COMMUNITY TRUST BANCORP INC /KY/ - Quarter Report: 2012 September (Form 10-Q)

ctbi10q0912.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2012

	Or

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _____________ to _____________

Commission file number 0-11129

COMMUNITY TRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)

Kentucky	61-0979818
(State or other jurisdiction of incorporation or organization)	IRS Employer Identification No.

346 North Mayo Trail Pikeville, Kentucky (address of principal executive offices)	41501 (Zip Code)

(606) 432-1414

(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

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

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 – 15,612,366 shares outstanding at October 31, 2012

CAUTIONARY STATEMENT

REGARDING FORWARD LOOKING STATEMENTS

Certain of the statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. CTBI’s actual results may differ materially from those included in the forward-looking statements. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may increase,” “may fluctuate,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” and “could.” These forward-looking statements involve risks and uncertainties including, but not limited to, economic conditions, portfolio growth, the credit performance of the portfolios, including bankruptcies, and seasonal factors; changes in general economic conditions including the performance of financial markets, prevailing inflation and interest rates, realized gains from sales of investments, gains from asset sales, and losses on commercial lending activities; results of various investment activities; the effects of competitors’ pricing policies, changes in laws and regulations, competition, and demographic changes on target market populations’ savings and financial planning needs; industry changes in information technology systems on which we are highly dependent; failure of acquisitions to produce revenue enhancements or cost savings at levels or within the time frames originally anticipated or unforeseen integration difficulties; the adoption by CTBI of a Federal Financial Institutions Examination Council (FFIEC) policy that provides guidance on the reporting of delinquent consumer loans and the timing of associated credit charge-offs for financial institution subsidiaries; and the resolution of legal proceedings and related matters. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation, and state regulators, whose policies and regulations could affect CTBI’s results. These statements are representative only on the date hereof, and CTBI undertakes no obligation to update any forward-looking statements made.

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

The accompanying information has not been audited by 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, 2011 for further information in this regard.

Community Trust Bancorp, Inc.

Condensed Consolidated Balance Sheets

(dollars in thousands)	(unaudited) September 30 2012			December 31 2011
Assets:
Cash and due from banks	$	59,480		$	69,723
Interest bearing deposits		135,630			166,057
Federal funds sold		7,431			2,701
Cash and cash equivalents		202,541			238,481

Certificates of deposit in other banks		8,758			11,875
Securities available-for-sale at fair value (amortized cost of $598,878 and $511,731, respectively)		621,230			527,398
Securities held-to-maturity at amortized cost (fair value of $1,664 and $1,661, respectively)		1,662			1,662
Loans held for sale		771			536

Loans		2,551,537			2,556,548
Allowance for loan losses		(33,189	)		(33,171	)
Net loans		2,518,348			2,523,377

Premises and equipment, net		55,068			54,297
Federal Home Loan Bank stock		25,673			25,673
Federal Reserve Bank stock		4,885			4,883
Goodwill		65,490			65,490
Core deposit intangible (net of accumulated amortization of $7,659 and $7,499, respectively)		957			1,117
Bank owned life insurance		44,546			43,483
Mortgage servicing rights		2,281			2,282
Other real estate owned		56,103			56,965
Other assets		33,218			33,660
Total assets	$	3,641,531		$	3,591,179

Liabilities and shareholders’ equity:
Deposits
Noninterest bearing	$	599,984		$	584,735
Interest bearing		2,311,860			2,293,624
Total deposits		2,911,844			2,878,359

Repurchase agreements		218,511			217,177
Federal funds purchased and other short-term borrowings		8,821			13,104
Advances from Federal Home Loan Bank		1,472			21,609
Long-term debt		61,341			61,341
Other liabilities		43,445			32,723
Total liabilities		3,245,434			3,224,313

Shareholders’ equity:
Preferred stock, 300,000 shares authorized and unissued		-			-
Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2012 – 15,604,383; 2011 – 15,429,992		78,023			77,151
Capital surplus		160,266			156,101
Retained earnings		143,279			123,431
Accumulated other comprehensive income, net of tax		14,529			10,183
Total shareholders’ equity		396,097			366,866

Total liabilities and shareholders’ equity	$	3,641,531		$	3,591,179

See notes to condensed consolidated financial statements.

Community Trust Bancorp, Inc.

Condensed Consolidated Statements of Income and Other Comprehensive Income

(unaudited)

	Three Months Ended				Nine Months Ended
	September 30				September 30
(in thousands except per share data)	2012		2011		2012			2011
Interest income:
Interest and fees on loans, including loans held for sale	$	34,298	$	36,180	$	103,628		$	109,048
Interest and dividends on securities
Taxable		3,148		2,598		9,001			7,631
Tax exempt		534		455		1,525			1,263
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock		345		329		1,054			1,042
Other, including interest on federal funds sold		125		146		423			425
Total interest income		38,450		39,708		115,631			119,409

Interest expense:
Interest on deposits		4,777		5,193		14,178			16,534
Interest on repurchase agreements and other short-term borrowings		294		397		953			1,251
Interest on advances from Federal Home Loan Bank		8		23		27			77
Interest on long-term debt		325		1,000		2,102			3,000
Total interest expense		5,404		6,613		17,260			20,862

Net interest income		33,046		33,095		98,371			98,547
Provision for loan losses		2,919		2,515		6,504			10,222
Net interest income after provision for loan losses		30,127		30,580		91,867			88,325

Noninterest income:
Service charges on deposit accounts		6,038		6,681		17,865			18,999
Gains on sales of loans, net		660		438		1,982			1,166
Trust income		1,734		1,597		5,169			4,790
Loan related fees		631		250		2,528			1,609
Bank owned life insurance		462		433		1,321			1,269
Securities gains		0		0		819			0
Other noninterest income		1,313		1,543		4,330			4,440
Total noninterest income		10,838		10,942		34,014			32,273

Noninterest expense:
Officer salaries and employee benefits		3,048		2,087		7,727			6,597
Other salaries and employee benefits		10,237		10,153		30,773			30,444
Occupancy, net		1,969		2,013		5,681			6,043
Equipment		957		1,008		2,870			2,781
Data processing		1,644		1,550		4,771			4,992
Bank franchise tax		1,130		1,120		3,413			3,403
Legal fees		522		631		1,619			2,131
Professional fees		411		285		1,056			970
FDIC insurance		643		591		1,913			2,554
Other real estate owned provision and expense		1,123		1,465		2,672			4,497
Other noninterest expense		4,129		4,924		13,216			15,108
Total noninterest expense		25,813		25,827		75,711			79,520

Income before income taxes		15,152		15,695		50,170			41,078
Income taxes		4,943		5,030		15,860			12,139
Net income		10,209		10,665		34,310			28,939

Other comprehensive income:
Unrealized holding gains on securities available-for-sale:
Unrealized holding gains arising during the period		3,337		4,093		7,505			9,702
Less: Reclassification adjustments for realized gains included in net income		0		0		(819	)		0
Tax expense		1,168		1,432		2,340			3,395
Other comprehensive income, net of tax		2,169		2,661		4,346			6,307
Comprehensive income	$	12,378	$	13,326	$	38,656		$	35,246

Basic earnings per share	$	0.66	$	0.70	$	2.22		$	1.89
Diluted earnings per share	$	0.66	$	0.70	$	2.21		$	1.89

Weighted average shares outstanding-basic		15,491		15,318		15,450			15,307
Weighted average shares outstanding-diluted		15,555		15,339		15,501			15,331

Dividends declared per share	$	0.315	$	0.310	$	0.935		$	0.920

See notes to condensed consolidated financial statements.

Community Trust Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended
	September 30
(in thousands)	2012			2011
Cash flows from operating activities:
Net income	$	34,310		$	28,939
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,212			3,123
Deferred taxes		(2,340	)		(3,373	)
Stock-based compensation		443			499
Excess tax benefits of stock-based compensation		495			(32	)
Provision for loan losses		6,504			10,222
Write-downs of other real estate owned and other repossessed assets		899			2,890
Gains on sale of mortgage loans held for sale		(1,982	)		(1,166	)
Gains on sales of securities		(819	)		0
Losses on sale of assets, net		101			80
Proceeds from sale of mortgage loans held for sale		89,015			53,986
Funding of mortgage loans held for sale		(87,268	)		(53,191	)
Amortization of securities premiums and discounts, net		4,143			2,430
Change in cash surrender value of bank owned life insurance		(1,063	)		(1,051	)
Death benefits received on bank owned life insurance		0			79
Mortgage servicing rights:
Fair value adjustments		511			1,139
New servicing assets created		(510	)		(378	)
Changes in:
Other assets		456			508
Other liabilities		11,088			27,492
Net cash provided by operating activities		57,195			72,196

Cash flows from investing activities:
Certificates of deposit in other banks:
Maturity of certificates of deposit		3,117			1,483
Securities available-for-sale (AFS):
Purchase of AFS securities		(216,143	)		(188,002	)
Proceeds from prepayments and maturities of AFS securities		113,648			70,341
Proceeds from the sales of AFS securities		12,025			0
Change in loans, net		(9,118	)		(2,666	)
Purchase of premises and equipment		(3,823	)		(2,806	)
Proceeds from sale of premises and equipment		103			39
Additional investment in Federal Reserve Bank stock		(2	)		(449	)
Proceeds from sale of other real estate and other repossessed assets		7,915			6,437
Additional investment in other real estate and other repossessed assets		(527	)		(254	)
Additional investment in bank owned life insurance		0			(2,458	)
Net cash used in investing activities		(92,805	)		(118,335	)

