisions
  $ 0     $ 0     $ 0  
Other debt securities
    480       (1 )     479  
Total temporarily impaired HTM securities
  $ 480     $ (1 )   $ 479  

Note 4 – Loans

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

 
(in thousands)
 
March 31
2012
   
December 31
2011
 
Commercial construction
  $ 114,161     $ 120,577  
Commercial secured by real estate
    806,909       798,887  
Equipment lease financing
    8,219       9,706  
Commercial other
    381,946       374,597  
Real estate construction
    52,558       53,534  
Real estate mortgage
    648,338       650,075  
Home equity
    83,498       84,841  
Consumer direct
    121,645       123,949  
Consumer indirect
    324,894       340,382  
Total loans
  $ 2,542,168     $ 2,556,548  
 
CTBI has segregated and evaluates its loan portfolio through nine portfolio classes. The nine classes are commercial construction, commercial secured by real estate, equipment lease financing, commercial other, real estate construction, real estate mortgage, home equity, consumer direct, and consumer indirect.  CTBI serves customers in small and mid-sized communities in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee.  Therefore, CTBI’s exposure to credit risk is significantly affected by changes in these communities.
 
Commercial construction loans are for the purpose of erecting or rehabilitating buildings or other structures for commercial purposes, including any infrastructure necessary for development.   Included in this category are improved property, land development, and tract development loans.  The terms of these loans are generally short-term with permanent financing upon completion.
 
Commercial real estate loans include loans secured by nonfarm, nonresidential properties, 1-4 family/ multi-family properties, farmland, and other commercial real estate.  These loans are originated based on the borrower’s ability to service the debt and secondarily based on the fair value of the underlying collateral.

Equipment lease financing loans are fixed, variable, and tax exempt leases for commercial purposes.
 
Commercial other loans consist of commercial check loans, agricultural loans, receivable financing, floorplans, loans to financial institutions, loans for purchasing or carrying securities, and other commercial purpose loans.  Commercial loans are underwritten based on the borrower’s ability to service debt from the business’s underlying cash flows.  As a general practice, we obtain collateral such as real estate, equipment, or other assets, although such loans may be uncollateralized but guaranteed.

Real estate construction loans are typically for owner-occupied properties.  The terms of these loans are generally short-term with permanent financing upon completion.
 
Residential real estate loans are a mixture of fixed rate and adjustable rate first and second lien residential mortgage loans.  As a policy, CTBI holds adjustable rate loans and sells the majority of its fixed rate first lien mortgage loans into the secondary market.  Changes in interest rates or market conditions may impact a borrower’s ability to meet contractual principal and interest payments.  Residential real estate loans are secured by real property.

Home equity lines are revolving adjustable rate credit lines secured by real property.

Consumer direct loans are fixed rate products comprised of unsecured loans, consumer revolving credit lines, deposit secured loans, and all other consumer purpose loans.
 
Consumer indirect loans are fixed rate loans secured by automobiles, trucks, vans, and recreational vehicles originated at the selling dealership underwritten and purchased by CTBI’s indirect lending department.  Both new and used products are financed.  Only dealers who have executed dealer agreements with CTBI participate in the indirect lending program.
 
Not included in the loan balances above were loans held for sale in the amount of $1.6 million at March 31, 2012 and $0.5 million at  December 31, 2011.  The amount of capitalized fees and costs under ASC 310-20, included in the above loan totals were $0.5 million and $0.7 million at March 31, 2012 and December 31, 2011, respectively.
 
CTBI acquired loans through the acquisition of First National Bank of LaFollette in the fourth quarter 2010.  At acquisition, the transferred loans with evidence of deterioration of credit quality since origination were not significant; therefore, none of the loans acquired were accounted for under the guidance in ASC 310-30.
 
Credit discounts representing principal losses expected over the life of the loans are a component of the initial fair value for purchased loans acquired that are not deemed impaired at acquisition.  Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date.  Subsequent to the acquisition date, the methods used to estimate the required allowance for credit losses for these loans is similar to originated loans; however, CTBI records a provision for loan losses only when the required allowance exceeds any remaining credit discounts.  The remaining difference between the purchase price and the unpaid principal balance at the date of acquisition is recorded in interest income over the life of the loans.  Management estimated the cash flows expected to be collected at acquisition using a third party that incorporated estimates of current key assumptions, such as default rates, severity, and prepayment speeds.  The carrying amounts of those loans included in the balance sheet are $83.6 million and $88.5 million at March 31, 2012 and December 31, 2011, respectively.

