Annual Statements Open main menu

COMMUNITY TRUST BANCORP INC /KY/ - Quarter Report: 2015 September (Form 10-Q)


 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015
   
 
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 
No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Yes 
No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of "accelerated filer, large accelerated filer, and smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
Accelerated filer 
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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.

Common stock – 17,519,343 shares outstanding at October 31, 2015
 
 




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, 2014 for further information in this regard.



Community Trust Bancorp, Inc.
Condensed Consolidated Balance Sheets

(dollars in thousands)
 
(unaudited)
September 30
2015
   
December 31
2014
 
Assets:
       
Cash and due from banks
 
$
54,041
   
$
56,299
 
Interest bearing deposits
   
106,628
     
44,285
 
Federal funds sold
   
2,523
     
4,933
 
Cash and cash equivalents
   
163,192
     
105,517
 
                 
Certificates of deposit in other banks
   
5,759
     
8,197
 
Securities available-for-sale at fair value (amortized cost of $571,539 and $638,395, respectively)
   
576,713
     
640,186
 
Securities held-to-maturity at amortized cost (fair value of $1,651 and $1,644, respectively)
   
1,661
     
1,662
 
Loans held for sale
   
1,983
     
2,264
 
                 
Loans
   
2,820,460
     
2,733,824
 
Allowance for loan and lease losses
   
(35,540
)
   
(34,447
)
Net loans
   
2,784,920
     
2,699,377
 
                 
Premises and equipment, net
   
48,541
     
49,980
 
Federal Home Loan Bank stock
   
17,927
     
17,927
 
Federal Reserve Bank stock
   
4,887
     
4,869
 
Goodwill
   
65,490
     
65,490
 
Core deposit intangible (net of accumulated amortization of $8,285 and $8,138, respectively)
   
331
     
477
 
Bank owned life insurance
   
61,942
     
60,697
 
Mortgage servicing rights
   
3,030
     
2,968
 
Other real estate owned
   
34,654
     
36,776
 
Other assets
   
37,118
     
27,378
 
Total assets
 
$
3,808,148
   
$
3,723,765
 
                 
Liabilities and shareholders' equity:
               
Deposits:
               
Noninterest bearing
 
$
737,657
   
$
677,626
 
Interest bearing
   
2,237,572
     
2,196,631
 
Total deposits
   
2,975,229
     
2,874,257
 
                 
Repurchase agreements
   
256,153
     
235,186
 
Federal funds purchased and other short-term borrowings
   
9,215
     
11,041
 
Advances from Federal Home Loan Bank
   
1,084
     
61,170
 
Long-term debt
   
61,341
     
61,341
 
Other liabilities
   
34,541
     
32,893
 
Total liabilities
   
3,337,563
     
3,275,888
 
                 
Shareholders' equity:
               
Preferred stock, 300,000 shares authorized and unissued
   
-
     
-
 
Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2015 – 17,513,449; 2014 – 17,466,375
   
87,568
     
87,332
 
Capital surplus
   
216,253
     
214,684
 
Retained earnings
   
163,401
     
144,697
 
Accumulated other comprehensive income, net of tax
   
3,363
     
1,164
 
Total shareholders' equity
   
470,585
     
447,877
 
                 
Total liabilities and shareholders' equity
 
$
3,808,148
   
$
3,723,765
 
 
See notes to condensed consolidated financial statements.



Community Trust Bancorp, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30
   
September 30
 
(in thousands except per share data)
 
2015
   
2014
   
2015
   
2014
 
Interest income:
               
Interest and fees on loans, including loans held for sale
 
$
32,847
   
$
32,191
   
$
97,691
   
$
95,741
 
Interest and dividends on securities
                               
Taxable
   
2,044
     
2,763
     
7,007
     
8,616
 
Tax exempt
   
679
     
664
     
2,032
     
1,912
 
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock
   
252
     
252
     
756
     
882
 
Other, including interest on federal funds sold
   
90
     
87
     
234
     
310
 
Total interest income
   
35,912
     
35,957
     
107,720
     
107,461
 
                                 
Interest expense:
                               
Interest on deposits
   
2,412
     
2,475
     
7,077
     
7,409
 
Interest on repurchase agreements and other short-term borrowings
   
231
     
205
     
689
     
614
 
Interest on advances from Federal Home Loan Bank
   
9
     
6
     
33
     
17
 
Interest on long-term debt
   
295
     
283
     
869
     
850
 
Total interest expense
   
2,947
     
2,969
     
8,668
     
8,890
 
                                 
Net interest income
   
32,965
     
32,988
     
99,052
     
98,571
 
Provision for loan losses
   
2,520
     
3,300
     
6,740
     
5,380
 
Net interest income after provision for loan losses
   
30,445
     
29,688
     
92,312
     
93,191
 
                                 
Noninterest income:
                               
Service charges on deposit accounts
   
6,348
     
6,321
     
17,976
     
17,739
 
Gains on sales of loans, net
   
462
     
303
     
1,575
     
781
 
Trust and wealth management income
   
2,297
     
2,395
     
6,902
     
6,703
 
Loan related fees
   
641
     
1,128
     
2,747
     
2,573
 
Bank owned life insurance
   
581
     
523
     
1,623
     
1,473
 
Brokerage revenue
   
395
     
505
     
1,058
     
1,709
 
Securities gains (losses)
   
12
     
(34
)
   
142
     
(145
)
Other noninterest income
   
1,299
     
865
     
2,976
     
2,210
 
Total noninterest income
   
12,035
     
12,006
     
34,999
     
33,043
 
                                 
Noninterest expense:
                               
Officer salaries and employee benefits
   
3,288
     
2,584
     
9,179
     
8,206
 
Other salaries and employee benefits
   
10,687
     
10,881
     
32,063
     
31,950
 
Occupancy, net
   
1,942
     
2,007
     
5,937
     
6,108
 
Equipment
   
746
     
831
     
2,295
     
2,669
 
Data processing
   
1,577
     
2,017
     
5,204
     
5,875
 
Bank franchise tax
   
1,272
     
1,208
     
3,816
     
3,625
 
Legal fees
   
505
     
558
     
1,604
     
1,912
 
Professional fees
   
524
     
491
     
1,497
     
1,331
 
FDIC insurance
   
606
     
575
     
1,798
     
1,782
 
Other real estate owned provision and expense
   
1,289
     
707
     
2,525
     
2,948
 
Repossession expense
   
347
     
322
     
947
     
863
 
Other noninterest expense
   
4,751
     
3,682
     
12,800
     
10,711
 
Total noninterest expense
   
27,534
     
25,863
     
79,665
     
77,980
 
                                 
Income before income taxes
   
14,946
     
15,831
     
47,646
     
48,254
 
Income taxes
   
3,724
     
4,907
     
13,084
     
14,995
 
Net income
   
11,222
     
10,924
     
34,562
     
33,259
 
                                 
                                 
Other comprehensive income:
                               
Unrealized holding gains (losses) on securities available-for-sale:
                               
Unrealized holding gains (losses) arising during the period
   
3,463
     
(2,009
)
   
3,525
     
10,642
 
Less: Reclassification adjustments for realized gains (losses) included in net income
   
12
     
(34
)
   
142
     
(145
)
Tax (benefit) expense
   
1,208
     
(691
)
   
1,184
     
3,776
 
Other comprehensive income (loss), net of tax
   
2,243
     
(1,284
)
   
2,199
     
7,011
 
Comprehensive income
 
$
13,465
   
$
9,640
   
$
36,761
   
$
40,270
 
                                 
Basic earnings per share
 
$
0.64
   
$
0.63
   
$
1.98
   
$
1.92
 
Diluted earnings per share
 
$
0.64
   
$
0.63
   
$
1.98
   
$
1.91
 
                                 
Weighted average shares outstanding-basic
   
17,440
     
17,326
     
17,420
     
17,317
 
Weighted average shares outstanding-diluted
   
17,491
     
17,402
     
17,472
     
17,395
 
                                 
Dividends declared per share
 
$
0.310
   
$
0.300
   
$
0.910
   
$
0.881
 

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)
 
2015
   
2014
 
Cash flows from operating activities:
       
Net income
 
$
34,562
   
$
33,259
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
2,977
     
3,307
 
Deferred taxes
   
1,711
     
1,421
 
Stock-based compensation
   
518
     
548
 
Excess tax benefits of stock-based compensation
   
190
     
22
 
Provision for loan losses
   
6,740
     
5,380
 
Write-downs of other real estate owned and other repossessed assets
   
1,146
     
1,402
 
Gains on sale of mortgage loans held for sale
   
(1,575
)
   
(781
)
Securities (gains) losses
   
(142
)
   
145
 
Losses on sale of assets, net
   
(115
)
   
(3
)
Proceeds from sale of mortgage loans held for sale
   
63,580
     
33,240
 
Funding of mortgage loans held for sale
   
(61,724
)
   
(31,998
)
Amortization of securities premiums and discounts, net
   
2,552
     
2,011
 
Change in cash surrender value of bank owned life insurance
   
(1,245
)
   
(1,113
)
Mortgage servicing rights:
               
Fair value adjustments
   
381
     
546
 
New servicing assets created
   
(443
)
   
(234
)
Changes in:
               
Other assets
   
(9,612
)
   
297
 
Other liabilities
   
(1,068
)
   
(943
)
Net cash provided by operating activities
   
38,433
     
46,506
 
                 
Cash flows from investing activities:
               
Certificates of deposit in other banks:
               
Maturity of certificates of deposit
   
2,438
     
389
 
Securities available-for-sale (AFS):
               
Purchase of AFS securities
   
(36,561
)
   
(177,579
)
Proceeds from the sales of AFS securities
   
44,198
     
112,949
 
Proceeds from prepayments and maturities of AFS securities
   
56,809
     
49,094
 
Securities held-to-maturity (HTM):
               
Proceeds from maturities of HTM securities
   
1
     
0
 
Change in loans, net
   
(98,730
)
   
(73,376
)
Purchase of premises and equipment
   
(1,685
)
   
(1,750
)
Proceeds from sale of premises and equipment
   
232
     
22
 
Redemption of stock by Federal Home Loan Bank
   
0
     
7,746
 
Additional investment in Federal Reserve Bank stock
   
(18
)
   
(1
)
Proceeds from sale of other real estate and other repossessed assets
   
7,563
     
4,551
 
Additional investment in other real estate and other repossessed assets
   
(85
)
   
0
 
Net cash used in investing activities
   
(25,838
)
   
(77,955
)
                 
Cash flows from financing activities:
               
Change in deposits, net
   
100,972
     
47,107
 
Change in repurchase agreements, federal funds purchased, and other short-term borrowings, net
   
19,141
     
10,677
 
Advances from Federal Home Loan Bank
   
70,000
     
0
 
Payments on advances from Federal Home Loan Bank
   
(130,086
)
   
(87
)
Issuance of common stock
   
1,345
     
930
 
Repurchase of common stock
   
(189
)
   
0
 
Excess tax benefits of stock-based compensation
   
(190
)
   
(22
)
Dividends paid
   
(15,913
)
   
(15,339
)
Net cash provided by financing activities
   
45,080
     
43,266
 
Net increase in cash and cash equivalents
   
57,675
     
11,817
 
Cash and cash equivalents at beginning of period
   
105,517
     
106,641
 
Cash and cash equivalents at end of period
 
$
163,192
   
$
118,458
 
                 
Supplemental disclosures:
               
Income taxes paid
 
$
15,199
   
$
10,170
 
Interest paid
   
7,935
     
8,058
 
Non-cash activities:
               
Loans to facilitate the sale of other real estate and repossessed assets
   
3,548
     
5,745
 
Common stock dividends accrued, paid in subsequent quarter
   
220
     
207
 
Real estate acquired in settlement of loans
   
9,694
     
5,267
 
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 adjustments) necessary, to present fairly the condensed consolidated financial position as of September 30, 2015, the results of operations for the three and nine months ended September 30, 2015 and 2014, and the cash flows for the nine months ended September 30, 2015 and 2014.  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, 2015 and 2014, and the cash flows for the nine months ended September 30, 2015 and 2014, are not necessarily indicative of the results to be expected for the full year.  The condensed consolidated balance sheet as of December 31, 2014 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, 2014, 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.

All share data has been adjusted for the 10% stock dividend issued on June 2, 2014.

New Accounting Standards

Ø            Accounting for Investments in Qualified Affordable Housing Projects  In January 2014, the FASB issued ASU No. 2014-01, Investments—Equity Method and Joint Ventures (Topic 323):  Accounting for Investments in Qualified Affordable Housing Projects, which enables companies that invest in affordable housing projects that qualify for the low-income housing tax credit (LIHTC) to elect to use the proportional amortization method if certain conditions are met.  Under the proportional amortization method, the initial investment cost of the project is amortized in proportion to the amount of tax credits and benefits received, with the results of the investment presented on a net basis as a component of income tax expense (benefit).  ASU 2014-01 is effective for interim and annual periods beginning after December 15, 2014.  The adoption of this ASU did not have a material impact on CTBI's consolidated financial statements.