Cash flows from financing activities:
Change in deposits, net		33,485			102,705
Change in repurchase agreements, federal funds purchased, and other short-term borrowings, net		(2,949	)		47,390
Advances from Federal Home Loan Bank		0			571
Payments on advances from Federal Home Loan Bank		(20,137	)		(151	)
Issuance of common stock		4,099			1,009
Excess tax benefits of stock-based compensation		(495	)		32
Dividends paid		(14,333	)		(13,994	)
Net cash provided by (used in) financing activities		(330	)		137,562
Net increase (decrease) in cash and cash equivalents		(35,940	)		91,423
Cash and cash equivalents at beginning of period		238,481			158,983
Cash and cash equivalents at end of period	$	202,541		$	250,406

Supplemental disclosures:
Income taxes paid	$	11,325		$	8,380
Interest paid		14,303			18,841
Non-cash activities:
Loans to facilitate the sale of other real estate and other repossessed assets		2,897			1,375
Common stock dividends accrued, paid in subsequent quarter		4,882			4,749
Real estate acquired in settlement of loans		10,540			25,551

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 September 30, 2012, the results of operations for the three and nine months ended September 30, 2012 and 2011, and the cash flows for the nine months ended September 30, 2012 and 2011. In accordance with accounting principles generally accepted in the United States of America for interim financial information, these statements do not include certain information and footnote disclosures required by accounting principles generally accepted in the United States of America for complete annual financial statements. The results of operations for the three and nine months ended September 30, 2012 and 2011, and the cash flows for the nine months ended September 30, 2012 and 2011, are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet as of December 31, 2011 has been derived from the audited consolidated financial statements of Community Trust Bancorp, Inc. (“CTBI”) for that period. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2011, included in our annual report on Form 10-K.

Principles of Consolidation – The unaudited condensed consolidated financial statements include the accounts of CTBI and its separate and distinct, wholly owned subsidiaries Community Trust Bank, Inc. (the “Bank”) and Community Trust and Investment Company. All significant intercompany transactions have been eliminated in consolidation.

Reclassifications – Certain reclassifications considered to be immaterial have been made in the prior year condensed consolidated financial statements to conform to current year classifications. These reclassifications had no effect on net income.

New Accounting Standards –

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

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

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

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

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

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

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

In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. Under these amendments, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on qualitative assessment, that it is not more likely than not that the indefinite-lived intangible asset is impaired. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. ASU 2012-02 is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. CTBI will adopt this ASU by the date required and does not anticipate that it will have a material effect on our consolidated financial statements.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our consolidated financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements.

We believe the application of accounting policies and the estimates required therein are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.

Our accounting policies are described above. We have identified the following critical accounting policies:

Investments – Management determines the classification of securities at purchase. We classify securities into held-to-maturity, trading, or available-for-sale categories. Held-to-maturity securities are those which we have the positive intent and ability to hold to maturity and are reported at amortized cost. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320, Investment Securities, investments in debt securities that are not classified as held-to-maturity and equity securities that have readily determinable fair values shall be classified in one of the following categories and measured at fair value in the statement of financial position:

a. Trading securities. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) shall be classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price.

b. Available-for-sale securities. Investments not classified as trading securities (nor as held-to-maturity securities) shall be classified as available-for-sale securities.

We do not have any securities that are classified as trading securities. Available-for-sale securities are reported at fair value, with unrealized gains and losses included as a separate component of shareholders’ equity, net of tax. If declines in fair value are other than temporary, the carrying value of the securities is written down to fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not credit related.

Gains or losses on disposition of securities are computed by specific identification for all securities except for shares in mutual funds, which are computed by average cost. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings.

When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair market value is below amortized cost, additional analysis is performed to determine whether an other than temporary impairment condition exists. Available-for-sale and held-to-maturity securities are analyzed quarterly for possible other than temporary impairment. The analysis considers (i) whether we have the intent to sell our securities prior to recovery and/or maturity and (ii) whether it is more likely than not that we will not have to sell our securities prior to recovery and/or maturity. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on the CTBI’s results of operations and financial condition.

Loans – Loans with the ability and the intent to be held until maturity and/or payoff are reported at the carrying value of unpaid principal reduced by unearned interest, an allowance for loan and lease losses, and unamortized deferred fees or costs. Income is recorded on the level yield basis. Interest accrual is discontinued when management believes, after considering economic and business conditions, collateral value, and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. Any loan greater than 90 days past due must be well secured and in the process of collection to continue accruing interest. Cash payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured. Loans are not reclassified as accruing until principal and interest payments remain current for a period of time, generally six months, and future payments appear reasonably certain. Included in certain loan categories of impaired loans are troubled debt restructurings that were classified as impaired. A restructuring of a debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.

Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized over the estimated life of the related loans, leases, or commitments as a yield adjustment.

Allowance for Loan and Lease Losses – We maintain an allowance for loan and lease losses (“ALLL”) at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. Since arriving at an appropriate ALLL involves a high degree of management judgment, we use an ongoing quarterly analysis to develop a range of estimated losses. In accordance with accounting principles generally accepted in the United States, we use our best estimate within the range of potential credit loss to determine the appropriate ALLL. Credit losses are charged and recoveries are credited to the ALLL.

We utilize an internal risk grading system for commercial credits. Those larger commercial credits that exhibit probable or observed credit weaknesses are subject to individual review. The borrower’s cash flow, adequacy of collateral coverage, and other options available to CTBI, including legal remedies, are evaluated. The review of individual loans includes those loans that are impaired as defined by ASC 310-35, Impairment of a Loan. We evaluate the collectability of both principal and interest when assessing the need for loss provision. Historical loss rates are analyzed and applied to other commercial loans not subject to specific allocations. The ALLL allocation for this pool of commercial loans is established based on the historical average, maximum, minimum, and median loss ratios.

A loan is considered impaired when, based on current information and events, it is probable that CTBI will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Homogenous loans, such as consumer installment, residential mortgages, and home equity lines are not individually risk graded. The associated ALLL for these loans is measured under ASC 450, Contingencies.

When any secured commercial loan is considered uncollectable, whether past due or not, a current assessment of the value of the underlying collateral is made. If the balance of the loan exceeds the fair value of the collateral, the loan is placed on non-accrual and the loan is charged down to the value of the collateral less estimated cost to sell or a specific reserve equal to the difference between book value of the loan and the fair value assigned to the collateral is created until such time as the loan is foreclosed. When the foreclosed collateral has been legally assigned to CTBI, a charge off is taken, if necessary, in order that the remaining balance reflects the fair value estimated less costs to sell of the collateral then transferred to other real estate owned or other repossessed assets. When any unsecured commercial loan is considered uncollectable the loan is charged off no later than at 90 days past due.

All closed-end consumer loans (excluding conventional 1-4 family residential loans and installment and revolving loans secured by real estate) are charged off no later than 120 days (5 monthly payments) delinquent. If a loan is considered uncollectable, it is charged off earlier than 120 days delinquent. For conventional 1-4 family residential loans and installment and revolving loans secured by real estate, when a loan is 90 days past due, a current assessment of the value of the real estate is made. If the balance of the loan exceeds the fair value of the property, the loan is placed on nonaccrual and foreclosure proceedings are initiated. When the foreclosed property has been legally assigned to CTBI, a charge-off is taken with the remaining balance, reflecting the fair value less estimated costs to sell, transferred to other real estate owned.

Historical loss rates for loans are adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. We generally review the historical loss rates over eight quarters and four quarters on a rolling average basis. Factors that we consider include delinquency trends, current economic conditions and trends, strength of supervision and administration of the loan portfolio, levels of underperforming loans, level of recoveries to prior year’s charge-offs, trend in loan losses, industry concentrations and their relative strengths, amount of unsecured loans and underwriting exceptions. Based upon management’s judgment, “best case,” “worst case,” and “most likely” scenarios are determined. The total of each of these weighted factors is then applied against the applicable portion of the portfolio and the ALLL is adjusted accordingly to approximate the most likely scenario. Management continually reevaluates the other subjective factors included in its ALLL analysis. During the most recent analysis, management increased several of these subjective factors including trends in past dues, trends in losses, and current economic and regulatory conditions impacting business and individual customers in our geographic markets. The cumulative effect of all of the changes increased the amount calculated for our “most likely” scenario by $3.2 million at September 30, 2012.

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. 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 $59 thousand and $72 thousand for the nine months ended September 30, 2012 and 2011, respectively. Restricted stock expense for the first nine months of 2012 and 2011 was $475 thousand and $517 thousand, respectively, including $91 thousand and $90 thousand, respectively, in dividends paid for each quarter. As of September 30, 2012, there was a total of $26 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 0.5 years and a total of $1.3 million of unrecognized compensation expense related to restricted stock grants that will be recognized as expense as the awards vest over a weighted average period of 1.5 years.

