10-Q 1 ctbi10q0314.htm CTBI MARCH 31, 2014 FORM 10-Q

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

Yes ü | 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 |  |  |  | 41 |
Total troubled debt restructurings |  |  | 4 |  |  | $ | 167 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 167 |

|  | Year Ended December 31, 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 |  |  | 27 |  |  |  | 2,568 |  |  |  | 0 |  |  |  | 2,920 |  |  |  | 5,488 |
Commercial other |  |  | 30 |  |  |  | 6,471 |  |  |  | 0 |  |  |  | 152 |  |  |  | 6,623 |
Residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate mortgage |  |  | 1 |  |  |  | 373 |  |  |  | 0 |  |  |  | 0 |  |  |  | 373 |
Total troubled debt restructurings |  |  | 64 |  |  | $ | 12,015 |  |  | $ | 0 |  |  | $ | 3,072 |  |  | $ | 15,087 |

|  | Three Months Ended March 31, 2013 |
(in thousands) |  | Number of Loans |  |  | Term Modification |  |  | Rate Modification |  |  | Combination |  |  | Post-Modification Outstanding Balance |
Commercial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial construction |  |  | 3 |  |  | $ | 2,110 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 2,110 |
Commercial secured by real estate |  |  | 5 |  |  |  | 605 |  |  |  | 0 |  |  |  | 0 |  |  |  | 605 |
Commercial other |  |  | 9 |  |  |  | 5,493 |  |  |  | 0 |  |  |  | 92 |  |  |  | 5,585 |
Total troubled debt restructurings |  |  | 17 |  |  | $ | 8,208 |  |  | $ | 0 |  |  | $ | 92 |  |  | $ | 8,300 |

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 generally considers a loan in default when it is 90 days or more past due or transferred to nonaccrual.

(in thousands) |  | Three Months Ended March 31, 2014 |
|  | Number of Loans |  |  | Recorded Balance |
Commercial: |  |  |  |  |  |
Commercial construction |  |  | 0 |  |  | $ | 0 |
Commercial secured by real estate |  |  | 0 |  |  |  | 0 |
Commercial other |  |  | 2 |  |  |  | 34 |
Total defaulted restructured loans |  |  | 2 |  |  | $ | 34 |

(in thousands) |  | Three Months Ended March 31, 2013 |
|  | Number of Loans |  |  | Recorded Balance |
Commercial: |  |  |  |  |  |
Commercial construction |  |  | 2 |  |  | $ | 328 |
Commercial secured by real estate |  |  | 2 |  |  |  | 662 |
Commercial other |  |  | 1 |  |  |  | 12 |
Total defaulted restructured loans |  |  | 5 |  |  | $ | 1,002 |

Note 5 – Allowance for Loan and Lease Losses
The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2014, December 31, 2013 and March 31, 2013:

|  | March 31, 2014 |
(in thousands) |  | Commercial Construction |  |  | Commercial Secured by Real Estate |  |  | Equipment Lease Financing |  |  | Commercial Other |  |  | Real Estate Construction |  |  | Real Estate Mortgage |  |  | Home Equity |  |  | Consumer Direct |  |  | Consumer Indirect |  |  | Total |
Allowance for loan losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 3,396 |  |  | $ | 14,535 |  |  | $ | 121 |  |  | $ | 5,238 |  |  | $ | 397 |  |  | $ | 4,939 |  |  | $ | 601 |  |  | $ | 1,127 |  |  | $ | 3,654 |  |  | $ | 34,008 |
Provision charged to expense |  |  | (296 | ) |  |  | (106 | ) |  |  | (14 | ) |  |  | (13 | ) |  |  | 44 |  |  |  | 356 |  |  |  | 51 |  |  |  | 753 |  |  |  | 570 |  |  |  | 1,345 |
Losses charged off |  |  | 0 |  |  |  | 322 |  |  |  | 0 |  |  |  | 633 |  |  |  | 0 |  |  |  | 164 |  |  |  | 27 |  |  |  | 453 |  |  |  | 946 |  |  |  | 2,545 |
Recoveries |  |  | 7 |  |  |  | 76 |  |  |  | 0 |  |  |  | 162 |  |  |  | 1 |  |  |  | 12 |  |  |  | 1 |  |  |  | 146 |  |  |  | 402 |  |  |  | 807 |
Ending balance |  | $ | 3,107 |  |  | $ | 14,183 |  |  | $ | 107 |  |  | $ | 4,754 |  |  | $ | 442 |  |  | $ | 5,143 |  |  | $ | 626 |  |  | $ | 1,573 |  |  | $ | 3,680 |  |  | $ | 33,615 |
Ending balance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 939 |  |  | $ | 1,084 |  |  | $ | 0 |  |  | $ | 112 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 2,135 |
Collectively evaluated for impairment |  | $ | 2,168 |  |  | $ | 13,099 |  |  | $ | 107 |  |  | $ | 4,642 |  |  | $ | 442 |  |  | $ | 5,143 |  |  | $ | 626 |  |  | $ | 1,573 |  |  | $ | 3,680 |  |  | $ | 31,480 |
Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 9,708 |  |  | $ | 39,953 |  |  | $ | 0 |  |  | $ | 14,604 |  |  | $ | 0 |  |  | $ | 1,021 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 65,286 |
Collectively evaluated for impairment |  | $ | 101,564 |  |  | $ | 834,484 |  |  | $ | 8,122 |  |  | $ | 337,044 |  |  | $ | 59,730 |  |  | $ | 694,493 |  |  | $ | 84,694 |  |  | $ | 117,497 |  |  | $ | 282,594 |  |  | $ | 2,520,222 |

|  | December 31, 2013 |
(in thousands) |  | Commercial Construction |  |  | Commercial Secured by Real Estate |  |  | Equipment Lease Financing |  |  | Commercial Other |  |  | Real Estate Construction |  |  | Real Estate Mortgage |  |  | Home Equity |  |  | Consumer Direct |  |  | Consumer Indirect |  |  | Total |
Allowance for loan losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 4,033 |  |  | $ | 13,541 |  |  | $ | 126 |  |  | $ | 5,469 |  |  | $ | 376 |  |  | $ | 4,767 |  |  | $ | 563 |  |  | $ | 1,102 |  |  | $ | 3,268 |  |  | $ | 33,245 |
Provision charged to expense |  |  | 189 |  |  |  | 2,438 |  |  |  | (5 | ) |  |  | 1,477 |  |  |  | 106 |  |  |  | 860 |  |  |  | 268 |  |  |  | 696 |  |  |  | 2,539 |  |  |  | 8,568 |
Losses charged off |  |  | 1,135 |  |  |  | 1,607 |  |  |  | 0 |  |  |  | 2,265 |  |  |  | 89 |  |  |  | 744 |  |  |  | 241 |  |  |  | 1,166 |  |  |  | 3,802 |  |  |  | 11,049 |
Recoveries |  |  | 309 |  |  |  | 163 |  |  |  | 0 |  |  |  | 557 |  |  |  | 4 |  |  |  | 56 |  |  |  | 11 |  |  |  | 495 |  |  |  | 1,649 |  |  |  | 3,244 |
Ending balance |  | $ | 3,396 |  |  | $ | 14,535 |  |  | $ | 121 |  |  | $ | 5,238 |  |  | $ | 397 |  |  | $ | 4,939 |  |  | $ | 601 |  |  | $ | 1,127 |  |  | $ | 3,654 |  |  | $ | 34,008 |
Ending balance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 1,189 |  |  | $ | 1,005 |  |  | $ | 0 |  |  | $ | 102 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 2,296 |
Collectively evaluated for impairment |  | $ | 2,207 |  |  | $ | 13,530 |  |  | $ | 121 |  |  | $ | 5,136 |  |  | $ | 397 |  |  | $ | 4,939 |  |  | $ | 601 |  |  | $ | 1,127 |  |  | $ | 3,654 |  |  | $ | 31,712 |
Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 9,810 |  |  | $ | 39,297 |  |  | $ | 0 |  |  | $ | 15,169 |  |  | $ | 0 |  |  | $ | 1,024 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 65,300 |
Collectively evaluated for impairment |  | $ | 100,969 |  |  | $ | 833,245 |  |  | $ | 8,840 |  |  | $ | 359,712 |  |  | $ | 56,075 |  |  | $ | 696,577 |  |  | $ | 84,880 |  |  | $ | 122,215 |  |  | $ | 287,541 |  |  | $ | 2,550,054 |

