10-Q 1 ctbi10q0615.htm CTBI JUNE 30, 2015 FORM 10-Q

 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2015
   
 
Or
   
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to _____________
   

Commission file number 0-11129

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

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

(606) 432-1414
(Registrant's telephone number)

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

Yes 
No

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

Yes 
No

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

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



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

Yes
   No

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

Common stock – 17,500,395 shares outstanding at July 31, 2015
 
 
 




CAUTIONARY STATEMENT
REGARDING FORWARD LOOKING STATEMENTS

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


PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

The accompanying information has not been audited by our independent registered public accountants; however, in the opinion of management such information reflects all adjustments necessary for a fair presentation of the results for the interim period.  All such adjustments are of a normal and recurring nature.

The accompanying condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Registrant's annual report on Form 10-K.  Accordingly, the reader of the Form 10-Q should refer to the Registrant's Form 10-K for the year ended December 31, 2014 for further information in this regard.



Community Trust Bancorp, Inc.
Condensed Consolidated Balance Sheets

(dollars in thousands)
 
(unaudited)
June 30
2015
   
December 31
2014
 
Assets:
       
Cash and due from banks
 
$
58,118
   
$
56,299
 
Interest bearing deposits
   
78,777
     
44,285
 
Federal funds sold
   
8,136
     
4,933
 
Cash and cash equivalents
   
145,031
     
105,517
 
                 
Certificates of deposit in other banks
   
6,665
     
8,197
 
Securities available-for-sale at fair value (amortized cost of $579,513 and $638,395, respectively)
   
581,236
     
640,186
 
Securities held-to-maturity at amortized cost (fair value of $1,641 and $1,644, respectively)
   
1,661
     
1,662
 
Loans held for sale
   
1,993
     
2,264
 
                 
Loans
   
2,792,831
     
2,733,824
 
Allowance for loan and lease losses
   
(35,190
)
   
(34,447
)
Net loans
   
2,757,641
     
2,699,377
 
                 
Premises and equipment, net
   
48,833
     
49,980
 
Federal Home Loan Bank stock
   
17,927
     
17,927
 
Federal Reserve Bank stock
   
4,887
     
4,869
 
Goodwill
   
65,490
     
65,490
 
Core deposit intangible (net of accumulated amortization of $8,245 and $8,138, respectively)
   
371
     
477
 
Bank owned life insurance
   
61,490
     
60,697
 
Mortgage servicing rights
   
3,235
     
2,968
 
Other real estate owned
   
36,698
     
36,776
 
Other assets
   
36,899
     
27,378
 
Total assets
 
$
3,770,057
   
$
3,723,765
 
                 
Liabilities and shareholders' equity:
               
Deposits:
               
Noninterest bearing
 
$
701,958
   
$
677,626
 
Interest bearing
   
2,211,113
     
2,196,631
 
Total deposits
   
2,913,071
     
2,874,257
 
                 
Repurchase agreements
   
241,776
     
235,186
 
Federal funds purchased and other short-term borrowings
   
12,220
     
11,041
 
Advances from Federal Home Loan Bank
   
51,112
     
61,170
 
Long-term debt
   
61,341
     
61,341
 
Other liabilities
   
28,914
     
32,893
 
Total liabilities
   
3,308,434
     
3,275,888
 
                 
Shareholders' equity:
               
Preferred stock, 300,000 shares authorized and unissued
   
-
     
-
 
Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2015 – 17,489,061; 2014 – 17,466,375
   
87,446
     
87,332
 
Capital surplus
   
215,470
     
214,684
 
Retained earnings
   
157,587
     
144,697
 
Accumulated other comprehensive income, net of tax
   
1,120
     
1,164
 
Total shareholders' equity
   
461,623
     
447,877
 
                 
Total liabilities and shareholders' equity
 
$
3,770,057
   
$
3,723,765
 
 
See notes to condensed consolidated financial statements.
 