There were no shares of restricted stock granted during the three months ended September 30, 2012 and 2011, and 331 shares and 45,452 shares granted during the nine months ended September 30, 2012 and 2011, respectively. The restrictions on the restricted stock for 2012 and 2011 will lapse over four years and at the end of five years, respectively. However, in the event of a change in control of CTBI or the death of the participant, the restrictions will lapse. In the event of the disability of the participant, the restrictions will lapse on a pro rata basis. The Compensation Committee of the Board of Directors will have discretion to review and revise restrictions applicable to a participant’s restricted stock in the event of the participant’s retirement. There were no options granted to purchase shares of CTBI common stock during the nine months ended September 30, 2012 or 2011.

Note 3 – Securities

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

The amortized cost and fair value of securities at September 30, 2012 are summarized as follows:

Available-for-Sale

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury and government agencies	$	26,139	$	516	$	0		$	26,655
State and political subdivisions		99,766		5,627		(29	)		105,364
U.S. government sponsored agency mortgage-backed securities		437,391		15,472		(132	)		452,731
Total debt securities		563,296		21,615		(161	)		584,750
Marketable equity securities		35,582		1,101		(203	)		36,480
Total available-for-sale securities	$	598,878	$	22,716	$	(364	)	$	621,230

Held-to-Maturity

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury and government agencies	$	480	$	1	$	0	$	481
State and political subdivisions		1,182		1		0		1,183
Total held-to-maturity securities	$	1,662	$	2	$	0	$	1,664

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

Available-for-Sale

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury and government agencies	$	32,077	$	1,171	$	0		$	33,248
State and political subdivisions		68,358		3,816		(30	)		72,144
U.S. government sponsored agency mortgage-backed securities		390,714		10,186		(57	)		400,843
Total debt securities		491,149		15,173		(87	)		506,235
Marketable equity securities		20,582		718		(137	)		21,163
Total available-for-sale securities	$	511,731	$	15,891	$	(224	)	$	527,398

Held-to-Maturity

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury and government agencies	$	480	$	0	$	(1	)	$	479
State and political subdivisions		1,182		0		0			1,182
Total held-to-maturity securities	$	1,662	$	0	$	(1	)	$	1,661

The amortized cost and fair value of securities at September 30, 2012 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-Sale				Held-to-Maturity
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	6,598	$	6,688	$	0	$	0
Due after one through five years		21,375		22,377		0		0
Due after five through ten years		64,291		67,275		1,662		1,664
Due after ten years		33,641		35,679		0		0
U.S. government sponsored agency mortgage-backed securities		437,391		452,731		0		0
Total debt securities		563,296		584,750		1,662		1,664
Marketable equity securities		35,582		36,480		0		0
Total securities	$	598,878	$	621,230	$	1,662	$	1,664

As of September 30, 2012, there was a combined gain of $819 thousand due to the sale of two agency securities. A pre-tax gain of $885 thousand and a pre-tax loss of $66 thousand were realized as of September 30, 2012. There were no gains or losses during the nine months ended September 30, 2011.

The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $233.7 million at September 30, 2012 and $198.6 million at December 31, 2011.

The amortized cost of securities sold under agreements to repurchase amounted to $238.8 million at September 30, 2012 and $217.2 million at December 31, 2011.

Certain investments in debt and marketable equity securities are reported in the financial statements at amounts less than their historical costs. CTBI evaluates its investment portfolio on a quarterly basis for impairment. The analysis performed as of September 30, 2012 indicates that all impairment is considered temporary, market driven, and not credit-related. The percentage of total investments with unrealized losses as of September 30, 2012 was 3.4% compared to 4.8% as of December 31, 2011. The following tables provide the amortized cost, gross unrealized losses, and fair market value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of September 30, 2012 that are not deemed to be other-than-temporarily impaired.

Available-for-Sale

(in thousands)	Amortized Cost		Gross Unrealized Losses			Fair Value
Less Than 12 Months
State and political subdivisions	$	4,615	$	(29	)	$	4,586
U.S. government sponsored agency mortgage-backed securities		16,617		(132	)		16,485
Total debt securities		21,232		(161	)		21,071
Total <12 months temporarily impaired AFS securities		21,232		(161	)		21,071

12 Months or More
Marketable equity securities		329		(203)			126
Total ≥12 months temporarily impaired AFS securities		329		(203)			126

Total
State and political subdivisions		4,615		(29	)		4,586
U.S. government sponsored agency mortgage-backed securities		16,617		(132	)		16,485
Total debt securities		21,232		(161	)		21,071
Marketable equity securities		329		(203	)		126
Total temporarily impaired AFS securities	$	21,561	$	(364	)	$	21,197

As of September 30, 2012, there were no held-to-maturity securities with unrealized losses.

The analysis performed as of December 31, 2011 indicated that all impairment was considered temporary, market driven, and not credit-related. The following tables provide the amortized cost, gross unrealized losses, and fair market value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of December 31, 2011 that are not deemed to be other-than-temporarily impaired.

Available-for-Sale

(in thousands)	Amortized Cost		Gross Unrealized Losses			Fair Value
Less Than 12 Months
State and political subdivisions	$	6,173	$	(25	)	$	6,148
U.S. government sponsored agency mortgage-backed securities		17,900		(57	)		17,843
Total debt securities		24,073		(82	)		23,991
Total <12 months temporarily impaired AFS securities		24,073		(82	)		23,991

12 Months or More
State and political subdivisions		613		(5	)		608
Total debt securities		613		(5	)		608
Marketable equity securities		329		(137	)		192
Total ≥12 months temporarily impaired AFS securities		942		(142	)		800

Total
State and political subdivisions		6,786		(30	)		6,756
U.S. government sponsored agency mortgage-backed securities		17,900		(57	)		17,843
Total debt securities		24,686		(87	)		24,599
Marketable equity securities		329		(137	)		192
Total temporarily impaired AFS securities	$	25,015	$	(224	)	$	24,791

Held-to-Maturity

(in thousands)	Amortized Cost		Gross Unrealized Losses			Fair Value
Less Than 12 Months
U.S. Treasury and government agencies	$	480	$	(1	)	$	479
Total temporarily impaired HTM securities	$	480	$	(1	)	$	479

Note 4 – Loans

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

(in thousands)	September 30 2012		December 31 2011
Commercial construction	$	115,091	$	120,577
Commercial secured by real estate		820,925		798,887
Equipment lease financing		10,167		9,706
Commercial other		379,308		374,597
Real estate construction		54,431		53,534
Real estate mortgage		664,329		650,075
Home equity		82,724		84,841
Consumer direct		126,005		123,949
Consumer indirect		298,557		340,382
Total loans	$	2,551,537	$	2,556,548

CTBI has segregated and evaluates its loan portfolio through nine portfolio segments. The nine segments are commercial construction, commercial secured by real estate, equipment lease financing, commercial other, real estate construction, real estate mortgage, home equity, consumer direct, and consumer indirect. CTBI serves customers in small and mid-sized communities in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. Therefore, CTBI’s exposure to credit risk is significantly affected by changes in these communities.

Commercial construction loans are for the purpose of erecting or rehabilitating buildings or other structures for commercial purposes, including any infrastructure necessary for development. Included in this category are improved property, land development, and tract development loans. The terms of these loans are generally short-term with permanent financing upon completion.

Commercial real estate loans include loans secured by nonfarm, nonresidential properties, 1-4 family/ multi-family properties, farmland, and other commercial real estate. These loans are originated based on the borrower’s ability to service the debt and secondarily based on the fair value of the underlying collateral.

Equipment lease financing loans are fixed, variable, and tax exempt leases for commercial purposes.

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

Real estate construction loans are typically for owner-occupied properties. The terms of these loans are generally short-term with permanent financing upon completion.

Residential real estate loans are a mixture of fixed rate and adjustable rate first and second lien residential mortgage loans. As a policy, CTBI holds adjustable rate loans and sells the majority of its fixed rate first lien mortgage loans into the secondary market. Changes in interest rates or market conditions may impact a borrower’s ability to meet contractual principal and interest payments. Residential real estate loans are secured by real property.

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

Consumer direct loans are fixed rate products comprised of unsecured loans, consumer revolving credit lines, deposit secured loans, and all other consumer purpose loans.

Consumer indirect loans are fixed rate loans secured by automobiles, trucks, vans, and recreational vehicles originated at the selling dealership underwritten and purchased by CTBI’s indirect lending department. Both new and used products are financed. Only dealers who have executed dealer agreements with CTBI participate in the indirect lending program.

Not included in the loan balances above were loans held for sale in the amount of $0.8 million at September 30, 2012 and $0.5 million at December 31, 2011. The amount of capitalized fees and costs under ASC 310-20, included in the above loan totals were $0.6 million and $0.7 million at September 30, 2012 and December 31, 2011, respectively.

CTBI acquired loans through the acquisition of First National Bank of LaFollette in the fourth quarter 2010. At acquisition, the transferred loans with evidence of deterioration of credit quality since origination were not significant; therefore, none of the loans acquired were accounted for under the guidance in ASC 310-30.