|  | March 31, 2013 |
(in thousands) |  | Commercial Construction |  |  | Commercial Secured by Real Estate |  |  | Equipment Lease Financing |  |  | Commercial Other |  |  | Real Estate Construction |  |  | Real Estate Mortgage |  |  | Home Equity |  |  | Consumer Direct |  |  | Consumer Indirect |  |  | Total |
Allowance for loan losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 4,033 |  |  | $ | 13,541 |  |  | $ | 126 |  |  | $ | 5,469 |  |  | $ | 376 |  |  | $ | 4,767 |  |  | $ | 563 |  |  | $ | 1,102 |  |  | $ | 3,268 |  |  | $ | 33,245 |
Provision charged to expense |  |  | (212 | ) |  |  | 484 |  |  |  | 2 |  |  |  | (155 | ) |  |  | (4 | ) |  |  | 334 |  |  |  | 50 |  |  |  | 165 |  |  |  | 895 |  |  |  | 1,559 |
Losses charged off |  |  | 0 |  |  |  | 365 |  |  |  | 0 |  |  |  | 332 |  |  |  | 0 |  |  |  | 131 |  |  |  | 47 |  |  |  | 314 |  |  |  | 999 |  |  |  | 2,188 |
Recoveries |  |  | 6 |  |  |  | 22 |  |  |  | 0 |  |  |  | 169 |  |  |  | 0 |  |  |  | 10 |  |  |  | 5 |  |  |  | 145 |  |  |  | 420 |  |  |  | 777 |
Ending balance |  | $ | 3,827 |  |  | $ | 13,682 |  |  | $ | 128 |  |  | $ | 5,151 |  |  | $ | 372 |  |  | $ | 4,980 |  |  | $ | 571 |  |  | $ | 1,098 |  |  | $ | 3,584 |  |  | $ | 33,393 |
Ending balance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 1,911 |  |  | $ | 1,192 |  |  | $ | 0 |  |  | $ | 322 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 3,425 |
Collectively evaluated for impairment |  | $ | 1,916 |  |  | $ | 12,490 |  |  | $ | 128 |  |  | $ | 4,829 |  |  | $ | 372 |  |  | $ | 4,980 |  |  | $ | 571 |  |  | $ | 1,098 |  |  | $ | 3,584 |  |  | $ | 29,968 |
Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 11,228 |  |  | $ | 37,923 |  |  | $ | 0 |  |  | $ | 16,646 |  |  | $ | 0 |  |  | $ | 657 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 66,454 |
Collectively evaluated for impairment |  | $ | 91,075 |  |  | $ | 809,884 |  |  | $ | 9,944 |  |  | $ | 358,763 |  |  | $ | 51,978 |  |  | $ | 695,664 |  |  | $ | 79,899 |  |  | $ | 119,191 |  |  | $ | 280,462 |  |  | $ | 2,496,860 |

Note 6 – Other Real Estate Owned
Activity for other real estate owned was as follows:

(in thousands) |  | March 31, 2014 |  |  | March 31, 2013 |
Beginning balance of other real estate owned |  | $ | 39,188 |  |  | $ | 47,537 |
New assets acquired |  |  | 1,268 |  |  |  | 2,047 |
Capitalized costs |  |  | 0 |  |  |  | 0 |
Fair value adjustments |  |  | (874 | ) |  |  | (1,146 | )
Sale of assets |  |  | (3,283 | ) |  |  | (2,718 | )
Ending balance of other real estate owned |  | $ | 36,299 |  |  | $ | 45,720 |

Foreclosed properties at March 31, 2014 and 2013 were $36.3 million and $45.2 million, respectively. At March 31, 2013, included in other real estate owned were two properties totaling $0.5 million which were not acquired through foreclosure. Carrying costs and fair value adjustments associated with foreclosed properties at March 31, 2014 and 2013 were $1.5 million and $1.8 million, respectively.
Note 7 – Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:

|  | Three Months Ended |
|  | March 31 |
(in thousands except per share data) |  | 2014 |  |  | 2013 |
Numerator: |  |  |  |  |  |
Net income |  | $ | 10,140 |  |  | $ | 11,820 |
Denominator: |  |  |  |  |  |  |  |
Basic earnings per share: |  |  |  |  |  |  |  |
Weighted average shares |  |  | 15,735 |  |  |  | 15,539 |
Diluted earnings per share: |  |  |  |  |  |  |  |
Effect of dilutive stock options and restricted stock grants |  |  | 86 |  |  |  | 53 |
Adjusted weighted average shares |  |  | 15,821 |  |  |  | 15,592 |
Earnings per share: |  |  |  |  |  |  |  |
Basic earnings per share |  | $ | 0.64 |  |  | $ | 0.76 |
Diluted earnings per share |  |  | 0.64 |  |  |  | 0.76 |

There were no options to purchase common shares that were excluded from the diluted calculations above for the three months ended March 31, 2014. In addition to in-the-money stock options, unvested restricted stock grants were also used in the calculation of diluted earnings per share based on the treasury method. Options to purchase 88,246 common shares at a weighted average price of $38.95 were excluded from the diluted calculations above for the three months ended March 31, 2013, because the exercises prices on the options were greater than the average market price for the period.
Note 8 – Fair Market Value of Financial Assets and Liabilities
Fair Value Measurements
ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, ASC 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:
Level 1 Inputs – Quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
Recurring Measurements
The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013 and indicates the level within the fair value hierarchy of the valuation techniques.

(in thousands) |  |  |  |  | Fair Value Measurements at March 31, 2014 Using |
|  | Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets measured – recurring basis |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agencies |  | $ | 136,479 |  |  | $ | 0 |  |  | $ | 136,479 |  |  | $ | 0 |
State and political subdivisions |  |  | 130,570 |  |  |  | 0 |  |  |  | 130,570 |  |  |  | 0 |
U.S. government sponsored agency mortgage-backed securities |  |  | 358,651 |  |  |  | 0 |  |  |  | 358,651 |  |  |  | 0 |
Marketable equity securities |  |  | 24,427 |  |  |  | 24,427 |  |  |  | 0 |  |  |  | 0 |
Mortgage servicing rights |  |  | 3,258 |  |  |  | 0 |  |  |  | 0 |  |  |  | 3,258 |

(in thousands) |  |  |  |  | Fair Value Measurements at December 31, 2013 Using |
|  | Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets measured – recurring basis |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agencies |  | $ | 60,610 |  |  | $ | 0 |  |  | $ | 60,610 |  |  | $ | 0 |
State and political subdivisions |  |  | 116,703 |  |  |  | 0 |  |  |  | 116,703 |  |  |  | 0 |
U.S. government sponsored agency mortgage-backed securities |  |  | 379,310 |  |  |  | 0 |  |  |  | 379,310 |  |  |  | 0 |
Marketable equity securities |  |  | 52,782 |  |  |  | 52,782 |  |  |  | 0 |  |  |  | 0 |
Mortgage servicing rights |  |  | 3,424 |  |  |  | 0 |  |  |  | 0 |  |  |  | 3,424 |

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. These valuation methodologies were applied to all of CTBI’s financial assets carried at fair value. CTBI had no liabilities measured at fair value as of March 31, 2014 and December 31, 2013. There have been no significant changes in the valuation techniques during the quarter ended March 31, 2014. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Available-for-Sale Securities
Securities classified as available-for-sale are reported at fair value on a recurring basis. CTBI’s CRA investment funds (included in marketable equity securities) are classified as Level 1 of the valuation hierarchy where quoted market prices are available in the active market on which the individual securities are traded.
If quoted market prices are not available, CTBI obtains fair value measurements from an independent pricing service, such as Interactive Data, which utilizes pricing models to determine fair value measurement. CTBI reviews the pricing quarterly to verify the reasonableness of the pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other factors. U.S. Treasury and government agencies, state and political subdivisions, and U.S. government sponsored agency mortgage-backed securities are classified as Level 2 inputs.
In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements are estimated on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States. As of March 31, 2014, CTBI does not own any securities classified as Level 3 inputs.
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active, open market with readily observable prices. CTBI reports mortgage servicing rights at fair value on a recurring basis with subsequent remeasurement of MSRs based on change in fair value.
In determining fair value, CTBI utilizes the expertise of an independent third party. Accordingly, fair value is determined by the independent third party by utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements of mortgage servicing rights are tested for impairment on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States. See the table below for inputs and valuation techniques used for Level 3 mortgage servicing rights.
Transfers between Levels
There were no transfers between Levels 1, 2, and 3 as of March 31, 2014.
Level 3 Reconciliation
Following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs for the three months ended March 31, 2014 and 2013:

