0000350852-14-000052.txt : 20140509 0000350852-14-000052.hdr.sgml : 20140509 20140509110327 ACCESSION NUMBER: 0000350852-14-000052 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20140331 FILED AS OF DATE: 20140509 DATE AS OF CHANGE: 20140509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY TRUST BANCORP INC /KY/ CENTRAL INDEX KEY: 0000350852 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 610979818 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31220 FILM NUMBER: 14827495 BUSINESS ADDRESS: STREET 1: 346 NORTH MAYO TRAIL STREET 2: P.O. BOX 2947 CITY: PIKEVILLE STATE: KY ZIP: 41502-2947 BUSINESS PHONE: (606)433-4643 MAIL ADDRESS: STREET 1: 346 NORTH MAYO TRAIL STREET 2: P.O. BOX 2947 CITY: PIKEVILLE STATE: KY ZIP: 41502-2947 FORMER COMPANY: FORMER CONFORMED NAME: COMMUNITY TRUST BANCORP INC/ DATE OF NAME CHANGE: 19971124 10-Q 1 ctbi10q0314.htm CTBI MARCH 31, 2014 FORM 10-Q ctbi10q0314.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, 2014
   
 
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 – 15,837,113 shares outstanding at April 30, 2014
 
 
 
 



 
 
 

 


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, 2013 for further information in this regard.


 
 

 

Community Trust Bancorp, Inc.
Condensed Consolidated Balance Sheets

(dollars in thousands)
 
(unaudited)
March 31
2014
   
December 31
2013
 
Assets:
           
Cash and due from banks
  $ 64,386     $ 64,828  
Interest bearing deposits
    121,236       33,200  
Federal funds sold
    8,067       8,613  
Cash and cash equivalents
    193,689       106,641  
                 
Certificates of deposit in other banks
    9,568       9,568  
Securities available-for-sale at fair value (amortized cost of $656,335 and $621,753, respectively)
    650,127       609,405  
Securities held-to-maturity at amortized cost (fair value of $1,619 and $1,601, respectively)
    1,662       1,662  
Loans held for sale
    1,610       828  
                 
Loans
    2,585,508       2,615,354  
Allowance for loan and lease losses
    (33,615 )     (34,008 )
Net loans
    2,551,893       2,581,346  
                 
Premises and equipment, net
    51,182       52,000  
Federal Home Loan Bank stock
    17,927       25,673  
Federal Reserve Bank stock
    4,887       4,886  
Goodwill
    65,490       65,490  
Core deposit intangible (net of accumulated amortization of $7,979 and $7,925, respectively)
    637       690  
Bank owned life insurance
    54,043       53,687  
Mortgage servicing rights
    3,258       3,424  
Other real estate owned
    36,299       39,188  
Other assets
    26,306       27,228  
Total assets
  $ 3,668,578     $ 3,581,716  
                 
Liabilities and shareholders’ equity:
               
Deposits:
               
Noninterest bearing
  $ 652,170     $ 621,321  
Interest bearing
    2,272,019       2,233,753  
Total deposits
    2,924,189       2,855,074  
                 
Repurchase agreements
    217,656       208,067  
Federal funds purchased and other short-term borrowings
    8,723       12,465  
Advances from Federal Home Loan Bank
    1,257       1,286  
Long-term debt
    61,341       61,341  
Other liabilities
    33,369       30,991  
Total liabilities
    3,246,535       3,169,224  
                 
Shareholders’ equity:
               
Preferred stock, 300,000 shares authorized and unissued
    -       -  
Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2014 – 15,832,347; 2013 – 15,821,304
    79,162       79,107  
Capital surplus
    167,524       167,122  
Retained earnings
    179,392       174,289  
Accumulated other comprehensive loss, net of tax
    (4,035 )     (8,026 )
Total shareholders’ equity
    422,043       412,492  
                 
Total liabilities and shareholders’ equity
  $ 3,668,578     $ 3,581,716  

See notes to condensed consolidated financial statements.

