10-Q 1 ctbi10q2ndqtr2014.htm CTBI JUNE 30, 2014 FORM 10-Q ctbi10q2ndqtr2014.htm



 

 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2014
   
 
Or
   
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to _____________
   

Commission file number 0-11129

COMMUNITY TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)

Kentucky
61-0979818
(State or other jurisdiction of incorporation or organization)
IRS Employer Identification No.
   
346 North Mayo Trail
Pikeville, Kentucky
(Address of principal executive offices)
41501
(Zip code)

(606) 432-1414
(Registrants telephone number)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes  ü
No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Yes  ü
No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
Accelerated filer  ü
Non-accelerated filer
Smaller reporting company
   
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes
   No ü

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

Common stock – 17,426,370 shares outstanding at July 31, 2014

 
 

 


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


PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements
 
The accompanying information has not been audited by our independent registered public accountants; however, in the opinion of management such information reflects all adjustments necessary for a fair presentation of the results for the interim period.  All such adjustments are of a normal and recurring nature.
 
The accompanying condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Registrant’s annual report on Form 10-K.  Accordingly, the reader of the Form 10-Q should refer to the Registrant’s Form 10-K for the year ended December 31, 2013 for further information in this regard.


 
 

 

Community Trust Bancorp, Inc.
Condensed Consolidated Balance Sheets

(dollars in thousands)
 
(unaudited)
June 30
2014
   
December 31
2013
 
Assets:
           
Cash and due from banks
  $ 72,637     $ 64,828  
Interest bearing deposits
    58,338       33,200  
Federal funds sold
    6,998       8,613  
Cash and cash equivalents
    137,973       106,641  
                 
Certificates of deposit in other banks
    9,473       9,568  
Securities available-for-sale at fair value (amortized cost of $647,122 and $621,753, respectively)
    647,536       609,405  
Securities held-to-maturity at amortized cost (fair value of $1,632 and $1,601, respectively)
    1,662       1,662  
Loans held for sale
    895       828  
                 
Loans
    2,632,609       2,615,354  
Allowance for loan and lease losses
    (33,617 )     (34,008 )
Net loans
    2,598,992       2,581,346  
                 
Premises and equipment, net
    50,552       52,000  
Federal Home Loan Bank stock
    17,927       25,673  
Federal Reserve Bank stock
    4,887       4,886  
Goodwill
    65,490       65,490  
Core deposit intangible (net of accumulated amortization of $8,032 and $7,925, respectively)
    584       690  
Bank owned life insurance
    54,398       53,687  
Mortgage servicing rights
    3,062       3,424  
Other real estate owned
    33,062       39,188  
Other assets
    26,109       27,228  
Total assets
  $ 3,652,602     $ 3,581,716  
                 
Liabilities and shareholders’ equity:
               
Deposits:
               
Noninterest bearing
  $ 651,588     $ 621,321  
Interest bearing
    2,235,601       2,233,753  
Total deposits
    2,887,189       2,855,074  
                 
Repurchase agreements
    217,979       208,067  
Federal funds purchased and other short-term borrowings
    15,205       12,465  
Advances from Federal Home Loan Bank
    1,228       1,286  
Long-term debt
    61,341       61,341  
Other liabilities
    35,782       30,991  
Total liabilities
    3,218,724       3,169,224  
                 
Shareholders’ equity:
               
Preferred stock, 300,000 shares authorized and unissued
    -       -  
Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2014 – 17,421,389; 2013 – 17,403,441
    87,107       79,107  
Capital surplus
    212,313       167,122  
Retained earnings
    134,189       174,289  
Accumulated other comprehensive income (loss), net of tax
    269       (8,026 )
Total shareholders’ equity
    433,878       412,492  
                 
Total liabilities and shareholders’ equity
  $ 3,652,602     $ 3,581,716  

See notes to condensed consolidated financial statements.

 
 
 

 

Community Trust Bancorp, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
June 30
   
June 30
 
(in thousands except per share data)
 
2014
   
2013
   
2014
   
2013
 
Interest income:
                       
Interest and fees on loans, including loans held for sale
  $ 31,937     $ 32,672     $ 63,550     $ 65,520  
Interest and dividends on securities
                               
Taxable
    2,806       3,129       5,853       6,024  
Tax exempt
    664       557       1,248       1,115  
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock
    298       342       630       690  
Other, including interest on federal funds sold
    106       83       223       210  
Total interest income
    35,811       36,783       71,504       73,559  
                                 
Interest expense:
                               
Interest on deposits
    2,472       2,902       4,934       5,921  
Interest on repurchase agreements and other short-term borrowings
    217       234       409       497  
Interest on advances from Federal Home Loan Bank
    5       6       11       13  
Interest on long-term debt
    284       299       567       589  
Total interest expense
    2,978       3,441       5,921       7,020  
                                 
Net interest income
    32,833       33,342       65,583       66,539  
Provision for loan losses
    735       3,661       2,080       5,220  
Net interest income after provision for loan losses
    32,098       29,681       63,503       61,319  
                                 
Noninterest income:
                               