Ø            Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure – In January 2014, the FASB also issued ASU No. 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40):  Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, which clarifies when an in-substance foreclosure or repossession of residential real estate property occurs, requiring a creditor to reclassify the loan to other real estate.  According to ASU 2014-04, a consumer mortgage loan should be reclassified to other real estate either upon the creditor obtaining legal title to the real estate collateral or when the borrower voluntarily conveys all interest in the real estate property to the creditor through a deed in lieu of foreclosure or similar legal agreement.  ASU 2014-04 also clarifies that a creditor should not delay reclassification when a borrower has a legal right of redemption.  ASU 2014-04 is effective for interim and annual periods beginning after December 15, 2014.  The adoption of this ASU did not have a material impact on CTBI's consolidated financial statements as our practice was already consistent with the new guidance.

Ø            Elimination of Extraordinary Reporting – In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.  ASU No. 2015-01 eliminates from U.S. GAAP the concept of an extraordinary item.  The FASB issued this ASU as part of its initiative to reduce complexity in accounting standards.  The objective of the simplification initiative is to identify, evaluate, and improve areas of U.S. GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to the users of financial statements.  The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  A reporting entity may apply the amendments prospectively.  A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements.  Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption.  The effective date is the same for both public business entities and all other entities.  For an entity that prospectively applies the guidance, the only required transition disclosure will be to disclose, if applicable, both the nature and the amount of an item included in income from continuing operations after adoption that adjusts an extraordinary item previously classified and presented before the date of adoption.  An entity retrospectively applying the guidance should provide the disclosures in paragraphs 250-10-50-1 through 50-2.  The adoption of this ASU is not expected to have a material impact on CTBI's consolidated financial statements.

Ø            Intangibles – Goodwill and Other – Internal-Use Software – In April 2015, the FASB issued ASU No. 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40).  The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license.  If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses.  If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.  The guidance will not change GAAP for a customer's accounting for service contracts.  In addition, the guidance in this update supersedes paragraph 350-40-25-16.  Consequently, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets.  For public business entities, the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015.  Early adoption is permitted.  An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively.  For prospective transition, the only disclosure requirements at transition are the nature of and reason for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change.  For retrospective transition, the disclosure requirements at transition include the requirements for prospective transition and quantitative information about the effects of the accounting change.  We are currently evaluating the impact of adopting ASU 2015-05, but we do not expect the adoption to have a material effect on CTBI's consolidated financial statements.
 
Ø            Business Combinations: Simplifying the Accounting Measurement-Period Adjustments – In September 2015, the FASB issued ASU No. 2015-16 – Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period AdjustmentsTopic 805 requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination, during the measurement period.  To simplify the accounting for adjustments made to provisional amounts, the amendments in the Update require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined.  The acquirer is required to also record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.  In addition an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.  For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update with earlier application permitted for financial statements that have not been issued.  The adoption of this ASU is not expected to have a material impact on CTBI's consolidated financial statements.

Critical Accounting Policies and Estimates

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

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

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 310-10-35, Impairment of a Loan.  We evaluate the collectability of both principal and interest when assessing the need for loss provision.  Historical loss rates are analyzed and applied to other commercial loans not subject to specific allocations.  The ALLL allocation for this pool of commercial loans is established based on the historical average, maximum, minimum, and median loss ratios.

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

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

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

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

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 use twelve rolling quarters for our historical loss rate analysis.  Factors that we consider include delinquency trends, current economic conditions and trends, strength of supervision and administration of the loan portfolio, levels of underperforming loans, level of recoveries to prior year's charge-offs, trends in loan losses, industry concentrations and their relative strengths, amount of unsecured loans, and underwriting exceptions.  Based upon management's judgment, "best case," "worst case," and "most likely" scenarios are determined.  The total of each of these weighted factors is then applied against the applicable portion of the portfolio and the ALLL is adjusted accordingly to approximate the most likely scenario.  Management continually reevaluates the other subjective factors included in its ALLL analysis.

Other Real Estate Owned – When foreclosed properties are acquired, appraisals are obtained and the properties are booked at the current market value less expected sales costs.  Additionally, periodic updated appraisals are obtained on unsold foreclosed properties.  When an updated appraisal reflects a market value below the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected sales costs.  Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months.  All revenues and expenses related to the carrying of other real estate owned are recognized by a charge to income.

Income Taxes – Income tax expense is based on the taxes due on the consolidated tax return plus deferred taxes based on the expected future tax benefits and consequences of temporary differences between carrying amounts and tax bases of assets and liabilities, using enacted tax rates.  Any interest and penalties incurred in connection with income taxes are recorded as a component of income tax expense in the consolidated financial statements.  During the nine months ended September 30, 2015 and 2014, CTBI did not recognize a significant amount of interest expense or penalties in connection with income taxes.

CTBI is currently under IRS examination of its 2013 corporate income tax return.  Management does not expect that the results of the examination will have a material effect on our financial condition.  While management believes our tax positions are appropriate, the IRS could challenge our positions as a part of this examination.

Note 2 – Stock-Based Compensation

CTBI's compensation expense related to stock option grants was $10 thousand and $3 thousand, respectively, for the three months ended September 30, 2015 and 2014, and $29 thousand and $8 thousand, respectively, for the nine months ended September 30, 2015 and 2014.  Restricted stock expense for the three months ended September 30, 2015 and 2014 was $186 thousand and $202 thousand, respectively, including $20 thousand and $30 thousand in dividends paid for each period.  Restricted stock expense for the nine months ended September 30, 2015 and 2014 was $554 thousand and $540 thousand, respectively, including $59 thousand and $90 thousand in dividends.  As of September 30, 2015, there was a total of $0.2 million 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 4.1 years and a total of $0.5 million of unrecognized compensation expense related to restricted stock grants that will be recognized as expense as the awards vest over a weighted average period of 2.0 years.

There were no shares of restricted stock granted during the three months ended September 30, 2015 and 2014.  There were 10,582 and 4,561 shares of restricted stock granted during the nine months ended September 30, 2015 and 2014, respectively.  The restrictions on the restricted stock lapse ratably over four years or in the event of a change in control of CTBI or the death of the participant.  In the event of the disability of the participant, the restrictions will lapse on a pro rata basis.  The Compensation Committee of the Board of Directors will have discretion to review and revise restrictions applicable to a participant's restricted stock in the event of the participant's retirement.  There were no options granted to purchase shares of CTBI common stock during the three months ended September 30, 2015.  There were 20,000 options granted during the nine months ended September 30, 2015.  There were 10,000 options granted during the three and nine months ended September 30, 2014.

The fair value of options granted during the nine months ended September 30, 2015, were established at the date of grant using a Black-Scholes option pricing model with the weighted average assumptions as follows:

   
Nine Months Ended
September 30
 
   
2015
   
2014
 
Expected dividend yield
   
3.72
%
   
3.40
%
Risk-free interest rate
   
1.54
%
   
2.01
%
Expected volatility
   
30.77
%
   
30.77
%
Expected term (in years)
   
7.0
     
7.0
 
Weighted average fair value of options
 
$
6.60
   
$
7.76
 

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, 2015 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
 
$
201,461
   
$
990
   
$
(401
)
 
$
202,050
 
State and political subdivisions
   
132,249
     
3,718
     
(508
)
   
135,459
 
U.S. government sponsored agency mortgage-backed securities
   
212,829
     
2,473
     
(1,126
)
   
214,176
 
Total debt securities
   
546,539
     
7,181
     
(2,035
)
   
551,685
 
CRA investment funds
   
25,000
     
28
     
0
     
25,028
 
Total available-for-sale securities
 
$
571,539
   
$
7,209
   
$
(2,035
)
 
$
576,713
 

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
U.S. Treasury and government agencies
 
$
480
   
$
0
   
$
(11
)
 
$
469
 
State and political subdivisions
   
1,181
     
1
     
0
     
1,182
 
Total held-to-maturity securities
 
$
1,661
   
$
1
   
$
(11
)
 
$
1,651
 

The amortized cost and fair value of securities at December 31, 2014 are summarized as follows:

Available-for-Sale

(in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
U.S. Treasury and government agencies
 
$
190,563
   
$
509
   
$
(2,140
)
 
$
188,932
 
State and political subdivisions
   
133,951
     
3,973
     
(466
)
   
137,458
 
U.S. government sponsored agency mortgage-backed securities
   
288,881
     
2,876
     
(2,850
)
   
288,907
 
Total debt securities
   
613,395
     
7,358
     
(5,456
)
   
615,297
 
CRA investment funds
   
25,000
     
0
     
(111
)
   
24,889
 
Total available-for-sale securities
 
$
638,395
   
$
7,358
   
$
(5,567
)
 
$
640,186
 

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
U.S. Treasury and government agencies
 
$
480
   
$
0
   
$
(19
)
 
$
461
 
State and political subdivisions
   
1,182
     
1
     
0
     
1,183
 
Total held-to-maturity securities
 
$
1,662
   
$
1
   
$
(19
)
 
$
1,644
 

The amortized cost and fair value of securities at September 30, 2015 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
 
$
30,015
   
$
30,092
   
$
0
   
$
0
 
Due after one through five years
   
128,605
     
129,937
     
1,181
     
1,182
 
Due after five through ten years
   
124,654
     
126,142
     
480
     
469
 
Due after ten years
   
50,436
     
51,338
     
0
     
0
 
U.S. government sponsored agency mortgage-backed securities
   
212,829
     
214,176
     
0
     
0
 
Total debt securities
   
546,539
     
551,685
     
1,661
     
1,651
 
CRA investment funds
   
25,000
     
25,028
     
0
     
0
 
Total securities
 
$
571,539
   
$
576,713
   
$
1,661
   
$
1,651
 

As of September 30, 2015, there was a net gain of $142 thousand realized on sales and calls of AFS securities, consisting of a pre-tax gain of $840 thousand and a pre-tax loss of $698 thousand.  As of September 30, 2014, there was a net loss of $145 thousand.

The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $217.6 million at September 30, 2015 and $267.1 million at December 31, 2014.

The amortized cost of securities sold under agreements to repurchase amounted to $286.4 million at September 30, 2015 and $280.9 million at December 31, 2014.

CTBI evaluates its investment portfolio on a quarterly basis for impairment.  The analysis performed as of September 30, 2015 indicates that all impairment is considered temporary, market and interest rate driven, and not credit-related.  The percentage of total investments with unrealized losses as of September 30, 2015 was 34.8% compared to 44.1% as of December 31, 2014.  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, 2015 that are not deemed to be other-than-temporarily impaired.

Available-for-Sale

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
Less Than 12 Months
           
U.S. Treasury and government agencies
 
$
22,178
   
$
(13
)
 
$
22,165
 
State and political subdivisions
   
17,068
     
(179
)
   
16,889
 
U.S. government sponsored agency mortgage-backed securities
   
50,213
     
(207
)
   
50,006
 
Total debt securities
   
89,459
     
(399
)
   
89,060
 
CRA investment funds
   
0
     
(0
)
   
0
 
Total <12 months temporarily impaired AFS securities
   
89,459
     
(399
)
   
89,060
 
                         
12 Months or More
                       
U.S. Treasury and government agencies
   
54,773
     
(388
)
   
54,385
 
State and political subdivisions
   
7,297
     
(329
)
   
6,968
 
U.S. government sponsored agency mortgage-backed securities
   
51,291
     
(919
)
   
50,372
 
Total debt securities
   
113,361
     
(1,636
)
   
111,725
 
CRA investment funds
   
0
     
0
     
0
 
Total ≥12 months temporarily impaired AFS securities
   
113,361
     
(1,636
)
   
111,725
 
                         
Total
                       
U.S. Treasury and government agencies
   
76,951
     
(401
)
   
76,550
 
State and political subdivisions
   
24,365
     
(508
)
   
23,857
 
U.S. government sponsored agency mortgage-backed securities
   
101,504
     
(1,126
)
   
100,378
 
Total debt securities
   
202,820
     
(2,035
)
   
200,785
 
CRA investment funds
   
0
     
(0
)
   
0
 
Total temporarily impaired AFS securities
 
$
202,820
   
$
(2,035
)
 
$
200,785
 

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
12 Months or More
           
U.S. Treasury and government agencies
 
$
480
   
$
(11
)
 
$
469
 
Total temporarily impaired HTM securities
 
$
480
   
$
(11
)
 
$
469
 

U.S. Treasury and Government Agencies

The unrealized losses in U.S. Treasury and government agencies were caused by interest rate increases.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than amortized cost.  CTBI does not consider those investments to be other-than-temporarily impaired at September 30, 2015, because CTBI does not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost, which may be at maturity.

State and Political Subdivisions

The unrealized losses in securities of state and political subdivisions were caused by interest rate increases.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than amortized cost.  CTBI does not consider those investments to be other-than-temporarily impaired at September 30, 2015, because CTBI does not intend to sell the investments before recovery of their amortized cost, which may be at maturity.

U.S. Government Sponsored Agency Mortgage-Backed Securities

The unrealized losses in U.S. government sponsored agency mortgage-backed securities were caused by interest rate increases.  CTBI expects to recover the amortized cost basis over the term of the securities.  CTBI does not consider those investments to be other-than-temporarily impaired at September 30, 2015, because (i) the decline in market value is attributable to changes in interest rates and not credit quality, (ii) CTBI does not intend to sell the investments, and (iii) it is not more likely than not we will be required to sell the investments before recovery of their amortized cost, which may be at maturity.