Credit discounts representing principal losses expected over the life of the loans are a component of the initial fair value for purchased loans acquired that are not deemed impaired at acquisition. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Subsequent to the acquisition date, the methods used to estimate the required allowance for credit losses for these loans is similar to originated loans; however, CTBI records a provision for loan losses only when the required allowance exceeds any remaining credit discounts. During the third quarter, the credit portion of the purchase accounting allocation was exhausted leaving only the premium paid for market rate adjustments to be amortized over the life of the remaining loans. The carrying amounts of those loans included in the balance sheet are $74.0 million and $88.5 million at September 30, 2012 and December 31, 2011, respectively. Provision expense charged to income during the quarter as a result of this change was $0.6 million.

Changes in accretable yield for the nine months ended September 30, 2012 and the year ended December 31, 2011 are as follows:

(in thousands)	September 30 2012			December 31 2011
Beginning balance	$	720		$	2,995
Accretion		(580	)		(1,067	)
Disposals		(140	)		(1,208	)
Ending balance	$	0		$	720

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

(in thousands)	September 30 2012		December 31 2011
Commercial:
Commercial construction	$	7,200	$	7,029
Commercial secured by real estate		5,741		9,810
Commercial other		1,823		3,914

Residential:
Real estate construction		315		607
Real estate mortgage		2,762		4,204
Home equity		257		189
Total nonaccrual loans	$	18,098	$	25,753

The following tables present CTBI’s loan portfolio aging analysis, segregated by class, as of September 30, 2012 and December 31, 2011:

	September 30, 2012
(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans		90+ and Accruing*
Commercial:
Commercial construction	$	761	$	0	$	8,187	$	8,948	$	106,143	$	115,091	$	1,125
Commercial secured by real estate		3,954		2,197		11,363		17,514		803,411		820,925		5,741
Equipment lease financing		0		0		0		0		10,167		10,167		0
Commercial other		1,798		194		5,368		7,360		371,948		379,308		3,977
Residential:
Real estate construction		212		75		607		894		53,537		54,431		292
Real estate mortgage		1,914		4,186		5,877		11,977		652,352		664,329		3,932
Home equity		1,270		175		584		2,029		80,695		82,724		353
Consumer:
Consumer direct		1,710		342		109		2,161		123,844		126,005		109
Consumer indirect		2,542		676		400		3,618		294,939		298,557		399
Total	$	14,161	$	7,845	$	32,495	$	54,501	$	2,497,036	$	2,551,537	$	15,928

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

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

Credit Quality Indicators:

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

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

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

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

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

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

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

The following tables present the credit risk profile of CTBI’s commercial loan portfolio based on rating category and payment activity, segregated by class of loans, as of September 30, 2012 and December 31, 2011:

(in thousands)	Commercial Construction		Commercial Secured by Real Estate		Commercial Other		Equipment Leases		Total
September 30, 2012
Pass	$	86,482	$	672,486	$	321,901	$	10,167	$	1,091,036
Watch		13,041		80,318		40,005		0		133,364
OAEM		1,067		19,798		4,093		0		24,958
Substandard		7,301		42,792		11,884		0		61,977
Doubtful		7,200		5,531		1,425		0		14,156
Total	$	115,091	$	820,925	$	379,308	$	10,167	$	1,325,491

December 31, 2011
Pass	$	85,886	$	643,312	$	323,471	$	9,706	$	1,062,375
Watch		17,721		78,611		38,185		0		134,517
OAEM		1,379		21,087		1,668		0		24,134
Substandard		8,783		46,238		7,364		0		62,385
Doubtful		6,808		9,639		3,909		0		20,356
Total	$	120,577	$	798,887	$	374,597	$	9,706	$	1,303,767

The following tables present the credit risk profile of the CTBI’s residential real estate and consumer loan portfolios based on performing or nonperforming status, segregated by class, as of September 30, 2012 and December 31, 2011:

(in thousands)	Real Estate Construction		Real Estate Mortgage		Home Equity		Consumer Direct		Consumer Indirect		Total
September 30, 2012
Performing	$	53,824	$	657,635	$	82,114	$	125,896	$	298,158	$	1,217,627
Nonperforming (1)		607		6,694		610		109		399		8,419
Total	$	54,431	$	664,329	$	82,724	$	126,005	$	298,557	$	1,226,046

December 31, 2011
Performing	$	52,911	$	643,152	$	84,306	$	123,878	$	339,899	$	1,244,146
Nonperforming (1)		623		6,923		535		71		483		8,635
Total	$	53,534	$	650,075	$	84,841	$	123,949	$	340,382	$	1,252,781

(1) A loan is considered nonperforming if it is 90 days or more past due or on nonaccrual.

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

The following table presents impaired loans, the average investment in impaired loans, and interest income recognized on impaired loans for the periods ended September 30, 2012, December 31, 2011, and September 30, 2011:

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

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

Totals:
Commercial		60,225		65,560		3,574
Residential		666		667		0
Total	$	60,891	$	66,227	$	3,574

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

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

Commercial		60,787		431		61,742		1,233
Residential		668		10		409		18
Total	$	61,455	$	441	$	62,151	$	1,251

	December 31, 2011
(in thousands)	Recorded Balance		Unpaid Contractual Principal Balance		Specific Allowance		Average Investment in Impaired Loans		*Interest Income Recognized
Loans without a specific valuation allowance:
Commercial construction	$	4,778	$	4,778	$	0	$	8,992	$	252
Commercial secured by real estate		27,811		29,765		0		31,480		1,543
Commercial other		1,770		2,501		0		3,392		143
Real estate construction		27		27		0		19		1
Real estate mortgage		82		82		0		84		5
Consumer direct		93		93		0		82		9
Consumer indirect		112		112		0		99		12

Loans with a specific valuation allowance:
Commercial construction		5,794		6,643		2,203		7,681		0
Commercial secured by real estate		3,525		3,669		1,156		4,747		23
Commercial other		3,432		6,022		1,310		5,071		22

Totals:
Commercial		47,110		53,378		4,669		61,363		1,983
Residential		109		109		0		103		6
Consumer		205		205		0		181		21
Total	$	47,424	$	53,692	$	4,669	$	61,647	$	2,010

	September 30, 2011
(in thousands)	Recorded Balance		Unpaid Contractual Principal Balance		Specific Allowance
Loans without a specific valuation allowance:
Commercial construction	$	5,748	$	5,748	$	0
Commercial secured by real estate		31,308		32,483		0
Commercial other		2,996		3,091		0
Real estate construction		28		28		0
Real estate mortgage		83		83		0
Consumer direct		78		78		0
Consumer indirect		121		121		0

Loans with a specific valuation allowance:
Commercial construction		9,247		10,756		3,714
Commercial secured by real estate		4,619		4,754		1,826
Commercial other		1,793		4,373		765

Totals:
Commercial		55,711		61,205		6,305
Residential		111		111		0
Consumer		199		199		0
Total	$	56,021	$	61,515	$	6,305

	Three Months Ended				Nine Months Ended
	September 30, 2011				September 30, 2011
(in thousands)	Average Investment in Impaired Loans		*Interest Income Recognized		Average Investment in Impaired Loans		*Interest Income Recognized
Loans without a specific valuation allowance:
Commercial construction	$	5,733	$	76	$	9,239	$	193
Commercial secured by real estate		30,910		666		31,901		1,239
Commercial other		3,129		38		3,677		126
Real estate construction		28		0		19		1
Real estate mortgage		83		1		84		4
Consumer direct		79		2		78		6
Consumer indirect		124		3		101		8

Loans with a specific valuation allowance:
Commercial construction		9,440		0		8,614		0
Commercial secured by real estate		4,632		0		5,025		23
Commercial other		1,873		0		4,666		0

Commercial		55,717		780		63,122		1,581
Residential		111		1		103		5
Consumer		203		5		179		14
Total	$	56,031	$	786	$	63,404	$	1,600

*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 2012, certain loans were modified in troubled debt restructurings, where economic concessions were granted to borrowers consisting of reductions in the interest rates, payment extensions, forgiveness of principal, and forbearances. Presented below, segregated by class of loans, are troubled debt restructurings that occurred during the three and nine months ended September 30, 2012 and 2011:

	Three Months Ended September 30, 2012
(in thousands)	Number of Loans		Post-Modification Outstanding Balance		Net Charge-offs Resulting from Modification
Commercial:
Commercial construction		0	$	0	$	0
Commercial secured by real estate		2		666		0
Commercial other		2		50		0
Residential:
Real estate mortgage		1		391		0
Total troubled debt restructurings		5	$	1,107	$	0

	Nine Months Ended September 30, 2012
(in thousands)	Number of Loans		Post-Modification Outstanding Balance		Net Charge-offs Resulting from Modification
Commercial:
Commercial construction		5	$	557	$	0
Commercial secured by real estate		8		4,078		0
Commercial other		13		1,116		0
Residential:
Real estate mortgage		1		391		0
Total troubled debt restructurings		27	$	6,142	$	0

	Three Months Ended September 30, 2011
(in thousands)	Number of Loans		Post-Modification Outstanding Balance		Net Charge-offs Resulting from Modification
Commercial:
Commercial construction		5	$	138	$	0
Commercial secured by real estate		7		6,949		0
Commercial other		1		3		1
Total troubled debt restructurings		13	$	7,090	$	1

	Nine Months Ended September 30, 2011
(in thousands)	Number of Loans		Post-Modification Outstanding Balance		Net Charge-offs Resulting from Modification
Commercial:
Commercial construction		7	$	3,372	$	0
Commercial secured by real estate		17		17,626		0
Commercial other		9		1,977		1
Total troubled debt restructurings		33	$	22,975	$	1

Loans retain their accrual status at the time of their modification. As a result, if a loan is on nonaccrual at the time it is modified, it stays as nonaccrual, and if a loan is on accrual at the time of the modification, it generally stays on accrual. Commercial and consumer loans modified in a troubled debt restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a troubled debt restructuring subsequently default, CTBI evaluates the loan for possible further impairment. The allowance for loan losses may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. Presented below, segregated by class of loans, are loans that were modified as troubled debt restructurings which have subsequently defaulted. CTBI considers a loan in default when it is 90 days or more past due or transferred to nonaccrual.

