Note 4 – Loans

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

(in thousands)	September 30 2013		December 31 2012
Commercial construction	$	107,940	$	119,447
Commercial secured by real estate		877,935		807,213
Equipment lease financing		9,380		9,246
Commercial other		376,486		376,348
Real estate construction		53,545		55,041
Real estate mortgage		693,809		696,928
Home equity		82,498		82,292
Consumer direct		123,960		122,581
Consumer indirect		290,812		281,477
Total loans	$	2,616,365	$	2,550,573

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 $0.8 million at September 30, 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 ($0.06) million and $0.4 million at September 30, 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)	September 30 2013		December 31 2012
Commercial:
Commercial construction	$	4,558	$	5,955
Commercial secured by real estate		6,471		5,572
Commercial other		2,482		1,655

Residential:
Real estate construction		481		315
Real estate mortgage		2,826		3,153
Home equity		313		141
Total nonaccrual loans	$	17,131	$	16,791

The following tables present CTBI’s loan portfolio aging analysis, segregated by class, as of September 30, 2013 and December 31, 2012:

	September 30, 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	$	226	$	95	$	6,310	$	6,631	$	101,309	$	107,940	$	1,768
Commercial secured by real estate		5,093		2,455		16,989		24,537		853,398		877,935		12,543
Equipment lease financing		0		0		0		0		9,380		9,380		0
Commercial other		5,602		592		6,636		12,830		363,656		376,486		4,174
Residential:
Real estate construction		354		409		657		1,420		52,125		53,545		175
Real estate mortgage		1,444		3,959		7,644		13,047		680,762		693,809		5,528
Home equity		976		222		690		1,888		80,610		82,498		383
Consumer:
Consumer direct		997		161		145		1,303		122,657		123,960		145
Consumer indirect		2,082		574		417		3,073		287,739		290,812		417
Total	$	16,774	$	8,467	$	39,488	$	64,729	$	2,551,636	$	2,616,365	$	25,133

	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:

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.

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.

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.

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.

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 September 30, 2013 and December 31, 2012:

(in thousands)	Commercial Construction		Commercial Secured by Real Estate		Equipment Leases		Commercial Other		Total
September 30, 2013
Pass	$	82,682	$	744,360	$	9,380	$	317,330	$	1,153,752
Watch		13,832		82,256		0		35,504		131,592
OAEM		10		11,696		0		8,941		20,647
Substandard		6,859		34,313		0		12,340		53,512
Doubtful		4,557		5,310		0		2,371		12,238
Total	$	107,940	$	877,935	$	9,380	$	376,486	$	1,371,741

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 September 30, 2013 and December 31, 2012:

(in thousands)	Real Estate Construction		Real Estate Mortgage		Home Equity		Consumer Direct		Consumer Indirect		Total
September 30, 2013
Performing	$	52,889	$	685,455	$	81,802	$	123,815	$	290,395	$	1,234,356
Nonperforming (1)		656		8,354		696		145		417		10,268
Total	$	53,545	$	693,809	$	82,498	$	123,960	$	290,812	$	1,244,624

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 September 30, 2013, December 31, 2012, and September 30, 2012:

	September 30, 2013
(in thousands)	Recorded Balance		Unpaid Contractual Principal Balance		Specific Allowance
Loans without a specific valuation allowance:
Commercial construction	$	5,586	$	6,163	$	0
Commercial secured by real estate		31,054		31,929		0
Commercial other		15,179		18,212		0
Real estate mortgage		1,028		1,028		0

Loans with a specific valuation allowance:
Commercial construction		4,557		4,563		1,827
Commercial secured by real estate		5,423		5,733		1,295
Commercial other		465		590		158

Totals:
Commercial construction		10,143		10,726		1,827
Commercial secured by real estate		36,477		37,662		1,295
Commercial other		15,644		18,802		158
Real estate mortgage		1,028		1,028		0
Total	$	63,292	$	68,218	$	3,280

	Three Months Ended				Nine Months Ended
	September 30, 2013				September 30, 2013
(in thousands)	Average Investment in Impaired Loans		*Interest Income Recognized		Average Investment in Impaired Loans		*Interest Income Recognized
Loans without a specific valuation allowance:
Commercial construction	$	5,597	$	77	$	5,622	$	204
Commercial secured by real estate		31,142		405		31,491		938
Commercial other		15,264		134		15,508		439
Real estate mortgage		1,027		8		903		32

Loans with a specific valuation allowance:
Commercial construction		4,572		0		5,101		0
Commercial secured by real estate		5,622		0		5,362		0
Commercial other		515		0		587		0

Totals:
Commercial construction		10,169		77		10,723		204
Commercial secured by real estate		36,764		405		36,853		938
Commercial other		15,779		134		16,095		439
Real estate mortgage		1,027		8		903		32
Total	$	63,739	$	624	$	64,574	$	1,613