Service charges on deposit accounts
    5,987       6,182       11,418       11,949  
Gains on sales of loans, net
    288       755       478       2,152  
Trust and wealth management income
    2,199       2,023       4,308       4,023  
Loan related fees
    766       1,496       1,445       2,444  
Bank owned life insurance
    476       1,327       950       1,748  
Brokerage revenue
    634       618       1,204       1,068  
Securities losses
    (51 )     (8 )     (111 )     (8 )
Other noninterest income
    673       881       1,345       1,818  
Total noninterest income
    10,972       13,274       21,037       25,194  
                                 
Noninterest expense:
                               
Officer salaries and employee benefits
    2,784       2,635       5,622       5,186  
Other salaries and employee benefits
    10,490       10,579       21,069       21,010  
Occupancy, net
    1,937       1,972       4,101       3,899  
Equipment
    938       988       1,838       1,966  
Data processing
    1,933       1,775       3,858       3,588  
Bank franchise tax
    1,208       1,123       2,417       2,246  
Legal fees
    656       556       1,354       1,162  
Professional fees
    425       432       840       814  
FDIC insurance
    558       637       1,207       1,239  
Other real estate owned provision and expense
    736       1,170       2,241       3,009  
Repossession expense
    222       487       541       898  
Other noninterest expense
    3,369       3,633       7,029       7,269  
Total noninterest expense
    25,256       25,987       52,117       52,286  
                                 
Income before income taxes
    17,814       16,968       32,423       34,227  
Income taxes
    5,619       5,026       10,088       10,465  
Net income
    12,195       11,942       22,335       23,762  
                                 
Other comprehensive income (loss):
                               
Unrealized holding gains (losses) on securities available-for-sale:
                               
Unrealized holding gains (losses) arising during the period
    6,571       (21,337 )     12,651       (23,923 )
Less: Reclassification adjustments for realized losses included in net income
    (51 )     (8 )     (111 )     (8 )
Tax (benefit) expense
    2,318       (7,465 )     4,467       (8,370 )
Other comprehensive income (loss), net of tax
    4,304       (13,864 )     8,295       (15,545 )
Comprehensive income (loss)
  $ 16,499     $ (1,922 )   $ 30,630     $ 8,217  
                                 
Basic earnings per share
  $ 0.70     $ 0.70     $ 1.29     $ 1.39  
Diluted earnings per share
  $ 0.70     $ 0.69     $ 1.28     $ 1.38  
                                 
Weighted average shares outstanding-basic
    17,318       17,121       17,313       17,107  
Weighted average shares outstanding-diluted
    17,393       17,205       17,393       17,188  
                                 
Dividends declared per share
  $ 0.290     $ 0.286     $ 0.581     $ 0.572  

See notes to condensed consolidated financial statements.

 
 
 

 

Community Trust Bancorp, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)

   
Six Months Ended
 
   
June 30
 
(in thousands)
 
2014
   
2013
 
Cash flows from operating activities:
           
Net income
  $ 22,335     $ 23,762  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    2,256       2,301  
Deferred taxes
    935       (8,370 )
Stock-based compensation
    344       335  
Excess tax benefits of stock-based compensation
    10       42  
Provision for loan losses
    2,080       5,220  
Write-downs of other real estate owned and other repossessed assets
    1,161       1,776  
Gains on sale of mortgage loans held for sale
    (478 )     (2,152 )
Losses on sales of securities
    111       8  
Losses on sale of assets, net
    43       92  
Proceeds from sale of mortgage loans held for sale
    20,310       93,445  
Funding of mortgage loans held for sale
    (19,900 )     (71,798 )
Amortization of securities premiums and discounts, net
    1,349       2,217  
Change in cash surrender value of bank owned life insurance
    (711 )     (704 )
Mortgage servicing rights:
               
Fair value adjustments
    507       (296 )
New servicing assets created
    (145 )     (562 )
Changes in:
               
Other assets
    1,123       3,472  
Other liabilities
    (684 )     4,672  
Net cash provided by operating activities
    30,646       53,460  
                 
Cash flows from investing activities:
               
Certificates of deposit in other banks:
               
Maturity of certificates of deposit
    95       240  
Purchase of certificates of deposit
    0       (4,472 )
Securities available-for-sale (AFS):
               
Purchase of AFS securities
    (175,553 )     (176,783 )
Proceeds from the sales of AFS securities
    112,949       0  
Proceeds from prepayments and maturities of AFS securities
    35,776       66,622  
Change in loans, net
    (17,970 )     (42,740 )
Purchase of premises and equipment
    (702 )     (603 )
Proceeds from sale of premises and equipment
    18       38  
Redemption of stock by Federal Home Loan Bank
    7,746       0  
Additional investment in Federal Reserve Bank stock
    (1 )     (1 )
Proceeds from sale of other real estate and other repossessed assets
    3,150       5,730  
Additional investment in other real estate and other repossessed assets
    0       (48 )
Additional investment in bank owned life insurance
    0       (7,306 )
Net cash used in investing activities
    (34,492 )     (159,323 )
                 
Cash flows from financing activities:
               