The analysis performed as of December 31, 2014 indicated that all impairment was considered temporary, market and interest rate 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, 2014 that are not deemed to be other-than-temporarily impaired.

Available-for-Sale

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
Less Than 12 Months
           
U.S. Treasury and government agencies
 
$
31,185
   
$
(87
)
 
$
31,098
 
State and political subdivisions
   
8,800
     
(23
)
   
8,777
 
U.S. government sponsored agency mortgage-backed securities
   
50,115
     
(442
)
   
49,673
 
Total debt securities
   
90,100
     
(552
)
   
89,548
 
CRA investment funds
   
25,000
     
(111
)
   
24,889
 
Total <12 months temporarily impaired AFS securities
   
115,100
     
(663
)
   
114,437
 
                         
12 Months or More
                       
U.S. Treasury and government agencies
   
65,209
     
(2,053
)
   
63,156
 
State and political subdivisions
   
21,308
     
(443
)
   
20,865
 
U.S. government sponsored agency mortgage-backed securities
   
86,389
     
(2,408
)
   
83,981
 
Total debt securities
   
172,906
     
(4,904
)
   
168,002
 
CRA investment funds
   
0
     
0
     
0
 
Total ≥12 months temporarily impaired AFS securities
   
172,906
     
(4,904
)
   
168,002
 
                         
Total
                       
U.S. Treasury and government agencies
   
96,394
     
(2,140
)
   
94,254
 
State and political subdivisions
   
30,108
     
(466
)
   
29,642
 
U.S. government sponsored agency mortgage-backed securities
   
136,504
     
(2,850
)
   
133,654
 
Total debt securities
   
263,006
     
(5,456
)
   
257,550
 
CRA investment funds
   
25,000
     
(111
)
   
24,889
 
Total temporarily impaired AFS securities
 
$
288,006
   
$
(5,567
)
 
$
282,439
 

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
12 Months or More
           
U.S. Treasury and government agencies
 
$
480
   
$
(19
)
 
$
461
 
Total temporarily impaired HTM securities
 
$
480
   
$
(19
)
 
$
461
 

Note 4 – Loans

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

 
(in thousands)
 
September 30
2015
   
December 31
2014
 
Commercial construction
 
$
106,855
   
$
121,942
 
Commercial secured by real estate
   
997,654
     
948,626
 
Equipment lease financing
   
9,146
     
10,344
 
Commercial other
   
346,318
     
352,048
 
Real estate construction
   
62,226
     
62,412
 
Real estate mortgage
   
706,187
     
712,465
 
Home equity
   
88,624
     
88,335
 
Consumer direct
   
125,847
     
122,136
 
Consumer indirect
   
377,603
     
315,516
 
Total loans
 
$
2,820,460
   
$
2,733,824
 

CTBI has segregated and evaluates its loan portfolio through nine portfolio segments. CTBI serves customers in small and mid-sized communities in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee.  Therefore, CTBI's exposure to credit risk is significantly affected by changes in these communities.

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

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

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

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

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

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

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

Consumer direct loans are primarily 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 $2.0 million at September 30, 2015 and $2.3 million at December 31, 2014, respectively.

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

 (in thousands)
 
September 30
2015
   
December 31
2014
 
Commercial:
       
Commercial construction
 
$
3,443
   
$
4,339
 
Commercial secured by real estate
   
4,134
     
6,725
 
Commercial other
   
1,412
     
2,423
 
                 
Residential:
               
Real estate construction
   
311
     
602
 
Real estate mortgage
   
5,108
     
6,513
 
Home equity
   
200
     
369
 
                 
Consumer:
               
Consumer direct
   
114
     
0
 
Total nonaccrual loans
 
$
14,722
   
$
20,971
 

The following tables present CTBI's loan portfolio aging analysis, segregated by class, as of September 30, 2015 and December 31, 2014:

   
September 30, 2015
 
(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
 
$
251
   
$
7
   
$
5,133
   
$
5,391
   
$
101,464
   
$
106,855
   
$
1,690
 
Commercial secured by real estate
   
5,348
     
1,401
     
6,574
     
13,323
     
984,331
     
997,654
     
4,766
 
Equipment lease financing
   
0
     
0
     
0
     
0
     
9,146
     
9,146
     
0
 
Commercial other
   
870
     
417
     
4,152
     
5,439
     
340,879
     
346,318
     
2,904
 
Residential:
                                                       
Real estate construction
   
609
     
129
     
717
     
1,455
     
60,771
     
62,226
     
420
 
Real estate mortgage
   
1,517
     
4,637
     
10,906
     
17,060
     
689,127
     
706,187
     
7,111
 
Home equity
   
516
     
122
     
749
     
1,387
     
87,237
     
88,624
     
602
 
Consumer:
                                                       
Consumer direct
   
1,055
     
260
     
89
     
1,404
     
124,443
     
125,847
     
89
 
Consumer indirect
   
2,503
     
404
     
419
     
3,326
     
374,277
     
377,603
     
419
 
Total
 
$
12,669
   
$
7,377
   
$
28,739
   
$
48,785
   
$
2,771,675
   
$
2,820,460
   
$
18,001
 


   
December 31, 2014
 
(in thousands)
 
30-59 Days Past Due
   
60-89 Days Past Due
   
90+ Days Past Due
   
Total Past Due
   
Current
   
Total Loans
   
90+ and Accruing*
 
Commercial:
                           
Commercial construction
 
$
40
   
$
31
   
$
6,171
   
$
6,242
   
$
115,700
   
$
121,942
   
$
1,863
 
Commercial secured by real estate
   
2,471
     
1,595
     
10,763
     
14,829
     
933,797
     
948,626
     
4,682
 
Equipment lease financing
   
0
     
0
     
0
     
0
     
10,344
     
10,344
     
0
 
Commercial other
   
826
     
55
     
4,205
     
5,086
     
346,962
     
352,048
     
2,367
 
Residential:
                                                       
Real estate construction
   
92
     
144
     
985
     
1,221
     
61,191
     
62,412
     
383
 
Real estate mortgage
   
1,005
     
5,171
     
13,049
     
19,225
     
693,240
     
712,465
     
7,742
 
Home equity
   
779
     
197
     
703
     
1,679
     
86,656
     
88,335
     
422
 
Consumer:
                                                       
Consumer direct
   
1,307
     
295
     
141
     
1,743
     
120,393
     
122,136
     
141
 
Consumer indirect
   
2,304
     
586
     
385
     
3,275
     
312,241
     
315,516
     
385
 
Total
 
$
8,824
   
$
8,074
   
$
36,402
   
$
53,300
   
$
2,680,524
   
$
2,733,824
   
$
17,985
 

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

The risk characteristics of CTBI's material portfolio segments are as follows:

Commercial construction loans generally are made to customers for the purpose of building income-producing properties.  Personal guarantees of the principals are generally required.  Such loans are made on a projected cash flow basis and are secured by the project being constructed.  Construction loan draw procedures are included in each specific loan agreement, including required documentation items and inspection requirements.  Construction loans may convert to term loans at the end of the construction period, or may be repaid by the take-out commitment from another financing source.  If the loan is to convert to a term loan, the repayment ability is based on the borrower's projected cash flow.  Risk is mitigated during the construction phase by requiring proper documentation and inspections whenever a draw is requested.  Loans in amounts greater than $500,000 generally require a performance bond to be posted by the general contractor to assure completion of the project.

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.  Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.  Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.  Management monitors and evaluates commercial real estate loans based on collateral and risk grade criteria.

Equipment lease financing is underwritten by our commercial lenders using the same underwriting standards as would be applied to a secured commercial loan requesting 100% financing.  The pricing for equipment lease financing is comparable to that of borrowers with similar quality commercial credits with similar collateral.  Maximum terms of equipment leasing are determined by the type and expected life of the equipment to be leased.  Residual values are determined by appraisals or opinion letters from industry experts.  Leases must be in conformity with our consolidated annual tax plan.  As we underwrite our equipment lease financing in a manner similar to our commercial loan portfolio described below, the risk characteristics for this portfolio mirror that of the commercial loan portfolio.

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.  The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value.  Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis.  In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, CTBI generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded.  Home equity loans are typically secured by a subordinate interest in 1-4 family residences. Residential construction loans are handled through the home mortgage area of the bank.  The repayment ability of the borrower and the maximum loan-to-value ratio are calculated using the normal mortgage lending criteria.  Draws are processed based on percentage of completion stages including normal inspection procedures.  Such loans generally convert to term loans after the completion of construction.

Consumer loans are secured by consumer assets such as automobiles or recreational vehicles.  Some consumer loans are unsecured such as small installment loans and certain lines of credit.  Our determination of a borrower's ability to repay these loans is primarily dependent on the personal income and credit rating of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels.  Repayment can also be impacted by changes in property values on residential properties.  Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

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

Credit Quality Indicators:

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

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

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

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

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

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

The following table presents 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, 2015 and December 31, 2014:

 (in thousands)
 
Commercial Construction
   
Commercial Secured by Real Estate
   
Equipment Leases
   
Commercial Other
   
Total
 
September 30, 2015
                   
Pass
 
$
85,878
   
$
885,941
   
$
9,146
   
$
296,254
   
$
1,277,219
 
Watch
   
6,615
     
69,393
     
0
     
41,547
     
117,555
 
OAEM
   
4,205
     
8,286
     
0
     
1,001
     
13,492
 
Substandard
   
8,999
     
33,162
     
0
     
6,451
     
48,612
 
Doubtful
   
1,158
     
872
     
0
     
1,065
     
3,095
 
Total
 
$
106,855
   
$
997,654
   
$
9,146
   
$
346,318
   
$
1,459,973
 
                                         
December 31, 2014
                                       
Pass
 
$
101,314
   
$
834,751
   
$
10,344
   
$
307,270
   
$
1,253,679
 
Watch
   
9,857
     
69,123
     
0
     
36,114
     
115,094
 
OAEM
   
934
     
10,973
     
0
     
881
     
12,788
 
Substandard
   
5,647
     
27,901
     
0
     
5,772
     
39,320
 
Doubtful
   
4,190
     
5,878
     
0
     
2,011
     
12,079
 
Total
 
$
121,942
   
$
948,626
   
$
10,344
   
$
352,048
   
$
1,432,960
 

The following table presents 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, 2015 and December 31, 2014:

(in thousands)
 
Real Estate Construction
   
Real Estate Mortgage
   
Home Equity
   
Consumer Direct
   
Consumer
Indirect
   
Total
 
September 30, 2015
                       
Performing
 
$
61,495
   
$
693,968
   
$
87,822
   
$
125,644
   
$
377,184
   
$
1,346,113
 
Nonperforming (1)
   
731
     
12,219
     
802
     
203
     
419
     
14,374
 
Total
 
$
62,226
   
$
706,187
   
$
88,624
   
$
125,847
   
$
377,603
   
$
1,360,487
 
                                                 
December 31, 2014
                                               
Performing
 
$
61,427
   
$
698,210
   
$
87,544
   
$
121,995
   
$
315,131
   
$
1,284,307
 
Nonperforming (1)
   
985
     
14,255
     
791
     
141
     
385
     
16,557
 
Total
 
$
62,412
   
$
712,465
   
$
88,335
   
$
122,136
   
$
315,516
   
$
1,300,864
 

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

The total of consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings are in process totaled $5.3 million at September 30, 2015 compared to $5.9 million at December 31, 2014.

