(5)

Loans

The composition of loans by primary loan portfolio class follows:

	December 31,
(in thousands)	2016		2015
Commercial and industrial	$	736,841	$	644,398
Construction and development, excluding undeveloped land		192,348		134,482
Undeveloped land		21,496		21,185

Real estate mortgage:
Commercial investment		538,886		436,989
Owner occupied commercial		408,292		420,666
1-4 family residential		249,498		226,575
Home equity - first lien		55,325		50,115
Home equity - junior lien		67,519		63,066

Subtotal: Real estate mortgage		1,319,520		1,197,411

Consumer		35,170		35,531

Total loans	$	2,305,375	$	2,033,007

Fees and costs of originating loans are deferred at origination and amortized over the life of the loan. Loan balances reported herein include deferred loan origination fees, net of deferred loan costs. At

December

31,

2016

and

2015,

net deferred loan origination costs exceeded deferred loan origination fees, resulting in net balances of

($459)

thousand and

($520)

thousand respectively. The lower net balance at

December

31,

2016,

as compared to the same point in

2015,

is primarily due to lower origination costs in some lending products as Bancorp improved efficiencies through the use of electronic products and streamlined systems.

Bancorp’s credit exposure is diversified with secured and unsecured loans to individuals and businesses. No specific industry concentration exceeds

ten

percent of loans. While Bancorp has a diversified loan portfolio, a customer’s ability to honor contracts is somewhat dependent upon the economic stability and/or industry in which that customer does business. Loans outstanding and related unfunded commitments are primarily concentrated within Bancorp’s current market areas, which encompass the Louisville, Indianapolis and Cincinnati metropolitan markets.

Bancorp occasionally enters into loan participation agreements with other banks in the ordinary course of business to diversify credit risk. For certain sold participation loans, Bancorp has retained effective control of the loans, typically by restricting the participating institutions from pledging or selling their share of the loan without permission from Bancorp. US GAAP requires the participated portion of these loans to be recorded as secured borrowings. The participated portions of these loans are included in the commercial and industrial loan (C&I) totals above, and a corresponding liability is reflected in other liabilities. At

December

31,

2016

and

2015,

the total participated portions of loans of this nature were

$15.8

million and

$7.2

million respectively.

Loans to directors and their associates, including loans to companies for which directors are principal owners and executive officers are presented in the following table.

(in thousands)	Year ended December 31,
Loans to directors and executive officers	201 6			201 5
Balance as of January 1	$	866		$	11,790
New loans		-			-
Repayment of term loans		(340	)		(560	)
Changes in balances of revolving lines of credit		443			562
Adjustment for Board member resignation		-			(10,926	)
Balance as of December 31	$	969		$	866

None

of the loans to directors and executive officers were past due or considered potential problem loans during

2016

2015.

The following tables present balances in the recorded investment in loans and allowance for loan losses by portfolio segment and based on impairment evaluation method as of

December

31,

2016,

2015

and

2014.

(in thousands)	Type of loan
			Construction
			and development
	Commercial		excluding
	and		undeveloped		Undeveloped		Real estate
December 31, 2016	industrial		land		land		mortgage		Consumer		Total

Loans	$	736,841	$	192,348	$	21,496	$	1,319,520	$	35,170	$	2,305,375

Loans individually evaluated for impairment	$	2,682	$	538	$	474	$	2,516	$	59	$	6,269

Loans collectively evaluated for impairment	$	734,139	$	191,810	$	21,022	$	1,316,400	$	35,111	$	2,298,482

Loans acquired with deteriorated credit quality	$	20	$	-	$	-	$	604	$	-	$	624

				Construction
				and development
	Commercial			excluding
	and			undeveloped			Undeveloped			Real estate
	industrial			land			land			mortgage			Consumer			Total
Allowance for loan losses
At December 31, 2015	$	8,645		$	1,760		$	814		$	10,875		$	347		$	22,441
Provision (credit)		2,775			275			(130	)		(68	)		148			3,000
Charge-offs		(1,216	)		(133	)		-			(576	)		(568	)		(2,493	)
Recoveries		279			21			-			342			417			1,059
At December 31, 2016	$	10,483		$	1,923		$	684		$	10,573		$	344		$	24,007

Allowance for loans individually evaluated for impairment	$	1,207		$	-		$	1		$	-		$	59		$	1,267

Allowance for loans collectively evaluated for impairment	$	9,276		$	1,923		$	683		$	10,573		$	285		$	22,740

