COMMUNITY TRUST BANCORP INC /KY/ - Quarter Report: 2017 June (Form 10-Q)

 

 

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UNITED STATES

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 June 30, 2017
	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, a smaller reporting company, or an emerging growth company.  See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer  ✓	Non-accelerated filer  ☐
		(Do not check if a smaller reporting company)
Smaller reporting company ☐	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

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 – 17,674,440 shares outstanding at July 31, 2017

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. Community Trust Bancorp, Inc.’s (“CTBI”) 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; and the resolution of legal  proceedings and related matters.  In addition, the banking industry in general is subject to various monetary, operational, and fiscal policies and regulations, which include, but are not limited to, those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau, and state regulators, whose policies, regulations, and enforcement actions 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, 2016 for further information in this regard.

(dollars in thousands)		(unaudited) June 30 2017				December 31 2016
Assets:
Cash and due from banks		$	51,224			$	48,603
Interest bearing deposits			74,806				95,586
Federal funds sold			1,800				527
Cash and cash equivalents			127,830				144,716
Certificates of deposit in other banks			12,260				980
Securities available-for-sale at fair value (amortized cost of $611,178 and $608,939, respectively)			610,368				605,394
Securities held-to-maturity at amortized cost (fair value of $858 and $867, respectively)			858				866
Loans held for sale			4,624				1,244
Loans			3,087,342				2,938,371
Allowance for loan and lease losses			(37,133	)			(35,933	)
Net loans			3,050,209				2,902,438
Premises and equipment, net			47,036				47,940
Federal Home Loan Bank stock			17,927				17,927
Federal Reserve Bank stock			4,887				4,887
Goodwill			65,490				65,490
Core deposit intangible (net of accumulated amortization of $8,562 and $8,483, respectively)			53				133
Bank owned life insurance			64,589				63,881
Mortgage servicing rights			3,304				3,433
Other real estate owned			32,785				35,856
Other assets			38,893				36,984
Total assets		$	4,081,113			$	3,932,169
Liabilities and shareholders’ equity:
Deposits:
Noninterest bearing		$	782,864			$	767,918
Interest bearing			2,322,746				2,313,390
Total deposits			3,105,610				3,081,308
Repurchase agreements			257,208				251,065
Federal funds purchased			7,220				4,816
Advances from Federal Home Loan Bank			100,894				944
Long-term debt			59,341				61,341
Deferred taxes			8,916				7,836
Other liabilities			27,009				24,244
Total liabilities			3,566,198				3,431,554
Shareholders’ equity:
Preferred stock, 300,000 shares authorized and unissued			-				-
Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2017 – 17,670,501; 2016 – 17,628,695			88,353				88,144
Capital surplus			220,471				219,697
Retained earnings			206,617				195,078
Accumulated other comprehensive loss, net of tax			(526	)			(2,304	)
Total shareholders’ equity			514,915				500,615
Total liabilities and shareholders’ equity		$	4,081,113			$	3,932,169