(in thousands) |  | Three Months Ended March 31, 2014 |
|  | Mortgage Servicing Rights |
Beginning balance |  | $ | 3,424 |
Total recognized gains (losses) |  |  |  |
Included in net income |  |  | (126 | )
Issues |  |  | 63 |
Settlements |  |  | (103 | )
Ending balance |  | $ | 3,258 |
Total gains (losses) for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date |  | $ | (126 | )

(in thousands) |  | Three Months Ended March 31, 2013 |
|  | Mortgage Servicing Rights |
Beginning balance |  | $ | 2,364 |
Total recognized gains (losses) |  |  |  |
Included in net income |  |  | 117 |
Issues |  |  | 357 |
Settlements |  |  | (186 | )
Ending balance |  | $ | 2,652 |
Total gains for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date |  | $ | 117 |

Realized and unrealized gains and losses for items reflected in the tables above are included in net income in the consolidated statements of income as follows:

(in thousands) |  | Three Months Ended March 31, 2014 |
|  | Noninterest Income |  |  | Noninterest Expense |
Total gains |  | $ | (289 | ) |  | $ | 0 |

(in thousands) |  | Three Months Ended March 31, 2013 |
|  | Noninterest Income |  |  | Noninterest Expense |
Total gains |  | $ | (69 | ) |  | $ | 0 |

Nonrecurring Measurements
The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a nonrecurring basis as of March 31, 2014 and December 31, 2013 and indicates the level within the fair value hierarchy of the valuation techniques.

(in thousands) |  |  |  |  | Fair Value Measurements at March 31, 2014 Using |
|  | Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets measured – nonrecurring basis |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans (collateral dependent) |  | $ | 4,020 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 4,020 |
Other real estate/assets owned |  |  | 4,440 |  |  |  | 0 |  |  |  | 0 |  |  |  | 4,440 |

(in thousands) |  |  |  |  | Fair Value Measurements at December 31, 2013 Using |
|  | Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Assets measured – nonrecurring basis |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans (collateral dependent) |  | $ | 6,830 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 6,830 |
Other real estate/assets owned |  |  | 11,111 |  |  |  | 0 |  |  |  | 0 |  |  |  | 11,111 |

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheet, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Impaired Loans (Collateral Dependent)
The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.
CTBI considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Chief Credit Officer. Appraisals are reviewed for accuracy and consistency by the Chief Credit Officer. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the Chief Credit Officer by comparison to historical results.
Loans considered impaired under ASC 310-35, Impairment of a Loan, are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are subject to nonrecurring fair value adjustments to reflect subsequent (1) partial write-downs that are based on the observable market price or current appraised value of the collateral or (2) the full charge-off of the loan carrying value. Quarter-to-date fair value adjustments on impaired loans were $0.2 million, $(1.0) million, and $0.5 million for the quarters ended March 31, 2014, December 31, 2013 and March 31, 2013, respectively.
Other Real Estate Owned
In accordance with the provisions of ASC 360, Property, Plant, and Equipment, other real estate owned (OREO) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of OREO is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy. Long-lived assets are subject to nonrecurring fair value adjustments to reflect subsequent partial write-downs that are based on the observable market price or current appraised value of the collateral. Quarter-to-date fair value adjustments on other real estate/assets owned were $0.8 million, $0.5 million, and $1.1 million for the quarters ended March 31, 2014, December 31, 2013, and March 31, 2013, respectively.
Appraisals of OREO are obtained when the real estate is acquired and subsequently as deemed necessary by the Chief Credit Officer. Appraisers are selected from the list of approved appraisers maintained by management.
Unobservable (Level 3) Inputs
The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at March 31, 2014 and December 31, 2013.

(in thousands) |  | Quantitative Information about Level 3 Fair Value Measurements |
|  | Fair Value at March 31, 2014 |  | Valuation Technique(s) | Unobservable Input |  | Range (Weighted Average) |
Mortgage servicing rights |  | $ | 3,258 |  | Discount cash flows, computer pricing model | Constant prepayment rate |  |  | 7.1% - 24.6% |
|  |  |  |  |  |  |  |  | (10.6%) |
|  |  |  |  |  | Probability of default |  |  | 0.00% - 10.67% |
|  |  |  |  |  |  |  | (2.99%) |
|  |  |  |  |  | Discount rate |  | Not applicable |
|  |  |  |  |  |  |  |  | (10.0%) |
Impaired loans (collateral-dependent) |  | $ | 4,020 |  | Market comparable properties | Marketability discount |  |  | 5.0% - 10.0% |
|  |  |  |  |  |  |  |  | (7.0%) |
Other real estate/assets owned |  | $ | 4,440 |  | Market comparable properties | Comparability adjustments (%) |  |  | 5.0% - 46.0% |
|  |  |  |  |  |  |  |  | (21.0%) |

(in thousands) |  | Quantitative Information about Level 3 Fair Value Measurements |
|  | Fair Value at December 31, 2013 |  | Valuation Technique(s) | Unobservable Input |  | Range (Weighted Average) |
Mortgage servicing rights |  | $ | 3,424 |  | Discount cash flows, computer pricing model | Constant prepayment rate |  |  | 4.3% - 23.6% |
|  |  |  |  |  |  |  |  | (9.7%) |
|  |  |  |  |  | Probability of default |  |  | 0.00% - 33.33% |
|  |  |  |  |  |  |  | (3.36%) |
|  |  |  |  |  | Discount rate |  | Not applicable |
|  |  |  |  |  |  |  | (10.0%) |
Impaired loans (collateral-dependent) |  | $ | 6,830 |  | Market comparable properties | Marketability discount |  |  | 5.0% - 10.0% |
|  |  |  |  |  |  |  |  | (7.0%) |
Other real estate/assets owned |  | $ | 11,111 |  | Market comparable properties | Comparability adjustments (%) |  |  | 5.0% - 38.0% |
|  |  |  |  |  |  |  |  | (9.0%) |

Sensitivity of Significant Unobservable Inputs
The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.
Mortgage Servicing Rights
Market value for mortgage servicing rights is derived based on unobservable inputs, such as prepayment speeds of the underlying loans generated using the Andrew Davidson Prepayment Model, FHLMC/FNMA guidelines, the weighted-average life of the loan, the discount rate, the weighted average coupon, and the weighted average default rate. Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for prepayment speeds is accompanied by a directionally opposite change in the assumption for interest rates.
Fair Value of Financial Instruments
The following table presents estimated fair value of CTBI’s financial instruments as of March 31, 2014 and indicates the level within the fair value hierarchy of the valuation techniques.