Allowance for loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-

(in thousands)	Type of loan
			Construction
			and development
	Commercial		excluding
	and		undeveloped		Undeveloped		Real estate
December 31, 2015	industrial		land		land		mortgage		Consumer		Total

Loans	$	644,398	$	134,482	$	21,185	$	1,197,411	$	35,531	$	2,033,007

Loans individually evaluated for impairment	$	4,635	$	-	$	-	$	4,050	$	68	$	8,753

Loans collectively evaluated for impairment	$	639,760	$	134,160	$	21,185	$	1,192,864	$	35,463	$	2,023,432

Loans acquired with deteriorated credit quality	$	3	$	322	$	-	$	497	$	-	$	822

				Construction
				and development
	Commercial			excluding
	and			undeveloped			Undeveloped			Real estate
	industrial			land			land			mortgage			Consumer			Total
Allowance for loan losses
At December 31, 2014	$	11,819		$	721		$	1,545		$	10,541		$	294		$	24,920
Provision (credit)		793			1,065			(2,131	)		872			151			750
Charge-offs		(4,065	)		(26	)		-			(693	)		(597	)		(5,381	)
Recoveries		98			-			1,400			155			499			2,152
At December 31, 2015	$	8,645		$	1,760		$	814		$	10,875		$	347		$	22,441

Allowance for loans individually evaluated for impairment	$	268		$	-		$	-		$	208		$	68		$	544

Allowance for loans collectively evaluated for impairment	$	8,377		$	1,760		$	814		$	10,667		$	279		$	21,897

Allowance for loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-

(in thousands)	Type of loan
			Construction
			and development
	Commercial		excluding
	and		undeveloped		Undeveloped		Real estate
December 31, 2014	industrial		land		land		mortgage		Consumer		Total

Loans	$	571,754	$	95,733	$	21,268	$	1,150,399	$	29,396	$	1,868,550

Loans individually evaluated for impairment	$	7,239	$	516	$	-	$	3,720	$	76	$	11,551

Loans collectively evaluated for impairment	$	564,443	$	94,603	$	21,268	$	1,146,212	$	29,311	$	1,855,837

Loans acquired with deteriorated credit quality	$	72	$	614	$	-	$	467	$	9	$	1,162

				Construction
				and development
	Commercial			excluding
	and			undeveloped			Undeveloped			Real estate
	industrial			land			land			mortgage			Consumer			Total
Allowance for loan losses
At December 31, 2013	$	7,644		$	2,555		$	5,376		$	12,604		$	343		$	28,522
Provision (credit)		4,593			(1,584	)		(2,244	)		(1,190	)		25			(400	)
Charge-offs		(661	)		(250	)		(1,753	)		(993	)		(587	)		(4,244	)
Recoveries		243			-			166			120			513			1,042
At December 31, 2014	$	11,819		$	721		$	1,545		$	10,541		$	294		$	24,920

Allowance for loans individually evaluated for impairment	$	1,029		$	15		$	-		$	256		$	76		$	1,376

Allowance for loans collectively evaluated for impairment	$	10,790		$	706		$	1,545		$	10,285		$	218		$	23,544

Allowance for loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-

The considerations by Bancorp in computing its allowance for loan losses are determined based on the various risk characteristics of each loan segment. Relevant risk characteristics are as follows:

●

Commercial and industrial loans: Loans in this category are made to businesses. Generally these loans are secured by assets of the business and repayment is expected from cash flows of the business. A decline in the strength of the business or a weakened economy and resultant decreased consumer and/or business spending

may

have a negative effect on credit quality in this loan category.

	●	Construction and development, excluding undeveloped land: Loans in this category primarily include owner-occupied and investment construction loans and commercial development projects. In most cases, construction loans require only interest to be paid during construction. Upon completion or stabilization, the construction loan may convert to permanent financing in the real estate mortgage segment, requiring principal amortization. Repayment of development loans is derived from sale of lots or units including any pre-sold units. Credit risk is affected by construction delays, cost overruns, market conditions and availability of permanent financing, to the extent such permanent financing is not being provided by Bancorp.

●

Undeveloped land: Loans in this category are secured by land acquired for development by the borrower, but for which no development has yet taken place. Credit risk is primarily dependent upon financial strength of the borrower, but can also be affected by market conditions and time to sell lots at an adequate price. Credit risk is also affected by availability of permanent financing, including to the end user, to the extent such permanent financing is not being provided by Bancorp.