A loan is considered impaired, in accordance with the impairment accounting guidance, 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 tables present impaired loans, the average investment in impaired loans, and interest income recognized on impaired loans for the periods ended September 30, 2015, December 31, 2014, and September 30, 2014:

   
September 30, 2015
 
(in thousands)
 
Recorded Balance
   
Unpaid Contractual Principal Balance
   
Specific Allowance
 
Loans without a specific valuation allowance:
           
Commercial construction
 
$
4,669
   
$
4,669
   
$
0
 
Commercial secured by real estate
   
30,318
     
31,551
     
0
 
Commercial other
   
7,163
     
8,804
     
0
 
Real estate mortgage
   
1,189
     
1,189
     
0
 
                         
Loans with a specific valuation allowance:
                       
Commercial construction
   
3,411
     
3,412
     
719
 
Commercial secured by real estate
   
835
     
1,075
     
317
 
Commercial other
   
754
     
935
     
312
 
                         
Totals:
                       
Commercial construction
   
8,080
     
8,081
     
719
 
Commercial secured by real estate
   
31,153
     
32,626
     
317
 
Commercial other
   
7,917
     
9,739
     
312
 
Real estate mortgage
   
1,189
     
1,189
     
0
 
Total
 
$
48,339
   
$
51,635
   
$
1,348
 

   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2015
   
September 30, 2015
 
(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
 
$
4,864
   
$
41
   
$
5,142
   
$
160
 
Commercial secured by real estate
   
30,713
     
316
     
30,357
     
985
 
Commercial other
   
7,312
     
73
     
9,182
     
201
 
Real estate mortgage
   
1,183
     
13
     
1,090
     
37
 
                                 
Loans with a specific valuation allowance:
                               
Commercial construction
   
3,445
     
0
     
3,712
     
0
 
Commercial secured by real estate
   
841
     
6
     
2,244
     
7
 
Commercial other
   
776
     
1
     
788
     
1
 
                                 
Totals:
                               
Commercial construction
   
8,309
     
41
     
8,854
     
160
 
Commercial secured by real estate
   
31,554
     
322
     
32,601
     
992
 
Commercial other
   
8,088
     
74
     
9,970
     
202
 
Real estate mortgage
   
1,183
     
13
     
1,090
     
37
 
Total
 
$
49,134
   
$
450
   
$
52,515
   
$
1,391
 

   
December 31, 2014
 
(in thousands)
 
Recorded Balance
   
Unpaid Contractual Principal Balance
   
Specific Allowance
   
Average Investment in Impaired Loans
   
*Interest Income Recognized
 
Loans without a specific valuation allowance:
                   
Commercial construction
 
$
5,653
   
$
5,654
   
$
0
   
$
5,415
   
$
205
 
Commercial secured by real estate
   
31,639
     
33,268
     
0
     
34,650
     
1,180
 
Commercial other
   
13,069
     
14,597
     
0
     
15,663
     
783
 
Real estate mortgage
   
1,277
     
1,277
     
0
     
1,507
     
53
 
                                         
Loans with a specific valuation allowance:
                                       
Commercial construction
   
3,974
     
3,974
     
734
     
4,216
     
0
 
Commercial secured by real estate
   
2,718
     
2,876
     
827
     
4,376
     
11
 
Commercial other
   
738
     
862
     
181
     
531
     
1
 
                                         
Totals:
                                       
Commercial construction
   
9,627
     
9,628
     
734
     
9,631
     
205
 
Commercial secured by real estate
   
34,357
     
36,144
     
827
     
39,026
     
1,191
 
Commercial other
   
13,807
     
15,459
     
181
     
16,194
     
784
 
Real estate mortgage
   
1,277
     
1,277
     
0
     
1,507
     
53
 
Total
 
$
59,068
   
$
62,508
   
$
1,742
   
$
66,358
   
$
2,233
 

   
September 30, 2014
 
(in thousands)
 
Recorded Balance
   
Unpaid Contractual Principal Balance
   
Specific Allowance
 
Loans without a specific valuation allowance:
           
Commercial construction
 
$
5,250
   
$
5,251
   
$
0
 
Commercial secured by real estate
   
33,010
     
34,086
     
0
 
Commercial other
   
15,972
     
18,247
     
0
 
Real estate mortgage
   
1,874
     
1,875
     
0
 
                         
Loans with a specific valuation allowance:
                       
Commercial construction
   
4,149
     
4,149
     
734
 
Commercial secured by real estate
   
6,070
     
6,219
     
1,273
 
Commercial other
   
586
     
710
     
211
 
                         
Totals:
                       
Commercial construction
   
9,399
     
9,400
     
734
 
Commercial secured by real estate
   
39,080
     
40,305
     
1,273
 
Commercial other
   
16,558
     
18,957
     
211
 
Real estate mortgage
   
1,874
     
1,875
     
0
 
Total
 
$
66,911
   
$
70,537
   
$
2,218
 

   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2014
   
September 30, 2014
 
(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
 
$
5,259
   
$
44
   
$
5,330
   
$
172
 
Commercial secured by real estate
   
33,290
     
261
     
34,464
     
858
 
Commercial other
   
17,577
     
248
     
16,421
     
619
 
Real estate mortgage
   
1,860
     
12
     
1,583
     
44
 
                                 
Loans with a specific valuation allowance:
                               
Commercial construction
   
4,213
     
0
     
4,270
     
0
 
Commercial secured by real estate
   
6,076
     
5
     
4,912
     
9
 
Commercial other
   
587
     
0
     
460
     
0
 
                                 
Totals:
                               
Commercial construction
   
9,472
     
44
     
9,600
     
172
 
Commercial secured by real estate
   
39,366
     
266
     
39,376
     
867
 
Commercial other
   
18,164
     
248
     
16,881
     
619
 
Real estate mortgage
   
1,860
     
12
     
1,583
     
44
 
Total
 
$
68,862
   
$
570
   
$
67,440
   
$
1,702
 

*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 2015, 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, 2015 and 2014 and the year ended December 31, 2014:

   
Three Months Ended
September 30, 2015
 
(in thousands)
 
Number of Loans
   
Term Modification
   
Rate Modification
   
Combination
   
Post-Modification Outstanding Balance
 
Commercial:
                   
Commercial secured by real estate
   
5
   
$
346
   
$
0
   
$
165
   
$
511
 
Commercial other
   
1
     
1,139
     
0
     
0
     
1,139
 
Total troubled debt restructurings
   
6
   
$
1,485
   
$
0
   
$
165
   
$
1,650
 

   
Nine Months Ended
September 30, 2015
 
(in thousands)
 
Number of Loans
   
Term Modification
   
Rate Modification
   
Combination
   
Post-Modification Outstanding Balance
 
Commercial:
                   
Commercial secured by real estate
   
13
   
$
953
   
$
0
   
$
165
   
$
1,118
 
Commercial other
   
4
     
1,193
     
0
     
0
     
1,193
 
Residential:
                                       
Real estate mortgage
   
1
     
0
     
0
     
290
     
290
 
Total troubled debt restructurings
   
18
   
$
2,146
   
$
0
   
$
455
   
$
2,601
 

   
Three Months Ended
September 30, 2014
 
(in thousands)
 
Number of Loans
   
Term Modification
   
Rate Modification
   
Combination
   
Post-Modification Outstanding Balance
 
Commercial:
                   
Commercial construction
   
1
   
$
7
   
$
0
   
$
  0    
$
7
 
Commercial secured by real estate
   
4
     
2,416
     
0
     
67
     
2,483
 
Commercial other
   
4
     
451
     
0
     
0
     
451
 
Total troubled debt restructurings
   
9
   
$
2,874
   
$
0
   
$
67
   
$
2,941
 

   
Nine Months Ended
September 30, 2014
 
(in thousands)
 
Number of Loans
   
Term Modification
   
Rate Modification
   
Combination
   
Post-Modification Outstanding Balance
 
Commercial:
                   
Commercial construction
   
1
   
$
7
   
$
0
   
$
0
   
$
7
 
Commercial secured by real estate
   
7
     
2,647
     
0
     
67
     
2,714
 
Commercial other
   
7
     
512
     
0
     
0
     
512
 
Residential:
                                       
Real estate mortgage
   
2
     
0
     
0
     
849
     
849
 
Total troubled debt restructurings
   
17
   
$
3,166
   
$
0
   
$
916
   
$
4,082
 

   
Year Ended
December 31, 2014
 
(in thousands)
 
Number of Loans
   
Term Modification
   
Rate Modification
   
Combination
   
Post-Modification Outstanding Balance
 
Commercial:
                   
Commercial construction
   
1
   
$
7
   
$
0
   
$
0
   
$
7
 
Commercial secured by real estate
   
11
     
5,707
     
0
     
68
     
5,775
 
Commercial other
   
8
     
1,268
     
0
     
0
     
1,268
 
Residential:
                                       
Real estate mortgage
   
2
     
0
     
0
     
848
     
848
 
Total troubled debt restructurings
   
22
   
$
6,982
   
$
0
   
$
916
   
$
7,898
 

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

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

 (in thousands)
 
Three Months Ended
September 30, 2015
   
Nine Months Ended
September 30, 2015
 
   
Number of Loans
   
Recorded Balance
   
Number of Loans
   
Recorded Balance
 
Commercial:
               
Commercial secured by real estate
   
2
   
$
31
     
4
   
$
390
 
Residential:
                               
Real estate mortgage
   
0
     
0
     
1
     
290
 
Total defaulted restructured loans
   
2
   
$
31
     
5
   
$
680
 
 
 (in thousands)
 
Three Months Ended
September 30, 2014
   
Nine Months Ended
September 30, 2014
 
   
Number of Loans
   
Recorded Balance
   
Number of Loans
   
Recorded Balance
 
Commercial:
               
Commercial secured by real estate
   
1
   
$
2,892
     
1
   
$
2,892
 
Residential:
                               
Real estate mortgage
   
1
     
594
     
2
     
1,175
 
Total defaulted restructured loans
   
2
   
$
3,486
     
3
   
$
4,067
 

Note 5 – Allowance for Loan and Lease Losses

The following tables present the balance in the allowance for loan and lease losses ("ALLL") and the recorded investment in loans based on portfolio segment and impairment method for the three and nine months ended September 30, 2015 and 2014 and the twelve months ended December 31, 2014:

   
Three Months Ended
September 30, 2015
 
(in thousands)
 
Commercial Construction
   
Commercial Secured by Real Estate
   
Equipment Lease Financing
   
Commercial Other
   
Real Estate Construction
   
Real Estate Mortgage
   
Home
Equity
   
Consumer Direct
   
Consumer Indirect
   
Total
 
Allowance for loan losses
                                       
Beginning balance
 
$
2,622
   
$
13,022
   
$
113
   
$
4,414
   
$
570
   
$
6,965
   
$
867
   
$
1,541
   
$
5,076
   
$
35,190
 
Provision charged to expense
   
151
     
293
     
(9
)
   
153
     
61
     
564
     
(38
)
   
382
     
963
     
2,520
 
Losses charged off
   
0
     
364
     
0
     
431
     
20
     
647
     
0
     
436
     
1,001
     
2,899
 
Recoveries
   
3
     
2
     
0
     
149
     
0
     
52
     
41
     
113
     
369
     
729
 
Ending balance
 
$
2,776
   
$
12,953
   
$
104
   
$
4,285
   
$
611
   
$
6,934
   
$
870
   
$
1,600
   
$
5,407
   
$
35,540
 
                                                                                 
Ending balance:
                                                                               
Individually evaluated for impairment
 
$
719
   
$
317
   
$
0
   
$
312
   
$
0
   
$
0
   
$
0
   
$
0
   
$
0
   
$
1,348
 
Collectively evaluated for impairment
 
$
2,057
   
$
12,636
   
$
104
   
$
3,973
   
$
611
   
$
6,934
   
$
870
   
$
1,600
   
$
5,407
   
$
34,192
 
                                                                                 
Loans
                                                                               
Ending balance:
                                                                               
Individually evaluated for impairment
 
$
8,080
   
$
31,153
   
$
0
   
$
7,917
   
$
0
   
$
1,189
   
$
0
   
$
0
   
$
0
   
$
48,339
 
Collectively evaluated for impairment
 
$
98,775
   
$
966,501
   
$
9,146
   
$
338,401
   
$
62,226
   
$
704,998
   
$
88,624
   
$
125,847
   
$
377,603
   
$
2,772,121
 

   
Nine Months Ended
September 30, 2015
 
(in thousands)
 
Commercial Construction
   
Commercial Secured by Real Estate
   
Equipment Lease Financing
   
Commercial Other
   
Real Estate Construction
   
Real Estate Mortgage
   
Home
Equity
   
Consumer Direct
   
Consumer Indirect
   
Total
 
Allowance for loan losses
                                       
Beginning balance
 
$
2,896
   
$
13,618
   
$
119
   
$
4,263
   
$
534
   
$
6,094
   
$
756
   
$
1,574
   
$
4,593
   
$
34,447
 
Provision charged to expense
   
(127
)
   
577
     
(15
)
   
1,054
     
184
     
2,023
     
128
     
804
     
2,112
     
6,740
 
Losses charged off
   
2
     
1,290
     
0
     
1,495
     
110
     
1,260
     
67
     
1,101
     
2,494
     
7,819
 
Recoveries
   
9
     
48
     
0
     
463
     
3
     
77
     
53
     
323
     
1,196
     
2,172
 
Ending balance
 
$
2,776
   
$
12,953
   
$
104
   
$
4,285
   
$
611
   
$
6,934
   
$
870
   
$
1,600
   
$
5,407
   
$
35,540
 
                                                                                 
Ending balance:
                                                                               
Individually evaluated for impairment
 
$
719
   
$
317
   
$
0
   
$
312
   
$
0
   
$
0
   
$
0
   
$
0
   
$
0
   
$
1,348
 
Collectively evaluated for impairment
 
$
2,057
   
$
12,636
   
$
104
   
$
3,973
   
$
611
   
$
6,934
   
$
870
   
$
1,600
   
$
5,407
   
$
34,192
 
                                                                                 
Loans
                                                                               
Ending balance:
                                                                               
Individually evaluated for impairment
 
$
8,080
   
$
31,153
   
$
0
   
$
7,917
   
$
0
   
$
1,189
   
$
0
   
$
0
   
$
0
   
$
48,339
 
Collectively evaluated for impairment
 
$
98,775
   
$
966,501
   
$
9,146
   
$
338,401
   
$
62,226
   
$
704,998
   
$
88,624
   
$
125,847
   
$
377,603
   
$
2,772,121
 

   
Three Months Ended
September 30, 2014
 
(in thousands)
 