 
 
 

 

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

   
Three Months Ended
 
   
March 31
 
(in thousands except per share data)
 
2014
   
2013
 
Interest income:
           
Interest and fees on loans, including loans held for sale
  $ 31,613     $ 32,848  
Interest and dividends on securities
               
Taxable
    3,047       2,895  
Tax exempt
    584       558  
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock
    332       348  
Other, including interest on federal funds sold
    117       127  
Total interest income
    35,693       36,776  
                 
Interest expense:
               
Interest on deposits
    2,462       3,019  
Interest on repurchase agreements and other short-term borrowings
    192       263  
Interest on advances from Federal Home Loan Bank
    6       7  
Interest on long-term debt
    283       290  
Total interest expense
    2,943       3,579  
                 
Net interest income
    32,750       33,197  
Provision for loan losses
    1,345       1,559  
Net interest income after provision for loan losses
    31,405       31,638  
                 
Noninterest income:
               
Service charges on deposit accounts
    5,431       5,767  
Gains on sales of loans, net
    190       1,397  
Trust and wealth management income
    2,109       2,000  
Loan related fees
    679       948  
Bank owned life insurance
    474       421  
Brokerage revenue
    570       450  
Securities losses
    (60 )     0  
Other noninterest income
    672       937  
Total noninterest income
    10,065       11,920  
                 
Noninterest expense:
               
Officer salaries and employee benefits
    2,838       2,551  
Other salaries and employee benefits
    10,579       10,431  
Occupancy, net
    2,164       1,927  
Equipment
    900       978  
Data processing
    1,925       1,813  
Bank franchise tax
    1,209       1,123  
Legal fees
    698       606  
Professional fees
    415       382  
FDIC insurance
    649       602  
Other real estate owned provision and expense
    1,505       1,839  
Repossession expense
    319       411  
Other noninterest expense
    3,660       3,636  
Total noninterest expense
    26,861       26,299  
                 
Income before income taxes
    14,609       17,259  
Income taxes
    4,469       5,439  
Net income
    10,140       11,820  
                 
                 
Other comprehensive income (loss):
               
Unrealized holding gains (losses) on securities available-for-sale:
               
Unrealized holding gains (losses) arising during the period
    6,080       (2,586 )
Less: Reclassification adjustments for realized losses included in net income
    (60 )     0  
Tax (benefit) expense
    2,149       (905 )
Other comprehensive income (loss), net of tax
    3,991       (1,681 )
Comprehensive income
  $ 14,131     $ 10,139  
                 
Basic earnings per share
  $ 0.64     $ 0.76  
Diluted earnings per share
  $ 0.64     $ 0.76  
                 
Weighted average shares outstanding-basic
    15,735       15,539  
Weighted average shares outstanding-diluted
    15,821       15,592  
                 
Dividends declared per share
  $ 0.320     $ 0.315  


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)
 
2014
   
2013
 
Cash flows from operating activities:
           
Net income
  $ 10,140     $ 11,820  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,121       1,151  
Deferred taxes
    (443 )     905  
Stock-based compensation
    191       164  
Excess tax benefits of stock-based compensation
    6       35  
Provision for loan losses
    1,345       1,559  
Write-downs of other real estate owned and other repossessed assets
    874       1,146  
Gains on sale of mortgage loans held for sale
    (190 )     (1,397 )
Losses on sales of securities
    60       0  
Losses on sale of assets, net
    14       65  
Proceeds from sale of mortgage loans held for sale
    8,583       59,723  
Funding of mortgage loans held for sale
    (9,176 )     (37,289 )
Amortization of securities premiums and discounts, net
    664       1,086  
Change in cash surrender value of bank owned life insurance
    (356 )     (324 )
Mortgage servicing rights:
               
Fair value adjustments
    229       69  
New servicing assets created
    (63 )     (357 )
Changes in:
               
Other assets
    927       (486 )
Other liabilities
    699       (5,968 )
Net cash provided by operating activities
    14,625       31,902  
                 
Cash flows from investing activities:
               
Certificates of deposit in other banks:
               
Purchase of certificates of deposit
    0       (3,984 )
Securities available-for-sale (AFS):
               
Purchase of AFS securities
    (168,168 )     (109,477 )
Proceeds from the sales of AFS securities
    112,949       0  
Proceeds from prepayments and maturities of AFS securities
    19,911       31,637  
Change in loans, net
    28,250       (15,881 )
Purchase of premises and equipment
    (250 )     (267 )
Proceeds from sale of premises and equipment
    18       0  
Redemption of stock by Federal Home Loan Bank
    7,746       0  
Additional investment in Federal Reserve Bank stock
    (1 )     (1 )
Proceeds from sale of other real estate and other repossessed assets
    1,837       2,347  
Additional investment in other real estate and other repossessed assets
    0       (5 )
Additional investment in bank owned life insurance
    0       (7,949 )
Net cash provided by (used in) investing activities
    2,292       (103,580 )
                 
