10-Q 1 ctbi10q0313.htm CTBI MARCH 31, 2013 FORM 10-Q ctbi10q0313.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, 2013
   
 
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 – 15,661,375 shares outstanding at April 30, 2013

 
 

 


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 our 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, 2012 for further information in this regard.


 
 

 

Community Trust Bancorp, Inc.
Condensed Consolidated Balance Sheets

(dollars in thousands)
 
(unaudited)
March 31
2013
   
December 31
2012
 
Assets:
           
Cash and due from banks
  $ 54,589     $ 73,451  
Interest bearing deposits
    111,128       127,438  
Federal funds sold
    2,227       6,671  
Cash and cash equivalents
    167,944       207,560  
                 
Certificates of deposit in other banks
    9,320       5,336  
Securities available-for-sale at fair value (amortized cost of $660,611 and $583,858, respectively)
    677,510       603,343  
Securities held-to-maturity at amortized cost (fair value of $1,656 and $1,659, respectively)
    1,662       1,662  
Loans held for sale
    1,449       22,486  
                 
Loans
    2,563,314       2,550,573  
Allowance for loan losses
    (33,393 )     (33,245 )
Net loans
    2,529,921       2,517,328  
                 
Premises and equipment, net
    53,491       54,321  
Federal Home Loan Bank stock
    25,673       25,673  
Federal Reserve Bank stock
    4,886       4,885  
Goodwill
    65,490       65,490  
Core deposit intangible (net of accumulated amortization of $7,765 and $7,712, respectively)
    850       904  
Bank owned life insurance
    53,166       44,893  
Mortgage servicing rights
    2,652       2,364  
Other real estate owned
    45,720       47,537  
Other assets
    32,361       31,882  
Total assets
  $ 3,672,095     $ 3,635,664  
                 
Liabilities and shareholders’ equity:
               
Deposits:
               
Noninterest bearing
  $ 619,819     $ 606,448  
Interest bearing
    2,313,761       2,297,400  
Total deposits
    2,933,580       2,903,848  
                 
Repurchase agreements
    213,573       210,120  
Federal funds purchased and other short-term borrowings
    15,272       12,314  
Advances from Federal Home Loan Bank
    1,387       1,429  
Long-term debt
    61,341       61,341  
Other liabilities
    40,308       46,268  
Total liabilities
    3,265,461       3,235,320  
                 
Shareholders’ equity:
               
Preferred stock, 300,000 shares authorized and unissued
    -       -  
Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2013 – 15,653,090; 2012 – 15,612,935
    78,266       78,065  
Capital surplus
    161,520       160,670  
Retained earnings
    155,864       148,944  
Accumulated other comprehensive income, net of tax
    10,984       12,665  
Total shareholders’ equity
    406,634       400,344  
                 
Total liabilities and shareholders’ equity
  $ 3,672,095     $ 3,635,664  


 
 

 

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)
 
2013
   
2012
 
Interest income:
           
Interest and fees on loans, including loans held for sale
  $ 32,848     $ 35,052  
Interest and dividends on securities
               
Taxable
    2,895       2,771  
Tax exempt
    558       477  
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock
    348       364  
Other, including interest on federal funds sold
    127       162  
Total interest income
    36,776       38,826  
                 
Interest expense:
               
Interest on deposits
    3,019       4,471  
Interest on repurchase agreements and other short-term borrowings
    263       338  
Interest on advances from Federal Home Loan Bank
    7       11  
Interest on long-term debt
    290       1,000  
Total interest expense
    3,579       5,820  
                 
Net interest income
    33,197       33,006  
Provision for loan losses
    1,559       1,160  
Net interest income after provision for loan losses
    31,638       31,846  
                 
Noninterest income:
               
Service charges on deposit accounts
    5,767       5,872  
Gains on sales of loans, net
    1,397       617  
Trust income
    2,000       1,613  
Loan related fees
    948       1,287  
Bank owned life insurance
    421       428  
Other noninterest income
    1,387       1,370  
Total noninterest income
    11,920       11,187  
                 
Noninterest expense:
               