Commercial Construction
   
Commercial Secured by Real Estate
   
Equipment Lease Financing
   
Commercial Other
   
Real Estate Construction
   
Real Estate Mortgage
   
Home
Equity
   
Consumer Direct
   
Consumer Indirect
   
Total
 
Allowance for loan losses
                                       
Beginning balance
 
$
2,916
   
$
14,402
   
$
102
   
$
4,677
   
$
450
   
$
5,142
   
$
643
   
$
1,597
   
$
3,688
   
$
33,617
 
Provision charged to expense
   
84
     
1,255
     
25
     
959
     
(6
)
   
8
     
42
     
216
     
717
     
3,300
 
Losses charged off
   
0
     
834
     
0
     
1,169
     
7
     
216
     
65
     
298
     
881
     
3,470
 
Recoveries
   
15
     
12
     
0
     
154
     
0
     
10
     
1
     
96
     
355
     
643
 
Ending balance
 
$
3,015
   
$
14,835
   
$
127
   
$
4,621
   
$
437
   
$
4,944
   
$
621
   
$
1,611
   
$
3,879
   
$
34,090
 
                                                                                 
Ending balance:
                                                                               
Individually evaluated for impairment
 
$
734
   
$
1,273
   
$
0
   
$
211
   
$
0
   
$
0
   
$
0
   
$
0
   
$
0
   
$
2,218
 
Collectively evaluated for impairment
 
$
2,281
   
$
13,562
   
$
127
   
$
4,410
   
$
437
   
$
4,944
   
$
621
   
$
1,611
   
$
3,879
   
$
31,872
 
                                                                                 
Loans
                                                                               
Ending balance:
                                                                               
Individually evaluated for impairment
 
$
9,399
   
$
39,080
   
$
0
   
$
16,558
   
$
0
   
$
1,874
   
$
0
   
$
0
   
$
0
   
$
66,911
 
Collectively evaluated for impairment
 
$
110,849
   
$
892,375
   
$
10,055
   
$
330,477
   
$
62,105
   
$
701,449
   
$
88,291
   
$
121,367
   
$
300,026
   
$
2,616,994
 
 
   
Nine Months Ended
September 30, 2014
 
(in thousands)
 
Commercial Construction
   
Commercial Secured by Real Estate
   
Equipment Lease Financing
   
Commercial Other
   
Real Estate Construction
   
Real Estate Mortgage
   
Home
Equity
   
Consumer Direct
   
Consumer Indirect
   
Total
 
Allowance for loan losses
                                       
Beginning balance
 
$
3,396
   
$
14,535
   
$
121
   
$
5,238
   
$
397
   
$
4,939
   
$
601
   
$
1,127
   
$
3,654
   
$
34,008
 
Provision charged to expense
   
(406
)
   
1,489
     
6
     
1,059
     
161
     
412
     
110
     
1,031
     
1,518
     
5,380
 
Losses charged off
   
0
     
1,452
     
0
     
2,074
     
123
     
437
     
93
     
980
     
2,485
     
7,644
 
Recoveries
   
25
     
263
     
0
     
398
     
2
     
30
     
3
     
433
     
1,192
     
2,346
 
Ending balance
 
$
3,015
   
$
14,835
   
$
127
   
$
4,621
   
$
437
   
$
4,944
   
$
621
   
$
1,611
   
$
3,879
   
$
34,090
 
                                                                                 
Ending balance:
                                                                               
Individually evaluated for impairment
 
$
734
   
$
1,273
   
$
0
   
$
211
   
$
0
   
$
0
   
$
0
   
$
0
   
$
0
   
$
2,218
 
Collectively evaluated for impairment
 
$
2,281
   
$
13,562
   
$
127
   
$
4,410
   
$
437
   
$
4,944
   
$
621
   
$
1,611
   
$
3,879
   
$
31,872
 
                                                                                 
Loans
                                                                               
Ending balance:
                                                                               
Individually evaluated for impairment
 
$
9,399
   
$
39,080
   
$
0
   
$
16,558
   
$
0
   
$
1,874
   
$
0
   
$
0
   
$
0
   
$
66,911
 
Collectively evaluated for impairment
 
$
110,849
   
$
892,375
   
$
10,055
   
$
330,477
   
$
62,105
   
$
701,449
   
$
88,291
   
$
121,367
   
$
300,026
   
$
2,616,994
 
 
   
December 31, 2014
 
(in thousands)
 
Commercial Construction
   
Commercial Secured by Real Estate
   
Equipment Lease Financing
   
Commercial Other
   
Real Estate Construction
   
Real Estate Mortgage
   
Home
Equity
   
Consumer Direct
   
Consumer Indirect
   
Total
 
Allowance for loan losses
                                       
Beginning balance
 
$
3,396
   
$
14,535
   
$
121
   
$
5,238
   
$
397
   
$
4,939
   
$
601
   
$
1,127
   
$
3,654
   
$
34,008
 
Provision charged to expense
   
(513
)
   
941
     
(2
)
   
1,545
     
258
     
2,173
     
265
     
1,207
     
2,881
     
8,755
 
Losses charged off
   
15
     
2,163
     
0
     
3,141
     
123
     
1,058
     
115
     
1,326
     
3,495
     
11,436
 
Recoveries
   
28
     
305
     
0
     
621
     
2
     
40
     
5
     
566
     
1,553
     
3,120
 
Ending balance
 
$
2,896
   
$
13,618
   
$
119
   
$
4,263
   
$
534
   
$
6,094
   
$
756
   
$
1,574
   
$
4,593
   
$
34,447
 
                                                                                 
Ending balance:
                                                                               
Individually evaluated for impairment
 
$
734
   
$
827
   
$
0
   
$
181
   
$
0
   
$
0
   
$
0
   
$
0
   
$
0
   
$
1,742
 
Collectively evaluated for impairment
 
$
2,162
   
$
12,791
   
$
119
   
$
4,082
   
$
534
   
$
6,094
   
$
756
   
$
1,574
   
$
4,593
   
$
32,705
 
                                                                                 
Loans
                                                                               
Ending balance:
                                                                               
Individually evaluated for impairment
 
$
9,627
   
$
34,357
   
$
0
   
$
13,807
   
$
0
   
$
1,277
   
$
0
   
$
0
   
$
0
   
$
59,068
 
Collectively evaluated for impairment
 
$
112,315
   
$
914,269
   
$
10,344
   
$
338,241
   
$
62,412
   
$
711,188
   
$
88,335
   
$
122,136
   
$
315,516
   
$
2,674,756
 

Note 6 – Other Real Estate Owned

Activity for other real estate owned was as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30
   
September 30
 
(in thousands)
 
2015
   
2014
   
2015
   
2014
 
Beginning balance of other real estate owned
 
$
36,698
   
$
33,062
   
$
36,776
   
$
39,188
 
New assets acquired
   
3,725
     
1,803
     
9,986
     
5,267
 
Capitalized costs
   
0
     
0
     
85
     
0
 
Fair value adjustments
   
(784
)
   
(241
)
   
(1,146
)
   
(1,402
)
Sale of assets
   
(4,985
)
   
(1,877
)
   
(11,047
)
   
(10,306
)
Ending balance of other real estate owned
 
$
34,654
   
$
32,747
   
$
34,654
   
$
32,747
 

Carrying costs and fair value adjustments associated with foreclosed properties for the three months ended September 30, 2015 and 2014 were $1.3 million and $0.7 million, respectively.  Carrying costs and fair value adjustments associated with foreclosed properties for the nine months ended September 30, 2015 and 2014 were $2.5 million and $2.9 million.

The major classifications of foreclosed properties are shown in the following table:

(in thousands)
 
September 30,
2015
   
December 31,
2014
 
1-4 family
 
$
7,866
   
$
10,337
 
Agricultural/farmland
   
116
     
116
 
Construction/land development/other
   
17,856
     
18,735
 
Multifamily
   
838
     
1,289
 
Non-farm/non-residential
   
7,978
     
6,299
 
Total foreclosed properties
 
$
34,654
   
$
36,776
 

Note 7 – Repurchase Agreements

We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and provide additional funding to our balance sheet.  Repurchase agreements are transactions whereby we offer to sell to a counterparty an undivided interest in an eligible security at an agreed upon purchase price, and which obligates CTBI to repurchase the security on an agreed upon date at an agreed upon repurchase price plus interest at an agreed upon rate.  Securities sold under agreements to repurchase are recorded at the amount of cash received in connection with the transaction and are reflected in the accompanying consolidated balance sheets.

We monitor collateral levels on a continuous basis and maintain records of each transaction specifically describing the applicable security and the counterparty's fractional interest in that security, and we segregate the security from its general assets in accordance with regulations governing custodial holdings of securities.  The primary risk with our repurchase agreements is market risk associated with the securities securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying securities.  Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.  The carrying value of investment securities available for sale pledged as collateral under repurchase agreements totaled $290.7 million and $283.3 million at September 30, 2015 and December 31, 2014, respectively.

The remaining contractual maturity of the securities sold under agreements to repurchase by class of collateral pledged included in the accompanying consolidated balance sheets as of September 30, 2015 and December 31, 2014 is presented in the following tables:

   
September 30, 2015
 
   
Remaining Contractual Maturity of the Agreements
 
(in thousands)
 
Overnight and
Continuous
   
Up to 30 days
   
30-90 days
   
Greater Than
90 days
   
Total
 
Repurchase agreements and
repurchase-to-maturity transactions:
                   
U.S. Treasury and government agencies
 
$
19,986
   
$
22,400
   
$
0
   
$
32,258
   
$
74,644
 
State and political subdivisions
   
59,293
     
2,330
     
508
     
9,401
     
71,532
 
U.S. government sponsored agency mortgage-backed securities
   
30,302
     
24,270
     
209
     
55,196
     
109,977
 
Total
 
$
109,581
   
$
49,000
   
$
717
   
$
96,855
   
$
256,153
 

   
December 31, 2014
 
   
Remaining Contractual Maturity of the Agreements
 
(in thousands)
 
Overnight and
Continuous
   
Up to 30 days
   
30-90 days
   
Greater Than
90 days
   
Total
 
Repurchase agreements and
repurchase-to-maturity transactions:
                   
U.S. Treasury and government agencies
 
$
6,790
   
$
1,000
   
$
6,834
   
$
14,076
   
$
28,700
 
State and political subdivisions
   
59,451
     
0
     
1,839
     
12,474
     
73,764
 
U.S. government sponsored agency mortgage-backed securities
   
39,315
     
0
     
15,871
     
77,536
     
132,722
 
Total
 
$
105,556
   
$
1,000
   
$
24,544
   
$
104,086
   
$
235,186
 

Note 8 – Fair Market Value of Financial Assets and Liabilities

Fair Value Measurements

ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances.  Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs.  In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability.  In support of this principle, ASC 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.  The fair value hierarchy is as follows:

Level 1 Inputs – Quoted prices in active markets for identical assets or liabilities.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Recurring Measurements

The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 and indicate the level within the fair value hierarchy of the valuation techniques.

       
Fair Value Measurements at
September 30, 2015 Using
 
(in thousands)
 
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
 
$
202,050
   
$
19,997
   
$
182,053
   
$
0
 
State and political subdivisions
   
135,459
     
0
     
135,459
     
0
 
U.S. government sponsored agency mortgage-backed securities
   
214,176
     
0
     
214,176
     
0
 
CRA investment funds
   
25,028
     
25,028
     
0
     
0
 
Mortgage servicing rights
   
3,030
     
0
     
0
     
3,030
 

       
Fair Value Measurements at
December 31, 2014 Using
 
(in thousands)
 
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
 
$
188,932
   
$
492
   
$
188,440
   
$
0
 
State and political subdivisions
   
137,458
     
0
     
137,458
     
0
 
U.S. government sponsored agency mortgage-backed securities
   
288,907
     
0
     
288,907
     
0
 
CRA investment funds
   
24,889
     
24,889
     
0
     
0
 
Mortgage servicing rights
   
2,968
     
0
     
0
     
2,968
 

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 and recorded at fair value as of September 30, 2015 and December 31, 2014.  There have been no significant changes in the valuation techniques during the quarter ended September 30, 2015.  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.  U.S. Treasury and government agencies and CTBI's CRA investment funds are classified as Level 1 of the valuation hierarchy where quoted market prices are available in the active market on which the individual securities are traded.

If quoted market prices are not available, CTBI obtains fair value measurements from an independent pricing service, such as Interactive Data, which utilizes pricing models to determine fair value measurement.  CTBI reviews the pricing quarterly to verify the reasonableness of the pricing.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other factors.  U.S. Treasury and government agencies, state and political subdivisions, and U.S. government sponsored agency mortgage-backed securities are classified as Level 2 inputs.

In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.  Fair value determinations for Level 3 measurements are estimated on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States.  As of September 30, 2015, CTBI does not own any securities classified as Level 3 inputs.

Mortgage Servicing Rights

Mortgage servicing rights do not trade in an active, open market with readily observable prices.  CTBI reports mortgage servicing rights at fair value on a recurring basis with subsequent remeasurement of MSRs based on change in fair value.

In determining fair value, CTBI utilizes the expertise of an independent third party.  Accordingly, fair value is determined by the independent third party by utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand.  Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.  Fair value determinations for Level 3 measurements of mortgage servicing rights are tested for impairment on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States.  See the table below for inputs and valuation techniques used for Level 3 mortgage servicing rights.