Cash flows from financing activities:
           
Change in deposits, net
    69,115       29,732  
Change in repurchase agreements, federal funds purchased, and other short-term borrowings, net
    5,847       6,411  
Payments on advances from Federal Home Loan Bank
    (29 )     (42 )
Issuance of common stock
    290       883  
Excess tax benefits of stock-based compensation
    (6 )     (35 )
Dividends paid
    (5,086 )     (4,887 )
Net cash provided by financing activities
    70,131       32,062  
Net increase (decrease) in cash and cash equivalents
    87,048       (39,616 )
Cash and cash equivalents at beginning of period
    106,641       207,560  
Cash and cash equivalents at end of period
   $ 193,689     $ 167,944  
                 
Supplemental disclosures:
               
Income taxes paid
   $ 4,100     $ 4,500  
Interest paid
    2,794       3,411  
Non-cash activities:
               
Loans to facilitate the sale of other real estate and other repossessed assets
    1,415       318  
Common stock dividends accrued, paid in subsequent quarter
    201       4,900  
Real estate acquired in settlement of loans
    1,273       2,047  

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, 2014, the results of operations for the three months ended March 31, 2014 and 2013, and the cash flows for the three months ended March 31, 2014 and 2013.  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, 2014 and 2013, and the cash flows for the three months ended March 31, 2014 and 2013, are not necessarily indicative of the results to be expected for the full year.  The condensed consolidated balance sheet as of December 31, 2013 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, 2013, 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 Accounting for Investments in Qualified Affordable Housing Projects – In January 2104, the FASB issued ASU No. 2014-01, Investments—Equity Method and Joint Ventures (Topic 323):  Accounting for Investments in Qualified Affordable Housing Projects, which enables companies that invest in affordable housing projects that qualify for the low-income housing tax credit (LIHTC) to elect to use the proportional amortization method if certain conditions are met.  Under the proportional amortization method, the initial investment cost of the project is amortized in proportion to the amount of tax credits and benefits received, with the results of the investment presented on a net basis as a component of income tax expense (benefit).  ASU 2014-01 is effective for interim and annual periods beginning after December 15, 2014, with early adoption permitted.  We are currently evaluating the impact of adopting ASU 2014-01, but we do not expect the adoption to have a material effect on CTBI’s financial condition or results of operations.

Ø Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure – In January 2014, the FASB also issued ASU No. 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40):  Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, which clarifies when an in-substance foreclosure or repossession of residential real estate property occurs, requiring a creditor to reclassify the loan to other real estate.  According to ASU 2014-04, a consumer mortgage loan should be reclassified to other real estate either upon the creditor obtaining legal title to the real estate collateral or when the borrower voluntarily conveys all interest in the real estate property to the creditor through a deed in lieu of foreclosure or similar legal agreement.  ASU 2014-04 also clarifies that a creditor should not delay reclassification when a borrower has a legal right of redemption.  Our current practice is consistent with the new guidance.  We expect to adopt ASU 2014-04 in the first quarter 2015 and do not expect the adoption to have a material effect on CTBI’s financial condition or results of operations.

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.

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.  Foreclosure proceedings are normally initiated after 120 days.  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.  During the quarter ended March 31, 2014, we continued to use twelve rolling quarters for our historical loss rate analysis.  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, trends 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 $4 thousand and $2 thousand for the three months ended March 31, 2014 and 2013, respectively.  Restricted stock expense for the three months ended March 31, 2014 and 2013 was $187 thousand and $162 thousand, respectively, including $30 thousand and $31 thousand in dividends paid for each period.  As of March 31, 2014, there was a total of $12 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 2.5 years and a total of $1.4 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 2.0 years.
 
There were 3,952 shares of restricted stock granted during the three months ended March 31, 2014, and 10,822 shares of restricted stock granted during the three months ended March 31, 2013.  The restrictions on the restricted stock lapse ratably over four years or in the event of a change in control of CTBI or the death of the participant.  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 no options granted to purchase shares of CTBI common stock during the three months ended March 31, 2014 and 1,500 options granted during the three months ended March 2013.