		Three Months Ended								Six Months Ended
		June 30								June 30
(in thousands except per share data)		2017				2016				2017				2016
Interest income:
Interest and fees on loans, including loans held for sale		$	34,880			$	33,255			$	68,355			$	66,579
Interest and dividends on securities
Taxable			2,230				2,065				4,260				4,158
Tax exempt			721				658				1,470				1,350
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock			283				252				559				506
Other, including interest on federal funds sold			297				144				535				308
Total interest income			38,411				36,374				75,179				72,901
Interest expense:
Interest on deposits			3,181				2,677				6,122				5,248
Interest on repurchase agreements and other short-term borrowings			411				284				749				548
Interest on advances from Federal Home Loan Bank			165				4				168				48
Interest on long-term debt			414				350				810				674
Total interest expense			4,171				3,315				7,849				6,518
Net interest income			34,240				33,059				67,330				66,383
Provision for loan losses			2,764				1,873				3,993				3,638
Net interest income after provision for loan losses			31,476				31,186				63,337				62,745
Noninterest income:
Service charges on deposit accounts			6,199				6,272				12,159				12,117
Gains on sales of loans, net			251				446				507				762
Trust and wealth management income			2,649				2,396				5,235				4,671
Loan related fees			773				739				1,778				1,350
Bank owned life insurance			526				538				1,050				1,068
Brokerage revenue			423				317				735				680
Securities gains (losses)			18				(4	)			10				64
Other noninterest income			1,472				1,065				2,416				2,028
Total noninterest income			12,311				11,769				23,890				22,740
Noninterest expense:
Officer salaries and employee benefits			2,663				2,964				5,927				6,057
Other salaries and employee benefits			11,381				11,358				23,041				22,398
Occupancy, net			1,972				1,966				3,999				4,023
Equipment			748				729				1,534				1,444
Data processing			1,757				1,559				3,546				3,128
Bank franchise tax			1,521				1,400				3,041				2,799
Legal fees			385				502				827				982
Professional fees			551				483				1,047				922
Advertising and marketing			708				580				1,393				1,209
FDIC insurance			315				576				607				1,159
Other real estate owned provision and expense			1,827				468				2,743				1,019
Repossession expense			227				424				428				639
Amortization of limited partnership investments			604				997				1,209				1,532
Other noninterest expense			2,907				3,186				5,868				6,123
Total noninterest expense			27,566				27,192				55,210				53,434
Income before income taxes			16,221				15,763				32,017				32,051
Income taxes			4,680				4,197				9,199				8,883
Net income			11,541				11,566				22,818				23,168
Other comprehensive income:
Unrealized holding gains on securities available-for-sale:
Unrealized holding gains arising during the period			1,630				2,321				2,745				8,124
Less: Reclassification adjustments for realized gains (losses) included in net income			18				(4	)			10				64
Tax expense			564				814				957				2,821
Other comprehensive income, net of tax			1,048				1,511				1,778				5,239
Comprehensive income		$	12,589			$	13,077			$	24,596			$	28,407
Basic earnings per share		$	0.65			$	0.66			$	1.29			$	1.32
Diluted earnings per share		$	0.65			$	0.66			$	1.29			$	1.32
Weighted average shares outstanding-basic			17,626				17,530				17,621				17,521
Weighted average shares outstanding-diluted			17,645				17,542				17,641				17,538
Dividends declared per share		$	0.32			$	0.31			$	0.64			$	0.62

		Six Months Ended
		June 30
(in thousands)		2017				2016
Cash flows from operating activities:
Net income		$	22,818			$	23,168
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			2,023				1,909
Deferred taxes			123				515
Stock-based compensation			302				235
Excess tax benefits of stock-based compensation			0				93
Provision for loan losses			3,993				3,638
Write-downs of other real estate owned and other repossessed assets			1,987				224
Gains on sale of mortgage loans held for sale			(507	)			(762	)
Securities gains			(10	)			(64	)
Gain on debt repurchase			(560	)			0
Losses on sale of assets, net			10				75
Proceeds from sale of mortgage loans held for sale			22,859				34,372
Funding of mortgage loans held for sale			(25,732	)			(34,145	)
Amortization of securities premiums and discounts, net			1,551				1,016
Change in cash surrender value of bank owned life insurance			(708	)			(758	)
Mortgage servicing rights:
Fair value adjustments			301				660
New servicing assets created			(172	)			(221	)
Changes in:
Other assets			(1,966	)			(3,371	)
Other liabilities			2,756				(1,813	)
Net cash provided by operating activities			29,068				24,771
Cash flows from investing activities:
Certificates of deposit in other banks:
Purchase of certificates of deposit			(11,515	)			0
Maturity of certificates of deposit			235				2,732
Securities available-for-sale (AFS):
Purchase of AFS securities			(77,344	)			(30,274	)
Proceeds from the sales of AFS securities			3,261				3,509
Proceeds from prepayments and maturities of AFS securities			70,304				49,693
Securities held-to-maturity (HTM):
Proceeds from maturities of HTM securities			8				0
Change in loans, net			(151,624	)			(62,493	)
Purchase of premises and equipment			(1,187	)			(1,746	)
Proceeds from sale and retirement of premises and equipment			25				10
Proceeds from sale of other real estate and other repossessed assets			1,128				3,713
Net cash used in investing activities			(166,709	)			(34,856	)
Cash flows from financing activities:
Change in deposits, net			24,302				61,201
Change in repurchase agreements, federal funds purchased, and other short-term borrowings, net			8,547				10,811
Proceeds from Federal Home Loan Bank advances			100,000				0
Payments on advances from Federal Home Loan Bank			(50	)			(100,057	)
Repurchase of long-term debt			(1,440	)			0
Issuance of common stock			708				560
Repurchase of common stock			0				(382	)
Excess tax benefits of stock-based compensation			0				(93	)
Dividends paid			(11,312	)			(10,916	)
Net cash provided by (used in) financing activities			120,755				(38,876	)
Net decrease in cash and cash equivalents			(16,886	)			(48,961	)
Cash and cash equivalents at beginning of period			144,716				187,611
Cash and cash equivalents at end of period		$	127,830			$	138,650
Supplemental disclosures:
Income taxes paid		$	6,400			$	11,279
Interest paid			6,912				5,763
Non-cash activities:
Loans to facilitate the sale of other real estate owned and repossessed assets			1,574				2,257
Common stock dividends accrued, paid in subsequent quarter			204				208
Real estate acquired in settlement of loans			1,434				3,292

Community Trust Bancorp, Inc.