Changes in accretable yield for the three months ended March 31, 2012 and the year ended December 31, 2011 are as follows:

 (in thousands)
 
March 31
2012
   
December 31
2011
 
Beginning balance
  $ 720     $ 2,995  
Additions
    0       0  
Accretion
    (259 )     (1,067 )
Disposals
    (35 )     (1,208 )
Ending balance
  $ 426     $ 720  

Refer to note 1 to the condensed consolidated financial statements for further information regarding our nonaccrual policy.  Nonaccrual loans segregated by class of loans were as follows:

 (in thousands)
 
March 31
2012
   
December 31
2011
 
Commercial:
           
Commercial construction
  $ 7,246     $ 7,029  
Commercial secured by real estate
    7,440       9,810  
Commercial other
    3,300       3,914  
                 
Residential:
               
Real estate construction
    397       607  
Real estate mortgage
    3,184       4,204  
Home equity
    202       189  
Total nonaccrual loans
  $ 21,769     $ 25,753  

The following tables present CTBI’s loan portfolio aging analysis, segregated by class, as of March 31, 2012 and December 31, 2011:

   
March 31, 2012
 
(in thousands)
 
30-59 Days Past Due
   
60-89 Days Past Due
   
90+ Days Past Due
   
Total Past Due
   
Current
   
Total Loans
   
90+ and Accruing*
 
Commercial:
                                         
Commercial construction
  $ 825     $ 0     $ 9,859     $ 10,684     $ 103,477     $ 114,161     $ 2,911  
Commercial secured by real estate
    3,588       1,390       12,480       17,458       789,451       806,909       5,191  
Equipment lease financing
    0       0       0       0       8,219       8,219       0  
Commercial other
    1,233       4,124       3,331       8,688       373,258       381,946       881  
Residential:
                                                       
Real estate construction
    460       12       480       952       51,606       52,558       84  
Real estate mortgage
    1,844       2,908       6,153       10,905       637,433       648,338       3,110  
Home equity
    459       117       588       1,164       82,334       83,498       406  
Consumer:
                                                       
Consumer direct
    693       129       36       858       120,787       121,645       36  
Consumer indirect
    1,721       495       209       2,425       322,469       324,894       209  
Total
  $ 10,823     $ 9,175     $ 33,136     $ 53,134     $ 2,489,034     $ 2,542,168     $ 12,828  

   
December 31, 2011
 
(in thousands)
 
30-59 Days Past Due
   
60-89 Days Past Due
   
90+ Days Past Due
   
Total Past Due
   
Current
   
Total Loans
   
90+ and Accruing*
 
Commercial:
                                         
Commercial construction
  $ 362     $ 33     $ 10,171     $ 10,566     $ 110,011     $ 120,577     $ 3,292  
Commercial secured by real estate
    4,566       2,978       11,998       19,542       779,345       798,887       3,969  
Equipment lease financing
    0       0       0       0       9,706       9,706       0  
Commercial other
    2,286       688       2,504       5,478       369,119       374,597       619  
Residential:
                                                       
Real estate construction
    305       91       622       1,018       52,516       53,534       16  
Real estate mortgage
    2,067       4,974       6,547       13,588       636,487       650,075       2,719  
Home equity
    968       312       482       1,762       83,079       84,841       346  
Consumer:
                                                       
Consumer direct
    1,723       171       71       1,965       121,984       123,949       71  
Consumer indirect
    2,684       755       483       3,922       336,460       340,382       483  
Total
  $ 14,961     $ 10,002     $ 32,878     $ 57,841     $ 2,498,707     $ 2,556,548     $ 11,515  

*90+ and Accruing are also included in 90+ Days Past Due column.

Credit Quality Indicators:
 
CTBI categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  CTBI also considers the fair value of the underlying collateral and the strength and willingness of the guarantor(s).  CTBI analyzes commercial loans individually by classifying the loans as to credit risk.  Loans classified as loss, doubtful, substandard, or special mention are reviewed quarterly by CTBI for further deterioration or improvement to determine if appropriately classified and valued if deemed impaired.  All other commercial loan reviews are completed every 12 to 18 months.  In addition, during the renewal process of any loan, as well as if a loan becomes past due or if other information becomes available, CTBI will evaluate the loan grade.  CTBI uses the following definitions for risk ratings:

Ø  
Pass grades include investment grade, low risk, moderate risk, and acceptable risk loans.  The loans range from loans that have no chance of resulting in a loss to loans that have a limited chance of resulting in a loss.  Customers in this grade have excellent to fair credit ratings.  The cash flows are adequate to meet required debt repayments.