Transfers between Levels

There were no transfers between Levels 1, 2, and 3 as of September 30, 2015.

Level 3 Reconciliation

Following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs for the three and nine months ended September 30, 2015 and 2014:

Mortgage Servicing Rights
       
   
Three Months Ended
   
Nine Months Ended
 
   
September 30
   
September 30
 
(in thousands)
 
2015
   
2014
   
2015
   
2014
 
Beginning balance
 
$
3,235
   
$
3,062
   
$
2,968
   
$
3,424
 
Total recognized gains (losses)
                               
Included in net income
   
(228
)
   
80
     
(37
)
   
(212
)
Issues
   
146
     
89
     
443
     
234
 
Settlements
   
(123
)
   
(119
)
   
(344
)
   
(334
)
Ending balance
 
$
3,030
   
$
3,112
   
$
3,030
   
$
3,112
 
                                 
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
 
$
(228
)
 
$
80
   
$
(37
)
 
$
(212
)

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

Noninterest Income
       
   
Three Months Ended
   
Nine Months Ended
 
   
September 30
   
September 30
 
(in thousands)
 
2015
   
2014
   
2015
   
2014
 
Total gains (losses)
 
$
(351
)
 
$
(39
)
 
$
(381
)
 
$
(546
)

Nonrecurring Measurements

The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a nonrecurring basis as of September 30, 2015 and December 31, 2014 and indicate the level within the fair value hierarchy of the valuation techniques.

       
Fair Value Measurements at
September 30, 2015 Using
 
(in thousands)
 
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)
 
$
2,195
   
$
0
   
$
0
   
$
2,195
 
Other real estate/assets owned
   
4,015
     
0
     
0
     
4,015
 

       
Fair Value Measurements at
December 31, 2014 Using
 
(in thousands)
 
Fair Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets measured – nonrecurring basis
               
Impaired loans (collateral dependent)
 
$
4,665
   
$
0
   
$
0
   
$
4,665
 
Other real estate/assets owned
   
6,472
     
0
     
0
     
6,472
 

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 (i) partial write-downs that are based on the observable market price or current appraised value of the collateral or (ii) the full charge-off of the loan carrying value.  Quarter-to-date fair value adjustments on impaired loans disclosed above were $0.3 million for the quarters ended September 30, 2015 and December 31, 2014 compared to $1.3 million for the quarter ended September 30, 2014.  Year-to-date adjustments were $0.9 million for the nine months ended September 30, 2015, $0.4 million for the year ended December 31, 2014, and $1.5 million for the nine months ended September 30, 2014.

Other Real Estate Owned

In accordance with the provisions of ASC 360, Property, Plant, and Equipment, other real estate owned (OREO) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired.  Estimated fair value of OREO is based on appraisals or evaluations.  OREO is classified within Level 3 of the fair value hierarchy.  Long-lived assets are subject to nonrecurring fair value adjustments to reflect subsequent partial write-downs that are based on the observable market price or current appraised value of the collateral.  Quarter-to-date fair value adjustments on other real estate/assets owned were decreases of $0.8 million, $0.3 million, and $0.2 million for the quarters ended September 30, 2015, December 31, 2014, and September 30, 2014, respectively.  Year-to-date adjustments were decreases of $1.1 million for the nine months ended September 30, 2015, $1.7 million for the year ended December 31, 2014, and $1.4 million for the nine months ended September 30, 2014.

Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months.  Appraisers are selected from the list of approved appraisers maintained by management.

Unobservable (Level 3) Inputs

The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at September 30, 2015 and December 31, 2014.

(in thousands)
 
Quantitative Information about Level 3 Fair Value Measurements
   
Fair Value at September 30, 2015
 
Valuation Technique(s)
Unobservable Input
 
Range (Weighted Average)
Mortgage servicing rights
 
$
3,030
 
Discount cash flows, computer pricing model
Constant prepayment rate
   
6.1% - 23.9%
(11.3%)
             
Probability of default
   
0.0% - 100.0%
(2.7%)
             
Discount rate
   
10.0% - 11.5%
(10.1%)
                   
Impaired loans (collateral-dependent)
 
$
2,195
 
Market comparable properties
Marketability discount
   
5.0% - 10.0%
(7.0%)
                   
Other real estate/assets owned
 
$
4,015
 
Market comparable properties
Comparability adjustments
   
5.0% - 30.0%
(10.5%)

(in thousands)
 
Quantitative Information about Level 3 Fair Value Measurements
   
Fair Value at December 31, 2014
 
Valuation Technique(s)
Unobservable Input
 
Range (Weighted Average)
Mortgage servicing rights
 
$
2,968
 
Discount cash flows, computer pricing model
Constant prepayment rate
   
4.6% - 25.1%
(11.3%)
             
Probability of default
   
0.0% - 100.0%
(3.6%)
             
Discount rate
   
10.0% - 11.5%
(10.1%)
                   
Impaired loans (collateral-dependent)
 
$
4,665
 
Market comparable properties
Marketability discount
   
5.0% - 10.0%
(7.0%)
                   
Other real estate/assets owned
 
$
6,472
 
Market comparable properties
Comparability adjustments
   
3.0% - 67.0%
(18.0%)

Sensitivity of Significant Unobservable Inputs

The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

Mortgage Servicing Rights

Market value for mortgage servicing rights is derived based on unobservable inputs, such as prepayment speeds of the underlying loans generated using the Andrew Davidson Prepayment Model, FHLMC/FNMA guidelines, the weighted-average life of the loan, the discount rate, the weighted average coupon, and the weighted average default rate.  Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value measurement.  Generally, a change in the assumption used for prepayment speeds is accompanied by a directionally opposite change in the assumption for interest rates.

Fair Value of Financial Instruments

The following table presents estimated fair value of CTBI's financial instruments as of September 30, 2015 and indicates the level within the fair value hierarchy of the valuation techniques.

       
Fair Value Measurements
at September 30, 2015 Using
 
(in thousands)
 
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
 
$
163,192
   
$
163,192
   
$
0
   
$
0
 
Certificates of deposit in other banks
   
5,759
     
0
     
5,769
     
0
 
Securities available-for-sale
   
576,713
     
45,025
     
531,688
     
0
 
Securities held-to-maturity
   
1,661
     
0
     
1,651
     
0
 
Loans held for sale
   
1,983
     
2,029
     
0
     
0
 
Loans, net
   
2,784,920
     
0
     
0
     
2,793,430
 
Federal Home Loan Bank stock
   
17,927
     
0
     
17,927
     
0
 
Federal Reserve Bank stock
   
4,887
     
0
     
4,887
     
0
 
Accrued interest receivable
   
13,581
     
0
     
13,581
     
0
 
Mortgage servicing rights
   
3,030
     
0
     
0
     
3,030
 
                                 
Financial liabilities:
                               
Deposits
 
$
2,975,229
   
$
737,657
   
$
2,219,060
   
$
0
 
Repurchase agreements
   
256,153
     
0
     
0
     
256,120
 
Federal funds purchased
   
9,215
     
0
     
9,215
     
0
 
Advances from Federal Home Loan Bank
   
1,084
     
0
     
1,233
     
0
 
Long-term debt
   
61,341
     
0
     
0
     
49,073
 
Accrued interest payable
   
1,641
     
0
     
1,641
     
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, 2014 and indicates the level within the fair value hierarchy of the valuation techniques.

 
(in thousands)
     
Fair Value Measurements
at December 31, 2014 Using
 
   
Carrying Amount
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Financial assets:
               
Cash and cash equivalents
 
$
105,517
   
$
105,517
   
$
0
   
$
0
 
Certificates of deposit in other banks
   
8,197
     
0
     
8,213
     
0
 
Securities available-for-sale
   
640,186
     
25,381
     
614,805
     
0
 
Securities held-to-maturity
   
1,662
     
0
     
1,644
     
0
 
Loans held for sale
   
2,264
     
2,321
     
0
     
0
 
Loans, net
   
2,699,377
     
0
     
0
     
2,691,906
 
Federal Home Loan Bank stock
   
17,927
     
0
     
17,927
     
0
 
Federal Reserve Bank stock
   
4,869
     
0
     
4,869
     
0
 
Accrued interest receivable
   
13,548
     
0
     
13,548
     
0
 
Mortgage servicing rights
   
2,968
     
0
     
0
     
2,968
 
                                 
Financial liabilities:
                               
Deposits
 
$
2,874,257
   
$
677,626
   
$
2,192,848
   
$
0
 
Repurchase agreements
   
235,186
     
0
     
0
     
235,193
 
Federal funds purchased
   
11,041
     
0
     
11,041
     
0
 
Advances from Federal Home Loan Bank
   
61,170
     
0
     
61,106
     
0
 
Long-term debt
   
61,341
     
0
     
0
     
35,615
 
Accrued interest payable
   
908
     
0
     
908
     
0
 
                                 
Unrecognized financial instruments:
                               
Letters of credit
 
$
0
   
$
0
   
$
0
   
$
0
 
Commitments to extend credit
   
0
     
0
     
0
     
0
 
Forward sale commitments
   
0
     
0
     
0
     
0
 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and cash equivalents – The carrying amount approximates fair value.

Certificates of deposit in other banks – Fair values are based on quoted market prices or dealer quotes for similar instruments.

Securities held-to-maturity – Fair values are based on quoted market prices, if available.  If a quoted price is not available, fair value is estimated using quoted prices for similar securities.  The fair value estimate is provided to management from a third party using modeling assumptions specific to each type of security that are reviewed and approved by management.  Quarterly sampling of fair values provided by additional third parties supplement the fair value review process.

Loans held for sale – The fair value is predetermined at origination based on sale price.

Loans (net of the allowance for loan and lease losses) – The fair value of fixed rate loans and variable rate mortgage loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  For other variable rate loans, the carrying amount approximates fair value.

Federal Home Loan Bank stock – The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Federal Reserve Bank stock – The carrying value of Federal Reserve Bank stock approximates fair value based on the redemption provisions of the Federal Reserve Bank.

Accrued interest receivable – The carrying amount approximates fair value.

Deposits – The fair value of fixed maturity time deposits is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.  For deposits including demand deposits, savings accounts, NOW accounts, and certain money market accounts, the carrying value approximates fair value.

Repurchase agreements – The fair value is estimated by discounting future cash flows using current rates.

Federal funds purchased – The carrying amount approximates fair value.

Advances from Federal Home Loan Bank – The fair value of these fixed-maturity advances is estimated by discounting future cash flows using rates currently offered for advances of similar remaining maturities.

Long-term debt – The fair value is estimated by discounting future cash flows using current rates.

Accrued interest payable – The carrying amount approximates fair value.

Commitments to originate loans, forward sale commitments, letters of credit, and lines of credit – The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.  For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.  The fair value of forward sale commitments is estimated based on current market prices for loans of similar terms and credit quality.  The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.  The fair values of these commitments are not material.

Note 9 – 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)
 
2015
   
2014
   
2015
   
2014
 
Numerator:
               
Net income
 
$
11,222
   
$
10,924
   
$
34,562
   
$
33,259
 
                                 
Denominator:
                               
Basic earnings per share:
                               
Weighted average shares
   
17,440
     
17,326
     
17,420
     
17,317
 
Diluted earnings per share:
                               
Effect of dilutive stock options and restricted stock grants
   
51
     
76
     
52
     
78
 
Adjusted weighted average shares
   
17,491
     
17,402
     
17,472
     
17,395
 
                                 
Earnings per share:
                               
Basic earnings per share
 
$
0.64
   
$
0.63
   
$
1.98
   
$
1.92
 
Diluted earnings per share
   
0.64
     
0.63
     
1.98
     
1.91
 

There were no options to purchase common shares that were excluded from the diluted calculations above for the three and nine months ended September 30, 2015.  In addition to in-the-money stock options, unvested restricted stock grants were also used in the calculation of diluted earnings per share based on the treasury method.  Options to purchase 63,270 common shares at a weighted average price of $35.41 were excluded from the diluted calculations above for the three months ended September 30, 2014.  There were no options to purchase common shares that were excluded from the diluted calculations above for the nine months ended September 30, 2014.

Note 10 – Accumulated Other Comprehensive Income

Unrealized gains (losses) on AFS securities

Amounts reclassified from accumulated other comprehensive income (AOCI) and the affected line items in the statements of income during the three and nine months ended September 30, 2015 and 2014 were:

   
Amounts Reclassified from AOCI
 
 (in thousands)
 
Three Months Ended
September 30
   
Nine Months Ended
September 30
 
 
2015
   
2014
   
2015
   
2014
 
Affected line item in the statements of income
               
Securities gains (losses)
 
$
12
   
$
(34
)
 
$
142
   
$
(145
)
Tax expense (benefit)
   
4
     
(12
)
   
50
     
(51
)
Total reclassifications out of AOCI
 
$
8
   
$
(22
)
 
$
92
   
$
(94
)


Item 2.  Management's Discussion and Analysis of Financial Condition
and Results of Operations

Overview

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand Community Trust Bancorp, Inc., our operations, and our present business environment.  The MD&A is provided as a supplement to – and should be read in conjunction with – our condensed consolidated financial statements and the accompanying notes contained in this quarterly report.  The MD&A includes the following sections:
 
v Our Business
 
v Results of Operations and Financial Condition
 
v Dividends
 
v Liquidity and Market Risk
 
v Interest Rate Risk
 
v Capital Resources
 
v Impact of Inflation, Changing Prices, and Economic Conditions
 
v Stock Repurchase Program
 
v Critical Accounting Policies and Estimates

Our Business

Community Trust Bancorp, Inc. ("CTBI") is a bank holding company headquartered in Pikeville, Kentucky.  Currently, we own one commercial bank, Community Trust Bank, Inc. ("CTB") and one trust company, Community Trust and Investment Company, Inc.  Through our subsidiaries, we have eighty 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, 2015, we had total consolidated assets of $3.8 billion and total consolidated deposits, including repurchase agreements, of $3.2 billion.  Total shareholders' equity at September 30, 2015 was $470.6 million.  Trust assets under management, which are excluded from CTBI's total consolidated assets, at September 30, 2015, were $1.9 billion.