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 June 30, 2017, the results of operations for the three and six months ended June 30, 2017 and 2016, and the cash flows for the six months ended June 30, 2017 and 2016.  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 six months ended June 30, 2017 and the cash flows for the six months ended June 30, 2017 and 2016 are not necessarily indicative of the results to be expected for the full year.  The condensed consolidated balance sheet as of December 31, 2016 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, 2016, 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. (“CTB”) and Community Trust and Investment Company.  All significant intercompany transactions have been eliminated in consolidation.

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

New Accounting Standards –

The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held.  The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting.  Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required.

The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method.  The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method.

The amendments became effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 and did not have a material impact on CTBI’s consolidated financial statements.

Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows.

For public companies, the amendments were effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  CTBI adopted this ASU effective January 1, 2017, and it did not have a material impact on our consolidated financial statements.

For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense.  Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss expense.

Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security.

ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. CTBI has an implementation team working through the provisions of ASU 2016-13 including assessing the impact on its accounting and disclosures.

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.  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 nonaccrual 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, the estimated fair value of the collateral less costs to sell is then transferred to other real estate owned or other repossessed assets, and a charge-off is taken for any remaining balance.  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.  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 through the income statement.

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 six months ended June 30, 2017 and 2016, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes.

Note 2 – Stock-Based Compensation

CTBI’s compensation expense related to stock option grants was $14 thousand and $15 thousand, respectively, for the three months ended June 30, 2017 and 2016, and $28 thousand for both the six months ended June 30, 2017 and 2016.  Restricted stock expense for the three months ended June 30, 2017 and 2016 was $142 thousand and $97 thousand, respectively, including $13 thousand and $9 thousand in dividends paid for each period.  Restricted stock expense for the six months ended June 30, 2017 and 2016 was $274 thousand and $207 thousand, respectively, including $27 thousand and $18 thousand in dividends paid for each period.  As of June 30, 2017, there was a total of $0.1 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 2.8 years and a total of $1.5 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 3.3 years.

There were no shares of restricted stock granted during three months ended June 30, 2017 and 2016.  There were 23,668 and 18,069 shares of restricted stock granted during the six months ended June 30, 2017 and 2016, respectively.  The restricted stock was issued pursuant to the terms of CTBI’s 2015 Stock Ownership Incentive Plan.  The restrictions on the restricted stock will lapse ratably over four years, except for a 5,000 management retention restricted stock award granted in 2017 which will cliff vest at the end of five years.  However, in the event of certain participant employee termination events occurring within 24 months of a change in control of CTBI or the death of the participant, the restrictions will lapse, and in the event of the participant’s disability, the restrictions will lapse on a pro rata basis.  The Compensation Committee will have discretion to review and revise restrictions applicable to a participant’s restricted stock in the event of the participant’s retirement.

 

		Six Months Ended June 30, 2016
Expected dividend yield			3.70	%
Risk-free interest rate			1.45	%
Expected volatility			34.34	%
Expected term (in years)			7.5
Weighted average fair value of options		$	6.82

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 June 30, 2017 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		$	236,345			$	173			$	(460	)		$	236,058
State and political subdivisions			129,872				2,833				(763	)			131,942
U.S. government sponsored agency mortgage-backed securities			219,961				836				(2,925	)			217,872
Total debt securities			586,178				3,842				(4,148	)			585,872
CRA investment funds			25,000				90				(594	)			24,496
Total available-for-sale securities		$	611,178			$	3,932			$	(4,742	)		$	610,368

Held-to-Maturity

(in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
State and political subdivisions		$	858			$	0			$	0			$	858
Total held-to-maturity securities		$	858			$	0			$	0			$	858

 