(in thousands) |  |  |  |  | Fair Value Measurements at March 31, 2014 Using |
|  | Carrying Amount |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 193,689 |  |  | $ | 193,689 |  |  | $ | 0 |  |  | $ | 0 |
Certificates of deposit in other banks |  |  | 9,568 |  |  |  | 0 |  |  |  | 9,605 |  |  |  | 0 |
Securities available-for-sale |  |  | 650,127 |  |  |  | 24,427 |  |  |  | 625,700 |  |  |  | 0 |
Securities held-to-maturity |  |  | 1,662 |  |  |  | 0 |  |  |  | 1,619 |  |  |  | 0 |
Loans held for sale |  |  | 1,610 |  |  |  | 1,645 |  |  |  | 0 |  |  |  | 0 |
Loans, net |  |  | 2,551,893 |  |  |  | 0 |  |  |  | 0 |  |  |  | 2,563,294 |
Federal Home Loan Bank stock |  |  | 17,927 |  |  |  | 0 |  |  |  | 17,927 |  |  |  | 0 |
Federal Reserve Bank stock |  |  | 4,887 |  |  |  | 0 |  |  |  | 4,887 |  |  |  | 0 |
Accrued interest receivable |  |  | 12,924 |  |  |  | 0 |  |  |  | 12,924 |  |  |  | 0 |
Mortgage servicing rights |  |  | 3,258 |  |  |  | 0 |  |  |  | 0 |  |  |  | 3,258 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 2,924,189 |  |  | $ | 652,170 |  |  | $ | 2,267,890 |  |  | $ | 0 |
Repurchase agreements |  |  | 217,656 |  |  |  | 0 |  |  |  | 0 |  |  |  | 217,630 |
Federal funds purchased |  |  | 8,723 |  |  |  | 0 |  |  |  | 8,723 |  |  |  | 0 |
Advances from Federal Home Loan Bank |  |  | 1,257 |  |  |  | 0 |  |  |  | 1,500 |  |  |  | 0 |
Long-term debt |  |  | 61,341 |  |  |  | 0 |  |  |  | 0 |  |  |  | 35,244 |
Accrued interest payable |  |  | 1,181 |  |  |  | 0 |  |  |  | 1,181 |  |  |  | 0 |
Unrecognized financial instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Letters of credit |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |
Commitments to extend credit |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Forward sale commitments |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |

The following table presents estimated fair value of CTBI’s financial instruments as of December 31, 2013 and indicates the level within the fair value hierarchy of the valuation techniques.

(in thousands) |  |  |  |  | Fair Value Measurements at December 31, 2013 Using |
|  | Carrying Amount |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 106,641 |  |  | $ | 106,641 |  |  | $ | 0 |  |  | $ | 0 |
Certificates of deposit in other banks |  |  | 9,568 |  |  |  | 0 |  |  |  | 9,582 |  |  |  | 0 |
Securities available-for-sale |  |  | 609,405 |  |  |  | 52,782 |  |  |  | 556,623 |  |  |  | 0 |
Securities held-to-maturity |  |  | 1,662 |  |  |  | 0 |  |  |  | 1,601 |  |  |  | 0 |
Loans held for sale |  |  | 828 |  |  |  | 845 |  |  |  | 0 |  |  |  | 0 |
Loans, net |  |  | 2,581,346 |  |  |  | 0 |  |  |  | 0 |  |  |  | 2,589,811 |
Federal Home Loan Bank stock |  |  | 25,673 |  |  |  | 0 |  |  |  | 25,673 |  |  |  | 0 |
Federal Reserve Bank stock |  |  | 4,886 |  |  |  | 0 |  |  |  | 4,886 |  |  |  | 0 |
Accrued interest receivable |  |  | 12,886 |  |  |  | 0 |  |  |  | 12,886 |  |  |  | 0 |
Mortgage servicing rights |  |  | 3,424 |  |  |  | 0 |  |  |  | 0 |  |  |  | 3,424 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 2,855,074 |  |  | $ | 621,321 |  |  | $ | 2,230,608 |  |  | $ | 0 |
Repurchase agreements |  |  | 208,067 |  |  |  | 0 |  |  |  | 0 |  |  |  | 207,992 |
Federal funds purchased |  |  | 12,465 |  |  |  | 0 |  |  |  | 12,465 |  |  |  | 0 |
Advances from Federal Home Loan Bank |  |  | 1,286 |  |  |  | 0 |  |  |  | 1,531 |  |  |  | 0 |
Long-term debt |  |  | 61,341 |  |  |  | 0 |  |  |  | 0 |  |  |  | 31,362 |
Accrued interest payable |  |  | 1,032 |  |  |  | 0 |  |  |  | 1,032 |  |  |  | 0 |
Unrecognized financial instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Letters of credit |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |
Commitments to extend credit |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Forward sale commitments |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents – The carrying amount approximates fair value.
Certificates of deposit in other banks – Fair values are based on quoted market prices or dealer quotes for similar instruments.
Securities held-to-maturity – Fair values are based on quoted market prices, if available. If a quoted price is not available, fair value is estimated using quoted prices for similar securities. The fair value estimate is provided to management from a third party using modeling assumptions specific to each type of security that are reviewed and approved by management. Quarterly sampling of fair values provided by additional third parties supplement the fair value review process.
Loans held for sale – The fair value is predetermined at origination based on sale price.
Loans (net of the allowance for loan and lease losses) – The fair value of fixed rate loans and variable rate mortgage loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. For other variable rate loans, the carrying amount approximates fair value.
Federal Home Loan Bank stock – The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.
Federal Reserve Bank stock – The carrying value of Federal Reserve Bank stock approximates fair value based on the redemption provisions of the Federal Reserve Bank.
Accrued interest receivable – The carrying amount approximates fair value.
Deposits – The fair value of fixed maturity time deposits is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. For deposits including demand deposits, savings accounts, NOW accounts, and certain money market accounts, the carrying value approximates fair value.
Repurchase agreements – The fair value is estimated by discounting future cash flows using current rates.
Federal funds purchased – The carrying amount approximates fair value.
Advances from Federal Home Loan Bank – The fair value of these fixed-maturity advances is estimated by discounting future cash flows using rates currently offered for advances of similar remaining maturities.
Long-term debt – The fair value is estimated by discounting future cash flows using current rates.
Accrued interest payable – The carrying amount approximates fair value.
Commitments to originate loans, forward sale commitments, letters of credit, and lines of credit – The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of forward sale commitments is estimated based on current market prices for loans of similar terms and credit quality. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair values of these commitments are not material.
Note 9 – Accumulated Other Comprehensive Income
Unrealized gains (losses) on AFS securities
Amounts reclassified from accumulated other comprehensive income (AOCI) and the affected line items in the statements of income during the three months ended March 31, 2014 and 2013 were:

|  | Amounts Reclassified from AOCI |
Three Months Ended March 31 (in thousands) |  | 2014 |  |  | 2013 |
Affected line item in the statements of income |  |  |  |  |  |
Securities gains (losses) |  | $ | (60 | ) |  | $ | 0 |
Tax (benefit) expense |  |  | (21 | ) |  |  | 0 |
Total reclassifications out of AOCI |  | $ | (39 | ) |  | $ | 0 |

Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Community Trust Bancorp, Inc., our operations, and our present business environment. The MD&A is provided as a supplement to – and should be read in conjunction with – our condensed consolidated financial statements and the accompanying notes contained in this quarterly report. The MD&A includes the following sections:

v | Our Business

v | Results of Operations and Financial Condition

v | Dividends

v | Liquidity and Market Risk

v | Interest Rate Risk

v | Capital Resources

v | Impact of Inflation, Changing Prices, and Economic Conditions

v | Stock Repurchase Program

v | Critical Accounting Policies and Estimates

Our Business
Community Trust Bancorp, Inc. (“CTBI”) is a bank holding company headquartered in Pikeville, Kentucky. Currently, we own one commercial bank and one trust company. Through our subsidiaries, we have eighty-one banking locations in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee, four trust offices across Kentucky, and one trust office in northeastern Tennessee. At March 31, 2014, we had total consolidated assets of $3.7 billion and total consolidated deposits, including repurchase agreements, of $3.1 billion, making us the largest bank holding company headquartered in the Commonwealth of Kentucky. Total shareholders’ equity at March 31, 2014 was $422.0 million.
Through our subsidiaries, we engage in a wide range of commercial and personal banking and trust and wealth management activities, which include accepting time and demand deposits; making secured and unsecured loans to corporations, individuals and others; providing cash management services to corporate and individual customers; issuing letters of credit; renting safe deposit boxes; and providing funds transfer services. The lending activities of our Bank include making commercial, construction, mortgage, and personal loans. Lease-financing, lines of credit, revolving lines of credit, term loans, and other specialized loans, including asset-based financing, are also available. Our corporate subsidiaries act as trustees of personal trusts, as executors of estates, as trustees for employee benefit trusts, as registrars, transfer agents, and paying agents for bond and stock issues, as depositories for securities, and as providers of full service brokerage services. For further information, see Item 1 of our annual report on Form 10-K for the year ended December 31, 2013.
Results of Operations and Financial Condition
For the quarter ended March 31, 2014, we reported earnings for the first quarter 2014 of $10.1 million, or $0.64 per basic share, compared to $11.8 million, or $0.76 per basic share, earned during the first quarter 2013 and $8.8 million, or $0.56 per basic share, earned during the fourth quarter 2013. The variance from prior quarter was impacted by the $6.2 million in accrued expenses during the fourth quarter 2013 related to the Federal Reserve determination previously disclosed in our annual report on Form 10-K for the year ended December 31, 2013.
1st Quarter 2014 Highlights

v | CTBI’s basic earnings per share for the quarter decreased $0.12 per share from the first quarter 2013 but increased $0.08 from fourth quarter 2013.