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

   
Three Months Ended
   
Six Months Ended
 
   
June 30
   
June 30
 
(in thousands except per share data)
 
2015
   
2014
   
2015
   
2014
 
Interest income:
               
Interest and fees on loans, including loans held for sale
 
$
32,669
   
$
31,937
   
$
64,844
   
$
63,550
 
Interest and dividends on securities
                               
Taxable
   
2,408
     
2,806
     
4,963
     
5,853
 
Tax exempt
   
682
     
664
     
1,353
     
1,248
 
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock
   
250
     
298
     
504
     
630
 
Other, including interest on federal funds sold
   
74
     
106
     
144
     
223
 
Total interest income
   
36,083
     
35,811
     
71,808
     
71,504
 
                                 
Interest expense:
                               
Interest on deposits
   
2,359
     
2,472
     
4,665
     
4,934
 
Interest on repurchase agreements and other short-term borrowings
   
242
     
217
     
458
     
409
 
Interest on advances from Federal Home Loan Bank
   
10
     
5
     
24
     
11
 
Interest on long-term debt
   
290
     
284
     
574
     
567
 
Total interest expense
   
2,901
     
2,978
     
5,721
     
5,921
 
                                 
Net interest income
   
33,182
     
32,833
     
66,087
     
65,583
 
Provision for loan losses
   
2,319
     
735
     
4,220
     
2,080
 
Net interest income after provision for loan losses
   
30,863
     
32,098
     
61,867
     
63,503
 
                                 
Noninterest income:
                               
Service charges on deposit accounts
   
6,046
     
5,987
     
11,628
     
11,418
 
Gains on sales of loans, net
   
823
     
288
     
1,113
     
478
 
Trust and wealth management income
   
2,366
     
2,199
     
4,605
     
4,308
 
Loan related fees
   
1,242
     
766
     
2,106
     
1,445
 
Bank owned life insurance
   
521
     
476
     
1,042
     
950
 
Brokerage revenue
   
367
     
634
     
663
     
1,204
 
Securities gains (losses)
   
(14
)
   
(51
)
   
130
     
(111
)
Other noninterest income
   
877
     
673
     
1,677
     
1,345
 
Total noninterest income
   
12,228
     
10,972
     
22,964
     
21,037
 
                                 
Noninterest expense:
                               
Officer salaries and employee benefits
   
2,919
     
2,784
     
5,891
     
5,622
 
Other salaries and employee benefits
   
10,703
     
10,490
     
21,376
     
21,069
 
Occupancy, net
   
1,908
     
1,937
     
3,995
     
4,101
 
Equipment
   
772
     
938
     
1,549
     
1,838
 
Data processing
   
1,695
     
1,933
     
3,627
     
3,858
 
Bank franchise tax
   
1,276
     
1,208
     
2,544
     
2,417
 
Legal fees
   
526
     
656
     
1,099
     
1,354
 
Professional fees
   
548
     
425
     
973
     
840
 
FDIC insurance
   
586
     
558
     
1,192
     
1,207
 
Other real estate owned provision and expense
   
752
     
736
     
1,236
     
2,241
 
Repossession expense
   
256
     
222
     
600
     
541
 
Other noninterest expense
   
4,372
     
3,369
     
8,049
     
7,029
 
Total noninterest expense
   
26,313
     
25,256
     
52,131
     
52,117
 
                                 
Income before income taxes
   
16,778
     
17,814
     
32,700
     
32,423
 
Income taxes
   
4,376
     
5,619
     
9,360
     
10,088
 
Net income
   
12,402
     
12,195
     
23,340
     
22,335
 
                                 
                                 
Other comprehensive income:
                               
Unrealized holding gains (losses) on securities available-for-sale:
                               
Unrealized holding gains (losses) arising during the period
   
(5,385
)
   
6,571
     
62
     
12,651
 
Less: Reclassification adjustments for realized gains (losses) included in net income
   
(14
)
   
(51
)
   
130
     
(111
)
Tax (benefit) expense
   
(1,880
)
   
2,318
     
(24
)
   
4,467
 
Other comprehensive income (loss), net of tax
   
(3,491
)
   
4,304
     
(44
)
   
8,295
 
Comprehensive income
 
$
8,911
   
$
16,499
   
$
23,296
   
$
30,630
 
                                 
Basic earnings per share
 
$
0.71
   
$
0.70
   
$
1.34
   
$
1.29
 
Diluted earnings per share
 
$
0.71
   
$
0.70
   
$
1.34
   
$
1.28
 
                                 
Weighted average shares outstanding-basic
   
17,421
     
17,318
     
17,411
     
17,313
 
Weighted average shares outstanding-diluted
   
17,465
     
17,393
     
17,458
     
17,393
 
                                 
Dividends declared per share
 
$
0.300
   
$
0.290
   
$
0.600
   
$
0.581
 
 
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)
 