(in thousands)	Three Months Ended September 30, 2012				Nine Months Ended September 30, 2012
	Number of Loans		Recorded Balance		Number of Loans		Recorded Balance
Commercial:
Commercial construction		0	$	0		0	$	0
Commercial secured by real estate		2		376		6		800
Commercial other		2		66		8		112
Total defaulted restructured loans		4	$	442		14	$	912

	Three Months Ended				Nine Months Ended
(in thousands)	September 30, 2011				September 30, 2011
	Number of Loans		Recorded Balance		Number of Loans		Recorded Balance
Commercial:
Commercial construction		2	$	3,913		2	$	3,913
Commercial secured by real estate		0		0		0		0
Commercial other		0		0		2		83
Total defaulted restructured loans		2	$	3,913		4	$	3,996

The following tables present the activity in the allowance for loan losses and the recorded investment in loans based on portfolio class and impairment method for the periods ended September 30, 2012 and 2011:

	Three Months Ended September 30, 2012
(in thousands)	Commercial Construction		Commercial Secured by Real Estate		Commercial Other		Equipment Lease Financing			Real Estate Construction			Real Estate Mortgage		Home Equity		Consumer Direct			Consumer Indirect		Total
Allowance for loan losses
Beginning balance	$	3,931	$	13,262	$	5,487	$	142		$	390		$	4,472	$	574	$	857		$	4,019	$	33,134
Provision charged to expense		1,249		698		529		(5	)		(8	)		407		26		(19	)		42		2,919
Losses charged off		787		658		766		0			18			411		41		173			810		3,664
Recoveries		67		87		184		0			3			17		0		122			320		800
Ending balance	$	4,460	$	13,389	$	5,434	$	137		$	367		$	4,485	$	559	$	787		$	3,571	$	33,189

Ending balance:
Individually evaluated for impairment	$	2,321	$	938	$	315	$	0		$	0		$	0	$	0	$	0		$	0	$	3,574
Collectively evaluated for impairment	$	2,139	$	12,451	$	5,119	$	137		$	367		$	4,485	$	559	$	787		$	3,571	$	29,615

Loans
Ending balance:
Individually evaluated for impairment	$	10,102	$	37,505	$	12,618	$	0		$	0		$	666	$	0	$	0		$	0	$	60,891
Collectively evaluated for impairment	$	104,989	$	783,420	$	366,690	$	10,167		$	54,431		$	663,663	$	82,724	$	126,005		$	298,557	$	2,490,646

	Nine Months Ended September 30, 2012
(in thousands)	Commercial Construction		Commercial Secured by Real Estate		Commercial Other		Equipment Lease Financing		Real Estate Construction		Real Estate Mortgage		Home Equity		Consumer Direct			Consumer Indirect			Total
Allowance for loan losses
Beginning balance	$	4,023	$	11,753	$	5,608	$	112	$	354	$	4,302	$	562	$	917		$	5,540		$	33,171
Provision charged to expense		1,500		3,148		1,454		25		189		892		119		(67	)		(756	)		6,504
Losses charged off		1,262		1,645		2,161		0		189		833		123		522			2,262			8,997
Recoveries		199		133		533		0		13		124		1		459			1,049			2,511
Ending balance	$	4,460	$	13,389	$	5,434	$	137	$	367	$	4,485	$	559	$	787		$	3,571		$	33,189

Ending balance:
Individually evaluated for impairment	$	2,321	$	938	$	315	$	0	$	0	$	0	$	0	$	0		$	0		$	3,574
Collectively evaluated for impairment	$	2,139	$	12,451	$	5,119	$	137	$	367	$	4,485	$	559	$	787		$	3,571		$	29,615

Loans
Ending balance:
Individually evaluated for impairment	$	10,102	$	37,505	$	12,618	$	0	$	0	$	666	$	0	$	0		$	0		$	60,891
Collectively evaluated for impairment	$	104,989	$	783,420	$	366,690	$	10,167	$	54,431	$	663,663	$	82,724	$	126,005		$	298,557		$	2,490,646

	Three Months Ended September 30, 2011
(in thousands)	Commercial Construction		Commercial Secured by Real Estate			Commercial Other		Equipment Lease Financing		Real Estate Construction		Real Estate Mortgage		Home Equity		Consumer Direct			Consumer Indirect		Total
Allowance for loan losses
Beginning balance	$	4,637	$	13,202		$	5,452	$	123	$	296	$	3,938	$	514	$	1,067		$	5,923	$	35,152
Provision charged to expense		1,162		(134	)		366		0		261		692		56		(6	)		118		2,515
Losses charged off		304		369			856		0		244		566		44		261			716		3,360
Recoveries		16		27			127		0		6		17		7		141			351		692
Ending balance	$	5,511	$	12,726		$	5,089	$	123	$	319	$	4,081	$	533	$	941		$	5,676	$	34,999

Ending balance:
Individually evaluated for impairment	$	3,714	$	1,826		$	765	$	0	$	0	$	0	$	0	$	0		$	0	$	6,305
Collectively evaluated for impairment	$	1,797	$	10,900		$	4,324	$	123	$	319	$	4,081	$	533	$	941		$	5,676	$	28,694

Loans
Ending balance:
Individually evaluated for impairment	$	14,995	$	35,927		$	4,789	$	0	$	28	$	83	$	0	$	78		$	121	$	56,021
Collectively evaluated for impairment	$	106,147	$	770,251		$	372,101	$	10,765	$	50,422	$	644,696	$	84,173	$	124,363		$	354,618	$	2,517,536

	Nine Months Ended September 30, 2011
(in thousands)	Commercial Construction		Commercial Secured by Real Estate		Commercial Other		Equipment Lease Financing			Real Estate Construction		Real Estate Mortgage		Home Equity		Consumer Direct		Consumer Indirect		Total
Allowance for loan losses
Beginning balance	$	4,332	$	12,327	$	7,392	$	148		$	271	$	2,982	$	407	$	1,169	$	5,777	$	34,805
Provision charged to expense		1,958		2,858		1,039		(25	)		347		2,247		282		70		1,446		10,222
Losses charged off		808		2,582		3,691		0			319		1,217		171		670		2,630		12,088
Recoveries		29		123		349		0			20		69		15		372		1,083		2,060
Ending balance	$	5,511	$	12,726	$	5,089	$	123		$	319	$	4,081	$	533	$	941	$	5,676	$	34,999

Ending balance:
Individually evaluated for impairment	$	3,714	$	1,826	$	765	$	0		$	0	$	0	$	0	$	0	$	0	$	6,305
Collectively evaluated for impairment	$	1,797	$	10,900	$	4,324	$	123		$	319	$	4,081	$	533	$	941	$	5,676	$	28,694

Loans
Ending balance:
Individually evaluated for impairment	$	14,995	$	35,927	$	4,789	$	0		$	28	$	83	$	0	$	78	$	121	$	56,021
Collectively evaluated for impairment	$	106,147	$	770,251	$	372,101	$	10,765		$	50,422	$	644,696	$	84,173	$	124,363	$	354,618	$	2,517,536

Note 5 – Other Real Estate Owned

Activity for other real estate owned during the three and nine months ended September 30, 2012 and 2011 was as follows:

	Three Months Ended						Nine Months Ended
	September 30						September 30
(in thousands)	2012			2011			2012			2011
Beginning balance of other real estate owned	$	56,435		$	46,791		$	56,965		$	42,935
New assets acquired		3,045			14,613			10,540			25,551
Capitalized costs		359			192			527			253
Fair value adjustments		(540	)		(713	)		(899	)		(2,890	)
Sale of assets		(3,196	)		(2,879	)		(11,030	)		(7,845	)
Ending balance of other real estate owned	$	56,103		$	58,004		$	56,103		$	58,004

Foreclosed properties at September 30, 2012 and 2011 were $55.6 million and $58.0 million, respectively. Also included in other real estate owned are two properties totaling $0.6 million which were not acquired through foreclosure. Carrying costs and fair value adjustments associated with foreclosed properties were $1.1 million and $1.5 million for the quarters ended September 30, 2012 and September 30, 2011. Carrying costs and fair value adjustments for the nine months ended September 30, 2012 and 2011, respectively, were $2.7 million and $4.5 million.