The amortized cost and fair value of securities at December 31, 2016 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		$	223,014			$	193			$	(743	)		$	222,464
State and political subdivisions			133,351				1,957				(1,792	)			133,516
U.S. government sponsored agency mortgage-backed securities			227,574				1,008				(3,526	)			225,056
Total debt securities			583,939				3,158				(6,061	)			581,036
CRA investment funds			25,000				76				(718	)			24,358
Total available-for-sale securities		$	608,939			$	3,234			$	(6,779	)		$	605,394

Held-to-Maturity

(in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
State and political subdivisions		$	866			$	1			$	0			$	867
Total held-to-maturity securities		$	866			$	1			$	0			$	867

The amortized cost and fair value of securities at June 30, 2017 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		$	69,861			$	69,819			$	0			$	0
Due after one through five years			162,304				163,221				858				858
Due after five through ten years			51,203				52,067				0				0
Due after ten years			82,849				82,893				0				0
U.S. government sponsored agency mortgage-backed securities			219,961				217,872				0				0
Total debt securities			586,178				585,872				858				858
CRA investment funds			25,000				24,496				0				0
Total securities		$	611,178			$	610,368			$	858			$	858

During the three months ended June 30, 2017, there was a net gain of $18 thousand on sales and calls of AFS securities, consisting of a pre-tax gain of $30 thousand and a pre-tax loss of $12 thousand.  During the three months ended June 30, 2016, there was a net loss of $4 thousand on calls of AFS securities, consisting of a pre-tax gain of $1 thousand and a pre-tax loss of $5 thousand.

During the six months ended June 30, 2017, there was a combined gain of $10 thousand on sales and calls of AFS securities, consisting of a pre-tax gain of $29 thousand and a pre-tax loss of $19 thousand.  During the six months ended June 30, 2016, there was a combined gain of $64 thousand on sales and calls of AFS securities, consisting of a pre-tax gain of $69 thousand and a pre-tax loss of $5 thousand.

The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $224.1 million at June 30, 2017 and $221.2 million at December 31, 2016.

The amortized cost of securities sold under agreements to repurchase amounted to $297.1 million at June 30, 2017 and $303.5 million at December 31, 2016.

CTBI evaluates its investment portfolio on a quarterly basis for impairment.  The analysis performed as of June 30, 2017 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 June 30, 2017 was 60.7% compared to 65.6% as of December 31, 2016.  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 June 30, 2017 that are not deemed to be other-than-temporarily impaired.  There were no held-to-maturity securities that were deemed to be impaired as of June 30, 2017.

Available-for-Sale

(in thousands)		Amortized Cost				Gross Unrealized Losses				Fair Value
Less Than 12 Months
U.S. Treasury and government agencies		$	139,137			$	(419	)		$	138,718
State and political subdivisions			26,970				(742	)			26,228
U.S. government sponsored agency mortgage-backed securities			132,510				(2,076	)			130,434
Total debt securities			298,617				(3,237	)			295,380
CRA investment funds			17,500				(347	)			17,153
Total <12 months temporarily impaired AFS securities			316,117				(3,584	)			312,533
12 Months or More
U.S. Treasury and government agencies			21,647				(41	)			21,606
State and political subdivisions			2,383				(21	)			2,362
U.S. government sponsored agency mortgage-backed securities			30,644				(849	)			29,795
Total debt securities			54,674				(911	)			53,763
CRA investment funds			5,000				(247	)			4,753
Total ≥12 months temporarily impaired AFS securities			59,674				(1,158	)			58,516
Total
U.S. Treasury and government agencies			160,784				(460	)			160,324
State and political subdivisions			29,353				(763	)			28,590
U.S. government sponsored agency mortgage-backed securities			163,154				(2,925	)			160,229
Total debt securities			353,291				(4,148	)			349,143
CRA investment funds			22,500				(594	)			21,906
Total temporarily impaired AFS securities		$	375,791			$	(4,742	)		$	371,049

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 par which will equal amortized cost at maturity.  CTBI does not consider those investments to be other-than-temporarily impaired at June 30, 2017, because CTBI does not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost, which may be maturity.

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 par which will equal amortized cost at maturity.  CTBI does not consider those investments to be other-than-temporarily impaired at June 30, 2017, because CTBI does not intend to sell the investments before recovery of their amortized cost and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost, which may be maturity.

 

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 June 30, 2017, 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 maturity.

CRA Investment Funds

CTBI’s CRA investment funds consist of investments in fixed income mutual funds ($24.5 million of the total fair value and $594 thousand of the total unrealized losses in common stock investments).  The severity of the impairment (fair value is approximately 2.4% less than cost) and the duration of the impairment correlates with the decline in long-term interest rates in 2017.  CTBI evaluated the near-term prospects of these funds in relation to the severity and duration of the impairment.  Based on that evaluation, CTBI does not consider those investments to be other-than-temporarily impaired at June 30, 2017.