●

Real estate mortgage: Loans in this category are made to and secured by owner-occupied residential real estate, owner-occupied real estate used for business purposes, and income-producing investment properties. For owner-occupied residential and owner-occupied commercial real estate, repayment is dependent on financial strength of the borrower. For income-producing investment properties, repayment is dependent on financial strength of both the

tenants

and the borrower. Underlying properties are generally located in Bancorp's primary market area. Cash flows of income producing investment properties

may

be adversely impacted by a downturn in the economy as reflected in increased vacancy rates, which in turn, will have an effect on credit quality and property values. Overall health of the economy, including unemployment rates and real estate prices, has an effect on credit quality in this loan category.

●

Consumer: Loans in this category

may

be either secured or unsecured and repayment is dependent on credit quality of the individual borrower and, if applicable, adequacy of collateral securing the loan. Therefore, overall health of the economy, including unemployment rates and securities prices, will have a significant effect on credit quality in this loan category.

Bancorp has loans that were acquired in a

2013

acquisition, for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is included in the balance sheet amounts for total loans at

December

31,

2016

and

2015.

Changes in the interest component of the fair value adjustment for acquired impaired loans for the years ended

December

31,

2015

and

2016

are shown in the following table:

(in thousands)	Accretable discount			Non- accretable discount
Balance at December 31, 2014	$	62		$	266
Accretion		(59	)		(77	)
Reclassifications from (to) non-accretable difference		-			-
Disposals		-			-
Balance at December 31, 2015		3			189

Accretion		(3	)		(41	)
Reclassifications from (to) non-accretable difference		-			-
Disposals		-			-
Balance at December 31, 2016	$	0		$	148

Accretion in the non-accretable discount column represents accretion recorded upon payoff of loans.

The following tables present loans individually evaluated for impairment as of

December

31,

2016

and

2015.

(in thousands)			Unpaid				Average
	Recorded		principal		Related		recorded
December 31, 2016	investment		balance		allowance		investment

Loans with no related allowance recorded:
Commercial and industrial	$	322	$	465	$	-	$	1,947
Construction and development, excluding undeveloped land		538		708		-		108
Undeveloped land		233		265		-		76

Real estate mortgage
Commercial investment		107		107		-		193
Owner occupied commercial		1,042		1,479		-		1,356
1-4 family residential		984		985		-		980
Home equity - first lien		-		-		-		3
Home equity - junior lien		383		383		-		315
Subtotal: Real estate mortgage		2,516		2,954		-		2,847

Consumer		-		-		-		18
Subtotal	$	3,609	$	4,392	$	-	$	4,996

Loans with an allowance recorded:
Commercial and industrial	$	2,360	$	2,835	$	1,207	$	1,619
Construction and development, excluding undeveloped land		-		-		-		182
Undeveloped land		241		241		1		149

Real estate mortgage
Commercial investment		-		-		-		-
Owner occupied commercial		-		-		-		554
1-4 family residential		-		-		-		-
Home equity - first lien		-		-		-		-
Home equity - junior lien		-		-		-		-
Subtotal: Real estate mortgage		-		-		-		554

Consumer		59		59		59		63
Subtotal	$	2,660	$	3,135	$	1,267	$	2,567

Total:
Commercial and industrial	$	2,682	$	3,300	$	1,207	$	3,566
Construction and development, excluding undeveloped land		538		708		-		290
Undeveloped land		474		506		1		225

Real estate mortgage		-		-		-		-
Commercial investment		107		107		-		193
Owner occupied commercial		1,042		1,479		-		1,910
1-4 family residential		984		985		-		980
Home equity - first lien		-		-		-		3
Home equity - junior lien		383		383		-		315
Subtotal: Real estate mortgage		2,516		2,954		-		3,401

Consumer		59		59		59		81
Total	$	6,269	$	7,527	$	1,267	$	7,563

(in thousands)			Unpaid				Average
	Recorded		principal		Related		recorded
December 31, 2015	investment		balance		allowance		investment

Loans with no related allowance recorded:
Commercial and industrial	$	3,119	$	3,859	$	-	$	1,414
Construction and development, excluding undeveloped land		-		151		-		21
Undeveloped land		-		-		-		-

Real estate mortgage
Commercial investment		278		278		-		178
Owner occupied commercial		1,743		2,713		-		1,622
1-4 family residential		906		906		-		661
Home equity - first lien		13		13		-		37
Home equity - junior lien		92		92		-		69
Subtotal: Real estate mortgage		3,032		4,002		-		2,567