Note 6 – Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

	Three Months Ended				Nine Months Ended
	September 30				September 30
(in thousands except per share data)	2012		2011		2012		2011
Numerator:
Net income	$	10,209	$	10,665	$	34,310	$	28,939

Denominator:
Basic earnings per share:
Weighted average shares		15,491		15,318		15,450		15,307
Diluted earnings per share:
Effect of dilutive stock options		64		21		51		24
Adjusted weighted average shares		15,555		15,339		15,501		15,331

Earnings per share:
Basic earnings per share	$	0.66	$	0.70	$	2.22	$	1.89
Diluted earnings per share		0.66		0.70		2.21		1.89

Options to purchase 89,746 common shares were excluded from the diluted calculations above for both the three and nine months ended September 30, 2012, because the exercise prices on the options were greater than the average market price for the period. Unvested restricted stock grants were also used in the calculation of diluted earnings per share based on the treasury method. Options to purchase 356,205 and 323,755 common shares, respectively, were excluded from the diluted calculations above for the three and nine months ended September 30, 2011.

Note 7 – Fair 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 September 30, 2012 and December 31, 2011 and indicates the level within the fair value hierarchy of the valuation techniques.

(in thousands)			Fair Value Measurements at September 30, 2012 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	$	26,655	$	0	$	26,655	$	0
State and political subdivisions		105,364		0		105,364		0
U.S. government sponsored agency mortgage-backed securities		452,731		0		452,731		0
Marketable equity securities		36,480		36,269		0		211
Mortgage servicing rights		2,281		0		0		2,281

(in thousands)			Fair Value Measurements at December 31, 2011 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	$	33,248	$	0	$	33,248	$	0
State and political subdivisions		72,144		0		72,144		0
U.S. government sponsored agency mortgage-backed securities		400,843		507		400,336		0
Marketable equity securities		21,163		20,675		277		211
Mortgage servicing rights		2,282		0		0		2,282

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 September 30, 2012 and December 31, 2011. There have been no significant changes in the valuation techniques during the quarter ended September 30, 2012. 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. The securities owned by CTBI that were measured using Level 3 criteria are auction rate securities (included in marketable equity securities) issued by FNMA. Fair value determinations for Level 3 measurements of auction rate securities 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. The fair market value for these auction rate securities are determined by valuing the underlying collateral which includes the public preferred stock of FNMA. Consideration is also given for the relative illiquidity of these shares. The securities that remain in the auction-rate security structure are valued assuming that they are exchanged into the contractual shares of public preferred stock. Likewise, consideration is given for the uncertainty of the reorganization process currently on-going. See the table below for inputs and valuation techniques used for Level 3 securities.

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

Transfers between Levels 1, 2, and 3 and the reasons for those transfers are as follows:

(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Reason for Transfer
Transfers from level:
U.S. government sponsored agency mortgage-backed securities	$	464	$	0	$	0	Quoted prices in exact security not available on the measurement date

Marketable equity securities		0		323		0	Quoted prices available on the measurement date
Total transfers from level	$	464	$	323	$	0

Transfers to level:
U.S. government sponsored agency mortgage-backed securities	$	0	$	464	$	0	Quoted prices in exact security not available on the measurement date

Marketable equity securities		323		0		0	Quoted prices available on the measurement date
Total transfers to level	$	323	$	464	$	0

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 three and nine months ended September 30, 2012 and 2011:

(in thousands)	Three Months Ended September 30, 2012					Nine Months Ended September 30, 2012
	Marketable Equity Securities		Mortgage Servicing Rights			Marketable Equity Securities		Mortgage Servicing Rights
Beginning balance	$	211	$	2,503		$	211	$	2,282
Total recognized gains (losses)
Included in net income		0		(257	)		0		(85	)
Issues		0		170			0		510
Settlements		0		(135	)		0		(426	)
Ending balance	$	211	$	2,281		$	211	$	2,281

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	$	0	$	(257	)	$	0	$	(85	)

(in thousands)	Three Months Ended September 30, 2011					Nine Months Ended September 30, 2011
	Marketable Equity Securities		Mortgage Servicing Rights			Marketable Equity Securities		Mortgage Servicing Rights
Beginning balance	$	211	$	3,029		$	211	$	3,161
Total recognized gains (losses)
Included in net income		0		(763	)		0		(957	)
Issues		0		127			0		378
Settlements		0		7			0		(182	)
Ending balance	$	211	$	2,400		$	211	$	2,400

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	$	0	$	(763	)	$	0	$	(957	)

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

(in thousands)	Three Months Ended September 30, 2012					Nine Months Ended September 30, 2012
	Noninterest Income			Noninterest Expense		Noninterest Income			Noninterest Expense
Total gains	$	(392	)	$	0	$	(511	)	$	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 September 30, 2012 and December 31, 2011 and indicates the level within the fair value hierarchy of the valuation techniques.

(in thousands)			Fair Value Measurements at September 30, 2012 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)	$	5,927	$	0	$	0	$	5,927
Other real estate/assets owned		7,222		0		0		7,222

(in thousands)			Fair Value Measurements at December 31, 2011 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)	$	7,898	$	0	$	0	$	7,898
Other real estate/assets owned		16,362		0		0		16,362

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. Adjustments for the quarters ended September 30, 2012, December 31, 2011, and September 30, 2011 were $0.5 million, $2.1 million, and $0.5 million, 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. Fair value adjustments on other real estate/assets owned for the quarters ended September 30, 2012, December 31, 2011, and September 30, 2011 were $0.6 million, $3.7 million, and $0.7 million, 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 table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.

(in thousands)	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at September 30, 2012		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Marketable equity securities	$	211	Discount cash flows, Market comparable	Offered quotes of underlying securities held as collateral	Not applicable

Mortgage servicing rights	$	2,281	Discount cash flows, computer pricing model	Constant prepayment rate		15.4% - 24.8% (17.6%)
				Probability of default		1.27% - 4.85% (2.12%)
				Discount rate	Not applicable (10.5%)

Impaired loans (collateral-dependent)	$	5,927	Market comparable properties	Marketability discount		5.0% - 10.0% (7.0%)

Other real estate/assets owned	$	7,222	Market comparable properties	Comparability adjustments (%)		5.0% - 10.0% (6.0%)

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.

Marketable Equity Securities

The significant unobservable input used in the fair value measurement of CTBI’s marketable equity securities is offered quotes on underlying securities held as collateral of public preferred stock. Significant increases (decreases) in the assumptions for the underlying securities would result in a significantly lower (higher) fair value measurement by affecting the implied market price of the public preferred stock for FNMA.

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 September 30, 2012 and indicates the level within the fair value hierarchy of the valuation techniques.

(in thousands)			Fair Value Measurements at September 30, 2012 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	$	202,541	$	202,541	$	0	$	0
Certificates of deposit in other banks		8,758		0		8,795		0
Securities available-for-sale		621,230		36,269		584,750		211
Securities held-to-maturity		1,662		0		1,662		0
Loans held for sale		771		788		0		0
Loans, net		2,518,348		0		0		2,540,421
Federal Home Loan Bank stock		25,673		0		25,673		0
Federal Reserve Bank stock		4,885		0		4,885		0
Accrued interest receivable		13,394		0		13,394		0
Mortgage servicing rights		2,281		0		0		2,281

Financial liabilities:
Deposits	$	2,911,844	$	599,984	$	2,312,129	$	0
Repurchase agreements		218,511		0		0		218,475
Federal funds purchased		8,821		0		8,821		0
Advances from Federal Home Loan Bank		1,472		0		1,774		0
Long-term debt		61,341		0		0		31,144
Accrued interest payable		5,127		0		5,127		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, 2011 and indicates the level within the fair value hierarchy of the valuation techniques.

(in thousands)			Fair Value Measurements at December 31, 2011 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	$	238,481	$	238,481	$	0	$	0
Certificates of deposit in other banks		11,875		0		11,860		0
Securities available-for-sale		527,398		21,182		506,005		211
Securities held-to-maturity		1,662		0		1,661		0
Loans held for sale		536		550		0		0
Loans, net		2,523,377		0		0		2,520,297
Federal Home Loan Bank stock		25,673		0		25,673		0
Federal Reserve Bank stock		4,883		0		4,883		0
Accrued interest receivable		12,280		0		12,280		0
Mortgage servicing rights		2,282		0		0		2,282

Financial liabilities:
Deposits	$	2,878,359	$	584,735	$	2,294,987	$	0
Repurchase agreements		217,177		0		0		217,062
Federal funds purchased		13,104		0		13,104		0
Advances from Federal Home Loan Bank		21,609		0		21,617		0
Long-term debt		61,341		0		0		31,030
Accrued interest payable		2,171		0		2,171		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. Loans acquired through acquisition were booked at their fair value on their date of acquisition. Management utilized a third party to assist in the valuation of the acquired loans and considered such factors as coupon rate on the acquired loans versus the current rate for similar instruments on the date of acquisition, weighted average expected life and expected loss rates using both national and regional loss rates on similar loans, and the historic loss rates on the pools of loans acquired.

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.

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

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 September 30, 2012, we had total consolidated assets of $3.6 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 September 30, 2012 was $396.1 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, 2011.