v | Net interest income for the quarter decreased 1.3% from prior year first quarter and 3.7% from prior quarter as our net interest margin decreased 5 basis points and 8 basis points, respectively, for those time periods. Average earning assets decreased 0.1% from first quarter 2013 but increased 0.4% from prior quarter while our yield on average earning assets decreased 13 basis points and 9 basis points, respectively.

v | Nonperforming loans at $42.4 million increased $8.6 million from March 31, 2013 but decreased $1.1 million from December 31, 2013. Nonperforming assets at $78.7 million decreased $0.3 million from March 31, 2013 and $4.0 million from December 31, 2013.

v | Net loan charge-offs for the quarter ended March 31, 2014 were $1.7 million, or 0.27% of average loans annualized, compared to $1.4 million, or 0.22%, experienced for the first quarter 2013 and $1.2 million, or 0.19%, for the fourth quarter 2013.

v | Our loan loss provision for the quarter decreased $0.2 million from prior year first quarter but increased $0.1 million from prior quarter.

v | Our loan loss reserve as a percentage of total loans outstanding remained at 1.30% from March 31, 2013 to March 31, 2014. Our reserve coverage (allowance for loan loss reserve to nonperforming loans) at March 31, 2014 was 79.2% compared to 98.6% at March 31, 2013 and 78.1% at December 31, 2013.

v | Noninterest income decreased 15.6% for the quarter ended March 31, 2014 compared to the same period in 2013 and decreased 16.4% from prior quarter. The decrease was primarily attributable to decreases in gains on sales of loans, deposit service charges, and loan related fees.

v | Noninterest expense for the quarter ended March 31, 2014 increased 2.1% from prior year first quarter but decreased 17.0% from prior quarter. The variance from prior quarter was primarily due to the $6.2 million accrued expenses related to the Federal Reserve determination in the fourth quarter 2013.

v | Our loan portfolio increased $22.2 million from March 31, 2013 but declined $29.8 million during the quarter.

v | Our investment portfolio declined $27.4 million from March 31, 2013 but increased $40.7 million during the quarter.

v | Deposits, including repurchase agreements, declined $5.3 million from March 31, 2013 but increased $78.7 million during the quarter.

v | Our tangible common equity/tangible assets ratio remains strong at 9.88%.

Income Statement Review

(dollars in thousands) |  |  |  |  |  |  |  | Change 2014 vs. 2013 |
Quarter Ended March 31 |  | 2014 |  |  | 2013 |  |  | Amount |  |  | Percent |
Net interest income |  | $ | 32,750 |  |  | $ | 33,197 |  |  | $ | (447 | ) |  |  | (1.3 | )%
Provision for loan losses |  |  | 1,345 |  |  |  | 1,559 |  |  |  | (214 | ) |  |  | (13.7 | )
Noninterest income |  |  | 10,065 |  |  |  | 11,920 |  |  |  | (1,855 | ) |  |  | (15.6 | )
Noninterest expense |  |  | 26,861 |  |  |  | 26,299 |  |  |  | 562 |  |  |  | 2.1 |
Income taxes |  |  | 4,469 |  |  |  | 5,439 |  |  |  | (970 | ) |  |  | (17.8 | )
Net income |  | $ | 10,140 |  |  | $ | 11,820 |  |  | $ | (1,680 | ) |  |  | (14.2 | )%
Average earning assets |  | $ | 3,389,490 |  |  | $ | 3,393,848 |  |  | $ | (4,358 | ) |  |  | (0.1 | )%
Yield on average earnings assets |  |  | 4.32 | % |  |  | 4.45 | % |  |  | (0.13 | )% |  |  | (2.9 | )%
Cost of interest bearing funds |  |  | 0.47 | % |  |  | 0.56 | % |  |  | (0.09 | )% |  |  | (16.1 | )%
Net interest margin |  |  | 3.97 | % |  |  | 4.02 | % |  |  | (0.05 | )% |  |  | (1.2 | )%

Net Interest Income
Net interest income for the quarter decreased $0.4 million, or 1.3%, from prior year first quarter and $1.2 million, or 3.7% from prior quarter as our net interest margin decreased 5 basis points and 8 basis points, respectively, for those time periods. The decrease in our net interest margin is attributable to the reversal of $0.5 million in accrued interest, representing 7 basis points of the margin, with the placement of an income producing commercial real estate loan on nonaccrual. Average earning assets decreased 0.1% from first quarter 2013 but increased 0.4% from prior quarter. The yield on average earning assets decreased 13 basis points and 9 basis points for these respective time periods. Loans represented 76.6% of our average earning assets for the quarter ended March 31, 2014 compared to 75.2% for the quarter ended March 31, 2013 and 77.1% for the quarter ended December 31, 2013. The cost of interest bearing funds decreased 9 basis points from prior year first quarter and 2 basis points from prior quarter.
Provision for Loan Losses
The provision for loan losses that was added to the allowance for the first quarter 2014 was $1.3 million compared to $1.6 million in the first quarter 2013 and $1.2 million for the quarter ended December 31, 2013. This provision represented a charge against current earnings in order to maintain the allowance at an appropriate level determined using the accounting estimates described in the Critical Accounting Policies and Estimates section.
Noninterest Income
Noninterest income decreased 15.6% for the quarter ended March 31, 2014 compared to the same period in 2013 and 16.4% from prior quarter. The decrease was primarily attributable to decreases in gains on sales of loans, deposit service charges, and loan related fees. Gains on sales of loans decreased $1.2 million from prior year same quarter and $0.1 million from prior quarter which is reflective of the decline in secondary market residential real estate mortgage activity. Deposit service charges decreased $0.3 million from the first quarter 2013 and $0.9 million from the fourth quarter 2013. The decrease from first quarter 2013 was primarily a result of a change in our processing of overdrafts, while the decrease from the fourth quarter 2013 was also a result of seasonality. Loan related fees decreased $0.3 million and $0.5 million, respectively, from the first quarter 2013 and the fourth quarter 2013, primarily due to variances in fair value adjustments to our mortgage servicing rights.
Noninterest Expense
Noninterest expense for the quarter ended March 31, 2014 increased 2.1% from prior year first quarter but decreased 17.0% from prior quarter. The increase from prior year same quarter included increases in personnel expense, occupancy and equipment expense, and data processing expense. The variance from prior quarter was primarily due to the $6.2 million accrued expenses related to the Federal Reserve determination in the fourth quarter 2013. During the first quarter of 2014, this accrual was reduced by $0.6 million as a result of updated information obtained regarding the amount of refunds to be issued. This reduction, however, was offset by higher than anticipated operational losses during the first quarter 2014. In April 2014, the Federal Reserve investigation concluded with no additional charges to income being recognized.
Balance Sheet Review
CTBI’s total assets at $3.7 billion decreased $3.5 million, or 0.1%, from March 31, 2013 but increased $86.9 million, or an annualized 9.8%, during the quarter. Loans outstanding at March 31, 2014 were $2.6 billion, increasing $22.2 million, or 0.9%, from March 31, 2013 but decreasing $29.8 million, or an annualized 4.6%, during the quarter. We experienced declines during the quarter of $21.6 million in the commercial loan portfolio and $9.7 million in the consumer loan portfolio, partially offset by growth of $1.4 million in the residential loan portfolio. CTBI’s investment portfolio decreased $27.4 million, or 4.0%, from March 31, 2013 but increased $40.7 million, or an annualized 27.0%, during the quarter. During the first quarter 2014, CTBI did a bond restructuring moving away from U.S. government sponsored agency mortgage-backed securities and marketable equity securities into U.S. Treasury and government agencies and state and political subdivisions. This restructuring was intended to improve book yield, reduce duration, and improve extension risk metrics. The re-positioning of the portfolio took advantage of the steep yield curve which should enhance the purchased yield as the securities roll or cushion the market value of the portfolio in an up rate environment. Deposits, including repurchase agreements, at $3.1 billion decreased $5.3 million, or 0.2%, from March 31, 2013 but increased $78.7 million, or an annualized 10.4%, from prior quarter.
Shareholders’ equity at March 31, 2014 was $422.0 million compared to $406.6 million at March 31, 2013 and $412.5 million at December 31, 2013. CTBI’s annualized dividend yield to shareholders as of March 31, 2014 was 3.09%.
Loans