Officer salaries and employee benefits
    2,551       2,356  
Other salaries and employee benefits
    10,431       10,457  
Occupancy, net
    1,927       1,853  
Equipment
    978       918  
Data processing
    1,813       1,579  
Bank franchise tax
    1,123       1,155  
Legal fees
    606       601  
Professional fees
    382       260  
FDIC insurance
    602       657  
Other real estate owned provision and expense
    1,839       790  
Other noninterest expense
    4,047       5,124  
Total noninterest expense
    26,299       25,750  
                 
Income before income taxes
    17,259       17,283  
Income taxes
    5,439       5,414  
Net income
    11,820       11,869  
                 
Other comprehensive income:
               
Unrealized holding gains on securities available-for-sale:
               
Unrealized holding gains arising during the period
    (2,586 )     (2,202 )
Tax benefit
    (905 )     (771 )
Other comprehensive income, net of tax
    (1,681 )     (1,431 )
Comprehensive income
  $ 10,139     $ 10,438  
                 
Basic earnings per share
  $ 0.76     $ 0.77  
Diluted earnings per share
  $ 0.76     $ 0.77  
                 
Weighted average shares outstanding-basic
    15,539       15,407  
Weighted average shares outstanding-diluted
    15,592       15,456  
                 
Dividends declared per share
  $ 0.315     $ 0.310  


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)
 
2013
   
2012
 
Cash flows from operating activities:
           
Net income
  $ 11,820     $ 11,869  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,151       1,061  
Deferred taxes
    905       771  
Stock-based compensation
    164       146  
Excess tax benefits of stock-based compensation
    35       336  
Provision for loan losses
    1,559       1,160  
Write-downs of other real estate owned and other repossessed assets
    1,146       179  
Gains on sale of mortgage loans held for sale
    (1,397 )     (617 )
(Gains)/losses on sale of assets, net
    65       (35 )
Proceeds from sale of mortgage loans held for sale
    59,723       26,731  
Funding of mortgage loans held for sale
    (37,289 )     (27,220 )
Amortization of securities premiums and discounts, net
    1,086       1,287  
Change in cash surrender value of bank owned life insurance
    (324 )     (344 )
Mortgage servicing rights:
               
Fair value adjustments
    69       (207 )
New servicing assets created
    (357 )     (151 )
Changes in:
               
Other assets
    (486 )     (392 )
Other liabilities
    (5,968 )     10,090  
Net cash provided by operating activities
    31,902       24,664  
                 
Cash flows from investing activities:
               
Certificates of deposit in other banks:
               
Purchase of certificates of deposit
    (3,984 )     (1,117 )
Securities available-for-sale (AFS):
               
Purchase of AFS securities
    (109,477 )     (123,695 )
Proceeds from prepayments and maturities of AFS securities
    31,637       33,626  
Change in loans, net
    (15,881 )     8,803  
Purchase of premises and equipment
    (267 )     (1,436 )
Proceeds from sale of premises and equipment
    0       73  
Additional investment in Federal Reserve Bank stock
    (1 )     (1 )
Proceeds from sale of other real estate and other repossessed assets
    2,347       2,089  
Additional investment in other real estate and other repossessed assets
    (5 )     (90 )
Additional investment in bank owned life insurance
    (7,949 )     0  
Net cash used in investing activities
    (103,580 )     (81,748 )
                 
Cash flows from financing activities:
               
Change in deposits, net
    29,732       69,194  
Change in repurchase agreements, federal funds purchased, and other short-term borrowings, net
    6,411       15,773  
Payments on advances from Federal Home Loan Bank
    (42 )     (20,047 )
Issuance of common stock
    883       1,993  
Excess tax benefits of stock-based compensation
    (35 )     (336 )
Dividends paid
    (4,887 )     (4,753 )
Net cash provided by financing activities
    32,062       61,824  
Net increase (decrease) in cash and cash equivalents
    (39,616 )     4,740  
Cash and cash equivalents at beginning of period
    207,560       238,481  
Cash and cash equivalents at end of period
  $ 167,944     $ 243,221  
                 
Supplemental disclosures:
               