Results of Operations and Financial Condition

For the quarter ended September 30, 2012, we reported earnings of $10.2 million, or $0.66 per basic share, compared to $10.7 million, or $0.70 per basic share, earned during the third quarter 2011 and $12.2 million, or $0.79 per basic share, earned during the second quarter 2012. Earnings for the nine months ended September 30, 2012 were $34.3 million, or $2.22 per basic share, an 18.6% increase from the $28.9 million, or $1.89 per basic share earned during the first nine months of 2011.

3rd Quarter 2012 Highlights

CTBI's basic earnings per share for the quarter decreased $0.04 per share from third quarter 2011 and $0.13 per share from second quarter 2012. Year-to-date basic earnings per share, however, increased $0.33 per share from prior year. The year-to-date increase in earnings was supported by increased noninterest income and decreased provision for loan loss and noninterest expense.

Net interest income for the quarter decreased slightly from prior year third quarter but increased $0.7 million from prior quarter as our net interest margin declined 15 basis points and increased 3 basis points, respectively, for those time periods. Year-to-date net interest income decreased $0.2 million as our net interest margin declined 20 basis points.

v	Nonperforming loans at $34.0 million decreased $3.3 million from December 31, 2011 and $1.3 million from June 30, 2012. Nonperforming assets at $89.6 million decreased $4.3 million from prior year-end and $1.6 million from prior quarter.

Net loan charge-offs for the quarter ended September 30, 2012 were $2.9 million, or 0.45% of average loans annualized, compared to $2.7 million, or 0.41%, experienced for the third quarter 2011 and prior quarter’s $2.5 million, or 0.39%. Year-to-date net charge-offs for the nine months ended September 30, 2012 were $6.5 million compared to $10.0 million for the nine months ended September 30, 2011.

Our loan loss provision for the quarter increased $0.4 million from prior year third quarter and $0.5 million from prior quarter. Our loan loss provision for the first nine months of 2012 was $3.7 million below the first nine months of 2011 as net charge-offs declined $3.5 million and loans declined $22.0 million.

Our loan loss reserve as a percentage of total loans outstanding remained at 1.30% from December 31, 2011 and June 30, 2012 to September 30, 2012. Our reserve coverage (allowance for loan loss reserve to nonperforming loans) at September 30, 2012 was 97.5% compared to 89.0% at December 31, 2011 and 93.8% at June 30, 2012.

Noninterest income decreased 0.9% for the quarter ended September 30, 2012 compared to the same period in 2011 and 9.6% from prior quarter. However, noninterest income for the first nine months of 2012 has increased 5.4% compared to the prior period as a result of increased gains on sales of loans, trust revenue, and loan related fees, as well as a $0.8 million net securities gain in the second quarter.

Noninterest expense for the quarter ended September 30, 2012 decreased slightly from prior year third quarter but increased 6.9% from prior quarter. Year-to-date noninterest expense decreased 4.8% from prior year as a result of decreases in FDIC insurance premiums, legal fees, other real estate owned expense, and repossession expense, partially offset by an increase in personnel expense.

v	Our loan portfolio decreased $5.1 million from prior year-end but increased $4.1 million from prior quarter.

v	Our investment portfolio increased $93.8 million from prior year-end but decreased $8.0 million from prior quarter.

v	Deposits, including repurchase agreements, increased $34.8 million from prior year-end but declined $12.2 million from prior quarter.

v	Our tangible common equity/tangible assets ratio remains strong at 9.22%.

Income Statement Review

(dollars in thousands)							Change 2012 vs. 2011
Quarter Ended September 30	2012			2011			Amount			Percent
Net interest income	$	33,046		$	33,095		$	(49	)		(0.1	)%
Provision for loan losses		2,919			2,515			404			16.1
Noninterest income		10,838			10,942			(104	)		(0.9	)
Noninterest expense		25,813			25,827			(14	)		(0.1	)
Income taxes		4,943			5,030			(87	)		(1.7	)
Net income	$	10,209		$	10,665		$	(456	)		(4.3	)%

Average earning assets	$	3,371,420		$	3,232,322		$	139,098			4.3	%

Yield on average earnings assets		4.59	%		4.92	%		(0.33	)%		(6.7	)%
Cost of interest bearing funds		0.82	%		1.03	%		(0.21	)%		(20.2	)%

Net interest margin		3.96	%		4.11	%		(0.15	)%		(3.8	)%

Net Interest Income

Net interest income for the quarter decreased slightly from prior year but increased $0.7 million from prior quarter with average earning assets increasing 4.3% and 0.5% and our net interest margin declining 15 basis points and increasing 3 basis points for the same periods. The yield on average earning assets decreased 33 basis points from prior year third quarter and 6 basis points from prior quarter. Loans represented 75.4% of our average earning assets for the quarter ended September 30, 2012 compared to 79.7% for the quarter ended September 30, 2011 and 75.8% for the quarter ended June 30, 2012. The cost of interest bearing funds decreased 21 basis points from prior year third quarter and 10 basis points from prior quarter. Net interest income for the first nine months of 2012 decreased 0.2% as our net interest margin declined 20 basis points and average earning assets increased 5.0%. The increased cost of our Hoops CD product resulting from the University of Kentucky’s national championship win increased our cost of interest bearing funds and decreased our net interest margin by approximately 7 basis points during the second quarter and 6 basis points in the third quarter 2012. The fourth quarter 2012 impact is expected to be 2 basis points as the CDs begin to mature. The impact to the net interest margin for the year 2012 as a result of the rate increase is expected to be approximately 4 basis points. The third quarter 2012 decrease in our net interest margin was partially offset by a decrease in the coupon rate of our junior subordinated debentures which positively impacted our net interest margin by 5 basis points. On June 1, 2012, the coupon rate of our $61.3 million junior subordinated debentures was reset from a fixed rate of 6.52% to a quarterly adjustable rate of 2.06%. On September 1, 2012, the rate adjusted to 2.01%. This rate is based on the three-month LIBOR rate plus 1.59%.

Provision for Loan Losses

The provision for loan losses that was added to the allowance for the third quarter 2012 was $2.9 million compared to $2.5 million in the third quarter 2011. Year-to-date allocations to the reserve were $6.5 million at September 30, 2012 compared to $10.2 million at September 30, 2011. 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 0.9% for the quarter ended September 30, 2012 compared to the same period in 2011 and 9.6% from prior quarter. The decrease from prior quarter was primarily the result of a $0.8 million net securities gain in the second quarter 2012. Noninterest income for the first nine months of 2012 has increased 5.4% as a result of increased gains on sales of loans, trust revenue, and loan related fees, as well as the second quarter securities gain, partially offset by a decline in deposit service charges. Loan related fees were impacted by $0.5 million in adjustments to the fair value of our mortgage servicing rights for the first nine months of the year.

Noninterest Expense

Noninterest expense decreased slightly from prior year third quarter but increased 6.9% from prior quarter primarily due to an increase in the incentive compensation accrual and other real estate owned expense. Year-to-date noninterest expense decreased 4.8% from prior year as a result of decreases in FDIC insurance premiums, legal fees, other real estate owned expense, and repossession expense, partially offset by an increase in personnel expense.

Balance Sheet Review

CTBI’s total assets at $3.6 billion increased $50.4 million, or an annualized 1.9%, from December 31, 2011 and $5.8 million, or an annualized 0.6%, during the quarter. Loans outstanding at September 30, 2012 were $2.6 billion, decreasing $5.0 million, or an annualized 0.3%, from December 31, 2011, but increasing $4.1 million, or an annualized 0.6%, during the quarter. Loan growth during the quarter of $2.6 million in the commercial loan portfolio and $14.1 million in the residential loan portfolio was partially offset by a decline of $12.5 million in the consumer loan portfolio, primarily in our indirect auto lending area. The decrease in indirect auto lending is the result of management’s decision not to invest in long-term fixed rate auto loans at the current market rates. CTBI's investment portfolio increased $93.8 million, or an annualized 23.7%, from December 31, 2011 but decreased $8.0 million, or an annualized 5.1%, during the quarter. Deposits, including repurchase agreements, at $3.1 billion increased $34.8 million, or an annualized 1.5%, from December 31, 2011 but decreased $12.2 million, or an annualized 1.5%, from prior quarter.

Shareholders’ equity at September 30, 2012 was $396.1 million compared to $366.9 million at December 31, 2011 and $387.3 million at June 30, 2012. CTBI's annualized dividend yield to shareholders as of September 30, 2012 was 3.55%.