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, 2014 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
  $ 140,033     $ 229     $ (3,783 )   $ 136,479  
State and political subdivisions
    129,975       2,480       (1,885 )     130,570  
U.S. government sponsored agency mortgage-backed securities
    361,327       3,086       (5,762 )     358,651  
Total debt securities
    631,335       5,795       (11,430 )     625,700  
Marketable equity securities
    25,000       0       (573 )     24,427  
Total available-for-sale securities
  $ 656,335     $ 5,795     $ (12,003 )   $ 650,127  

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
U.S. Treasury and government agencies
  $ 480     $ 0     $ (44 )   $ 436  
State and political subdivisions
    1,182       1       0       1,183  
Total held-to-maturity securities
  $ 1,662     $ 1     $ (44 )   $ 1,619  

The amortized cost and fair value of securities as of December 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
  $ 65,524     $ 225     $ (5,139 )   $ 60,610  
State and political subdivisions
    118,055       1,907       (3,259 )     116,703  
U.S. government sponsored agency mortgage-backed securities
    383,174       4,325       (8,189 )     379,310  
Total debt securities
    566,753       6,457       (16,587 )     556,623  
Marketable equity securities
    55,000       0       (2,218 )     52,782  
Total available-for-sale securities
  $ 621,753     $ 6,457     $ (18,805 )   $ 609,405  

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
U.S. Treasury and government agencies
  $ 480     $ 0     $ (62 )   $ 418  
State and political subdivisions
    1,182       1       0       1,183  
Total held-to-maturity securities
  $ 1,662     $ 1     $ (62 )   $ 1,601  
 
The amortized cost and fair value of securities at March 31, 2014 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
  $ 2,366     $ 2,377     $ 0     $ 0  
Due after one through five years
    104,520       104,901       0       0  
Due after five through ten years
    123,723       120,778       1,182       1,183  
Due after ten years
    39,399       38,993       480       436  
U.S. government sponsored agency mortgage-backed securities
    361,327       358,651       0       0  
Total debt securities
    631,335       625,700       1,662       1,619  
Marketable equity securities
    25,000       24,427       0       0  
Total securities
  $ 656,335     $ 650,127     $ 1,662     $ 1,619  
 
As of March 31, 2014, there was a combined loss of $60 thousand.  A pre-tax gain of $1.8 million and a pre-tax loss of $1.9 million were realized during the year.  There were no sales or calls of securities and no gains or losses realized as of March 31, 2013.

The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $236.0 million at March 31, 2014 and $257.5 million at December 31, 2013.

The amortized cost of securities sold under agreements to repurchase amounted to $254.6 million at March 31, 2014 and $255.4 million at December 31, 2013.
 
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, 2014 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, 2014 was 65.7% compared to 67.8% as of December 31, 2013.  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, 2014 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
  $ 66,121     $ (1,364 )   $ 64,757  
State and political subdivisions
    46,229       (1,518 )     44,711  
U.S. government sponsored agency mortgage-backed securities
    257,459       (5,762 )     251,697  
Total debt securities
    369,809       (8,644 )     361,165  
Marketable equity securities
    25,000       (573 )     24,427  
Total <12 months temporarily impaired AFS securities
    394,809       (9,217 )     385,592  
                         
12 Months or More
                       
U.S. Treasury and government agencies
    35,750       (2,419 )     33,331  
State and political subdivisions
    9,292       (367 )     8,925  
Total ≥12 months temporarily impaired AFS securities
    45,042       (2,786 )     42,256  
                         
Total
                       
U.S. Treasury and government agencies
    101,871       (3,783 )     98,088  
State and political subdivisions
    55,521       (1,885 )     53,636  
U.S. government sponsored agency mortgage-backed securities
    257,459       (5,762 )     251,697  
Total debt securities
    414,851       (11,430 )     403,421  
Marketable equity securities
    25,000       (573 )     24,427  
Total temporarily impaired AFS securities
  $ 439,851     $ (12,003 )   $ 427,848  

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
12 Months or More
                 
U.S. Treasury and government agencies
  $ 480     $ (44 )   $ 436  
Total temporarily impaired HTM securities
  $ 480     $ (44 )   $ 436  

U.S. Treasury and Government Agencies
 
The unrealized losses in U.S. Treasury and government agencies were caused by interest rate increases.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than amortized cost.  Because CTBI does not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost, which may be maturity, CTBI does not consider those investments to be other-than-temporarily impaired at March 31, 2014.