Ø  
Watch graded loans are loans that warrant extra management attention but are not currently criticized.  Loans on the watch list may be potential troubled credits or may warrant “watch” status for a reason not directly related to the asset quality of the credit.  The watch grade is a management tool to identify credits which may be candidates for future classification or may temporarily warrant extra management monitoring.

Ø  
Other assets especially mentioned (OAEM) reflects loans that are currently protected but are potentially weak.  These loans constitute an undue and unwarranted credit risk but not to the point of justifying a classification of substandard.  The credit risk may be relatively minor yet constitute an unwarranted risk in light of circumstances surrounding a specific asset. Loans in this grade display potential weaknesses which may, if unchecked or uncorrected, inadequately protect CTBI’s credit position at some future date.  The loans may be adversely affected by economic or market conditions.

Ø  
Substandard grading indicates that the loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged.  These loans have a well-defined weakness or weaknesses that jeopardize the orderly liquidation of the debt with the distinct possibility that CTBI will sustain some loss if the deficiencies are not corrected.

Ø  
Doubtful graded loans have the weaknesses inherent in the substandard grading with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  The probability of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to CTBI’s advantage or strengthen the asset(s), its classification as an estimated loss is deferred until its more exact status may be determined.  Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.

Ø  
A loss grading applies to loans that are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.  This classification does not mean that the asset has absolutely no recovery value, but rather it is not practical or desirable to defer writing off the asset.  Losses must be taken in the period in which they surface as uncollectible, or in the case of collateral-dependent loans, a specific reserve in the amount of the expected loss is applied to the loan until the collateral is liquidated or we have taken possession and moved it into other real estate owned.

The following tables present the credit risk profile of CTBI’s commercial loan portfolio based on rating category and payment activity, segregated by class of loans, as of March 31, 2012 and December 31, 2011:

 (in thousands)
 
Commercial Construction
   
Commercial Secured by Real Estate
   
Commercial Other
   
Equipment Leases
   
Total
 
March 31, 2012
                             
Pass
  $ 81,848     $ 659,812     $ 322,849     $ 8,219     $ 1,072,728  
Watch
    14,948       76,821       39,855       0       131,624  
OAEM
    1,435       19,262       8,662       0       29,359  
Substandard
    8,793       43,596       7,309       0       59,698  
Doubtful
    7,137       7,418       3,271       0       17,826  
Loss
    0       0       0       0       0  
Total
  $ 114,161     $ 806,909     $ 381,946     $ 8,219     $ 1,311,235  
                                         
December 31, 2011
                                       
Pass
  $ 85,886     $ 643,312     $ 323,471     $ 9,706     $ 1,062,375  
Watch
    17,721       78,611       38,185       0       134,517  
OAEM
    1,379       21,087       1,668       0       24,134  
Substandard
    8,783       46,238       7,364       0       62,385  
Doubtful
    6,808       9,639       3,909       0       20,356  
Loss
    0       0       0       0       0  
Total
  $ 120,577     $ 798,887     $ 374,597     $ 9,706     $ 1,303,767  
 
The following tables present the credit risk profile of the CTBI’s residential real estate and consumer loan portfolios based on performing or nonperforming status, segregated by class, as of March 31, 2012 and December 31, 2011:

(in thousands)
 
Real Estate Construction
   
Real Estate Mortgage
   
Home Equity
   
Consumer Direct
   
Consumer
Indirect
   
Total
 
March 31, 2012
                                   
Performing
  $ 52,077     $ 642,044     $ 82,890     $ 121,609     $ 324,685     $ 1,223,305  
Nonperforming (1)
    481       6,294       608       36       209       7,628  
Total
  $ 52,558     $ 648,338     $ 83,498     $ 121,645     $ 324,894     $ 1,230,933  
                                                 
December 31, 2011
                                               
Performing
  $ 52,911     $ 643,152     $ 84,306     $ 123,878     $ 339,899     $ 1,244,146  
Nonperforming (1)
    623       6,923       535       71       483       8,635  
Total
  $ 53,534     $ 650,075     $ 84,841     $ 123,949     $ 340,382     $ 1,252,781  

(1)  A loan is considered nonperforming if it is 90 days or more past due or on nonaccrual.
 
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable CTBI will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.  These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection.