Change in deposits, net
    32,115       18,325  
Change in repurchase agreements, federal funds purchased, and other short-term borrowings, net
    12,652       (3,624 )
Payments on advances from Federal Home Loan Bank
    (58 )     (82 )
Issuance of common stock
    594       1,272  
Excess tax benefits of stock-based compensation
    (10 )     (42 )
Dividends paid
    (10,115 )     (9,787 )
Net cash provided by financing activities
    35,178       6,062  
Net increase (decrease) in cash and cash equivalents
    31,332       (99,801 )
Cash and cash equivalents at beginning of period
    106,641       207,560  
Cash and cash equivalents at end of period
  $ 137,973     $ 107,759  
                 
Supplemental disclosures:
               
Income taxes paid
  $ 6,720     $ 10,340  
Interest paid
    5,431       6,474  
Non-cash activities:
               
Loans to facilitate the sale of other real estate and other repossessed assets
    5,225       1,007  
Common stock dividends accrued, paid in subsequent quarter
    201       4,904  
Real estate acquired in settlement of loans
    3,469       4,655  

See notes to condensed consolidated financial statements.

 
 
 

 

Community Trust Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1 - Summary of Significant Accounting Policies
 
In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (which consist of normal recurring accruals) necessary, to present fairly the condensed consolidated financial position as of June 30, 2014, the results of operations for the three and six months ended June 30, 2014 and 2013, and the cash flows for the six months ended June 30, 2014 and 2013.  In accordance with accounting principles generally accepted in the United States of America for interim financial information, these statements do not include certain information and footnote disclosures required by accounting principles generally accepted in the United States of America for complete annual financial statements.  The results of operations for the three and six months ended June 30, 2014 and 2013, and the cash flows for the six months ended June 30, 2014 and 2013, are not necessarily indicative of the results to be expected for the full year.  The condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited consolidated financial statements of Community Trust Bancorp, Inc. (“CTBI”) for that period.  For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2013, included in our annual report on Form 10-K.
 
Principles of Consolidation – The unaudited condensed consolidated financial statements include the accounts of CTBI and its separate and distinct, wholly owned subsidiaries Community Trust Bank, Inc. (the “Bank”) and Community Trust and Investment Company.  All significant intercompany transactions have been eliminated in consolidation.
 
Reclassifications – Certain reclassifications considered to be immaterial have been made in the prior year condensed consolidated financial statements to conform to current year classifications.  These reclassifications had no effect on net income.

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, with early adoption permitted.  We are currently evaluating the impact of adopting ASU 2014-01, but we do not expect the adoption to have a material effect on CTBI’s financial condition or results of operations.

Ø Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure – In January 2014, the FASB also issued ASU No. 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40):  Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, which clarifies when an in-substance foreclosure or repossession of residential real estate property occurs, requiring a creditor to reclassify the loan to other real estate.  According to ASU 2014-04, a consumer mortgage loan should be reclassified to other real estate either upon the creditor obtaining legal title to the real estate collateral or when the borrower voluntarily conveys all interest in the real estate property to the creditor through a deed in lieu of foreclosure or similar legal agreement.  ASU 2014-04 also clarifies that a creditor should not delay reclassification when a borrower has a legal right of redemption.  Our current practice is consistent with the new guidance.  We expect to adopt ASU 2014-04 in the first quarter 2015 and do not expect the adoption to have a material effect on CTBI’s financial condition or results of operations.

Critical Accounting Policies and Estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our consolidated financial statements and related notes.  Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates.  Such differences could be material to the consolidated financial statements.
 
We believe the application of accounting policies and the estimates required therein are reasonable.  These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change.  Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.

We have identified the following critical accounting policies:
 
Investments  Management determines the classification of securities at purchase.  We classify securities into held-to-maturity, trading, or available-for-sale categories.  Held-to-maturity securities are those which we have the positive intent and ability to hold to maturity and are reported at amortized cost.  In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320, Investment Securities, investments in debt securities that are not classified as held-to-maturity and equity securities that have readily determinable fair values shall be classified in one of the following categories and measured at fair value in the statement of financial position:
 
a. Trading securities. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) shall be classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price.
 
b. Available-for-sale securities. Investments not classified as trading securities (nor as held-to-maturity securities) shall be classified as available-for-sale securities.
 
We do not have any securities that are classified as trading securities.  Available-for-sale securities are reported at fair value, with unrealized gains and losses included as a separate component of shareholders’ equity, net of tax.  If declines in fair value are other than temporary, the carrying value of the securities is written down to fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not credit related.
 
Gains or losses on disposition of securities are computed by specific identification for all securities except for shares in mutual funds, which are computed by average cost.  Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings.
 
When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair market value is below amortized cost, additional analysis is performed to determine whether an other than temporary impairment condition exists.  Available-for-sale and held-to-maturity securities are analyzed quarterly for possible other than temporary impairment.  The analysis considers (i) whether we have the intent to sell our securities prior to recovery and/or maturity and (ii) whether it is more likely than not that we will not have to sell our securities prior to recovery and/or maturity.  Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment.  If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on the CTBI’s results of operations and financial condition.
 
Loans  Loans with the ability and the intent to be held until maturity and/or payoff are reported at the carrying value of unpaid principal reduced by unearned interest, an allowance for loan and lease losses, and unamortized deferred fees or costs.  Income is recorded on the level yield basis.  Interest accrual is discontinued when management believes, after considering economic and business conditions, collateral value, and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful.  Any loan greater than 90 days past due must be well secured and in the process of collection to continue accruing interest.  Cash payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured.  Loans are not reclassified as accruing until principal and interest payments remain current for a period of time, generally six months, and future payments appear reasonably certain.  Included in certain loan categories of impaired loans are troubled debt restructurings that were classified as impaired.  A restructuring of a debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.

Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized over the estimated life of the related loans, leases, or commitments as a yield adjustment.
 
Allowance for Loan and Lease Losses  We maintain an allowance for loan and lease losses (“ALLL”) at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio.  Since arriving at an appropriate ALLL involves a high degree of management judgment, we use an ongoing quarterly analysis to develop a range of estimated losses.  In accordance with accounting principles generally accepted in the United States, we use our best estimate within the range of potential credit loss to determine the appropriate ALLL.  Credit losses are charged and recoveries are credited to the ALLL.
 
We utilize an internal risk grading system for commercial credits.  Those larger commercial credits that exhibit probable or observed credit weaknesses are subject to individual review.  The borrower’s cash flow, adequacy of collateral coverage, and other options available to CTBI, including legal remedies, are evaluated.  The review of individual loans includes those loans that are impaired as defined by ASC 310-35, Impairment of a Loan.  We evaluate the collectability of both principal and interest when assessing the need for loss provision.  Historical loss rates are analyzed and applied to other commercial loans not subject to specific allocations.  The ALLL allocation for this pool of commercial loans is established based on the historical average, maximum, minimum, and median loss ratios.
 
A loan is considered impaired when, based on current information and events, it is probable that CTBI will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Homogenous loans, such as consumer installment, residential mortgages, and home equity lines are not individually risk graded.  The associated ALLL for these loans is measured under ASC 450, Contingencies.
 
When any secured commercial loan is considered uncollectable, whether past due or not, a current assessment of the value of the underlying collateral is made.  If the balance of the loan exceeds the fair value of the collateral, the loan is placed on non-accrual and the loan is charged down to the value of the collateral less estimated cost to sell or a specific reserve equal to the difference between book value of the loan and the fair value assigned to the collateral is created until such time as the loan is foreclosed.  When the foreclosed collateral has been legally assigned to CTBI, a charge off is taken, if necessary, in order that the remaining balance reflects the fair value estimated less costs to sell of the collateral then transferred to other real estate owned or other repossessed assets.  When any unsecured commercial loan is considered uncollectable the loan is charged off no later than at 90 days past due.
 
All closed-end consumer loans (excluding conventional 1-4 family residential loans and installment and revolving loans secured by real estate) are charged off no later than 120 days (5 monthly payments) delinquent.  If a loan is considered uncollectable, it is charged off earlier than 120 days delinquent.  For conventional 1-4 family residential loans and installment and revolving loans secured by real estate, when a loan is 90 days past due, a current assessment of the value of the real estate is made.  If the balance of the loan exceeds the fair value of the property, the loan is placed on nonaccrual.  Foreclosure proceedings are normally initiated after 120 days.  When the foreclosed property has been legally assigned to CTBI, 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 continue to use twelve rolling quarters for our historical loss rate analysis.  Factors that we consider include delinquency trends, current economic conditions and trends, strength of supervision and administration of the loan portfolio, levels of underperforming loans, level of recoveries to prior year’s charge-offs, trends in loan losses, industry concentrations and their relative strengths, amount of unsecured loans, and underwriting exceptions.  Based upon management’s judgment, “best case,” “worst case,” and “most likely” scenarios are determined.  The total of each of these weighted factors is then applied against the applicable portion of the portfolio and the ALLL is adjusted accordingly to approximate the most likely scenario.  Management continually reevaluates the other subjective factors included in its ALLL analysis.
 
Other Real Estate Owned – When foreclosed properties are acquired, appraisals are obtained and the properties are booked at the current market value less expected sales costs.  Additionally, periodic updated appraisals are obtained on unsold foreclosed properties.  When an updated appraisal reflects a market value below the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected sales costs.  Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months.  All revenues and expenses related to the carrying of other real estate owned are recognized by a charge to income.

Note 2 – Stock-Based Compensation
 
CTBI’s compensation expense related to stock option grants was $2 thousand for each of the three months ended June 30, 2014 and 2013 and $6 thousand and $5 thousand, respectively, for the six months ended June 30, 2014 and 2013.  Restricted stock expense for the three months ended June 30, 2014 and 2013 was $151 thousand and $169 thousand, respectively, including $30 thousand and $31 thousand in dividends paid for each period.  Restricted stock expense for the six months ended June 30, 2014 and 2013 was $338 thousand and $330 thousand, respectively, including $60 thousand and $62 thousand in dividends.  As of June 30, 2014, there was a total of $10 thousand of unrecognized compensation expense related to unvested stock option awards that will be recognized as expense as the awards vest over a weighted average period of 2.3 years and a total of $1.2 million of unrecognized compensation expense related to restricted stock grants that will be recognized as expense as the awards vest over a weighted average period of 1.8 years.
 
There were no shares of restricted stock granted during the three months ended June 30, 2014 or 2013.  There were 4,347 and 11,904 shares of restricted stock granted during the six months ended June 30, 2014 and 2013, 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 or six months ended June 30, 2014.  There also were no options granted during the three months ended June 30, 2013, but 1,650 options were granted during the six months ended June 30, 2013.