State and Political Subdivisions
 
The unrealized losses in securities of state and political subdivisions were caused by interest rate increases.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than amortized cost.  Because CTBI does not intend to sell the investments before recovery of their amortized cost, which may be maturity, CTBI does not consider those investments to be other-than-temporarily impaired at March 31, 2014.

U.S. Government Sponsored Agency Mortgage-Backed Securities
 
The unrealized losses in U.S. government sponsored agency mortgage-backed securities were caused by interest rate increases.  CTBI expects to recover the amortized cost basis over the term of the securities.  Because the decline in market value is attributable to changes in interest rates and not credit quality, and because CTBI does not intend to sell the investments and it is not more likely than not we will be required to sell the investments before recovery of their amortized cost, which may be maturity, CTBI does not consider those investments to be other-than-temporarily impaired at March 31, 2014.

Marketable Equity Securities
 
CTBI’s investments in marketable equity securities consist of investments in fixed income mutual funds ($24.4 million of the total fair value and $573 thousand of the total unrealized losses in common stock investments).  The severity of the impairment (fair value is approximately 2.3% less than cost) and the duration of the impairment (less than twelve months) correlates with the rise in interest rates during the latter half of 2013.  CTBI evaluated the near-term prospects of these funds in relation to the severity and duration of the impairment.  Based on that evaluation, CTBI does not consider those investments to be other-than-temporarily impaired at March 31, 2014.
 
The analysis performed as of December 31, 2013 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, 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
  $ 21,750     $ (1,617 )   $ 20,133  
State and political subdivisions
    57,165       (2,789 )     54,376  
U.S. government sponsored agency mortgage-backed securities
    248,705       (8,182 )     240,523  
Total debt securities
    327,620       (12,588 )     315,032  
Marketable equity securities
    55,000       (2,218 )     52,782  
Total <12 months temporarily impaired AFS securities
    382,620       (14,806 )     367,814  
                         
12 Months or More
                       
U.S. Treasury and government agencies
    35,750       (3,522 )     32,228  
State and political subdivisions
    7,639       (470 )     7,169  
U.S. government sponsored agency mortgage-backed securities
    6,579       (7 )     6,572  
Total ≥12 months temporarily impaired AFS securities
    49,968       (3,999 )     45,969  
                         
Total
                       
U.S. Treasury and government agencies
    57,500       (5,139 )     52,361  
State and political subdivisions
    64,804       (3,259 )     61,545  
U.S. government sponsored agency mortgage-backed securities
    255,284       (8,189 )     247,095  
Total debt securities
    377,588       (16,587 )     361,001  
Marketable equity securities
    55,000       (2,218 )     52,782  
Total temporarily impaired AFS securities
  $ 432,588     $ (18,805 )   $ 413,783  

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
12 Months or More
                 
U.S. Treasury and government agencies
  $ 480     $ (62 )   $ 418  
Total temporarily impaired HTM securities
  $ 480     $ (62 )   $ 418  

Note 4 – Loans

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

 
(in thousands)
 
March 31
2014
   
December 31
2013
 
Commercial construction
  $ 111,272     $ 110,779  
Commercial secured by real estate
    874,437       872,542  
Equipment lease financing
    8,122       8,840  
Commercial other
    351,648       374,881  
Real estate construction
    59,730       56,075  
Real estate mortgage
    695,514       697,601  
Home equity
    84,694       84,880  
Consumer direct
    117,497       122,215  
Consumer indirect
    282,594       287,541  
Total loans
  $ 2,585,508     $ 2,615,354  
 
CTBI has segregated and evaluates its loan portfolio through nine portfolio segments. 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, 2014 and $0.8 million at December 31, 2013, respectively.  The amount of capitalized fees and costs under ASC 310-20, included in the above loan totals were ($6) thousand and $3 thousand at March 31, 2014 and December 31, 2013, 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
2014
   
December 31
2013
 
Commercial:
           
Commercial construction
  $ 4,767     $ 4,519  
Commercial secured by real estate
    13,252       6,576  
Commercial other
    2,629       2,801  
                 
Residential:
               
Real estate construction
    481       481  
Real estate mortgage
    5,406       5,152  
Home equity
    349       429  
Total nonaccrual loans
  $ 26,884     $ 19,958  
 