Income taxes paid
  $ 4,500     $ 3,800  
Interest paid
    3,411       5,290  
Non-cash activities:
               
Loans to facilitate the sale of other real estate and other repossessed assets
    318       952  
Common stock dividends accrued, paid in subsequent quarter
    4,900       4,783  
Real estate acquired in settlement of loans
    2,047       5,370  

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, 2013, the results of operations for the three months ended March 31, 2013 and 2012, and the cash flows for the three months ended March 31, 2013 and 2012.  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, 2013 and 2012, and the cash flows for the three months ended March 31, 2013 and 2012, are not necessarily indicative of the results to be expected for the full year.  The condensed consolidated balance sheet as of December 31, 2012 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, 2012, 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 Testing Goodwill for Impairment – In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment.  Under these amendments, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on qualitative assessment, that it is not more likely than not that the indefinite-lived intangible asset is impaired.  The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment.  ASU 2012-02 is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012.  Adoption of this ASU did not have a material effect on our consolidated financial statements.

Ø Amounts Reclassified Out of Other Comprehensive Income – In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income.  The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP.  The new amendments will require an organization to:
-  
Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period; and
-  
Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
 
The amendments apply to all public and private companies that report items of other comprehensive income.  Public companies are required to comply with these amendments for all reporting periods (interim and annual).  The amendments are effective for reporting periods beginning after December 15, 2012, for public companies.  The adoption of ASU No. 2013-02 did not have a material impact on CTBI’s consolidated financial statements.

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 the 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 described above.  We have identified the following critical accounting policies:
 
Investments  Management determines the classification of securities at purchase.  We classify securities into held-to-maturity, trading, or available-for-sale categories.  Held-to-maturity securities are those which we have the positive intent and ability to hold to maturity and are reported at amortized cost.  In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320, Investment Securities, investments in debt securities that are not classified as held-to-maturity and equity securities that have readily determinable fair values shall be classified in one of the following categories and measured at fair value in the statement of financial position:
 
a. Trading securities. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) shall be classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price.
 
b. Available-for-sale securities. Investments not classified as trading securities (nor as held-to-maturity securities) shall be classified as available-for-sale securities.
 
We do not have any securities that are classified as trading securities.  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 other than temporary, the carrying value of the securities is written down to fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not credit related.
 
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.
 
When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair market value is below amortized cost, additional analysis is performed to determine whether an other than temporary impairment condition exists.  Available-for-sale and held-to-maturity securities are analyzed quarterly for possible other than temporary impairment.  The analysis considers (i) whether we have the intent to sell our securities prior to recovery and/or maturity and (ii) whether it is more likely than not that we will not have to sell our securities prior to recovery and/or maturity.  Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment.  If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on the CTBI’s results of operations and financial condition.
 
Loans  Loans with the ability and the intent to be held until maturity and/or payoff are reported at the carrying value of unpaid principal reduced by unearned interest, an allowance for loan and lease losses, and unamortized deferred fees or costs.  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 remain current for a period of time, generally six months, and future payments appear reasonably certain.  Included in certain loan categories of impaired loans are troubled debt restructurings that were classified as impaired.  A restructuring of a debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.

Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized over the estimated life of the related loans, leases, or commitments as a yield adjustment.
 
Allowance for Loan and Lease Losses  We maintain an allowance for loan and lease losses (“ALLL”) at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio.  Since arriving at an appropriate ALLL involves a high degree of management judgment, we use an ongoing quarterly analysis to develop a range of estimated losses.  In accordance with accounting principles generally accepted in the United States, we use our best estimate within the range of potential credit loss to determine the appropriate ALLL.  Credit losses are charged and recoveries are credited to the ALLL.
 
We utilize an internal risk grading system for commercial credits.  Those larger commercial credits that exhibit probable or observed credit weaknesses are subject to individual review.  The borrower’s cash flow, adequacy of collateral coverage, and other options available to CTBI, including legal remedies, are evaluated.  The review of individual loans includes those loans that are impaired as defined by ASC 310-35, Impairment of a Loan.  We evaluate the collectability of both principal and interest when assessing the need for loss provision.  Historical loss rates are analyzed and applied to other commercial loans not subject to specific allocations.  The ALLL allocation for this pool of commercial loans is established based on the historical average, maximum, minimum, and median loss ratios.
 