2015
   
2014
 
Cash flows from operating activities:
       
Net income
 
$
23,340
   
$
22,335
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
2,027
     
2,256
 
Deferred taxes
   
396
     
935
 
Stock-based compensation
   
387
     
344
 
Excess tax benefits of stock-based compensation
   
148
     
10
 
Provision for loan losses
   
4,220
     
2,080
 
Write-downs of other real estate owned and other repossessed assets
   
363
     
1,161
 
Gains on sale of mortgage loans held for sale
   
(1,113
)
   
(478
)
Securities (gains) losses
   
(130
)
   
111
 
Losses on sale of assets, net
   
61
     
43
 
Proceeds from sale of mortgage loans held for sale
   
42,455
     
20,310
 
Funding of mortgage loans held for sale
   
(41,071
)
   
(19,900
)
Amortization of securities premiums and discounts, net
   
1,372
     
1,349
 
Change in cash surrender value of bank owned life insurance
   
(793
)
   
(711
)
Mortgage servicing rights:
               
Fair value adjustments
   
30
     
507
 
New servicing assets created
   
(297
)
   
(145
)
Changes in:
               
Other assets
   
(9,372
)
   
1,123
 
Other liabilities
   
(4,204
)
   
(684
)
Net cash provided by operating activities
   
17,819
     
30,646
 
                 
Cash flows from investing activities:
               
Certificates of deposit in other banks:
               
Maturity of certificates of deposit
   
1,532
     
95
 
Securities available-for-sale (AFS):
               
Purchase of AFS securities
   
(13,816
)
   
(175,553
)
Proceeds from the sales of AFS securities
   
40,944
     
112,949
 
Proceeds from prepayments and maturities of AFS securities
   
30,512
     
35,776
 
Securities held-to-maturity (HTM):
               
Proceeds from maturities of HTM securities
   
1
     
0
 
Change in loans, net
   
(66,589
)
   
(17,970
)
Purchase of premises and equipment
   
(1,067
)
   
(702
)
Proceeds from sale of premises and equipment
   
(23
)
   
18
 
Redemption of stock by Federal Home Loan Bank
   
0
     
7,746
 
Additional investment in Federal Reserve Bank stock
   
(18
)
   
(1
)
Proceeds from sale of other real estate and other repossessed assets
   
4,015
     
3,150
 
Additional investment in other real estate and other repossessed assets
   
(85
)
   
0
 
Net cash used in investing activities
   
(4,594
)
   
(34,492
)
                 
Cash flows from financing activities:
               
Change in deposits, net
   
38,814
     
32,115
 
Change in repurchase agreements, federal funds purchased, and other short-term borrowings, net
   
7,769
     
12,652
 
Advances from Federal Home Loan Bank
   
70,000
     
0
 
Payments on advances from Federal Home Loan Bank
   
(80,058
)
   
(58
)
Issuance of common stock
   
593
     
594
 
Netting of common stock
   
(189
)
   
0
 
Excess tax benefits of stock-based compensation
   
(148
)
   
(10
)
Dividends paid
   
(10,492
)
   
(10,115
)
Net cash provided by financing activities
   
26,289
     
35,178
 
Net increase in cash and cash equivalents
   
39,514
     
31,332
 
Cash and cash equivalents at beginning of period
   
105,517
     
106,641
 
Cash and cash equivalents at end of period
 
$
145,031
   
$
137,973
 
                 
Supplemental disclosures:
               
Income taxes paid
 
$
12,475
   
$
6,720
 
Interest paid
   
5,337
     
5,431
 
Non-cash activities:
               