The following tables present CTBI’s loan portfolio aging analysis, segregated by class, as of March 31, 2014 and December 31, 2013:

   
March 31, 2014
 
(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
  $ 386     $ 52     $ 6,209     $ 6,647     $ 104,625     $ 111,272     $ 1,456  
Commercial secured by real estate
    4,975       1,900       15,937       22,812       851,625       874,437       4,728  
Equipment lease financing
    0       0       0       0       8,122       8,122       0  
Commercial other
    578       8,182       5,595       14,355       337,293       351,648       3,323  
Residential:
                                                       
Real estate construction
    439       31       752       1,222       58,508       59,730       271  
Real estate mortgage
    1,510       3,846       9,929       15,285       680,229       695,514       5,189  
Home equity
    843       240       648       1,731       82,963       84,694       319  
Consumer:
                                                       
Consumer direct
    803       168       58       1,029       116,468       117,497       202  
Consumer indirect
    1,525       531       202       2,258       280,336       282,594       58  
Total
  $ 11,059     $ 14,950     $ 39,330     $ 65,339     $ 2,520,169     $ 2,585,508     $ 15,546  

   
December 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
  $ 250     $ 166     $ 6,012     $ 6,428     $ 104,351     $ 110,779     $ 1,673  
Commercial secured by real estate
    3,703       1,982       16,660       22,345       850,197       872,542       12,403  
Equipment lease financing
    0       0       0       0       8,840       8,840       0  
Commercial other
    344       422       6,156       6,922       367,959       374,881       3,723  
Residential:
                                                       
Real estate construction
    81       383       694       1,158       54,917       56,075       213  
Real estate mortgage
    1,274       4,419       9,346       15,039       682,562       697,601       4,847  
Home equity
    786       330       737       1,853       83,027       84,880       324  
Consumer:
                                                       
Consumer direct
    1,063       291       119       1,473       120,742       122,215       119  
Consumer indirect
    2,750       668       297       3,715       283,826       287,541       297  
Total
  $ 10,251     $ 8,661     $ 40,021     $ 58,933     $ 2,556,421     $ 2,615,354     $ 23,599  

*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 construction loans generally are made to customers for the purpose of building income-producing properties.  Personal guarantees of the principals are generally required.  Such loans are made on a projected cash flow basis and are secured by the project being constructed.  Construction loan draw procedures are included in each specific loan agreement, including required documentation items and inspection requirements.  Construction loans may convert to term loans at the end of the construction period, or may be repaid by the take-out commitment from another financing source.  If the loan is to convert to a term loan, the repayment ability is based on the borrower’s projected cash flow.  Risk is mitigated during the construction phase by requiring proper documentation and inspections whenever a draw is requested.  Loans in amounts greater than $500,000 generally require a performance bond to be posted by the general contractor to assure completion of the project.
 
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.
 
Equipment lease financing is underwritten by our commercial lenders using the same underwriting standards as would be applied to a secured commercial loan requesting 100% financing.  The pricing for equipment lease financing is comparable to that of borrowers with similar quality commercial credits with similar collateral.  Maximum terms of equipment leasing are determined by the type and expected life of the equipment to be leased.  Residual values are determined by appraisals or opinion letters from industry experts.  Leases must be in conformity with our consolidated annual tax plan.  As we underwrite our equipment lease financing in a manner similar to our commercial loan portfolio described below, the risk characteristics for this portfolio mirror that of the commercial loan portfolio.

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. Residential construction loans are handled through the home mortgage area of the bank.  The repayment ability of the borrower and the maximum loan-to-value ratio are calculated using the normal mortgage lending criteria.  Draws are processed based on percentage of completion stages including normal inspection procedures.  Such loans generally convert to term loans after the completion of construction.

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.  Our determination of a borrower’s ability to repay 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.
 
The indirect lending area of the bank generally deals with purchasing/funding consumer contracts with new and used automobile dealers.  The dealers generate consumer loan applications which are forwarded to the indirect loan processing area for approval or denial.  Loan approvals or denials are based on the creditworthiness and repayment ability of the borrower, and on the collateral value.  The dealers may have recourse agreements with the Bank.