The fair value of options granted during the six months ended June 30, 2013, were established at the date of grant using a Black-Scholes option pricing model with the weighted average assumptions as follows:

   
Six Months Ended
 
   
June 30
 
   
2013
 
Expected dividend yield
    3.74 %
Risk-free interest rate
    1.33 %
Expected volatility
    39.11 %
Expected term (in years)
    7.5  
Weighted average fair value of options
  $ 8.23  

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, 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
  $ 139,938     $ 429     $ (2,490 )   $ 137,877  
State and political subdivisions
    134,394       3,607       (897 )     137,104  
U.S. government sponsored agency mortgage-backed securities
    347,790       3,643       (3,629 )     347,804  
Total debt securities
    622,122       7,679       (7,016 )     622,785  
Marketable equity securities
    25,000       0       (249 )     24,751  
Total available-for-sale securities
  $ 647,122     $ 7,679     $ (7,265 )   $ 647,536  

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
U.S. Treasury and government agencies
  $ 480     $ 0     $ (31 )   $ 449  
State and political subdivisions
    1,182       1       0       1,183  
Total held-to-maturity securities
  $ 1,662     $ 1     $ (31 )   $ 1,632  

The amortized cost and fair value of securities as of December 31, 2013 are summarized as follows:

Available-for-Sale

(in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
U.S. Treasury and government agencies
  $ 65,524     $ 225     $ (5,139 )   $ 60,610  
State and political subdivisions
    118,055       1,907       (3,259 )     116,703  
U.S. government sponsored agency mortgage-backed securities
    383,174       4,325       (8,189 )     379,310  
Total debt securities
    566,753       6,457       (16,587 )     556,623  
Marketable equity securities
    55,000       0       (2,218 )     52,782  
Total available-for-sale securities
  $ 621,753     $ 6,457     $ (18,805 )   $ 609,405  

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
U.S. Treasury and government agencies
  $ 480     $ 0     $ (62 )   $ 418  
State and political subdivisions
    1,182       1       0       1,183  
Total held-to-maturity securities
  $ 1,662     $ 1     $ (62 )   $ 1,601  
 
The amortized cost and fair value of securities at June 30, 2014 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Available-for-Sale
   
Held-to-Maturity
 
(in thousands)
 
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
Due in one year or less
  $ 3,443     $ 3,482     $ 0     $ 0  
Due after one through five years
    106,802       107,691       0       0  
Due after five through ten years
    126,757       126,150       1,182       1,183  
Due after ten years
    37,330       37,658       480       449  
U.S. government sponsored agency mortgage-backed securities
    347,790       347,804       0       0  
Total debt securities
    622,122       622,785       1,662       1,632  
Marketable equity securities
    25,000       24,751       0       0  
Total securities
  $ 647,122     $ 647,536     $ 1,662     $ 1,632  
 
During the six months ended June 30, 2014, there was a combined loss of $111 thousand.  A pre-tax gain of $1.8 million and a pre-tax loss of $1.9 million were realized during the year.  During the six months ended June 30, 2013, there was a combined loss of $8 thousand.

The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $243.0 million at June 30, 2014 and $257.5 million at December 31, 2013.

The amortized cost of securities sold under agreements to repurchase amounted to $260.1 million at June 30, 2014 and $255.4 million at December 31, 2013.
 
Certain investments in debt and marketable equity securities are reported in the financial statements at amounts less than their historical costs.  CTBI evaluates its investment portfolio on a quarterly basis for impairment.  The analysis performed as of June 30, 2014 indicates that all impairment is considered temporary, market driven, and not credit-related.  The percentage of total investments with unrealized losses as of June 30, 2014 was 46.3% compared to 67.8% as of December 31, 2013.  The following tables provide the amortized cost, gross unrealized losses, and fair market value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of June 30, 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
  $ 3,031     $ (19 )   $ 3,012  
State and political subdivisions
    4,555       (19 )     4,536  
U.S. government sponsored agency mortgage-backed securities
    88,171       (556 )     87,615  
Total debt securities
    95,757       (594 )     95,163  
Marketable equity securities
    0       0       0  
Total <12 months temporarily impaired AFS securities
    95,757       (594 )     95,163  
                         
12 Months or More
                       
U.S. Treasury and government agencies
    55,519       (2,471 )     53,048  
State and political subdivisions
    31,336       (878 )     30,458  
U.S. government sponsored agency mortgage-backed securities
    99,468       (3,073 )     96,395  
Total debt securities
    186,323       (6,422 )     179,901  
Marketable equity securities
    25,000       (249 )     24,751  
Total ≥12 months temporarily impaired AFS securities
    211,323       (6,671 )     204,652  
                         
Total
                       
U.S. Treasury and government agencies
    58,550       (2,490 )     56,060  
State and political subdivisions
    35,891       (897 )     34,994  
U.S. government sponsored agency mortgage-backed securities
    187,639       (3,629 )     184,010  
Total debt securities
    282,080       (7,016 )     275,064  
Marketable equity securities
    25,000       (249 )     24,751  
Total temporarily impaired AFS securities
  $ 307,080     $ (7,265 )   $ 299,815  

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
12 Months or More
                 
U.S. Treasury and government agencies
  $ 480     $ (31 )   $ 449  
Total temporarily impaired HTM securities
  $ 480     $ (31 )   $ 449  

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 June 30, 2014, 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 June 30, 2014, 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 June 30, 2014, because the decline in market value is attributable to changes in interest rates and not credit quality, and because CTBI does not intend to sell the investments and it is not more likely than not we will be required to sell the investments before recovery of their amortized cost, which may be at maturity.