The analysis performed as of December 31, 2016 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, 2016 that are not deemed to be other-than-temporarily impaired.  There were no held-to-maturity securities that were deemed to be impaired as of December 31, 2016.

Available-for-Sale

(in thousands)		Amortized Cost				Gross Unrealized Losses				Fair Value
Less Than 12 Months
U.S. Treasury and government agencies		$	158,732			$	(716	)		$	158,016
State and political subdivisions			53,491				(1,780	)			51,711
U.S. government sponsored agency mortgage-backed securities			135,939				(2,646	)			133,293
Total debt securities			348,162				(5,142	)			343,020
CRA investment funds			17,500				(444	)			17,056
Total <12 months temporarily impaired AFS securities			365,662				(5,586	)			360,076
12 Months or More
U.S. Treasury and government agencies			1,880				(27	)			1,853
State and political subdivisions			751				(12	)			739
U.S. government sponsored agency mortgage-backed securities			31,132				(880	)			30,252
Total debt securities			33,763				(919	)			32,844
CRA investment funds			5,000				(274	)			4,726
Total ≥12 months temporarily impaired AFS securities			38,763				(1,193	)			37,570
Total
U.S. Treasury and government agencies			160,612				(743	)			159,869
State and political subdivisions			54,242				(1,792	)			52,450
U.S. government sponsored agency mortgage-backed securities			167,071				(3,526	)			163,545
Total debt securities			381,925				(6,061	)			375,864
CRA investment funds			22,500				(718	)			21,782
Total temporarily impaired AFS securities		$	404,425			$	(6,779	)		$	397,646

 

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)		June 30 2017				December 31 2016
Commercial construction		$	72,054			$	66,998
Commercial secured by real estate			1,179,229				1,085,428
Equipment lease financing			4,903				5,512
Commercial other			352,173				350,159
Real estate construction			58,566				57,966
Real estate mortgage			708,467				702,969
Home equity			93,721				91,511
Consumer direct			135,228				133,093
Consumer indirect			483,001				444,735
Total loans		$	3,087,342			$	2,938,371

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

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

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

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

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

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

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

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

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

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

Not included in the loan balances above were loans held for sale in the amount of $4.6 million at June 30, 2017 and $1.2 million at December 31, 2016.

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)		June 30 2017				December 31 2016
Commercial:
Commercial construction		$	1,328			$	1,912
Commercial secured by real estate			8,713				6,326
Commercial other			1,404				1,559
Residential:
Real estate construction			189				11
Real estate mortgage			7,461				6,260
Home equity			556				555
Total nonaccrual loans		$	19,651			$	16,623

The following tables present CTBI’s loan portfolio aging analysis, segregated by class, as of June 30, 2017 and December 31, 2016:

		June 30, 2017
(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		$	0			$	0			$	1,352			$	1,352			$	70,702			$	72,054			$	24
Commercial secured by real estate			2,272				3,540				7,757				13,569				1,165,660				1,179,229				2,171
Equipment lease financing			0				0				130				130				4,773				4,903				130
Commercial other			513				420				1,123				2,056				350,117				352,173				235
Residential:
Real estate construction			1,254				177				393				1,824				56,742				58,566				205
Real estate mortgage			950				4,113				11,270				16,333				692,134				708,467				5,042
Home equity			1,004				261				692				1,957				91,764				93,721				300
Consumer:
Consumer direct			788				132				34				954				134,274				135,228				34
Consumer indirect			2,826				793				221				3,840				479,161				483,001				221
Total		$	9,607			$	9,436			$	22,972			$	42,015			$	3,045,327			$	3,087,342			$	8,362

 

		December 31, 2016
(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		$	22			$	0			$	1,940			$	1,962			$	65,036			$	66,998			$	28
Commercial secured by real estate			2,033				478				8,847				11,358				1,074,070				1,085,428				3,015
Equipment lease financing			0				0				0				0				5,512				5,512				0
Commercial other			997				122				1,235				2,354				347,805				350,159				141
Residential:
Real estate construction			707				42				152				901				57,065				57,966				152
Real estate mortgage			1,493				5,278				10,695				17,466				685,503				702,969				6,295
Home equity			829				288				905				2,022				89,489				91,511				467
Consumer:
Consumer direct			873				265				68				1,206				131,887				133,093				68
Consumer indirect			3,288				851				681				4,820				439,915				444,735				681
Total		$	10,242			$	7,324			$	24,523			$	42,089			$	2,896,282			$	2,938,371			$	10,847

*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 CTB.