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, 2014 and December 31, 2013:

 (in thousands)
 
Commercial Construction
   
Commercial Secured by Real Estate
   
Equipment Leases
   
Commercial Other
   
Total
 
March 31, 2014
                             
Pass
  $ 90,787     $ 747,805     $ 8,122     $ 299,605     $ 1,146,319  
Watch
    9,141       75,684       0       32,277       117,102  
OAEM
    1,094       9,611       0       6,005       16,710  
Substandard
    5,649       28,986       0       11,552       46,187  
Doubtful
    4,601       12,351       0       2,209       19,161  
Total
  $ 111,272     $ 874,437     $ 8,122     $ 351,648     $ 1,345,479  
                                         
December 31, 2013
                                       
Pass
  $ 85,699     $ 746,202     $ 8,840     $ 321,819     $ 1,162,559  
Watch
    13,519       77,561       0       32,800       123,880  
OAEM
    0       6,639       0       6,200       12,839  
Substandard
    7,208       37,334       0       11,772       56,314  
Doubtful
    4,353       4,806       0       2,291       11,450  
Total
  $ 110,779     $ 872,542     $ 8,840     $ 374,881     $ 1,367,042  
 
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, 2014 and December 31, 2013:

(in thousands)
 
Real Estate Construction
   
Real Estate Mortgage
   
Home Equity
   
Consumer Direct
   
Consumer
Indirect
   
Total
 
March 31, 2014
                                   
Performing
  $ 58,978     $ 684,919     $ 84,026     $ 117,295     $ 282,536     $ 1,227,754  
Nonperforming (1)
    752       10,595       668       202       58       12,275  
Total
  $ 59,730     $ 695,514     $ 84,694     $ 117,497     $ 282,594     $ 1,240,029  
                                                 
December 31, 2013
                                               
Performing
  $ 55,381     $ 687,602     $ 84,127     $ 122,096     $ 287,244     $ 1,236,450  
Nonperforming (1)
    694       9,999       753       119       297       11,862  
Total
  $ 56,075     $ 697,601     $ 84,880     $ 122,215     $ 287,541     $ 1,248,312  

(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, 2014, December 31, 2013, and March 31, 2013:

   
March 31, 2014
 
(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
  $ 5,430     $ 5,431     $ 0     $ 5,441     $ 50  
Commercial secured by real estate
    35,719       36,618       0       36,416       265  
Commercial other
    14,191       15,726       0       14,324       114  
Real estate mortgage
    1,021       1,021       0       1,022       10  
                                         
Loans with a specific valuation allowance:
                                       
Commercial construction
    4,278       4,284       939       4,312       0  
Commercial secured by real estate
    4,234       4,611       1,084       4,686       4  
Commercial other
    413       536       112       439       0  
                                         
Totals:
                                       
Commercial construction
    9,708       9,715       939       9,753       50  
Commercial secured by real estate
    39,953       41,229       1,084       41,102       269  
Commercial other
    14,604       16,262       112       14,763       114  
Real estate mortgage
    1,021       1,021       0       1,022       10  
Total
  $ 65,286     $ 68,227     $ 2,135     $ 66,640     $ 443  
 
   
December 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
  $ 5,457     $ 5,458     $ 0     $ 5,595     $ 240  
Commercial secured by real estate
    35,258       36,173       0       32,472       1,231  
Commercial other
    14,839       16,435       0       15,396       568  
Real estate mortgage
    1,024       1,024       0       934       43  
                                         
Loans with a specific valuation allowance:
                                       
Commercial construction
    4,353       4,359       1,189       4,935       0  
Commercial secured by real estate
    4,039       4,326       1,005       5,033       1  
Commercial other
    330       453       102       525       0  
                                         
Totals:
                                       
Commercial construction
    9,810       9,817       1,189       10,530       240  
Commercial secured by real estate
    39,297       40,499       1,005       37,505       1,232  
Commercial other
    15,169       16,888       102       15,921       568  
Real estate mortgage
    1,024       1,024       0       934       43  
Total
  $ 65,300     $ 68,228     $ 2,296     $ 64,890     $ 2,083  

   
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  

*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 2014, 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, 2014 and 2013 and the year ended December 31, 2013:

   
Three Months Ended
March 31, 2014
 
(in thousands)
 
Number of Loans
   
Term Modification
   
Rate Modification
   
Combination
   
Post-Modification Outstanding Balance
 
Commercial:
                             
Commercial secured by real estate
    2     $ 126     $ 0     $ 0     $ 126  
Commercial other
    2       41       0       0      </