Marketable Equity Securities
 
CTBI’s investments in marketable equity securities consist of investments in fixed income mutual funds ($24.8 million of the total fair value and $249 thousand of the total unrealized losses in common stock investments).  The severity of the impairment (fair value is approximately 1.0% less than cost) and the duration of the impairment correlates with the rise in interest rates during the latter half of 2013.  CTBI evaluated the near-term prospects of these funds in relation to the severity and duration of the impairment.  Based on that evaluation, CTBI does not consider those investments to be other-than-temporarily impaired at June 30, 2014.
 
The analysis performed as of December 31, 2013 indicated that all impairment was considered temporary, market driven, and not credit-related.  The following tables provide the amortized cost, gross unrealized losses, and fair market value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of December 31, 2013 that are not deemed to be other-than-temporarily impaired.

Available-for-Sale

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
Less Than 12 Months
                 
U.S. Treasury and government agencies
  $ 21,750     $ (1,617 )   $ 20,133  
State and political subdivisions
    57,165       (2,789 )     54,376  
U.S. government sponsored agency mortgage-backed securities
    248,705       (8,182 )     240,523  
Total debt securities
    327,620       (12,588 )     315,032  
Marketable equity securities
    55,000       (2,218 )     52,782  
Total <12 months temporarily impaired AFS securities
    382,620       (14,806 )     367,814  
                         
12 Months or More
                       
U.S. Treasury and government agencies
    35,750       (3,522 )     32,228  
State and political subdivisions
    7,639       (470 )     7,169  
U.S. government sponsored agency mortgage-backed securities
    6,579       (7 )     6,572  
Total ≥12 months temporarily impaired AFS securities
    49,968       (3,999 )     45,969  
                         
Total
                       
U.S. Treasury and government agencies
    57,500       (5,139 )     52,361  
State and political subdivisions
    64,804       (3,259 )     61,545  
U.S. government sponsored agency mortgage-backed securities
    255,284       (8,189 )     247,095  
Total debt securities
    377,588       (16,587 )     361,001  
Marketable equity securities
    55,000       (2,218 )     52,782  
Total temporarily impaired AFS securities
  $ 432,588     $ (18,805 )   $ 413,783  

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
12 Months or More
                 
U.S. Treasury and government agencies
  $ 480     $ (62 )   $ 418  
Total temporarily impaired HTM securities
  $ 480     $ (62 )   $ 418  

Note 4 – Loans

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

 
(in thousands)
 
June 30
2014
   
December 31
2013
 
Commercial construction
  $ 113,420     $ 110,779  
Commercial secured by real estate
    905,996       872,542  
Equipment lease financing
    7,928       8,840  
Commercial other
    354,944       374,881  
Real estate construction
    61,184       56,075  
Real estate mortgage
    698,403       697,601  
Home equity
    87,279       84,880  
Consumer direct
    119,610       122,215  
Consumer indirect
    283,845       287,541  
Total loans
  $ 2,632,609     $ 2,615,354  
 
CTBI has segregated and evaluates its loan portfolio through nine portfolio segments. CTBI serves customers in small and mid-sized communities in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee.  Therefore, CTBI’s exposure to credit risk is significantly affected by changes in these communities.
 
Commercial construction loans are for the purpose of erecting or rehabilitating buildings or other structures for commercial purposes, including any infrastructure necessary for development.   Included in this category are improved property, land development, and tract development loans.  The terms of these loans are generally short-term with permanent financing upon completion.
 
Commercial real estate loans include loans secured by nonfarm, nonresidential properties, 1-4 family/multi-family properties, farmland, and other commercial real estate.  These loans are originated based on the borrower’s ability to service the debt and secondarily based on the fair value of the underlying collateral.

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

Real estate construction loans are typically for owner-occupied properties.  The terms of these loans are generally short-term with permanent financing upon completion.
 
Residential real estate loans are a mixture of fixed rate and adjustable rate first and second lien residential mortgage loans.  As a policy, CTBI holds adjustable rate loans and sells the majority of its fixed rate first lien mortgage loans into the secondary market.  Changes in interest rates or market conditions may impact a borrower’s ability to meet contractual principal and interest payments.  Residential real estate loans are secured by real property.

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

Consumer direct loans are fixed rate products comprised of unsecured loans, consumer revolving credit lines, deposit secured loans, and all other consumer purpose loans.
 
Consumer indirect loans are fixed rate loans secured by automobiles, trucks, vans, and recreational vehicles originated at the selling dealership underwritten and purchased by CTBI’s indirect lending department.  Both new and used products are financed.  Only dealers who have executed dealer agreements with CTBI participate in the indirect lending program.