(in thousands) |  | March 31, 2014 |
Loan Category |  | Balance |  |  | Variance from Prior Year-End |  |  | Net Charge-Offs |  |  | Nonperforming |  |  | ALLL |
Commercial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction |  | $ | 111,272 |  |  |  | 0.4 | % |  | $ | (7 | ) |  | $ | 6,223 |  |  | $ | 3,107 |
Secured by real estate |  |  | 874,437 |  |  |  | 0.2 |  |  |  | 246 |  |  |  | 17,980 |  |  |  | 14,183 |
Equipment lease financing |  |  | 8,122 |  |  |  | (8.1 | ) |  |  | 0 |  |  |  | 0 |  |  |  | 107 |
Commercial other |  |  | 351,648 |  |  |  | (6.2 | ) |  |  | 471 |  |  |  | 5,952 |  |  |  | 4,754 |
Total commercial |  |  | 1,345,479 |  |  |  | (1.6 | ) |  |  | 710 |  |  |  | 30,155 |  |  |  | 22,151 |
Residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate construction |  |  | 59,730 |  |  |  | 6.5 |  |  |  | (1 | ) |  |  | 752 |  |  |  | 442 |
Real estate mortgage |  |  | 695,514 |  |  |  | (0.3 | ) |  |  | 152 |  |  |  | 10,595 |  |  |  | 5,143 |
Home equity |  |  | 84,694 |  |  |  | (0.2 | ) |  |  | 26 |  |  |  | 668 |  |  |  | 626 |
Total residential |  |  | 839,938 |  |  |  | 0.2 |  |  |  | 177 |  |  |  | 12,015 |  |  |  | 6,211 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer direct |  |  | 117,497 |  |  |  | (3.9 | ) |  |  | 307 |  |  |  | 202 |  |  |  | 1,573 |
Consumer indirect |  |  | 282,594 |  |  |  | (1.7 | ) |  |  | 544 |  |  |  | 58 |  |  |  | 3,680 |
Total consumer |  |  | 400,091 |  |  |  | (2.4 | ) |  |  | 851 |  |  |  | 260 |  |  |  | 5,253 |
Total loans |  | $ | 2,585,508 |  |  |  | (1.1 | )% |  | $ | 1,738 |  |  | $ | 42,430 |  |  | $ | 33,615 |

Asset Quality
CTBI’s total nonperforming loans were $42.4 million at March 31, 2014, a 25.3% increase from the $33.9 million at March 31, 2013 but a 2.6% decrease from the $43.6 million at December 31, 2013. Loans 90+ days past due and still accruing decreased $8.1 million for the quarter, primarily due to the movement of a $7.3 million income producing commercial real estate loan relationship to nonaccrual. Without the movement of this loan, both 90+ days past due and nonaccrual loans would have shown improvement. Loans 30-89 days past due at $23.5 million is a decrease of $2.6 million from March 31, 2013 but an increase of $7.6 million from December 31, 2013. The increase in 30-89 days past due loans is attributable to one borrower relationship which was negatively impacted during the first quarter by weather and permit issues. Our loan portfolio management processes focus on the immediate identification, management, and resolution of problem loans to maximize recovery and minimize loss. Our loan risk management processes include weekly delinquent loan review meetings at the market levels and monthly delinquent loan review meetings involving senior corporate management to review all nonaccrual loans and loans 30 days or more past due. Any activity regarding a criticized/classified loan (i.e. problem loan) must be approved by CTB’s Watch List Asset Committee (i.e. Problem Loan Committee). CTB’s Watch List Asset Committee also meets on a quarterly basis and reviews every criticized/classified loan of $100,000 or greater. We also have a Loan Review Department that reviews every market within CTB annually and performs extensive testing of the loan portfolio to assure the accuracy of loan grades and classifications for delinquency, troubled debt restructuring, impaired status, impairment, nonaccrual status, and adequate loan loss reserves.
Impaired loans, loans not expected to meet contractual principal and interest payments other than insignificant delays, at March 31, 2014 totaled $65.3 million, compared to $66.5 million at March 31, 2013 and $65.3 million at December 31, 2013. Included in certain loan categories of impaired loans are troubled debt restructurings that were classified as impaired. At March 31, 2014, CTBI had $22.0 million in commercial loans secured by real estate, $7.7 million in commercial real estate construction loans, $9.8 million in commercial other loans, and $1.0 million in consumer loans that were modified in troubled debt restructurings and impaired. Management evaluates all impaired loans for impairment and records a direct charge-off or provides specific reserves when necessary.
For further information regarding nonperforming and impaired loans, see note 4 to the condensed consolidated financial statements.
CTBI generally does not offer high risk loans such as option ARM products, high loan to value ratio mortgages, interest-only loans, loans with initial teaser rates, or loans with negative amortizations, and therefore, CTBI would have no significant exposure to these products.
Net loan charge-offs for the quarter ended March 31, 2014 were $1.7 million, or 0.27% of average loans annualized, compared to $1.4 million, or 0.22%, experienced for the first quarter 2013 and $1.2 million, or 0.19%, for the fourth quarter 2013. Of the total net charge-offs for the quarter, $0.7 million were in commercial loans, $0.5 million were in indirect auto loans, and $0.2 million were in residential real estate mortgage loans. Allocations to loan loss reserves were $1.3 million for the quarter ended March 31, 2014 compared to $1.6 million for the quarter ended March 31, 2013 and $1.2 million for the quarter ended December 31, 2013. Our loan loss reserve as a percentage of total loans outstanding has remained at 1.30% from March 31, 2013 to March 31, 2014.
We continue to experience improvement in other real estate owned. Our level of foreclosed properties at $36.3 million at March 31, 2014 was a decrease from $45.2 million at March 31, 2013 and $39.2 million at December 31, 2013. Sales of foreclosed properties for the quarter ended March 31, 2014 totaled $3.3 million while new foreclosed properties totaled $1.3 million. At March 31, 2014, the book value of properties under contracts to sell was $6.1 million; however, the closings had not occurred at quarter-end.
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. Charges to earnings in the first quarter 2014 to reflect the decrease in current market values of foreclosed properties totaled $0.9 million. There were 38 properties reappraised during the first quarter 2014. Of these, 18 were written down by a total of $0.3 million. Charges during the quarters ended March 31, 2013 and December 31, 2013 were $1.1 million and $0.5 million, respectively. 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. Approximately forty-two percent of our OREO properties have been reappraised within the past 12 months. Management anticipates that our foreclosed properties will remain elevated as we work through current market conditions.
The major classifications of foreclosed properties are shown in the following table:

(in thousands) |  | March 31, 2014 |  |  | December 31, 2013 |
1-4 family |  | $ | 6,779 |  |  | $ | 8,640 |
Agricultural/farmland |  |  | 781 |  |  |  | 792 |
Construction/land development/other |  |  | 19,613 |  |  |  | 20,278 |
Multifamily |  |  | 1,402 |  |  |  | 1,456 |
Non-farm/non-residential |  |  | 7,724 |  |  |  | 8,022 |
Total foreclosed properties |  | $ | 36,299 |  |  | $ | 39,188 |

The appraisal aging analysis of foreclosed properties, as well as the holding period, at March 31, 2014 is shown below:

(in thousands) |  |  |
Appraisal Aging Analysis |  | Holding Period Analysis |
Days Since Last Appraisal |  | Current Book Value |  | Holding Period |  | Current Book Value |
Up to 3 months |  | $ | 7,173 |  | Less than one year |  | $ | 4,484 |
3 to 6 months |  |  | 2,027 |  | 1 to 2 years |  |  | 3,326 |
6 to 9 months |  |  | 863 |  | 2 to 3 years |  |  | 12,453 |
9 to 12 months |  |  | 5,057 |  | 3 to 4 years |  |  | 3,871 |
12 to 24 months |  |  | 17,208 |  | Over 4 years |  |  | 9,791 |
Over 24 months |  |  | 3,971 |  | Over 5 years |  |  | 2,374 |
Total |  | $ | 36,299 |  | Total |  | $ | 36,299 |

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

Pay Date | Record Date | Amount Per Share
April 1, 2014 | March 15, 2014 | $0.320
January 1, 2014 | December 15, 2013 | $0.320
October 1, 2013 | September 15, 2013 | $0.320
July 1, 2013 | June 15, 2013 | $0.315
April 1, 2013 | March 15, 2013 | $0.315
January 1, 2013 | December 15, 2012 | $0.315

On April 29, 2014, the Board of Directors of CTBI declared a 10% stock dividend to shareholders of record on May 15, 2014. The stock dividend will be distributed on June 2, 2014. The Board also declared the payment of a quarterly cash dividend of $0.29 per share, after adjusting for the stock dividend, to be paid on July 1, 2014 to shareholders of record on June 15, 2014.
Liquidity and Market Risk
The objective of CTBI’s Asset/Liability management function is to maintain consistent growth in net interest income within our policy limits. This objective is accomplished through management of our consolidated balance sheet composition, liquidity, and interest rate risk exposures arising from changing economic conditions, interest rates, and customer preferences. The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand or deposit withdrawals. This is accomplished by maintaining liquid assets in the form of cash and cash equivalents and investment securities, sufficient unused borrowing capacity, and growth in core deposits. As of March 31, 2014, we had approximately $193.7 million in cash and cash equivalents and approximately $650.1 million in securities valued at estimated fair value designated as available-for-sale and available to meet liquidity needs on a continuing basis compared to $106.6 million and $609.4 million at December 31, 2013. Additional asset-driven liquidity is provided by the remainder of the securities portfolio and the repayment of loans. In addition to core deposit funding, we also have a variety of other short-term and long-term funding sources available. We also rely on Federal Home Loan Bank advances for both liquidity and management of our asset/liability position. Federal Home Loan Bank advances were $1.3 million at March 31, 2014 and December 31, 2013. As of March 31, 2014, we had a $337.1 million available borrowing position with the Federal Home Loan Bank compared to $342.6 million at December 31, 2013. We generally rely upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash for our investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, use of short-term borrowing facilities such as repurchase agreements and federal funds purchased, and issuance of long-term debt. At March 31, 2014 and December 31, 2013, we had $44 million in lines of credit with various correspondent banks available to meet any future cash needs. Our primary investing activities include purchases of securities and loan originations. We do not rely on any one source of liquidity and manage availability in response to changing consolidated balance sheet needs. At March 31, 2014, federal funds sold were $8.1 million compared to $8.6 million at December 31, 2013, and deposits with the Federal Reserve were $119.5 million compared to $28.5 million at December 31, 2013. Additionally, we project cash flows from our investment portfolio to generate additional liquidity over the next 90 days.
The investment portfolio consists of investment grade short-term issues suitable for bank investments. The majority of the investment portfolio is in U.S. government and government sponsored agency issuances. The average life of the portfolio is 4.48 years. At the end of March 31, 2014, available-for-sale (“AFS”) securities comprised approximately 99.7% of the total investment portfolio, and the AFS portfolio was approximately 154% of equity capital. Seventy-nine percent of the pledge eligible portfolio was pledged.
Interest Rate Risk
We consider interest rate risk one of our most significant market risks. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of our net interest revenue is largely dependent upon the effective management of interest rate risk. We employ a variety of measurement techniques to identify and manage our interest rate risk including the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain, and as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.
CTBI’s Asset/Liability Management Committee (ALCO), which includes executive and senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk within Board-approved policy limits. Our current exposure to interest rate risks is determined by measuring the anticipated change in net interest income spread evenly over the twelve-month period.
Capital Resources
Shareholders’ equity was $422.0 million at March 31, 2014 and $412.5 million at December 31, 2013. CTBI’s annualized dividend yield to shareholders as of March 31, 2014 was 3.09%. Our primary source of capital growth is the retention of earnings. Cash dividends were $0.320 per share for the three months ended March 31, 2014 and $0.315 per share for the three months ended March 31, 2013. We retained 50.0% of our earnings for the first three months of 2014 compared to 58.6% for the first three months of 2013.
Regulatory guidelines require bank holding companies, commercial banks, and savings banks to maintain certain minimum capital ratios and define companies as “well-capitalized” that sufficiently exceed the minimum ratios. The banking regulators may alter minimum capital requirements as a result of revising their internal policies and their ratings of individual institutions. To be “well-capitalized” banks and bank holding companies must maintain a Tier 1 leverage ratio of no less than 5.0%, a Tier 1 risk based ratio of no less than 6.0%, and a total risk based ratio of no less than 10.0%. Our ratios as of March 31, 2014 were 11.68%, 16.57%, and 17.81%, respectively, all exceeding the threshold for meeting the definition of “well-capitalized.”
As of March 31, 2014, we are not aware of any other current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material adverse impact on our liquidity, capital resources, or operations, except as provided for in the Dodd-Frank Act, which is discussed in the Supervision and Regulation section of Item 1. Business in our annual report on Form 10-K for the year ended December 31, 2013, and the Basel III proposal which is discussed below.
Basel III
On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to CTBI and CTB. The FDIC has subsequently approved these rules. The final rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012, and implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.
The rules include new risk-based capital and leverage ratios, which would be phased in from 2015 to 2019, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to CTBI and CTB under the final rules would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
Basel III provided discretion for regulators to impose an additional buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier 1 capital to take into account the macro-financial environment and periods of excessive credit growth. However, the final rules permit the countercyclical buffer to be applied only to “advanced approach banks” (i.e., banks with $250 billion or more in total assets or $10 billion or more in total foreign exposures), which currently excludes CTBI and CTB. The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes CTBI) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.
The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions take effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions will be required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).
The final rules set forth certain changes for the calculation of risk-weighted assets, which we will be required to utilize beginning January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets. Based on our current capital composition and levels, we anticipate that our capital ratios, on a Basel III basis, will continue to exceed the well-capitalized minimum capital requirements upon the effectiveness of the final rule.
Impact of Inflation, Changing Prices, and Economic Conditions
The majority of our assets and liabilities are monetary in nature. Therefore, CTBI differs greatly from most commercial and industrial companies that have significant investment in nonmonetary assets, such as fixed assets and inventories. However, inflation does have an important impact on the growth of assets in the banking industry and on the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other expenses, which tend to rise during periods of general inflation.
We believe one of the most significant impacts on financial and operating results is our ability to react to changes in interest rates. We seek to maintain an essentially balanced position between interest rate sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations.
Since 2008 the U.S. economy has faced a severe economic crisis including a major recession from which it is slowly recovering. Commerce and business growth across a wide range of industries and regions in the U.S. remains reduced and local governments and many businesses continue to experience financial difficulty. While reflecting some improvement in many parts of the country and in parts of our own service area, unemployment levels remain elevated. There can be no assurance that these conditions will continue to improve and these conditions could worsen. Regionally, recent economic conditions in the coal industry are resulting in increased unemployment in the markets we serve where coal is a major contributor to the economy. In addition, ongoing federal budget negotiations, the implementation of the Patient Protection and Affordable Care Act, the Federal Open Market Committee’s plan for economic easing, and the level of U.S. debt may have a destabilizing effect on financial markets.
Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent upon the business environment in the markets where we operate, in the states of Kentucky, West Virginia, and Tennessee and in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors.
Overall, during recent years, the business environment has been adverse for many households and businesses in the United States and worldwide. While economic conditions in the United States and worldwide have improved since the recession, there can be no assurance that this improvement will continue. Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in consumer and business spending, borrowing, and savings habits. Such conditions could adversely affect the credit quality of our loans and our business, financial condition, and results of operations.