Credit Quality Indicators:

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

Ø

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

Ø

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

Ø

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

Ø

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

Ø

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

The following tables present the credit risk profile of CTBI’s commercial loan portfolio based on rating category and payment activity, segregated by class of loans, as of June 30, 2017 and December 31, 2016:

(in thousands)		Commercial Construction				Commercial Secured by Real Estate				Equipment Leases				Commercial Other				Total
June 30, 2017
Pass		$	62,033			$	1,056,938			$	4,667			$	302,783			$	1,426,421
Watch			3,988				64,594				0				30,861				99,443
OAEM			1,874				23,458				106				8,775				34,213
Substandard			3,981				33,882				130				9,389				47,382
Doubtful			178				357				0				365				900
Total		$	72,054			$	1,179,229			$	4,903			$	352,173			$	1,608,359
December 31, 2016
Pass		$	55,315			$	975,383			$	5,206			$	299,301			$	1,335,205
Watch			3,366				51,932				137				32,780				88,215
OAEM			2,535				25,772				169				7,913				36,389
Substandard			5,592				31,945				0				9,599				47,136
Doubtful			190				396				0				566				1,152
Total		$	66,998			$	1,085,428			$	5,512			$	350,159			$	1,508,097

The following tables present the credit risk profile of CTBI’s residential real estate and consumer loan portfolios based on performing or nonperforming status, segregated by class, as of June 30, 2017 and December 31, 2016:

(in thousands)		Real Estate Construction				Real Estate Mortgage				Home Equity				Consumer Direct				Consumer Indirect				Total
June 30, 2017
Performing		$	58,172			$	695,964			$	92,865			$	135,194			$	482,780			$	1,464,975
Nonperforming (1)			394				12,503				856				34				221				14,008
Total		$	58,566			$	708,467			$	93,721			$	135,228			$	483,001			$	1,478,983
December 31, 2016
Performing		$	57,803			$	690,414			$	90,489			$	133,025			$	444,054			$	1,415,785
Nonperforming (1)			163				12,555				1,022				68				681				14,489
Total		$	57,966			$	702,969			$	91,511			$	133,093			$	444,735			$	1,430,274

(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 $5.0 million at June 30, 2017 compared to $3.5 million at December 31, 2016.

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

The following table presents impaired loans, the average investment in impaired loans, and interest income recognized on impaired loans for the periods ended June 30, 2017, December 31, 2016, and June 30, 2016:

		June 30, 2017
(in thousands)		Recorded Balance				Unpaid Contractual Principal Balance				Specific Allowance
Loans without a specific valuation allowance:
Commercial construction		$	4,707			$	4,709			$	0
Commercial secured by real estate			27,509				28,195				0
Equipment lease financing			130				130				0
Commercial other			10,719				12,619				0
Real estate construction			846				846				0
Real estate mortgage			1,803				1,803				0
Loans with a specific valuation allowance:
Commercial construction			153				174				25
Commercial secured by real estate			4,731				5,833				1,227
Commercial other			131				134				67
Totals:
Commercial construction			4,860				4,883				25
Commercial secured by real estate			32,240				34,028				1,227
Equipment lease financing			130				130				0
Commercial other			10,850				12,753				67
Real estate construction			846				846				0
Real estate mortgage			1,803				1,803				0
Total		$	50,729			$	54,443			$	1,319

 

		Three Months Ended								Six Months Ended
		June 30, 2017								June 30, 2017
(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		$	5,041			$	49			$	5,101			$	86
Commercial secured by real estate			27,858				343				28,252				704
Equipment lease financing			135				0				68				0
Commercial other			10,882				133				10,981				273
Real estate construction			846				0				423				0
Real estate mortgage			1,803				11				1,804				22
Loans with a specific valuation allowance:
Commercial construction			153				0				157				0
Commercial secured by real estate			4,745				5				4,362				5
Commercial other			131				0				66				0
Totals:
Commercial construction			5,194				49				5,258				86
Commercial secured by real estate			32,603				348				32,614				709
Equipment lease financing			135				0				68				0
Commercial other			11,013				133				11,047				273
Real estate construction			846				0				423				0
Real estate mortgage			1,803				11				1,804				22
Total		$	51,594			$	541			$	51,214			$	1,090