Consumer		-		-		-		3
Subtotal	$	6,151	$	8,012	$	-	$	4,005

Loans with an allowance recorded:
Commercial and industrial	$	1,516	$	3,087	$	268	$	4,612
Construction and development, excluding undeveloped land		-		-		-		368
Undeveloped land		-		-		-		-

Real estate mortgage
Commercial investment		-		-		-		92
Owner occupied commercial		1,018		1,018		208		1,266
1-4 family residential		-		-		-		188
Home equity - first lien		-		-		-		-
Home equity - junior lien		-		-		-		-
Subtotal: Real estate mortgage		1,018		1,018		208		1,546

Consumer		68		68		68		72
Subtotal	$	2,602	$	4,173	$	544	$	6,598

Total:
Commercial and industrial	$	4,635	$	6,946	$	268	$	6,026
Construction and development, excluding undeveloped land		-		151		-		389
Undeveloped land		-		-		-		-

Real estate mortgage		-		-		-		-
Commercial investment		278		278		-		270
Owner occupied commercial		2,761		3,731		208		2,888
1-4 family residential		906		906		-		849
Home equity - first lien		13		13		-		37
Home equity - junior lien		92		92		-		69
Subtotal: Real estate mortgage		4,050		5,020		208		4,113

Consumer		68		68		68		75
Total	$	8,753	$	12,185	$	544	$	10,603

Differences between recorded investment amounts and unpaid principal balance amounts less related allowance are due to partial charge-offs which have occurred over the life of loans and fair value adjustments recorded for loans acquired.

Interest paid on impaired or non-accrual loans that was used to reduce principal was

$307

thousand,

$521

thousand and

$284

thousand in

2016,

2015,

and

2014,

respectively. Interest income that would have been recorded if non-accrual loans were on a current basis in accordance with their original terms was

$149

thousand,

$465

thousand and

$376

thousand in

2016,

2015

and

2014,

respectively.

Impaired loans include non-accrual loans and loans accounted for as troubled debt restructurings (TDRs), which continue to accrue interest. Non-performing loans include the balance of impaired loans plus any loans over

days past due and still accruing interest. Loans past due more than

days or more and still accruing interest amounted to

$438

thousand and

$176

thousand at

December

31,

2016

and

2015,

respectively.

The following table presents the recorded investment in non-accrual loans as of

December

31,

2016

and

2015.

	December 31,
(in thousands)	2016		2015

Commercial and industrial	$	1,767	$	3,643
Construction and development, excluding undeveloped land		538		-
Undeveloped land		474		-

Real estate mortgage
Commercial investment		107		278
Owner occupied commercial		1,042		2,761
1-4 family residential		984		906
Home equity - first lien		-		13
Home equity - junior lien		383		92
Subtotal: Real estate mortgage		2,516		4,050

Consumer		-		-

Total	$	5,295	$	7,693

In the course of working with borrowers, Bancorp

may

elect to restructure the contractual terms of certain loans. A troubled debt restructuring (TDRs) occurs when, for economic or legal reasons related to a borrower’s financial difficulties, Bancorp grants a concession to the borrower that it would not otherwise consider. Bancorp had

$974

thousand and

$1.1

million of accruing loans classified as TDRs, at

December

31,

2016

and

2015,

respectively. In both periods this consisted of

two

C&I loans, to a single borrower, and

one

consumer loan. Bancorp did

not

identify and report any additional loans as TDRs during the years ended

December

31,

2016,

2015

and

2014.

Loans accounted for as TDRs are individually evaluated for impairment. At

December

31,

2016

loans reported as TDRs had a total allowance allocation of

$207

thousand, compared to

$177

thousand at

December

31,

2015.

December

31,

2016

and

2015,

Bancorp had

outstanding commitments to lend additional funds to borrowers whose loans have been classified as TDRs.

The following table presents the aging of the recorded investment in loans as of

December

31,

2016

and

2015.