Loans to facilitate the sale of other real estate and repossessed assets
   
2,165
     
5,225
 
Common stock dividends accrued, paid in subsequent quarter
   
214
     
201
 
Real estate acquired in settlement of loans
   
5,969
     
3,469
 
 
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, 2015, the results of operations for the three and six months ended June 30, 2015 and 2014, and the cash flows for the six months ended June, 2015 and 2014.  In accordance with accounting principles generally accepted in the United States of America for interim financial information, these statements do not include certain information and footnote disclosures required by accounting principles generally accepted in the United States of America for complete annual financial statements.  The results of operations for the three and six months ended June 30, 2015 and 2014, and the cash flows for the six months ended June 30, 2015 and 2014, are not necessarily indicative of the results to be expected for the full year.  The condensed consolidated balance sheet as of December 31, 2014 has been derived from the audited consolidated financial statements of Community Trust Bancorp, Inc. ("CTBI") for that period.  For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2014, included in our annual report on Form 10-K.

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

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

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

New Accounting Standards

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

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

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

Ø            Intangibles – Goodwill and Other – Internal-Use Software – In April 2015, the FASB issued ASU No. 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40).  The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license.  If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses.  If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.  The guidance will not change GAAP for a customer's accounting for service contracts.  In addition, the guidance in this update supersedes paragraph 350-40-25-16.  Consequently, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets.  For public business entities, the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015.  Early adoption is permitted.  An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively.  For prospective transition, the only disclosure requirements at transition are the nature of and reason for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change.  For retrospective transition, the disclosure requirements at transition include the requirements for prospective transition and quantitative information about the effects of the accounting change.  We are currently evaluating the impact of adopting ASU 2015-05, but we do not expect the adoption to have a material effect on CTBI's consolidated financial statements.

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

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

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

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

Note 2 – Stock-Based Compensation

CTBI's compensation expense related to stock option grants was $10 thousand and $2 thousand, respectively, for the three months ended June 30, 2015 and 2014, and $18 thousand and $6 thousand, respectively, for the six months ended June 30, 2015 and 2014.  Restricted stock expense for the three months ended June 30, 2015 and 2014 was $180 thousand and $151 thousand, respectively, including $20 thousand and $30 thousand in dividends paid for each period.  Restricted stock expense for the six months ended June 30, 2015 and 2014 was $369 thousand and $338 thousand, respectively, including $39 thousand and $60 thousand in dividends.  As of June 30, 2015, there was a total of $0.2 million of unrecognized compensation expense related to unvested stock option awards that will be recognized as expense as the awards vest over a weighted average period of 4.3 years and a total of $0.8 million of unrecognized compensation expense related to restricted stock grants that will be recognized as expense as the awards vest over a weighted average period of 2.0 years.

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

The fair value of options granted during the six months ended June 30, 2015, 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
 
   
2015
 
Expected dividend yield
   
3.72
%
Risk-free interest rate
   
1.54
%
Expected volatility
   
30.77
%
Expected term (in years)
   
7.0
 
Weighted average fair value of options
 
$
6.60
 

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, 2015 are summarized as follows:

Available-for-Sale

(in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
U.S. Treasury and government agencies
 
$
182,465
   
$
587
   
$
(1,338
)
 
$
181,714
 
State and political subdivisions
   
133,031
     
2,913
     
(783
)
   
135,161
 
U.S. government sponsored agency mortgage-backed securities
   
239,017
     
2,529
     
(1,982
)
   
239,564
 
Total debt securities
   
554,513
     
6,029
     
(4,103
)
   
556,439
 
CRA investment funds
   
25,000
     
0
     
(203
)
   
24,797
 
Total available-for-sale securities
 
$
579,513
   
$
6,029
   
$
(4,306
)
 
$
581,236
 

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
U.S. Treasury and government agencies
 
$
480
   
$
0
   
$
(22
)
 
$
458
 
State and political subdivisions
   
1,181
     
2
     
0
     
1,183
 
Total held-to-maturity securities
 
$
1,661
   
$
2
   
$
(22
)
 
$
1,641
 

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

Available-for-Sale

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

Held-to-Maturity

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

The amortized cost and fair value of securities at June 30, 2015 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Available-for-Sale
   
Held-to-Maturity
 
(in thousands)
 