Through its subsidiaries, CTBI engages 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 CTB 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 investment agent, as depositories for securities, and as providers of full service brokerage and insurance services.  For further information, see Item 1 of our annual report on Form 10-K for the year ended December 31, 2014.

Results of Operations and Financial Condition

For the quarter ended September 30, 2015, we reported earnings of $11.2 million, or $0.64 per basic share, compared to $10.9 million, or $0.63 per basic share, earned during the third quarter 2014 and $12.4 million, or $0.71 per basic share, earned during the second quarter 2015.  Earnings for the nine months ended September 30, 2015 were $34.6 million, or $1.98 per basic share compared to $33.3 million, or $1.92 per basic share, for the nine months ended September 30, 2014.

Quarterly Highlights

v
Our loan portfolio increased $86.6 million from December 31, 2014 and $27.6 million during the quarter.

v
Our investment portfolio decreased $63.5 million from December 31, 2014 and $4.5 million during the quarter.

v
Deposits, including repurchase agreements, increased $121.9 million from December 31, 2014 and $76.5 million during the quarter.

v
Nonperforming loans at $32.7 million decreased $6.2 million from December 31, 2014 and $0.7 million from June 30, 2015.  Nonperforming assets at $67.5 million decreased $8.3 million from December 31, 2014 and $2.5 million from June 30, 2015.

v
Net loan charge-offs for the quarter ended September 30, 2015 were $2.2 million, or 0.31% of average loans annualized, compared to $2.8 million, or 0.42%, experienced for the third quarter 2014 and $1.7 million, or 0.25%, for the second quarter 2015.

v
CTBI's investments in low income housing and other community related investments provided tax credits to offset current income tax expense for the third quarter 2015 in the amount of $1.2 million compared to $0.3 million in the third quarter 2014 and $0.9 million in the second quarter 2015.  Year-to-date credits used to offset current income tax expense totaled $2.4 million compared to $0.8 million for the first nine months of 2014.  The amortization of our investment in these partnerships increased as well.  Amortization for the third quarter 2015 totaled $1.0 million compared to $0.2 million for the third quarter 2014 and $0.7 million for the second quarter 2015.  Year-to-date amortization was $2.0 million compared to $0.6 million for the first nine months of 2014.

v
In addition to the amortization expense mentioned above, noninterest expense for the quarter was impacted by an increase of $0.6 million in other real estate owned expense from same quarter last year and an increase of $0.5 million from prior quarter.  Personnel expense for the quarter also increased $0.5 million from same quarter last year and $0.4 million from prior quarter.  Year-to-date noninterest expense was impacted by a $1.1 million increase in personnel expense due to a $0.6 million increase in group medical and life insurance cost and a $0.5 million increase in the performance based bonus accrual year over year, in addition to the $1.4 million increase in amortization expense.  The year-to-date increases were partially offset by a $0.7 million decrease in data processing expense and a $0.4 million decrease in other real estate owned expense.

Income Statement Review

(dollars in thousands)
         
Change 2015 vs. 2014
 
Nine Months Ended September 30
 
2015
   
2014
   
Amount
   
Percent
 
Net interest income
 
$
99,052
   
$
98,571
   
$
481
     
0.5
%
Provision for loan losses
   
6,740
     
5,380
     
1,360
     
25.3
 
Noninterest income
   
34,999
     
33,043
     
1,956
     
5.9
 
Noninterest expense
   
79,665
     
77,980
     
1,685
     
2.2
 
Income taxes
   
13,084
     
14,995
     
(1,911
)
   
(12.7
)
Net income
 
$
34,562
   
$
33,259
   
$
1,303
     
3.9
%
                                 
Average earning assets
 
$
3,506,303
   
$
3,409,905
   
$
96,398
     
2.8
%
                                 
Yield on average earnings assets
   
4.17
%
   
4.27
%
   
(0.10
)%
   
(2.4
)%
Cost of interest bearing funds
   
0.45
%
   
0.47
%
   
(0.02
)%
   
(3.1
)%
                                 
Net interest margin
   
3.84
%
   
3.92
%
   
(0.08
)%
   
(2.2
)%

Net Interest Income

Net interest income for the quarter decreased $0.02 million, or 0.1%, from prior year third quarter and $0.2 million, or 0.7%, from prior quarter, while our net interest margin decreased 11 basis points and 8 basis points during the respective time periods.  Average earning assets increased $97.9 million, or 2.9%, from third quarter 2014 and $10.3 million, or 0.3%, from prior quarter, while our yield on average earning assets decreased 12 basis points and 8 basis points, respectively, during these time periods.  The cost of interest bearing funds remained flat to prior year third quarter but increased 1 basis point from prior quarter.  Our ratio of average loans to deposits, including repurchase agreements, for the quarter ended September 30, 2015 was 87.5% compared to 84.9% for the quarter ended September 30, 2014 and 87.1% for the quarter ended June 30, 2015.  Year-to-date net interest income increased $0.5 million, or 0.5% from prior year.
 
Provision for Loan Losses

The provision for loan losses that was added to the allowance for the third quarter 2015 was $2.5 million compared to $3.3 million in the third quarter 2014 and $2.3 million for the quarter ended June 30, 2015.  Year-to-date allocations to the reserve were $6.7 million at September 30, 2015 compared to $5.4 million at September 30, 2014.  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.  Our provision increased for the quarter due to higher loan growth.  Our reserve coverage (allowance for loan and lease loss reserve to nonperforming loans) at September 30, 2015 was 108.6% compared to 70.2% at September 30, 2014 and 105.4% at June 30, 2015.  Our loan loss reserve as a percentage of total loans outstanding decreased from the 1.27% at September 30, 2014 but remained at 1.26% from June 30, 2015 to September 30, 2015.

Noninterest Income

Noninterest income for the quarter ended September 30, 2015 increased $0.02 million, or 0.2%, from prior year same quarter but decreased $0.2 million, or 1.6%, from prior quarter.  The increase year over year was primarily due to an increase in other noninterest income items, including a $0.3 million increase in insurance commissions and brokerage revenue and a $0.2 million gain on the sale of our Hazard Main Street Branch, partially offset by a $0.5 million decrease in loan related fees.  Quarter over quarter, we experienced decreases in gains on sales of loans, trust revenue, and loan related fees, partially offset by increases in deposit service charges and other noninterest income.  The quarterly decrease in loan related fees resulted primarily from a $0.3 million fluctuation in the fair value adjustments of our mortgage servicing rights from prior year same quarter and a $0.5 million fluctuation from prior quarter.

Year-to-date noninterest income increased $2.0 million, or 5.9% from prior year.  Gains on sales of loans increased $0.8 million, deposit service charges increased $0.2 million, trust revenue increased $0.2 million, loan related fees increased $0.2 million, and securities gains (losses) improved $0.3 million.  The increase in loan related fees resulted primarily from a $0.2 million fluctuation in the fair value adjustments of our mortgage servicing rights.

Noninterest Expense

Noninterest expense for the quarter ended September 30, 2015 increased $1.7 million, or 6.5%, from prior year third quarter and $1.2 million, or 4.6%, from prior quarter.  The increase in noninterest expense was primarily due to increases in amortization expense related to tax credits, personnel expense, and other real estate owned expense.

Year-to-date noninterest expense increased $1.7 million, or 2.2%, from prior year.  The increase primarily resulted from a $1.4 million increase in amortization expense related to tax credits and a $1.1 million increase in personnel expense due to a $0.6 million increase in group medical and life insurance cost and a $0.5 million increase in the performance based bonus accrual year over year.  These increases were partially offset by a $0.7 million decrease in data processing expense and a $0.4 million decrease in other real estate owned expense.

Balance Sheet Review

CTBI's total assets at $3.8 billion increased $84.4 million, or an annualized 9.0%, from December 31, 2014 and $38.1 million, or an annualized 4.0%, during the quarter.  Loans outstanding at September 30, 2015 were $2.8 billion, increasing $86.6 million, or an annualized 12.6%, from December 31, 2014 and $27.6 million, or an annualized 3.9%, during the quarter.  We experienced growth during the quarter of $23.4 million in the indirect loan portfolio, $4.2 million in the consumer direct loan portfolio, and $3.4 million in the residential loan portfolio and a decrease of $3.4 million in the commercial loan portfolio.  CTBI's investment portfolio decreased $63.5 million, or an annualized 39.2%, from December 31, 2014 and $4.5 million, or an annualized 3.1%, during the quarter.  The decline in the investment portfolio was utilized to provide additional liquidity through an increase in our deposits with the Federal Reserve and to support loan growth.  Deposits, including repurchase agreements, at $3.2 billion increased $121.9 million, or an annualized 15.6%, from December 31, 2014 and $76.5 million, or an annualized 9.6%, during the quarter.  Interest bearing deposits in other banks increased $59.9 million from December 31, 2014 and $26.9 million during the quarter.

Shareholders' equity at September 30, 2015 was $470.6 million compared to $447.9 million at December 31, 2014 and $461.6 million at June 30, 2015.  Our tangible common equity/tangible assets ratio increased to 10.82%.

Loans

(in thousands)
 
September 30, 2015
 
Loan Category
 
Balance
   
Variance from Prior Year-End
   
Net Charge-Offs
   
Nonperforming
   
ALLL
 
Commercial:
                   
Construction
 
$
106,855
     
(12.4
)%
 
$
(7
)
 
$
5,133
   
$
2,776
 
Secured by real estate
   
997,654
     
5.2
     
1,242
     
8,900
     
12,953
 
Equipment lease financing
   
9,146
     
(11.6
)
   
0
     
0
     
104
 
Commercial other
   
346,318
     
(1.6
)
   
1,032
     
4,316
     
4,285
 
Total commercial
   
1,459,973
     
1.9
     
2,267
     
18,349
     
20,118
 
                                         
Residential:
                                       
Real estate construction
   
62,226
     
(0.3
)
   
107
     
731
     
611
 
Real estate mortgage
   
706,187
     
(0.9
)
   
1,183
     
12,219
     
6,934
 
Home equity
   
88,624
     
0.3
     
14
     
802
     
870
 
Total residential
   
857,037
     
(0.7
)
   
1,304
     
13,752
     
8,415
 
                                         
Consumer:
                                       
Consumer direct
   
125,847
     
3.0
     
778
     
203
     
1,600
 
Consumer indirect
   
377,603
     
19.7
     
1,298
     
419
     
5,407
 
Total consumer
   
503,450
     
15.0
     
2,076
     
622
     
7,007
 
                                         
Total loans
 
$
2,820,460
     
3.2
%
 
$
5,647
   
$
32,723
   
$
35,540
 

Asset Quality

CTBI's total nonperforming loans were $32.7 million at September 30, 2015, a 16.0% decrease from the $39.0 million at December 31, 2014 and a 2.0% decrease from the $33.4 million at June 30, 2015.  Nonaccrual loans decreased $6.2 million during the nine months ended September 30, 2015 while loans 90+ days past due remained relatively flat.  Loans 30-89 days past due at $18.8 million was an increase of $3.7 million from December 31, 2014.  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, 2015 totaled $48.3 million, a $10.8 million decline from the $59.1 million at December 31, 2014 and a $1.9 million decline from the $50.2 million at June 30, 2015.  Included in certain loan categories of impaired loans are troubled debt restructurings that were classified as impaired.  At September 30, 2015, CTBI had $23.5 million in commercial loans secured by real estate, $6.0 million in commercial real estate construction loans, $4.9 million in commercial other loans, and $1.2 million in real estate mortgage loans that were modified in troubled debt restructurings and impaired.  Management evaluates all impaired loans for the amount of impairment, if any, and records a direct charge-off or provides specific reserves when necessary.

For further information regarding nonperforming and impaired loans, see note 4 to the condensed consolidated financial statements.

CTBI generally does not offer high risk loans such as option ARM products, high loan to value ratio mortgages, interest-only loans, loans with initial teaser rates, or loans with negative amortizations, and therefore, CTBI would have no significant exposure to these products.