A loan is considered impaired when, based on current information and events, it is probable that CTBI will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Homogenous loans, such as consumer installment, residential mortgages, and home equity lines are not individually risk graded.  The associated ALLL for these loans is measured under ASC 450, Contingencies.
 
When any secured commercial loan is considered uncollectable, whether past due or not, a current assessment of the value of the underlying collateral is made.  If the balance of the loan exceeds the fair value of the collateral, the loan is placed on non-accrual and the loan is charged down to the value of the collateral less estimated cost to sell or a specific reserve equal to the difference between book value of the loan and the fair value assigned to the collateral is created until such time as the loan is foreclosed.  When the foreclosed collateral has been legally assigned to CTBI, a charge off is taken, if necessary, in order that the remaining balance reflects the fair value estimated less costs to sell of the collateral then transferred to other real estate owned or other repossessed assets.  When any unsecured commercial loan is considered uncollectable the loan is charged off no later than at 90 days past due.
 
All closed-end consumer loans (excluding conventional 1-4 family residential loans and installment and revolving loans secured by real estate) are charged off no later than 120 days (5 monthly payments) delinquent.  If a loan is considered uncollectable, it is charged off earlier than 120 days delinquent.  For conventional 1-4 family residential loans and installment and revolving loans secured by real estate, when a loan is 90 days past due, a current assessment of the value of the real estate is made.  If the balance of the loan exceeds the fair value of the property, the loan is placed on nonaccrual and foreclosure proceedings are initiated.  When the foreclosed property has been legally assigned to CTBI, a charge-off is taken with the remaining balance, reflecting the fair value less estimated costs to sell, transferred to other real estate owned.
 
Historical loss rates for loans are adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition.  We generally review the historical loss rates over eight quarters and four quarters on a rolling average basis.  Factors that we consider include delinquency trends, current economic conditions and trends, strength of supervision and administration of the loan portfolio, levels of underperforming loans, level of recoveries to prior year’s charge-offs, trend in loan losses, industry concentrations and their relative strengths, amount of unsecured loans and underwriting exceptions.  Based upon management’s judgment, “best case,” “worst case,” and “most likely” scenarios are determined.  The total of each of these weighted factors is then applied against the applicable portion of the portfolio and the ALLL is adjusted accordingly to approximate the most likely scenario.  Management continually reevaluates the other subjective factors included in its ALLL analysis.
 
Other Real Estate Owned – When foreclosed properties are acquired, appraisals are obtained and the properties are booked at the current market value less expected sales costs.  Additionally, periodic updated appraisals are obtained on unsold foreclosed properties.  When an updated appraisal reflects a market value below the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected sales costs.  Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months.  All revenues and expenses related to the carrying of other real estate owned are recognized by a charge to income.

Note 2 – Stock-Based Compensation
 
CTBI’s compensation expense related to stock option grants was $3 thousand and $19 thousand for the three months ended March 31, 2013 and 2012, respectively.  Restricted stock expense for the first three months of 2013 and 2012 was $161 thousand and $157 thousand, respectively, including $31 thousand and $30 thousand, respectively, in dividends paid for each period.  As of March 31, 2013, there was a total of $17 thousand 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 1.6 years and a total of $1.3 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 1.5 years.
 
There were 10,822 shares and 331 shares of restricted stock granted during the three months ended March 31, 2013 and 2012.  The restrictions on the restricted stock granted in 2013 and 2012 will lapse over four 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.  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 1,500 options granted to purchase shares of CTBI common stock during the three months ended March 31, 2013.  There were no options granted to purchase shares of CTBI common stock during the three months ended March 31, 2012.