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
Due in one year or less
 
$
22,117
   
$
22,209
   
$
0
   
$
0
 
Due after one through five years
   
114,754
     
115,899
     
1,181
     
1,183
 
Due after five through ten years
   
127,998
     
127,897
     
480
     
458
 
Due after ten years
   
50,627
     
50,870
     
0
     
0
 
U.S. government sponsored agency mortgage-backed securities
   
239,017
     
239,564
     
0
     
0
 
Total debt securities
   
554,513
     
556,439
     
1,661
     
1,641
 
CRA investment funds
   
25,000
     
24,797
     
0
     
0
 
Total securities
 
$
579,513
   
$
581,236
   
$
1,661
   
$
1,641
 

As of June 30, 2015, there was a net gain of $130 thousand realized on sales and calls of AFS securities, consisting of a pre-tax gain of $828 thousand and a pre-tax loss of $698 thousand.  As of June 30, 2014, there was a net loss of $111 thousand.

The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $227.3 million at June 30, 2015 and $267.1 million at December 31, 2014.

The amortized cost of securities sold under agreements to repurchase amounted to $272.6 million at June 30, 2015 and $280.9 million at December 31, 2014.

CTBI evaluates its investment portfolio on a quarterly basis for impairment.  The analysis performed as of June 30, 2015 indicates that all impairment is considered temporary, market and interest rate driven, and not credit-related.  The percentage of total investments with unrealized losses as of June 30, 2015 was 43.6% compared to 44.1% as of December 31, 2014.  The following tables provide the amortized cost, gross unrealized losses, and fair market value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of June 30, 2015 that are not deemed to be other-than-temporarily impaired.

Available-for-Sale

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
Less Than 12 Months
           
U.S. Treasury and government agencies
 
$
27,878
   
$
(81
)
 
$
27,797
 
State and political subdivisions
   
31,676
     
(501
)
   
31,175
 
U.S. government sponsored agency mortgage-backed securities
   
54,031
     
(642
)
   
53,389
 
Total debt securities
   
113,585
     
(1,224
)
   
112,361
 
CRA investment funds
   
25,000
     
(203
)
   
24,797
 
Total <12 months temporarily impaired AFS securities
   
138,585
     
(1,427
)
   
137,158
 
                         
12 Months or More
                       
U.S. Treasury and government agencies
   
54,772
     
(1,257
)
   
53,515
 
State and political subdivisions
   
7,316
     
(282
)
   
7,034
 
U.S. government sponsored agency mortgage-backed securities
   
57,395
     
(1,340
)
   
56,055
 
Total debt securities
   
119,483
     
(2,879
)
   
116,604
 
CRA investment funds
   
0
     
0
     
0
 
Total ≥12 months temporarily impaired AFS securities
   
119,483
     
(2,879
)
   
116,604
 
                         
Total
                       
U.S. Treasury and government agencies
   
82,650
     
(1,338
)
   
81,312
 
State and political subdivisions
   
38,992
     
(783
)
   
38,209
 
U.S. government sponsored agency mortgage-backed securities
   
111,426
     
(1,982
)
   
109,444
 
Total debt securities
   
233,068
     
(4,103
)
   
228,965
 
CRA investment funds
   
25,000
     
(203
)
   
24,797
 
Total temporarily impaired AFS securities
 
$
258,068
   
$
(4,306
)
 
$
253,762
 

Held-to-Maturity

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
12 Months or More
           
U.S. Treasury and government agencies
 
$
480
   
$
(22
)
 
$
458
 
Total temporarily impaired HTM securities
 
$
480
   
$
(22
)
 
$
458
 

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, 2015, because CTBI does not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost, which may be at maturity.

State and Political Subdivisions

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

U.S. Government Sponsored Agency Mortgage-Backed Securities

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

CRA Investment Funds

CTBI's CRA investment funds consist of investments in fixed income mutual funds ($24.8 million of the total fair value and $203 thousand of the total unrealized losses in common stock investments).  The severity of the impairment (fair value is approximately 0.8% less than cost) and the duration of the impairment correlates with the decline in long-term interest rates in 2015.  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, 2015.

The analysis performed as of December 31, 2014 indicated that all impairment was considered temporary, market and interest rate driven, and not credit-related.  The following tables provide the amortized cost, gross unrealized losses, and fair market value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of December 31, 2014 that are not deemed to be other-than-temporarily impaired.