Not included in the loan balances above were loans held for sale in the amount of $0.9 million at June 30, 2014 and $0.8 million at December 31, 2013, respectively.

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

 (in thousands)
 
June 30
2014
   
December 31
2013
 
Commercial:
           
Commercial construction
  $ 4,668     $ 4,519  
Commercial secured by real estate
    12,568       6,576  
Commercial other
    2,563       2,801  
                 
Residential:
               
Real estate construction
    162       481  
Real estate mortgage
    5,338       5,152  
Home equity
    426       429  
Total nonaccrual loans
  $ 25,725     $ 19,958  

The following tables present CTBI’s loan portfolio aging analysis, segregated by class, as of June 30, 2014 and December 31, 2013:

   
June 30, 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
  $ 30     $ 0     $ 6,088     $ 6,118     $ 107,302     $ 113,420     $ 1,420  
Commercial secured by real estate
    7,323       2,694       15,885       25,902       880,094       905,996       4,018  
Equipment lease financing
    0       0       0       0       7,928       7,928       0  
Commercial other
    1,236       742       7,700       9,678       345,266       354,944       5,404  
Residential:
                                                       
Real estate construction
    150       75       704       929       60,255       61,184       542  
Real estate mortgage
    1,074       4,211       11,184       16,469       681,934       698,403       6,428  
Home equity
    533       142       934       1,609       85,670       87,279       572  
Consumer:
                                                       
Consumer direct
    1,250       247       79       1,576       118,034       119,610       79  
Consumer indirect
    2,262       543       344       3,149       280,696       283,845       344  
Total
  $ 13,858     $ 8,654     $ 42,918     $ 65,430     $ 2,567,179     $ 2,632,609     $ 18,807  

   
December 31, 2013
 
(in thousands)
 
30-59 Days Past Due
   
60-89 Days Past Due
   
90+ Days Past Due
   
Total Past Due
   
Current
   
Total Loans
   
90+ and Accruing*
 
Commercial:
                                         
Commercial construction
  $ 250     $ 166     $ 6,012     $ 6,428     $ 104,351     $ 110,779     $ 1,673  
Commercial secured by real estate
    3,703       1,982       16,660       22,345       850,197       872,542       12,403  
Equipment lease financing
    0       0       0       0       8,840       8,840       0  
Commercial other
    344       422       6,156       6,922       367,959       374,881       3,723  
Residential:
                                                       
Real estate construction
    81       383       694       1,158       54,917       56,075       213  
Real estate mortgage
    1,274       4,419       9,346       15,039       682,562       697,601       4,847  
Home equity
    786       330       737       1,853       83,027       84,880       324  
Consumer:
                                                       
Consumer direct
    1,063       291       119       1,473       120,742       122,215       119  
Consumer indirect
    2,750       668       297       3,715       283,826       287,541       297  
Total
  $ 10,251     $ 8,661     $ 40,021     $ 58,933     $ 2,556,421     $ 2,615,354     $ 23,599  

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

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

Commercial construction loans generally are made to customers for the purpose of building income-producing properties.  Personal guarantees of the principals are generally required.  Such loans are made on a projected cash flow basis and are secured by the project being constructed.  Construction loan draw procedures are included in each specific loan agreement, including required documentation items and inspection requirements.  Construction loans may convert to term loans at the end of the construction period, or may be repaid by the take-out commitment from another financing source.  If the loan is to convert to a term loan, the repayment ability is based on the borrower’s projected cash flow.  Risk is mitigated during the construction phase by requiring proper documentation and inspections whenever a draw is requested.  Loans in amounts greater than $500,000 generally require a performance bond to be posted by the general contractor to assure completion of the project.
 
Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.  Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.  Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.  Management monitors and evaluates commercial real estate loans based on collateral and risk grade criteria.
 
Equipment lease financing is underwritten by our commercial lenders using the same underwriting standards as would be applied to a secured commercial loan requesting 100% financing.  The pricing for equipment lease financing is comparable to that of borrowers with similar quality commercial credits with similar collateral.  Maximum terms of equipment leasing are determined by the type and expected life of the equipment to be leased.  Residual values are determined by appraisals or opinion letters from industry experts.  Leases must be in conformity with our consolidated annual tax plan.  As we underwrite our equipment lease financing in a manner similar to our commercial loan portfolio described below, the risk characteristics for this portfolio mirror that of the commercial loan portfolio.
 
Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.  The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value.  Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis.  In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
 
With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, CTBI generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded.  Home equity loans are typically secured by a subordinate interest in 1-4 family residences. Residential construction loans are handled through the home mortgage area of the bank.  The repayment ability of the borrower and the maximum loan-to-value ratio are calculated using the normal mortgage lending criteria.  Draws are processed based on percentage of completion stages including normal inspection procedures.  Such loans generally convert to term loans after the completion of construction.
 
Consumer loans are secured by consumer assets such as automobiles or recreational vehicles.  Some consumer loans are unsecured such as small installment loans and certain lines of credit.  Our determination of a borrower’s ability to repay these loans is primarily dependent on the personal income and credit rating of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels.  Repayment can also be impacted by changes in property values on residential properties.  Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
 
The indirect lending area of the bank generally deals with purchasing/funding consumer contracts with new and used automobile dealers.  The dealers generate consumer loan applications which are forwarded to the indirect loan processing area for approval or denial.  Loan approvals or denials are based on the creditworthiness and repayment ability of the borrower, and on the collateral value.  The dealers may have recourse agreements with the Bank.