Stock Repurchase Program
CTBI’s stock repurchase program currently has 288,519 shares remaining under CTBI’s current repurchase authorization. We have not repurchased any shares of our common stock since February 2008. As of March 31, 2014, a total of 2,211,481 shares have been repurchased through this program.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our consolidated financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements.
We believe the application of accounting policies and the estimates required therein are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.
Our accounting policies are described in note 1 to the condensed consolidated financial statements. We have identified the following critical accounting policies:
Investments – Management determines the classification of securities at purchase. We classify securities into held-to-maturity, trading, or available-for-sale categories. Held-to-maturity securities are those which we have the positive intent and ability to hold to maturity and are reported at amortized cost. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320, Investment Securities, investments in debt securities that are not classified as held-to-maturity and equity securities that have readily determinable fair values shall be classified in one of the following categories and measured at fair value in the statement of financial position:
a. Trading securities. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) shall be classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price.
b. Available-for-sale securities. Investments not classified as trading securities (nor as held-to-maturity securities) shall be classified as available-for-sale securities.
We do not have any securities that are classified as trading securities. Available-for-sale securities are reported at fair value, with unrealized gains and losses included as a separate component of shareholders’ equity, net of tax. If declines in fair value are other than temporary, the carrying value of the securities is written down to fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not credit related.
Gains or losses on disposition of securities are computed by specific identification for all securities except for shares in mutual funds, which are computed by average cost. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings.
When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair market value is below amortized cost, additional analysis is performed to determine whether an other than temporary impairment condition exists. Available-for-sale and held-to-maturity securities are analyzed quarterly for possible other than temporary impairment. The analysis considers (i) whether we have the intent to sell our securities prior to recovery and/or maturity and (ii) whether it is more likely than not that we will not have to sell our securities prior to recovery and/or maturity. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on the CTBI’s results of operations and financial condition.
Loans – Loans with the ability and the intent to be held until maturity and/or payoff are reported at the carrying value of unpaid principal reduced by unearned interest, an allowance for loan and lease losses, and unamortized deferred fees or costs. Income is recorded on the level yield basis. Interest accrual is discontinued when management believes, after considering economic and business conditions, collateral value, and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. Any loan greater than 90 days past due must be well secured and in the process of collection to continue accruing interest. Cash payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured. Loans are not reclassified as accruing until principal and interest payments remain current for a period of time, generally six months, and future payments appear reasonably certain. Included in certain loan categories of impaired loans are troubled debt restructurings that were classified as impaired. A restructuring of a debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.
Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized over the estimated life of the related loans, leases, or commitments as a yield adjustment.
Allowance for Loan and Lease Losses – We maintain an allowance for loan and lease losses (“ALLL”) at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. Since arriving at an appropriate ALLL involves a high degree of management judgment, we use an ongoing quarterly analysis to develop a range of estimated losses. In accordance with accounting principles generally accepted in the United States, we use our best estimate within the range of potential credit loss to determine the appropriate ALLL. Credit losses are charged and recoveries are credited to the ALLL.
We utilize an internal risk grading system for commercial credits. Those larger commercial credits that exhibit probable or observed credit weaknesses are subject to individual review. The borrower’s cash flow, adequacy of collateral coverage, and other options available to CTBI, including legal remedies, are evaluated. The review of individual loans includes those loans that are impaired as defined by ASC 310-35, Impairment of a Loan. We evaluate the collectability of both principal and interest when assessing the need for loss provision. Historical loss rates are analyzed and applied to other commercial loans not subject to specific allocations. The ALLL allocation for this pool of commercial loans is established based on the historical average, maximum, minimum, and median loss ratios.
A loan is considered impaired when, based on current information and events, it is probable that CTBI will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Homogenous loans, such as consumer installment, residential mortgages, and home equity lines are not individually risk graded. The associated ALLL for these loans is measured under ASC 450, Contingencies.
When any secured commercial loan is considered uncollectable, whether past due or not, a current assessment of the value of the underlying collateral is made. If the balance of the loan exceeds the fair value of the collateral, the loan is placed on non-accrual and the loan is charged down to the value of the collateral less estimated cost to sell or a specific reserve equal to the difference between book value of the loan and the fair value assigned to the collateral is created until such time as the loan is foreclosed. When the foreclosed collateral has been legally assigned to CTBI, a charge off is taken, if necessary, in order that the remaining balance reflects the fair value estimated less costs to sell of the collateral then transferred to other real estate owned or other repossessed assets. When any unsecured commercial loan is considered uncollectable the loan is charged off no later than at 90 days past due.
All closed-end consumer loans (excluding conventional 1-4 family residential loans and installment and revolving loans secured by real estate) are charged off no later than 120 days (5 monthly payments) delinquent. If a loan is considered uncollectable, it is charged off earlier than 120 days delinquent. For conventional 1-4 family residential loans and installment and revolving loans secured by real estate, when a loan is 90 days past due, a current assessment of the value of the real estate is made. If the balance of the loan exceeds the fair value of the property, the loan is placed on nonaccrual and foreclosure proceedings are initiated. When the foreclosed property has been legally assigned to CTBI, a charge-off is taken with the remaining balance, reflecting the fair value less estimated costs to sell, transferred to other real estate owned.
Historical loss rates for loans are adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. While we generally review the historical loss rates over eight quarters and four quarters on a rolling average basis, recognizing the slow pace of economic recovery and the currently unknown impact of recent layoffs in coal-related employment in our geographic footprint, at December 31, 2013, management expanded our historical loss rate analysis to twelve rolling quarters. During the quarter ended March 31, 2014, we continued to use the 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. CTBI uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. Given a 200 basis point increase to the yield curve used in the simulation model, it is estimated net interest income for CTBI would increase by 0.68 percent over one year and decrease by 1.85 percent over two years. A 25 basis point decrease in the yield curve would decrease net interest income by an estimated 0.21 percent over one year and by 0.07 percent over two years. For further discussion of CTBI’s market risk, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Market Risk included in the annual report on Form 10-K for the year ended December 31, 2013.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
CTBI’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. As of the end of the period covered by this report, an evaluation was carried out by CTBI’s management, with the participation of our Chief Executive Officer and the Executive Vice President, Chief Financial Officer, and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, management concluded that disclosure controls and procedures as of March 31, 2014 were effective in ensuring material information required to be disclosed in this quarterly report on Form 10-Q was recorded, processed, summarized, and reported on a timely basis.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in CTBI’s internal control over financial reporting that occurred during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, CTBI’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. | Legal Proceedings | None
Item 1A. | Risk Factors | None
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | None
Item 3. | Defaults Upon Senior Securities | None
Item 4. | Mine Safety Disclosure | Not applicable
Item 5. | Other Information: |
| CTBI’s Principal Executive Officer and Principal Financial Officer have furnished to the SEC the certifications with respect to this Form 10-Q that are required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 |
Item 6. | a. Exhibits: |
| (1) Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Exhibit 31.1 Exhibit 31.2
| (2) Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Exhibit 32.1 Exhibit 32.2
| (3) XBRL Instance Document | Exhibit 101.INS
| (4) XBRL Taxonomy Extension Schema | Exhibit 101.SCH
| (5) XBRL Taxonomy Extension Calculation Linkbase | Exhibit 101.CAL
| (6) XBRL Taxonomy Extension Definition Linkbase | Exhibit 101.DEF
| (7) XBRL Taxonomy Extension Label Linkbase | Exhibit 101.LAB
| (8) XBRL Taxonomy Extension Presentation Linkbase | Exhibit 101.PRE

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, CTBI has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| COMMUNITY TRUST BANCORP, INC. |
Date: May 9, 2014 | By: | /s/ Jean R. Hale |
|  | Jean R. Hale |
|  | Chairman, President, and Chief Executive Officer |

|  | /s/ Kevin J. Stumbo |
|  | Kevin J. Stumbo |
|  | Executive Vice President, Chief Financial Officer, and Treasurer |