The fair values of options granted during the three months ended March 31, 2013, were established at the date of grant using a Black-Scholes option pricing model with the weighted average assumptions as follows:

   
Three Months Ended
 
   
March 31
 
   
2013
 
Expected dividend yield
    3.74 %
Risk-free interest rate
    1.33 %
Expected volatility
    39.11 %
Expected term (in years)
    7.5  
Weighted average fair value of options
  $ 9.05  

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, 2013 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
  $ 61,100     $ 435     $ (272 )   $ 61,263  
State and political subdivisions
    115,724       4,949       (225 )     120,448  
U.S. government sponsored agency mortgage-backed securities
    428,787       11,992       (309 )     440,470  
Total debt securities
    605,611       17,376       (806 )     622,181  
Marketable equity securities
    55,000       606       (277 )     55,329  
Total available-for-sale securities
  $ 660,611     $ 17,982     $ (1,083 )   $ 677,510  

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
U.S. Treasury and government agencies
  $ 480     $ 0     $ (7 )   $ 473  
State and political subdivisions
    1,182       1       0       1,183  
Total held-to-maturity securities
  $ 1,662     $ 1     $ (7 )   $ 1,656  

The amortized cost and fair value of securities as of December 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
  $ 60,625     $ 463     $ (173 )   $ 60,915  
State and political subdivisions
    107,987       5,369       (135 )     113,221  
U.S. government sponsored agency mortgage-backed securities
    370,246       13,347       (12 )     383,581  
Total debt securities
    538,858       19,179       (320 )     557,717  
Marketable equity securities
    45,000       791       (165 )     45,626  
Total available-for-sale securities
  $ 583,858     $ 19,970     $ (485 )   $ 603,343  

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
U.S. Treasury and government agencies
  $ 480     $ 0     $ (4 )   $ 476  
State and political subdivisions
    1,182       1       0       1,183  
Total held-to-maturity securities
  $ 1,662     $ 1     $ (4 )   $ 1,659  

The amortized cost and fair value of securities at March 31, 2013 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
  $ 7,602     $ 7,653     $ 0     $ 0  
Due after one through five years
    23,004       24,051       0       0  
Due after five through ten years
    107,594       109,952       1,182       1,183  
Due after ten years
    38,624       40,055       480       473  
U.S. government sponsored agency mortgage-backed securities
    428,787       440,470       0       0  
Total debt securities
    605,611       622,181       1,662       1,656  
Marketable equity securities
    55,000       55,329       0       0  
Total securities
  $ 660,611     $ 677,510     $ 1,662     $ 1,656  

There were no sales of securities and no gains or losses realized as of March 31, 2013 or 2012.

The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $258.6 million at March 31, 2013 and $262.4 million at December 31, 2012.

The amortized cost of securities sold under agreements to repurchase amounted to $237.0 million at March 31, 2013 and $237.3 million at December 31, 2012.
 
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, 2013 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, 2013 was 22.2% compared to 14.8% as of December 31, 2012.  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, 2013 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
  $ 48,078     $ (272 )   $ 47,806  
State and political subdivisions
    17,012       (212 )     16,800  
U.S. government sponsored agency mortgage-backed securities
    55,489       (309 )     55,180  
Total debt securities
    120,579       (793 )     119,786  
Marketable equity securities
    30,000       (277 )     29,723  
Total <12 months temporarily impaired AFS securities
    150,579       (1,070 )     149,509  
                         
12 Months or More
                       
State and political subdivisions
    1,106       (13 )     1,093  
Total ≥12 months temporarily impaired AFS securities
    1,106       (13 )     1,093  
                         
Total
                       
U.S. Treasury and government agencies
    48,078       (272 )     47,806  
State and political subdivisions
    18,118       (225 )     17,893  
U.S. government sponsored agency mortgage-backed securities
    55,489       (309 )     55,180  
Total debt securities
    121,685       (806 )     120,879  
Marketable equity securities
    30,000       (277 )     29,723  
Total temporarily impaired AFS securities
  $ 151,685     $ (1,083 )   $ 150,602  

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
Less Than 12 Months
                 
U.S. Treasury and government agencies
  $ 480     $ (7 )   $ 473  
Total temporarily impaired HTM securities
  $ 480     $ (7 )   $ 473  
 