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

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

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

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

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

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

The following tables present the credit risk profile of CTBI’s commercial loan portfolio based on rating category and payment activity, segregated by class of loans, as of June 30, 2014 and December 31, 2013:

 (in thousands)
 
Commercial Construction
   
Commercial Secured by Real Estate
   
Equipment Leases
   
Commercial Other
   
Total
 
June 30, 2014
                             
Pass
  $ 92,911     $ 783,366     $ 7,928     $ 305,702     $ 1,189,907  
Watch
    9,179       73,612       0       31,711       114,502  
OAEM
    1,106       11,007       0       1,088       13,201  
Substandard
    5,705       26,476       0       14,296       46,477  
Doubtful
    4,519       11,535       0       2,147       18,201  
Total
  $ 113,420     $ 905,996     $ 7,928     $ 354,944     $ 1,382,288  
                                         
December 31, 2013
                                       
Pass
  $ 85,699     $ 746,202     $ 8,840     $ 321,819     $ 1,162,559  
Watch
    13,519       77,561       0       32,800       123,880  
OAEM
    0       6,639       0       6,200       12,839  
Substandard
    7,208       37,334       0       11,772       56,314  
Doubtful
    4,353       4,806       0       2,291       11,450  
Total
  $ 110,779     $ 872,542     $ 8,840     $ 374,881     $ 1,367,042  
 
The following tables present the credit risk profile of the CTBI’s residential real estate and consumer loan portfolios based on performing or nonperforming status, segregated by class, as of June 30, 2014 and December 31, 2013:

(in thousands)
 
Real Estate Construction
   
Real Estate Mortgage
   
Home Equity
   
Consumer Direct
   
Consumer
Indirect
   
Total
 
June 30, 2014
                                   
Performing
  $ 60,480     $ 686,637     $ 86,281     $ 119,531     $ 283,501     $ 1,236,430  
Nonperforming (1)
    704       11,766       998       79       344       13,891  
Total
  $ 61,184     $ 698,403     $ 87,279     $ 119,610     $ 283,845     $ 1,250,321  
                                                 
December 31, 2013
                                               
Performing
  $ 55,381     $ 687,602     $ 84,127     $ 122,096     $ 287,244     $ 1,236,450  
Nonperforming (1)
    694       9,999       753       119       297       11,862  
Total
  $ 56,075     $ 697,601     $ 84,880     $ 122,215     $ 287,541     $ 1,248,312  

(1)  A loan is considered nonperforming if it is 90 days or more past due and/or on nonaccrual.
 
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable CTBI will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.  These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection.

The following table presents impaired loans, the average investment in impaired loans, and interest income recognized on impaired loans for the periods ended June 30, 2014, December 31, 2013, and June 30, 2013:

   
June 30, 2014
 
(in thousands)
 
Recorded Balance
   
Unpaid Contractual Principal Balance
   
Specific Allowance
 
Loans without a specific valuation allowance:
                 
Commercial construction
  $ 5,270     $ 5,271     $ 0  
Commercial secured by real estate
    33,504       34,523       0  
Commercial other
    16,947       18,527       0  
Real estate mortgage
    1,865       1,865       0  
                         
Loans with a specific valuation allowance:
                       
Commercial construction
    4,285       4,285       734  
Commercial secured by real estate
    3,968       4,272       1,077  
Commercial other
    339       463       84  
                         
Totals:
                       
Commercial construction
    9,555       9,556       734  
Commercial secured by real estate
    37,472       38,795       1,077  
Commercial other
    17,286       18,990       84  
Real estate mortgage
    1,865       1,865       0  
Total
  $ 66,178     $ 69,206     $ 1,895  

   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2014
   
June 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
  $ 5,291     $ 78     $ 5,366     $ 128  
Commercial secured by real estate
    33,687       332       35,051       597  
Commercial other
    17,362       257       15,843       371  
Real estate mortgage
    1,866       22       1,445       32  
                                 
Loans with a specific valuation allowance:
                               
Commercial construction
    4,285       0       4,299       0  
Commercial secured by real estate
    3,973       0       4,330       4  
Commercial other
    353       0       396       0  
                                 
Totals:
                               
Commercial construction
    9,576       78       9,665       128  
Commercial secured by real estate
    37,660       332       39,381       601  
Commercial other
    17,715       257       16,239       371  
Real estate mortgage
    1,866       22       1,445       32  
Total
  $ 66,817     $ 689     $ 66,730     $ 1,132  

   
December 31, 2013
 
(in thousands)
 
Recorded Balance
   
Unpaid Contractual Principal Balance
   
Specific Allowance
   
Average Investment in Impaired Loans
   
*Interest Income Recognized
 
Loans without a specific valuation allowance:
                             
Commercial construction
  $ 5,457     $ 5,458     $ 0     $ 5,595     $ 240  
Commercial secured by real estate
    35,258       36,173       0       32,472       1,231  
Commercial other
    14,839       16,435       0       15,396       568  
Real estate mortgage
    1,024       1,024       0