Net loan charge-offs for the quarter ended September 30, 2015 were $2.2 million, or 0.31% of average loans annualized, compared to $2.8 million, or 0.42%, experienced for the third quarter 2014 and $1.7 million, or 0.25%, for the second quarter 2015.  Of the net charge-offs for the quarter, $0.6 million were in commercial loans, $0.6 million were in indirect auto loans, $0.6 million were in residential real estate mortgage loans, and $0.3 million were in consumer direct loans.  Net loan charge-offs for the nine months ended September 30, 2015 were $5.6 million, or 0.27% of average loans, compared to $5.3 million, or 0.27% of average loans, experienced for the nine months ended September 30, 2014.

Our level of foreclosed properties at $34.7 million at September 30, 2015 was a decrease from $36.8 million at December 31, 2014 and $36.4 million at June 30, 2015.  Sales of foreclosed properties for the nine months ended September 30, 2015 totaled $11.0 million while new foreclosed properties totaled $10.0 million.  At September 30, 2015, the book value of properties under contracts to sell was $4.0 million; however, the closings had not occurred at quarter-end.

When foreclosed properties are acquired, appraisals are obtained and the properties are booked at the current market value less expected sales costs.  Additionally, periodic updated appraisals are obtained on unsold foreclosed properties.  When an updated appraisal reflects a market value below the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected sales costs.   Charges to earnings in the third quarter 2015 to reflect the decrease in current market values of foreclosed properties totaled $0.8 million.  There were twenty-six properties appraised during the third quarter 2015.  Of these, twelve properties were written down by a total of $0.8 million.  Charges during the quarters ended September 30, 2014 and June 30, 2015 were $0.2 million and $0.3 million, respectively.  OREO losses through the nine months ended September 30, 2015 totaled $1.1 million compared to $1.4 million for September 30, 2014.  Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months.  Approximately fifty-two percent of our OREO properties have been reappraised within the past 12 months.  Management anticipates that our foreclosed properties will remain elevated as we work through current market conditions.

The appraisal aging analysis of foreclosed properties, as well as the holding period, at September 30, 2015 is shown below:

(in thousands)
   
Appraisal Aging Analysis
 
Holding Period Analysis
 
Days Since Last Appraisal
 
Current Book Value
 
Holding Period
 
Current Book Value
 
Up to 3 months
 
$
7,906
 
Less than one year
 
$
8,634
 
3 to 6 months
   
5,397
 
1 to 2 years
   
3,326
 
6 to 9 months
   
1,499
 
2 to 3 years
   
1,754
 
9 to 12 months
   
3,073
 
3 to 4 years
   
2,951
 
12 to 24 months
   
15,755
 
4 to 5 years
   
10,808
 
Over 24 months
   
1,024
 
Over 5 years*
   
7,181
 
Total
 
$
34,654
 
Total
 
$
34,654
 

*Regulatory approval is required and has been obtained to hold these properties beyond the initial period of 5 years.  Additional approval may be required to continue to hold these properties should they not be liquidated during the extension period.

Dividends

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

Pay Date
Record Date
 
Amount Per Share
 
October 1, 2015
September 15, 2015
 
$
0.310
 
July 1, 2015
June 15, 2015
 
$
0.300
 
April 1, 2015
March 15, 2015
 
$
0.300
 
January 1, 2015
December 15, 2014
 
$
0.300
 
October 1, 2014
September 15, 2014
 
$
0.300
 
July 1, 2014
June 15, 2014
 
$
0.290
 

On October 27, 2015, the Board of Directors of CTBI declared a quarterly cash dividend of $0.31 per share to be paid on January 1, 2016 to shareholders of record on December 15, 2015.

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, 2015, we had approximately $163.2 million in cash and cash equivalents and approximately $576.7 million in securities valued at estimated fair value designated as available-for-sale and available to meet liquidity needs on a continuing basis compared to $105.5 million and $640.2 million at December 31, 2014.  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 $1.1 million at September 30, 2015 compared to $61.2 million at December 31, 2014.  As of September 30, 2015, we had a $323 million available borrowing position with the Federal Home Loan Bank compared to $312.3 million at December 31, 2014.  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, 2015 and December 31, 2014, we had $44 million in lines of credit with various correspondent banks available to meet any future cash needs.  Our primary investing activities include purchases of securities and loan originations.  We do not rely on any one source of liquidity and manage availability in response to changing consolidated balance sheet needs.  Included in our cash and cash equivalents at September 30, 2015 were federal funds sold of $2.5 million compared to $4.9 million at December 31, 2014, and deposits with the Federal Reserve were $102.7 million compared to $40.9 million at December 31, 2014.  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.  At September 30, 2015, available-for-sale ("AFS") securities comprised approximately 99.7% of the total investment portfolio, and the AFS portfolio was approximately 123% of equity capital.  Ninety-four percent of the pledge eligible portfolio was pledged.

Interest Rate Risk

We consider interest rate risk one of our most significant market risks. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates.  Consistency of our net interest revenue is largely dependent upon the effective management of interest rate risk.  We employ a variety of measurement techniques to identify and manage our interest rate risk including the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates.  The model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities.  Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model.  These assumptions are inherently uncertain, and as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income.  Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

CTBI's Asset/Liability Management Committee (ALCO), which includes executive and senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk within Board-approved policy limits.  Our current exposure to interest rate risks is determined by measuring the anticipated change in net interest income spread evenly over the twelve-month period.

Capital Resources

Shareholders' equity was $470.6 million at September 30, 2015 and $447.9 million at December 31, 2014.  CTBI's annualized dividend yield to shareholders as of September 30, 2015 was 3.49%.  Our primary source of capital growth is the retention of earnings.  Cash dividends were $0.910 per share and $0.881 per share for the nine months ended September 30, 2015 and 2014, respectively.  We retained 54.0% of our earnings for the first nine months of 2015 compared to 54.1% for the first nine months of 2014.

On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to CTBI and CTB.  The FDIC subsequently approved these rules.  The final rules implement the "Basel III" regulatory capital reforms and changes required by the Dodd-Frank Act.

The rules include new risk-based capital and leverage ratios, which are being phased in from 2015 to 2019, and refine the definition of what constitutes "capital" for purposes of calculating those ratios.  The new minimum capital level requirements applicable to CTBI and CTB under the final rules would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions.  The final rules also establish a "capital conservation buffer" above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016.

The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time.  However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes CTBI) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.

The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness.  These revisions took effect January 1, 2015.  Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following increased capital level requirements in order to qualify as "well capitalized:" (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from current rules).

The final rules set forth certain changes for the calculation of risk-weighted assets, which we were required to utilize beginning January 1, 2015.  The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the "advance approach rules" that apply to banks with greater than $250 billion in consolidated assets.  For more information regarding Basel III, please refer to the Supervision and Regulation section of Item 1. Business in our annual report on Form 10-K for the year ended December 31, 2014.

As of September 30, 2015, following implementation of the new rules, CTBI had a Common Equity Tier 1 capital ratio of 14.49%, a Tier 1 capital ratio of 16.63%, a total capital ratio of 17.88%, and a Tier 1 leverage ratio of 12.40%, all above the required levels to be considered "well-capitalized."

As of September 30, 2015, we are not aware of any other current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material adverse impact on our liquidity, capital resources, or operations, except as provided for in Basel III and 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, 2014.

Impact of Inflation, Changing Prices, and Economic Conditions

The majority of our assets and liabilities are monetary in nature. Therefore, CTBI differs greatly from most commercial and industrial companies that have significant investment in nonmonetary assets, such as fixed assets and inventories.  However, inflation does have an important impact on the growth of assets in the banking industry and on the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio.  Inflation also affects other expenses, which tend to rise during periods of general inflation.

We believe one of the most significant impacts on financial and operating results is our ability to react to changes in interest rates.  We seek to maintain an essentially balanced position between interest rate sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations.

Since 2008 the U.S. economy has faced a severe economic crisis including a major recession from which it is slowly recovering.  Commerce and business growth across a wide range of industries and regions in the U.S. remains reduced and local governments and many businesses continue to experience financial difficulty.  While reflecting some improvement in many parts of the country and in parts of our own service area, unemployment levels remain elevated.  There can be no assurance that these conditions will continue to improve and these conditions could worsen.  Regionally, recent economic conditions in the coal industry could result in increased unemployment in the markets we serve where coal is a major contributor to the economy.  In addition, the implementation of the Patient Protection and Affordable Care Act, the Federal Open Market Committee's plan for economic easing, and the level of U.S. debt may have a destabilizing effect on financial markets.

Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent upon the business environment in the markets where we operate, in the states of Kentucky, West Virginia, and Tennessee and in the United States as a whole.  A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings.  Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors.

Overall, during recent years, the business environment has been adverse for many households and businesses in the United States and worldwide.  While economic conditions in the United States and worldwide have improved since the recession, there can be no assurance that this improvement will continue.  Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in consumer and business spending, borrowing, and savings habits.  Such conditions could adversely affect the credit quality of our loans and our business, financial condition, and results of operations.

Stock Repurchase Program

CTBI has not acquired any shares of common stock through the stock repurchase program since February 2008.  There are 67,371 shares remaining under CTBI's current repurchase authorization.

Critical Accounting Policies and Estimates

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

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

We have identified the following critical accounting policies:

Investments  Management determines the classification of securities at purchase.  We classify securities into held-to-maturity, trading, or available-for-sale categories.  Held-to-maturity securities are those which we have the positive intent and ability to hold to maturity and are reported at amortized cost.  In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320, Investment Securities, investments in debt securities that are not classified as held-to-maturity and equity securities that have readily determinable fair values shall be classified in one of the following categories and measured at fair value in the statement of financial position:
a. Trading securities. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) shall be classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price.
b. Available-for-sale securities. Investments not classified as trading securities (nor as held-to-maturity securities) shall be classified as available-for-sale securities.
We do not have any securities that are classified as trading securities.  Available-for-sale securities are reported at fair value, with unrealized gains and losses included as a separate component of shareholders' equity, net of tax.  If declines in fair value are other than temporary, the carrying value of the securities is written down to fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not credit related.

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

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

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

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

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

We utilize an internal risk grading system for commercial credits.  Those larger commercial credits that exhibit probable or observed credit weaknesses are subject to individual review.  The borrower's cash flow, adequacy of collateral coverage, and other options available to CTBI, including legal remedies, are evaluated.  The review of individual loans includes those loans that are impaired as defined by ASC 310-10-35, Impairment of a Loan.  We evaluate the collectability of both principal and interest when assessing the need for loss provision.  Historical loss rates are analyzed and applied to other commercial loans not subject to specific allocations.  The ALLL allocation for this pool of commercial loans is established based on the historical average, maximum, minimum, and median loss ratios.

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

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

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

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

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 use twelve rolling quarters for our historical loss rate analysis.  Factors that we consider include delinquency trends, current economic conditions and trends, strength of supervision and administration of the loan portfolio, levels of underperforming loans, level of recoveries to prior year's charge-offs, trends in loan losses, industry concentrations and their relative strengths, amount of unsecured loans, and underwriting exceptions.  Based upon management's judgment, "best case," "worst case," and "most likely" scenarios are determined.  The total of each of these weighted factors is then applied against the applicable portion of the portfolio and the ALLL is adjusted accordingly to approximate the most likely scenario.  Management continually reevaluates the other subjective factors included in its ALLL analysis.

Other Real Estate Owned – When foreclosed properties are acquired, appraisals are obtained and the properties are booked at the current market value less expected sales costs.  Additionally, periodic updated appraisals are obtained on unsold foreclosed properties.  When an updated appraisal reflects a market value below the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected sales costs.  Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months.  All revenues and expenses related to the carrying of other real estate owned are recognized by a charge to income.

Income Taxes – Income tax expense is based on the taxes due on the consolidated tax return plus deferred taxes based on the expected future tax benefits and consequences of temporary differences between carrying amounts and tax bases of assets and liabilities, using enacted tax rates.  Any interest and penalties incurred in connection with income taxes are recorded as a component of income tax expense in the consolidated financial statements.  During the nine months ended September 30, 2015 and 2014, CTBI did not recognize a significant amount of interest expense or penalties in connection with income taxes.

CTBI is currently under IRS examination of its 2013 corporate income tax return.  Management does not expect that the results of the examination will have a material effect on our financial condition.  While management believes our tax positions are appropriate, the IRS could challenge our positions as a part of this examination.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits.  CTBI uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates.  Given a 200 basis point increase to the yield curve used in the simulation model, it is estimated net interest income for CTBI would increase by 2.62 percent over one year and increase by 3.52 percent over two years.  A 25 basis point decrease in the yield curve would decrease net interest income by an estimated 0.22 percent over one year and decrease by 0.05 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, 2014.


Item 4.  Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

CTBI's management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.  As of the end of the period covered by this report, an evaluation was carried out by CTBI's management, with the participation of our Chief Executive Officer and the Executive Vice President, Chief Financial Officer, and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on this evaluation, management concluded that disclosure controls and procedures as of September 30, 2015 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, 2015 that have materially affected, or are reasonably likely to materially affect, CTBI's internal control over financial reporting.


PART II - OTHER INFORMATION

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







SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, CTBI has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  COMMUNITY TRUST BANCORP, INC.  
       
Date:  November 6, 2015
By:
/s/ Jean R. Hale  
    Jean R. Hale  
    Chairman, President, and Chief Executive Officer  
       

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