The analysis performed as of December 31, 2012 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, 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
  $ 47,576     $ (173 )   $ 47,403  
State and political subdivisions
    11,126       (135 )     10,991  
U.S. government sponsored agency mortgage-backed securities
    10,563       (12 )     10,551  
Total debt securities
    69,265       (320 )     68,945  
Marketable equity securities
    20,000       (165 )     19,835  
Total <12 months temporarily impaired AFS securities
    89,265       (485 )     88,780  
                         
Total
                       
U.S. Treasury and government agencies
    47,576       (173 )     47,403  
State and political subdivisions
    11,126       (135 )     10,991  
U.S. government sponsored agency mortgage-backed securities
    10,563       (12 )     10,551  
Total debt securities
    69,265       (320 )     68,945  
Marketable equity securities
    20,000       (165 )     19,835  
Total temporarily impaired AFS securities
  $ 89,265     $ (485 )   $ 88,780  

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
Less Than 12 Months
                 
U.S. Treasury and government agencies
  $ 480     $ (4 )   $ 476  
Total temporarily impaired HTM securities
  $ 480     $ (4 )   $ 476  

Note 4 – Loans

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

 
(in thousands)
 
March 31
2013
   
December 31
2012
 
Commercial construction
  $ 102,303     $ 119,447  
Commercial secured by real estate
    847,807       807,213  
Equipment lease financing
    9,944       9,246  
Commercial other
    375,409       376,348  
Real estate construction
    51,978       55,041  
Real estate mortgage
    696,321       696,928  
Home equity
    79,899       82,292  
Consumer direct
    119,191       122,581  
Consumer indirect
    280,462       281,477  
Total loans
  $ 2,563,314     $ 2,550,573  
 
CTBI has segregated and evaluates its loan portfolio through nine portfolio segments. The nine segments 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 $1.4 million at March 31, 2013 and $22.5 million at December 31, 2012.  The amount of capitalized fees and costs under ASC 310-20, included in the above loan totals were $0.2 million and $0.4 million at March 31, 2013 and December 31, 2012, respectively.

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
2013
December 31
2012
Commercial:
   
Commercial construction
$6,196
$5,955
Commercial secured by real estate
6,256
5,572
Commercial other
1,344
1,655
     
Residential:
   
Real estate construction
635
315
Real estate mortgage
3,763
3,153
Home equity
143
141
Total nonaccrual loans
$18,337
$16,791

The following tables present CTBI’s loan portfolio aging analysis, segregated by class, as of March 31, 2013 and December 31, 2012:

   
March 31, 2013
 
(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
  $ 617     $ 16     $ 8,599     $ 9,232     $ 93,071     $ 102,303     $ 2,532  
Commercial secured by real estate
    6,619       7,111       9,129       22,859       824,948       847,807       4,475  
Equipment lease financing
    0       0       0       0       9,944       9,944       0  
Commercial other
    1,776       1,398       5,101       8,275       367,134       375,409       3,827  
Residential:
                                                       
Real estate construction
    195       272       866       1,333       50,645       51,978       232  
Real estate mortgage
    1,822       2,394       6,698       10,914       685,407       696,321       3,635  
Home equity
    1,118       119       497       1,734       78,165       79,899       374  
Consumer:
                                                       
Consumer direct
    851       247       79       1,177       118,014       119,191       79  
Consumer indirect
    1,860       546       379       2,785       277,677       280,462       379  
Total
  $ 14,858     $ 12,103     $ 31,348     $ 58,309     $ 2,505,005     $ 2,563,314     $ 15,533  
 
   
December 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
  $ 1,413     $ 312     $ 9,598     $ 11,323     $ 108,124     $ 119,447     $ 3,778  
Commercial secured by real estate
    9,733       1,633       10,456       21,822       785,391       807,213       5,943  
Equipment lease financing
    0       0       0       0       9,246       9,246       0  
Commercial other
    259       1,142       5,164       6,565       369,783       376,348       3,867  
Residential:
                                                       
Real estate construction
    248       572       511       1,331       53,710       55,041       196  
Real estate mortgage
    2,765       4,029       7,138       13,932       682,996       696,928       4,511  
Home equity
    921       102       565       1,588       80,704       82,292       441  
Consumer:
                                                       
Consumer direct
    1,360       336       98       1,794       120,787       122,581       98  
Consumer indirect
    2,772       907       381       4,060       277,417       281,477       381  
Total
  $ 19,471     $ 9,033     $ 33,911     $ 62,415     $ 2,488,158     $ 2,550,573     $ 19,215  

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

The risk characteristics of CTBI’s material portfolio segments are as follows:
 
Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.  Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.  Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.  Management monitors and evaluates commercial real estate loans based on collateral and risk grade criteria.
 
Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.  The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value.  Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis.  In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
 
With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, CTBI generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded.  Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles.  Some consumer loans are unsecured such as small installment loans and certain lines of credit.  Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels.  Repayment can also be impacted by changes in property values on residential properties.  Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

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.

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, 2013 and December 31, 2012:

 (in thousands)
 
Commercial Construction
   
Commercial Secured by Real Estate
   
Equipment Leases
   
Commercial Other
   
Total
 
March 31, 2013
                             
Pass
  $ 74,898     $ 704,073     $ 9,944     $ 327,158     $ 1,116,073  
Watch
    14,142       85,439       0       29,830       129,411  
OAEM
    56       13,769       0       974       14,799  
Substandard
    7,011       39,387       0       16,336       62,734  
Doubtful
    6,196       5,139       0       1,111       12,446  
Total
  $ 102,303     $ 847,807     $ 9,944     $ 375,409     $ 1,335,463  
                                         
December 31, 2012
                                       
Pass
  $ 92,140     $ 665,764     $ 9,246     $ 328,646     $ 1,095,796  
Watch
    12,915       79,517       0       28,760       121,192  
OAEM
    1,054       16,532       0       2,816       20,402  
Substandard
    7,383       40,021       0       14,878       62,282  
Doubtful
    5,955       5,379       0       1,248       12,582  
Total
  $ 119,447     $ 807,213     $ 9,246     $ 376,348     $ 1,312,254  
 
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, 2013 and December 31, 2012:

(in thousands)
 
Real Estate Construction
   
Real Estate Mortgage
   
Home Equity
   
Consumer Direct
   
Consumer
Indirect
   
Total
 
March 31, 2013
                                   
Performing
  $ 51,111     $ 688,923     $ 79,382     $ 119,112     $ 280,083     $ 1,218,611  
Nonperforming (1)
    867       7,398       517       79       379       9,240  
Total
  $ 51,978     $ 696,321     $ 79,899     $ 119,191     $ 280,462     $ 1,227,851  
                                                 
December 31, 2012
                                               
Performing
  $ 54,530     $ 689,264     $ 81,710     $ 122,483     $ 281,096     $ 1,229,083  
Nonperforming (1)
    511       7,664       582       98       381       9,236  
Total
  $ 55,041     $ 696,928     $ 82,292     $ 122,581     $ 281,477     $ 1,238,319  

(1)  A loan is considered nonperforming if it is 90 days or more past due and/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, 2013, December 31, 2012, and March 31, 2012:

   
March 31, 2013
 
(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
  $ 5,155     $ 5,609     $ 0     $ 5,225     $ 74  
Commercial secured by real estate
    33,765       34,586       0       33,908       297  
Commercial other
    15,779       17,920       0       15,435       154  
Real estate mortgage
    657       657       0       658       7  
                                         
Loans with a specific valuation allowance:
                                       
Commercial construction
    6,073       7,303       1,911       6,075       0  
Commercial secured by real estate
    4,158       4,276       1,192       4,166       0  
Commercial other
    867       2,188       322       868       0  
                                         
Totals:
                                       
Commercial construction
    11,228       12,912       1,911       11,300       74  
Commercial secured by real estate
    37,923       38,862       1,192       38,074       297  
Commercial other
    16,646       20,108       322       16,303       154  
Real estate mortgage
    657       657       0       658       7  
Total
  $ 66,454     $ 72,539     $ 3,425     $ 66,335     $ 532  