													Recorded
(in thousands)							90 or more						investment
							days past						> 90 days
			30-59 days		60-89 days		due (includes)		Total		Total		and
December 31, 2016	Current		past due		past due		non-accrual)		past due		loans		accruing

Commercial and industrial	$	734,682	$	84	$	290	$	1,785	$	2,159	$	736,841	$	18
Construction and development, excluding undeveloped land		191,810		-		-		538		538		192,348		-
Undeveloped land		21,022		-		-		474		474		21,496		-

Real estate mortgage
Commercial investment		537,998		631		64		193		888		538,886		86
Owner occupied commercial		406,726		342		-		1,224		1,566		408,292		182
1-4 family residential		246,730		1,174		576		1,018		2,768		249,498		34
Home equity - first lien		55,027		231		21		46		298		55,325		46
Home equity - junior lien		66,911		99		126		383		608		67,519		72
Subtotal: Real estate mortgage		1,313,392		2,477		787		2,864		6,128		1,319,520		420

Consumer		34,965		28		105		72		205		35,170		-

Total	$	2,295,871	$	2,589	$	1,182	$	5,733	$	9,504	$	2,305,375	$	438

December 31, 2015

Commercial and industrial	$	640,190	$	238	$	327	$	3,643	$	4,208	$	644,398	$	-
Construction and development, excluding undeveloped land		134,482		-		-		-		-		134,482		-
Undeveloped land		21,185		-		-		-		-		21,185		-

Real estate mortgage
Commercial investment		436,281		290		140		278		708		436,989		-
Owner occupied commercial		417,905		-		-		2,761		2,761		420,666		-
1-4 family residential		224,252		1,147		94		1,082		2,323		226,575		176
Home equity - first lien		50,016		35		51		13		99		50,115		-
Home equity - junior lien		62,516		285		173		92		550		63,066		-
Subtotal: Real estate mortgage		1,190,970		1,757		458		4,226		6,441		1,197,411		176

Consumer		35,180		343		8		-		351		35,531		-

Total	$	2,022,007	$	2,338	$	793	$	7,869	$	11,000	$	2,033,007	$	176

Consistent with regulatory guidance, Bancorp categorizes loans into credit 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. Pass-rated loans include all risk-rated loans other than those classified as other assets especially mentioned, substandard, and doubtful, which are defined below:

	●	Other assets especially mentioned (“OAEM”): Loans classified as OAEM have a potential weakness that deserves management's close attention. These potential weaknesses may result in deterioration of repayment prospects for the loan or of Bancorp's credit position at some future date.

●

Substandard: Loans classified as substandard are inadequately protected by the paying capacity of the obligor or of collateral pledged, if any. Loans so classified have well-defined weaknesses that

may

jeopardize repayment of the debt. Default is a distinct possibility if the deficiencies are not corrected.

●

Substandard non-performing: Loans classified as substandard non-performing have deteriorated beyond the characteristics of substandard loans and have been placed on non-accrual status or have been accounted for as troubled debt restructurings.

●

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

As of

December

31,

2016

and

2015,

internally assigned risk grades of loans by category were as follows:

(in thousands)							Substandard				Total
December 31, 2016	Pass		OAEM		Substandard		non-performing		Doubtful		loans

Commercial and industrial	$	714,025	$	14,266	$	5,850	$	2,700	$	-	$	736,841
Construction and development, excluding undeveloped land		191,455		-		355		538		-		192,348
Undeveloped land		21,022		-		-		474		-		21,496

Real estate mortgage
Commercial investment		538,688		-		5		193		-		538,886
Owner occupied commercial		396,997		7,960		2,111		1,224		-		408,292
1-4 family residential		247,888		-		592		1,018		-		249,498
Home equity - first lien		55,279		-		-		46		-		55,325
Home equity - junior lien		66,710		-		426		383		-		67,519
Subtotal: Real estate mortgage		1,305,562		7,960		3,134		2,864		-		1,319,520

Consumer		35,039		-		-		131		-		35,170

Total	$	2,267,103	$	22,226	$	9,339	$	6,707	$	-	$	2,305,375


December 31, 2015

Commercial and industrial	$	612,853	$	19,672	$	7,238	$	4,635	$	-	$	644,398
Construction and development, excluding undeveloped land		133,342		773		367		-		-		134,482
Undeveloped land		20,513		517		155		-		-		21,185

Real estate mortgage
Commercial investment		434,528		2,183		-		278		-		436,989
Owner occupied commercial		397,357		17,135		3,413		2,761		-		420,666
1-4 family residential		224,645		848		-		1,082		-		226,575
Home equity - first lien		50,102		-		-		13		-		50,115
Home equity - junior lien		62,924		50		-		92		-		63,066
Subtotal: Real estate mortgage		1,169,556		20,216		3,413		4,226		-		1,197,411

Consumer		35,463		-		-		68		-		35,531

Total	$	1,971,727	$	41,178	$	11,173	$	8,929	$	-	$	2,033,007