Loans

(in thousands)	September 30, 2012
Loan Category	Balance		Variance from Prior Year-End			Net Charge-Offs		Nonperforming		ALLL
Commercial:
Construction	$	115,091		(4.5	)%	$	720	$	8,325	$	4,460
Secured by real estate		820,925		2.8			571		11,482		13,389
Equipment lease financing		10,167		4.7			0		0		137
Other commercial		379,308		1.3			582		5,800		5,434
Total commercial		1,325,491		1.7			1,873		25,607		23,420

Residential:
Real estate construction		54,431		1.7			15		607		367
Real estate mortgage		664,329		2.2			394		6,694		4,485
Home equity		82,724		(2.5	)		41		610		559
Total residential		801,484		1.7			450		7,911		5,411

Consumer:
Consumer direct		126,005		1.7			51		109		787
Consumer indirect		298,557		(12.3	)		490		399		3,571
Total consumer		424,562		(8.6	)		541		508		4,358

Total loans	$	2,551,537		(0.2	)%	$	2,864	$	34,026	$	33,189

Asset Quality

CTBI's total nonperforming loans were $34.0 million at September 30, 2012, an 8.7% decrease from the $37.3 million at December 31, 2011 and a 3.6% decrease from the $35.3 million at June 30, 2012. The decrease for the quarter included a $2.4 million decrease in nonaccrual loans partially offset by a $1.1 million increase in the 90+ days past due category. Loans 30-89 days past due at $21.5 million is a decline of $0.2 million from December 31, 2011 but a $4.5 million increase from prior quarter. Our loan portfolio management processes focus on the immediate identification, management, and resolution of problem loans to maximize recovery and minimize loss. 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 September 30, 2012 totaled $60.9 million, compared to $56.0 million at September 30, 2011 and $64.4 million at June 30, 2012. Included in certain loan categories of impaired loans are troubled debt restructurings that were classified as impaired. At September 30, 2012, CTBI had $19.3 million in commercial loans secured by real estate, $5.0 million in commercial real estate construction loans, $2.4 million in commercial other loans, and $0.1 million in consumer loans that were modified in troubled debt restructurings and impaired. Included in these amounts are troubled debt restructurings that were performing in accordance with their modified terms of $17.6 million in commercial loans secured by real estate, $1.4 million in commercial real estate construction loans, $1.9 million in commercial other loans, and $0.1 million in consumer loans. Management evaluates all impaired loans for impairment and 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.

Our level of foreclosed properties at $55.6 million at September 30, 2012 was a decrease from $56.5 million at December 31, 2011 and from $55.9 million at June 30, 2012. Sales of foreclosed properties for the nine months ended September 30, 2012 totaled $11.0 million while new foreclosed properties totaled $10.7 million. At September 30, 2012, the book value of properties under contracts to sell was $7.3 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 expense. 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 expense. There were 21 properties reappraised during the third quarter of 2012 totaling $1.6 million. Of these, seven were written down by a total of $0.1 million or 8.4%. Charges during the quarters ended September 30, 2012 and December 31, 2011 were $0.5 million, including $0.4 million in write-downs due to pending sales contracts at the end of the quarter, and $3.6 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. Quarterly OREO summary reports on each OREO property are completed under the direction of the Market President and forwarded to the Chief Credit Officer as he may direct. Such reports will review the property condition, value, and sales efforts. One hundred thirty, or 61%, of our two hundred twelve OREO properties have been reappraised within the past 12 months. Our nonperforming loans and foreclosed properties remain primarily concentrated in our Central Kentucky Region. 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)	September 30, 2012		December 31, 2011
1-4 family	$	15,946	$	20,065
Agricultural/farmland		653		652
Construction/land development/other		24,737		23,006
Multifamily		1,851		1,841
Non-farm/non-residential		12,364		10,981
Total foreclosed properties	$	55,551	$	56,545

The appraisal aging analysis of foreclosed properties, as well as the holding period, at September 30, 2012 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 90 days	$	1,617	Less than one year	$	12,854
91 to 180 days		9,568	1 to 2 years		22,030
181 to 270 days		3,340	2 to 3 years		5,103
271 to 365 days		9,088	3 to 4 years		13,674
Over one year		31,938	Over 4 years		1,890

Net loan charge-offs for the quarter were $2.9 million, or 0.45% of average loans annualized, compared to prior year third quarter's $2.7 million, or 0.41%, and prior quarter’s $2.5 million, or 0.39%. Of the total net charge-offs for the quarter, $1.7 million were in commercial loans, $0.5 million were in indirect auto loans, and $0.4 million were in residential real estate mortgage loans. Allocations to loan loss reserves were $2.9 million for the quarter ended September 30, 2012 compared to $2.5 million for the quarter ended September 30, 2011 and $2.4 million for the quarter ended June 30, 2012. Year-to-date net charge-offs of $6.5 million, or 0.34% of average loans annualized, was a $3.5 million decrease from the $10.0 million, 0.52% of average loans annualized, for the nine months ended September 30, 2011. Our loan loss reserve as a percentage of total loans outstanding was 1.30% at September 30, 2012 and June 30, 2012 compared to 1.36% at September 30, 2011. Our reserve coverage was 97.5% at September 30, 2012.

Dividends

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

Pay Date	Record Date	Amount Per Share
October 1, 2012	September 15, 2012	$0.315
July 1, 2012	June 15, 2012	$0.310
April 1, 2012	March 15, 2012	$0.310
January 1, 2012	December 15, 2011	$0.310
October 1, 2011	September 15, 2011	$0.310
July 1, 2011	June 15, 2011	$0.305

On October 23, 2012, the Board of Directors of CTBI declared the payment of a quarterly cash dividend of $0.315 per share to be paid on January 1, 2013, to shareholders of record on December 15, 2012.

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 September 30, 2012, we had approximately $202.5 million in cash and cash equivalents and approximately $621.2 million in securities valued at estimated fair value designated as available-for-sale and available to meet liquidity needs on a continuing basis. 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 $1.5 million at September 30, 2012 compared to $21.6 million at December 31, 2011. As of September 30, 2012, we had a $293.1 million available borrowing position with the Federal Home Loan Bank. 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 September 30, 2012, we had $47 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 September 30, 2012, federal funds sold were $7.4 million compared to $2.7 million at December 31, 2011, and deposits with the Federal Reserve were $132.5 million compared to $159.0 million at December 31, 2011. 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 4.02 years. At the end of September 30, 2012, available-for-sale (“AFS”) securities comprised approximately 99.7% of the total investment portfolio, and the AFS portfolio was approximately 157% of equity capital. Eighty 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

We continue to grow our shareholders’ equity while also providing an annual dividend yield for the quarter ended September 30, 2012 of 3.55% to shareholders. Shareholders’ equity increased an annualized 10.6% from December 31, 2011 to $396.1 million at September 30, 2012. Our primary source of capital growth is the retention of earnings. Cash dividends were $0.935 per share for the nine months ended September 30, 2012 and $0.92 per share for the nine months ended September 30, 2011. We retained 57.9% of our earnings for the first nine months of 2012 compared to 51.3% for the first nine months of 2011.

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 September 30, 2012 were 10.51%, 14.86%, and 16.12%, respectively, all exceeding the threshold for meeting the definition of “well-capitalized.”

As of September 30, 2012, we are not aware of any 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, 2011, and the current Basel III proposal. On June 7, 2012, the Board of Governors of the Federal Reserve System announced Notices of Proposed Rulemaking (NPRs) for three sets of capital rules that translate the Basel III capital rules into U.S. regulation. The Basel III capital standards substantially increase the complexity of capital calculations and the amount of required capital to be maintained. Specifically, Basel III reduces the items that count as capital, establishes higher capital ratios for all banks and increases risk weighted assets. While we continue to analyze the NPRs and recognize that the final rules may differ from the proposed rules, the potential impact of Basel III includes, but is not limited to, reduced lending and negative pressure on profitability and return on equity due to the higher capital requirements. The cost of implementation and ongoing compliance with Basel III may also negatively impact overhead costs. To the extent CTBI is required to increase capital in the future to comply with Basel III, existing shareholders may be diluted and/or our ability to pay common stock dividends may be reduced. Given our strong capital position, if the proposed Basel III rules are adopted as final rules, we expect to be able to satisfy such requirements.

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.

Our success is dependent on the general economic conditions of the communities we serve. Unlike larger banks that are more geographically diversified, we provide financial and banking services primarily to eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. The economic conditions in these areas have a significant impact on loan demand, the ability of borrowers to repay loans, and the value of the collateral securing loans. A significant decline in general economic conditions will affect these local economic conditions and will negatively affect the financial results of our banking operations. Factors influencing general conditions include inflation, recession, unemployment, and other factors beyond our control.

Although we have seen some improvement in our financial performance during 2012, we believe that we will continue to experience a challenging environment for the remainder of 2012 and in 2013. The slow pace of economic activity, high unemployment rates, and slowing of growth in business fixed investments contribute to make the short-term difficult for the banking sector and could materially and adversely impact CTBI’s 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 September 30, 2012, a total of 2,211,481 shares have been repurchased through this program.

Critical Accounting Policies and Estimates

Our accounting policies are described in note 1 to the condensed consolidated financial statements. We have identified the following critical accounting policies:

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.

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 decrease by 1.71 percent over one year and would decrease by 4.66 percent over two years. A 25 basis point decrease in the yield curve would decrease net interest income by an estimated 0.14 percent over one year and by 0.12 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, 2011.

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/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 September 30, 2012 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 September 30, 2012 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 Label Linkbase*	Exhibit 101.LAB
	(7) XBRL Taxonomy Extension Presentation Linkbase*	Exhibit 101.PRE

* These interactive data files are being submitted electronically with this report and, in accordance with Rule 406T of Regulation S-T, are not deemed filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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: November 8, 2012	By:	/s/ Jean R. Hale
		Jean R. Hale
		Chairman, President, and Chief Executive Officer

	By:	/s/ Kevin J. Stumbo
		Kevin J. Stumbo
		Executive Vice President and Treasurer
		(Principal Financial Officer)