Available-for-Sale

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

Held-to-Maturity

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

Note 4 – Loans

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

 
(in thousands)
 
June 30
2015
   
December 31
2014
 
Commercial construction
 
$
111,218
   
$
121,942
 
Commercial secured by real estate
   
978,412
     
948,626
 
Equipment lease financing
   
9,859
     
10,344
 
Commercial other
   
363,909
     
352,048
 
Real estate construction
   
57,914
     
62,412
 
Real estate mortgage
   
707,582
     
712,465
 
Home equity
   
88,113
     
88,335
 
Consumer direct
   
121,620
     
122,136
 
Consumer indirect
   
354,204
     
315,516
 
Total loans
 
$
2,792,831
   
$
2,733,824
 

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

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

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

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

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

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

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

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

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

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

Not included in the loan balances above were loans held for sale in the amount of $2.0 million at June 30, 2015 and $2.3 million at December 31, 2014, respectively.

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

 (in thousands)
 
June 30
2015
   
December 31
2014
 
Commercial:
       
Commercial construction
 
$
3,699
   
$
4,339
 
Commercial secured by real estate
   
4,186
     
6,725
 
Commercial other
   
1,326
     
2,423
 
                 
Residential:
               
Real estate construction
   
500
     
602
 
Real estate mortgage
   
6,556
     
6,513
 
Home equity
   
204
     
369
 
                 
Consumer:
               
Consumer direct
   
15
     
0
 
Total nonaccrual loans
 
$
16,486
   
$
20,971
 

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

   
June 30, 2015
 
(in thousands)
 
30-59 Days Past Due
   
60-89 Days Past Due
   
90+ Days Past Due
   
Total Past Due
   
Current
   
Total Loans
   
90+ and Accruing*
 
Commercial:
                           
Commercial construction
 
$
13
   
$
0
   
$
5,392
   
$
5,405
   
$
105,813
   
$
111,218
   
$
1,692
 
Commercial secured by real estate
   
3,073
     
984
     
8,334
     
12,391
     
966,021
     
978,412
     
5,045
 
Equipment lease financing
   
0
     
0
     
0
     
0
     
9,859
     
9,859
     
0
 
Commercial other
   
1,298
     
171
     
4,033
     
5,502
     
358,407
     
363,909
     
2,874
 
Residential:
                                                       
Real estate construction
   
33
     
67
     
576
     
676
     
57,238
     
57,914
     
90
 
Real estate mortgage
   
1,377
     
4,739
     
11,913
     
18,029
     
689,553
     
707,582
     
6,446
 
Home equity
   
1,035
     
168
     
563
     
1,766
     
86,347
     
88,113
     
404
 
Consumer:
                                                       
Consumer direct
   
1,002
     
358
     
105
     
1,465
     
120,155
     
121,620
     
105
 
Consumer indirect
   
2,380
     
585
     
259
     
3,224
     
350,980
     
354,204
     
259
 
Total
 
$
10,211
   
$
7,072
   
$
31,175
   
$
48,458
   
$
2,744,373
   
$
2,792,831
   
$
16,915
 

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

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

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

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

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

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

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

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

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

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

Credit Quality Indicators:

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

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

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

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

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

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

The following table presents the credit risk profile of CTBI's commercial loan portfolio based on rating category and payment activity, segregated by class of loans, as of June 30, 2015 and December 31, 2014:

 (in thousands)
 
Commercial Construction
   
Commercial Secured by Real Estate
   
Equipment Leases
   
Commercial Other
   
Total
 
June 30, 2015
                   
Pass
 
$
91,970
   
$
866,899
   
$
9,859
   
$
323,470
   
$
1,292,198
 
Watch
   
7,954
     
70,847
     
0
     
32,858
     
111,659
 
OAEM
   
1,939
     
8,998
     
0
     
949
     
11,886
 
Substandard
   
5,656
     
27,750
     
0
     
5,756
     
39,162
 
Doubtful
   
3,699
     
3,918
     
0
     
876
     
8,493
 
Total
 
$
111,218
   
$
978,412
   
$
9,859
   
$
363,909
   
$
1,463,398
 
                                         
December 31, 2014
                                       
Pass
 
$
101,314
   
$
834,751
   
$
10,344
   
$
307,270
   
$
1,253,679
 
Watch
   
9,857
     
69,123
     
0
     
36,114
     
115,094
 
OAEM
   
934
     
10,973
     
0
     
881
     
12,788
 
Substandard
   
5,647
     
27,901
     
0
     
5,772
     
39,320
 
Doubtful
   
4,190
     
5,878
     
0
     
2,011
     
12,079
 
Total
 
$
121,942
   
$
948,626
   
$
10,344
   
$
352,048
   
$
1,432,960
 

The following table presents the credit risk profile of the CTBI's residential real estate and consumer loan portfolios based on performing or nonperforming status, segregated by class, as of June 30, 2015 and December 31, 2014:

(in thousands)
 
Real Estate Construction
   
Real Estate Mortgage
   
Home Equity
   
Consumer Direct
   
Consumer
Indirect
   
Total
 
June 30, 2015
                       
Performing
 
$
57,324
   
$
694,580
   
$
87,505
   
$
121,500
   
$
353,945
   
$
1,314,854
 
Nonperforming (1)
   
590
     
13,002
     
608
     
120
     
259
     
14,579
 
Total
 
$
57,914
   
$
707,582
   
$
88,113
   
$
121,620
   
$
354,204
   
$
1,329,433
 
                                                 
December 31, 2014
                                               
Performing
 
$
61,427
   
$
698,210
   
$
87,544
   
$
121,995
   
$
315,131
   
$
1,284,307
 
Nonperforming (1)
   
985
     
14,255
     
791
     
141
     
385
     
16,557
 
Total
 
$
62,412
   
$
712,465
   
$
88,335
   
$
122,136
   
$
315,516
   
$
1,300,864
 

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

The total of consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings are in process totaled $6.3 million at June 30, 2015 compared to $5.9 million at December 31, 2014.

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

The following tables present impaired loans, the average investment in impaired loans, and interest income recognized on impaired loans for the periods ended June 30, 2015, December 31, 2014, and June 30, 2014:

   
June 30, 2015
 
(in thousands)
 
Recorded Balance
   
Unpaid Contractual Principal Balance
   
Specific Allowance
 
Loans without a specific valuation allowance:
           
Commercial construction
 
$
5,211
   
$
5,211
   
$
0
 
Commercial secured by real estate
   
29,951
     
31,340
     
0
 
Commercial other
   
7,262
     
8,898
     
0
 
Real estate mortgage
   
1,185
     
1,185
     
0
 
                         
Loans with a specific valuation allowance:
                       
Commercial construction
   
3,500
     
3,500
     
719
 
Commercial secured by real estate
   
2,377
     
2,560
     
529
 
Commercial other
   
687
     
809
     
215
 
                         
Totals:
                       
Commercial construction
   
8,711
     
8,711
     
719
 
Commercial secured by real estate
   
32,328
     
33,900
     
529
 
Commercial other
   
7,949
     
9,707
     
215
 
Real estate mortgage
   
1,185
     
1,185
     
0
 
Total
 
$
50,173
   
$
53,503
   
$
1,463
 

   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2015
   
June 30, 2015
 
(in thousands)
 
Average Investment in Impaired Loans
   
*Interest Income Recognized
   
Average Investment in Impaired Loans
   
*Interest Income Recognized
 
Loans without a specific valuation allowance:
               
Commercial construction
 
$
5,266
   
$
68
   
$
5,282
   
$
119
 
Commercial secured by real estate
   
30,366
     
359
     
30,179
     
669
 
Commercial other
   
7,367
     
67
     
10,118
     
128
 
Real estate mortgage
   
1,186
     
12
     
1,044
     
24
 
                                 
Loans with a specific valuation allowance:
                               
Commercial construction
   
3,796
     
0
     
3,846
     
0
 
Commercial secured by real estate
   
2,452
     
0
     
2,946
     
1
 
Commercial other
   
729
     
0
     
794
     
0
 
                                 
Totals:
                               
Commercial construction
   
9,062
     
68
     
9,128
     
119
 
Commercial secured by real estate
   
32,818
     
359
     
33,125
     
670
 
Commercial other
   
8,096
     
67
     
10,912
     
128
 
Real estate mortgage
   
1,186
     
12
     
1,044
     
24
 
Total
 
$
51,162
   
$
506
   
$
54,209
   
$
941
 

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

   
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