   
December 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
  $ 3,692     $ 4,146     $ 0     $ 4,249     $ 97  
Commercial secured by real estate
    35,046       35,818       0       35,542       1,337  
Commercial other
    13,285       15,484       0       11,083       416  
Real estate mortgage
    695       695       0       481       30  
                                         
Loans with a specific valuation allowance:
                                       
Commercial construction
    5,703       6,933       1,820       6,585       0  
Commercial secured by real estate
    3,067       3,189       1,090       3,243       0  
Commercial other
    1,010       2,331       338       1,441       0  
                                         
Totals:
                                       
Commercial construction
    9,395       11,079       1,820       10,834       97  
Commercial secured by real estate
    38,113       39,007       1,090       38,785       1,337  
Commercial other
    14,295       17,815       338       12,524       416  
Real estate mortgage
    695       695       0       481       30  
Total
  $ 62,498     $ 68,596     $ 3,248     $ 62,624     $ 1,880  
 
   
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 mortgage
    279       279       0       280       3  
                                         
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 construction
    10,506       11,359       2,180       10,492       18  
Commercial secured by real estate
    39,694       41,286       1,246       39,891       332  
Commercial other
    9,487       12,797       1,104       9,614       16  
Real estate mortgage
    279       279       0       280       3  
Total
  $ 59,966     $ 65,721     $ 4,530     $ 60,277     $ 369  

*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 without 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 unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, we evaluate all troubled debt restructuring, including those that have payment defaults, for possible impairment and recognize impairment through the allowance.
 
During 2013, certain loans were modified in troubled debt restructurings, where economic concessions were granted to borrowers consisting of reductions in the interest rates, payment extensions, forgiveness of principal, and forbearances.  Presented below, segregated by class of loans, are troubled debt restructurings that occurred during the three months ended March 31, 2013 and 2012 and the year ended December 31, 2012:

   
Three Months Ended March 31, 2013
 
(in thousands)
 
Number of Loans
   
Post-Modification Outstanding Balance
   
Net Charge-offs Resulting from Modification
 
Commercial:
                 
Commercial construction
    3     $ 2,110     $ 0  
Commercial secured by real estate
    5       605       0  
Commercial other
    9       5,585       0  
Total troubled debt restructurings
    17     $ 8,300     $ 0  

   
Year Ended December 31, 2012
 
(in thousands)
 
Number of Loans
   
Post-Modification Outstanding Balance
   
Net Charge-offs Resulting from Modification
 
Commercial:
                 
Commercial construction
    5     $ 557     $ 0  
Commercial secured by real estate
    11       4,506       0  
Commercial other
    23       3,233       0  
Residential:
                       
Real estate mortgage
    1       391       0  
Total troubled debt restructurings
    40     $ 8,687     $ 0  

   
Three Months Ended March 31, 2012
 
(in thousands)
 
Number of Loans
   
Post-Modification Outstanding Balance
   
Net Charge-offs Resulting from Modification
 
Commercial:
                 
Commercial construction
    0     $ 0     $ 0  
Commercial secured by real estate
    3       1,665       0  
Commercial other
    1       48       0  
Total troubled debt restructurings
    4     $ 1,713     $ 0  
 
Loans retain their accrual status at the time of their modification. As a result, if a loan is on nonaccrual at the time it is modified, it stays as nonaccrual, and if a loan is on accrual at the time of the modification, it generally stays on accrual.  Commercial and consumer loans modified in a troubled debt restructuring are closely monitored for delinquency as an early indicator of possible future default.  If loans modified in a troubled debt restructuring subsequently default, CTBI evaluates the loan for possible further impairment.  The allowance for loan losses may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.  Presented below, segregated by class of loans, are loans that were modified as troubled debt restructurings which have subsequently defaulted.  CTBI considers a loan in default when it is 90 days or more past due or transferred to nonaccrual.

 (in thousands)
 
Three Months Ended
March 31, 2013
 
   
Number of Loans
   
Recorded Balance
 
Commercial:
           
Commercial construction
    2     $ 328  
Commercial secured by real estate
    2       662  
Commercial other
    1       12  
Total defaulted restructured loans