	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

	September 30, 2012
(in thousands)	Recorded Balance		Unpaid Contractual Principal Balance		Specific Allowance
Loans without a specific valuation allowance:
Commercial construction	$	3,032	$	3,032	$	0
Commercial secured by real estate		34,099		34,586		0
Commercial other		11,643		13,819		0
Real estate mortgage		666		667		0

Loans with a specific valuation allowance:
Commercial construction		7,070		8,298		2,321
Commercial secured by real estate		3,406		3,530		938
Commercial other		975		2,295		315

Totals:
Commercial construction		10,102		11,330		2,321
Commercial secured by real estate		37,505		38,116		938
Commercial other		12,618		16,114		315
Real estate mortgage		666		667		0
Total	$	60,891	$	66,227	$	3,574

	Three Months Ended				Nine Months Ended
	September 30, 2012				September 30, 2012
(in thousands)	Average Investment in Impaired Loans		*Interest Income Recognized		Average Investment in Impaired Loans		*Interest Income Recognized
Loans without a specific valuation allowance:
Commercial construction	$	3,034	$	32	$	4,072	$	90
Commercial secured by real estate		34,229		291		35,566		976
Commercial other		11,756		108		10,348		167
Real estate mortgage		668		10		409		18

Loans with a specific valuation allowance:
Commercial construction		7,355		0		6,881		0
Commercial secured by real estate		3,436		0		3,293		0
Commercial other		977		0		1,582		0

Totals:
Commercial construction		10,389		32		10,953		90
Commercial secured by real estate		37,665		291		38,859		976
Commercial other		12,733		108		11,930		167
Real estate mortgage		668		10		409		18
Total	$	61,455	$	441	$	62,151	$	1,251

*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 and nine months ended September 30, 2013 and 2012 and the year ended December 31, 2012:

	Three Months Ended September 30, 2013
(in thousands)	Number of Loans		Term Modification		Rate Modification		Combination		Post-Modification Outstanding Balance
Commercial:
Commercial secured by real estate		3	$	905	$	0	$	0	$	905
Commercial other		7		103		0		60		163
Total troubled debt restructurings		10	$	1,008	$	0	$	60	$	1,068

	Nine Months Ended September 30, 2013
(in thousands)	Number of Loans		Term Modification		Rate Modification		Combination		Post-Modification Outstanding Balance
Commercial:
Commercial construction		6	$	2,603	$	0	$	0	$	2,603
Commercial secured by real estate		23		2,172		0		0		2,172
Commercial other		29		6,468		0		152		6,620
Residential:
Real estate mortgage		1		373		0		0		373
Total troubled debt restructurings		59	$	11,616	$	0	$	152	$	11,768

	Three Months Ended September 30, 2012
(in thousands)	Number of Loans		Term Modification		Rate Modification		Combination		Post-Modification Outstanding Balance
Commercial:
Commercial secured by real estate		2		0		0		666		666
Commercial other		1		45		0		0		45
Residential:
Real estate mortgage		1		0		391		0		391
Total troubled debt restructurings		4	$	45	$	391	$	666	$	1,102

	Nine Months Ended September 30, 2012
(in thousands)	Number of Loans		Term Modification		Rate Modification		Combination		Post-Modification Outstanding Balance
Commercial:
Commercial construction		5	$	557	$	0	$	0	$	557
Commercial secured by real estate		8		3,196		0		882		4,078
Commercial other		12		1,111		0		0		1,111
Residential:
Real estate mortgage		1		0		391		0		391
Total troubled debt restructurings		26	$	4,864	$	391	$	882	$	6,137

	Year Ended December 31, 2012
(in thousands)	Number of Loans		Term Modification		Rate Modification		Combination		Post-Modification Outstanding Balance
Commercial:
Commercial construction		5	$	557	$	0	$	0	$	557
Commercial secured by real estate		11		3,624		0		882		4,506
Commercial other		22		3,217		0		11		3,228
Residential:
Real estate mortgage		1		0		391		0		391
Total troubled debt restructurings		39	$	7,398	$	391	$	893	$	8,682

No charge-offs have resulted from modifications for any of the presented periods.

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 within the past twelve months 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 September 30, 2013				Nine Months Ended September 30, 2013
	Number of Loans		Recorded Balance		Number of Loans		Recorded Balance
Commercial:
Commercial construction		0	$	0		0	$	0
Commercial secured by real estate		1		69		1		69
Commercial other		2		173		7		2,202
Total defaulted restructured loans		3	$	242		8	$	2,272

(in thousands)	Three Months Ended September 30, 2012				Nine Months Ended September 30, 2012
	Number of Loans		Recorded Balance		Number of Loans		Recorded Balance
Commercial:
Commercial construction		0	$	0		0	$	0
Commercial secured by real estate		1		344		1		344
Commercial other		2		66		5		71
Total defaulted restructured loans		3	$	410		6	$	415