The following table presents impaired loans, the average investment in impaired loans, and interest income recognized on impaired loans for the periods ended March 31, 2012, December 31, 2011, and March 31, 2011:

   
March 31, 2012
 
(in thousands)
 
Recorded Balance
   
Unpaid Contractual Principal Balance
   
Specific Allowance
   
Average Investment in Impaired Loans
   
*Interest Income Recognized
 
Loans without a specific valuation allowance:
                             
Commercial construction
  $ 4,594     $ 4,595     $ 0     $ 4,683     $ 18  
Commercial secured by real estate
    36,312       37,778       0       36,506       332  
Commercial other
    6,696       7,406       0       6,785       16  
Real estate construction
    0       0       0       0       0  
Real estate mortgage
    279       279       0       280       3  
  Consumer direct
    0       0       0       0       0  
  Consumer indirect
    0       0       0       0       0  
                                         
Loans with a specific valuation allowance:
                                       
Commercial construction
    5,912       6,764       2,180       5,809       0  
Commercial secured by real estate
    3,382       3,508       1,246       3,385       0  
Commercial other
    2,791       5,391       1,104       2,829       0  
                                         
Totals:
                                       
Commercial
    59,687       65,442       4,530       59,997       366  
Residential
    279       279       0       280       3  
Consumer
    0       0       0       0       0  
Total
  $ 59,966     $ 65,721     $ 4,530     $ 60,277     $ 369  

   
December 31, 2011
 
(in thousands)
 
Recorded Balance
   
Unpaid Contractual Principal Balance
   
Specific Allowance
   
Average Investment in Impaired Loans
   
*Interest Income Recognized
 
Loans without a specific valuation allowance:
                             
Commercial construction
  $ 4,778     $ 4,778     $ 0     $ 8,992     $ 252  
Commercial secured by real estate
    27,811       29,765       0       31,480       1,543  
Commercial other
    1,770       2,501       0       3,392       143  
Real estate construction
    27       27       0       19       1  
Real estate mortgage
    82       82       0       84       5  
  Consumer direct
    93       93       0       82       9  
  Consumer indirect
    112       112       0       99       12  
                                         
Loans with a specific valuation allowance:
                                       
Commercial construction
    5,794       6,643       2,203       7,681       0  
Commercial secured by real estate
    3,525       3,669       1,156       4,747       23  
Commercial other
    3,432       6,022       1,310       5,071       22  
                                         
Totals:
                                       
Commercial
    47,110       53,378       4,669       61,363       1,983  
Residential
    109       109       0       103       6  
Consumer
    205       205       0       181       21  
Total
  $ 47,424     $ 53,692     $ 4,669     $ 61,647     $ 2,010  

   
March 31, 2011
 
(in thousands)
 
Recorded Balance
   
Unpaid Contractual Principal Balance
   
Specific Allowance
   
Average Investment in Impaired Loans
   
*Interest Income Recognized
 
Loans without a specific valuation allowance:
                             
Commercial construction
  $ 7,537     $ 8,394     $ 0     $ 7,540     $ 71  
Commercial secured by real estate
    30,903       33,279       0       32,777       257  
Commercial other
    3,870       4,970       0       3,886       56  
Real estate construction
    0       0       0       0       0  
Real estate mortgage
    85       85       0       85       2  
  Consumer direct
    43       43       0       43       1  
  Consumer indirect
    89       89       0       89       2  
                                         
Loans with a specific valuation allowance:
                                       
Commercial construction
    9,356       9,788       2,805       9,356       0  
Commercial secured by real estate
    5,189       5,379       1,622       5,219       23  
Commercial other
    7,247       8,645       2,913       7,963       0  
                                         
Totals:
                                       
Commercial
    64,102       70,455       7,340       66,741       407  
Residential
    85       85       0       85       2  
Consumer
    132       132       0       132       3  
Total
  $ 64,319     $ 70,672     $ 7,340     $ 66,958     $ 412  

*Cash basis interest is substantially the same as interest income recognized.
 
Included in certain loan categories of impaired loans are certain loans and leases that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.  Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances.  Loan modifications that are included as troubled debt restructurings may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral of principal and/or interest payments, regardless of the period of the modification.  All of the loans identified as troubled debt restructuring were modified due to financial stress of the borrower.  In order to determine if a borrower is experiencing financial difficulty, an evaluation is performed to determine the probability that the borrower will be in payment default on any of its debt in the foreseeable future with the modification.  This evaluation is performed under CTBI’s internal underwriting policy.
 
When we modify loans and leases in a troubled debt restructuring, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamort