Loans | 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) December 31 2016 December 31 2015 Commercial construction $ 66,998 $ 78,020 Commercial secured by real estate 1,085,428 1,052,919 Equipment lease financing 5,512 8,514 Commercial other 350,159 358,898 Real estate construction 57,966 61,750 Real estate mortgage 702,969 707,874 Home equity 91,511 89,450 Consumer direct 133,093 126,406 Consumer indirect 444,735 390,130 Total loans $ 2,938,371 $ 2,873,961 CTBI has segregated and evaluates its loan portfolio through nine portfolio segments. CTBI serves customers in small and mid-sized communities in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. Therefore, CTBI’s exposure to credit risk is significantly affected by changes in these communities. Commercial construction loans are for the purpose of erecting or rehabilitating buildings or other structures for commercial purposes, including any infrastructure necessary for development. Included in this category are improved property, land development, and tract development loans. The terms of these loans are generally short-term with permanent financing upon completion. Commercial real estate loans include loans secured by nonfarm, nonresidential properties, 1-4 family/multi-family properties, farmland, and other commercial real estate. These loans are originated based on the borrower’s ability to service the debt and secondarily based on the fair value of the underlying collateral. Equipment lease financing loans are fixed, variable, and tax exempt leases for commercial purposes. Commercial other loans consist of commercial check loans, agricultural loans, receivable financing, floorplans, loans to financial institutions, loans for purchasing or carrying securities, and other commercial purpose loans. Commercial loans are underwritten based on the borrower’s ability to service debt from the business’s underlying cash flows. As a general practice, we obtain collateral such as real estate, equipment, or other assets, although such loans may be uncollateralized but guaranteed. Real estate construction loans are typically for owner-occupied properties. The terms of these loans are generally short-term with permanent financing upon completion. Residential real estate loans are a mixture of fixed rate and adjustable rate first and second lien residential mortgage loans. As a policy, CTBI holds adjustable rate loans and sells the majority of its fixed rate first lien mortgage loans into the secondary market. Changes in interest rates or market conditions may impact a borrower’s ability to meet contractual principal and interest payments. Residential real estate loans are secured by real property. Home equity lines are revolving adjustable rate credit lines secured by real property. Consumer direct loans are fixed rate products comprised of unsecured loans, consumer revolving credit lines, deposit secured loans, and all other consumer purpose loans. Consumer indirect loans are fixed rate loans secured by automobiles, trucks, vans, and recreational vehicles originated at the selling dealership underwritten and purchased by CTBI’s indirect lending department. Both new and used products are financed. Only dealers who have executed dealer agreements with CTBI participate in the indirect lending program. Not i 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) December 31 2016 December 31 2015 Commercial: Commercial construction $ 1,912 $ 3,402 Commercial secured by real estate 6,326 5,928 Commercial other 1,559 1,485 Residential: Real estate construction 11 249 Real estate mortgage 6,260 5,206 Home equity 555 183 Consumer: Consumer direct 0 110 Total nonaccrual loans $ 16,623 $ 16,563 The following tables present CTBI’s loan portfolio aging analysis, segregated by class, as of December 31, 2016 and 2015: December 31, 2016 (in thousands) 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due Total Past Due Current Total Loans 90+ and Accruing* Commercial: Commercial construction $ 22 $ 0 $ 1,940 $ 1,962 $ 65,036 $ 66,998 $ 28 Commercial secured by real estate 2,033 478 8,847 11,358 1,074,070 1,085,428 3,015 Equipment lease financing 0 0 0 0 5,512 5,512 0 Commercial other 997 122 1,235 2,354 347,805 350,159 141 Residential: Real estate construction 707 42 152 901 57,065 57,966 152 Real estate mortgage 1,493 5,278 10,695 17,466 685,503 702,969 6,295 Home equity 829 288 905 2,022 89,489 91,511 467 Consumer: Consumer direct 873 265 68 1,206 131,887 133,093 68 Consumer indirect 3,288 851 681 4,820 439,915 444,735 681 Total $ 10,242 $ 7,324 $ 24,523 $ 42,089 $ 2,896,282 $ 2,938,371 $ 10,847 December 31, 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 $ 36 $ 6 $ 3,431 $ 3,473 $ 74,547 $ 78,020 $ 30 Commercial secured by real estate 2,947 622 7,923 11,492 1,041,427 1,052,919 3,757 Equipment lease financing 199 0 0 199 8,315 8,514 0 Commercial other 762 121 1,476 2,359 356,539 358,898 310 Residential: Real estate construction 443 62 291 796 60,954 61,750 55 Real estate mortgage 1,128 3,888 10,907 15,923 691,951 707,874 6,925 Home equity 527 148 580 1,255 88,195 89,450 448 Consumer: Consumer direct 835 479 126 1,440 124,966 126,406 126 Consumer indirect 2,133 814 395 3,342 386,788 390,130 395 Total $ 9,010 $ 6,140 $ 25,129 $ 40,279 $ 2,833,682 $ 2,873,961 $ 12,046 *90+ and Accruing are also included in 90+ Days Past Due column. The risk characteristics of CTBI’s material portfolio segments are as follows: Commercial construction loans generally are made to customers for the purpose of building income-producing properties. Personal guarantees of the principals are generally required. Such loans are made on a projected cash flow basis and are secured by the project being constructed. Construction loan draw procedures are included in each specific loan agreement, including required documentation items and inspection requirements. Construction loans may convert to term loans at the end of the construction period, or may be repaid by the take-out commitment from another financing source. If the loan is to convert to a term loan, the repayment ability is based on the borrower’s projected cash flow. Risk is mitigated during the construction phase by requiring proper documentation and inspections whenever a draw is requested. Loans in amounts greater than $500,000 generally require a performance bond to be posted by the general contractor to assure completion of the project. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Management monitors and evaluates commercial real estate loans based on collateral and risk grade criteria. Equipment lease financing is underwritten by our commercial lenders using the same underwriting standards as would be applied to a secured commercial loan requesting 100% financing. The pricing for equipment lease financing is comparable to that of borrowers with similar quality commercial credits with similar collateral. Maximum terms of equipment leasing are determined by the type and expected life of the equipment to be leased. Residual values are determined by appraisals or opinion letters from industry experts. Leases must be in conformity with our consolidated annual tax plan. As we underwrite our equipment lease financing in a manner similar to our commercial loan portfolio described below, the risk characteristics for this portfolio mirror that of the commercial loan portfolio. Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, CTBI generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences. Residential construction loans are handled through the home mortgage area of the bank. The repayment ability of the borrower and the maximum loan-to-value ratio are calculated using the normal mortgage lending criteria. Draws are processed based on percentage of completion stages including normal inspection procedures. Such loans generally convert to term loans after the completion of construction. Consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Our determination of a borrower’s ability to repay these loans is primarily dependent on the personal income and credit rating of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. The indirect lending area of the bank generally deals with purchasing/funding consumer contracts with new and used automobile dealers. The dealers generate consumer loan applications which are forwarded to the indirect loan processing area for approval or denial. Loan approvals or denials are based on the creditworthiness and repayment ability of the borrower, and on the collateral value. The dealers may have recourse agreements with CTB. Credit Quality Indicators: CTBI categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. CTBI also considers the fair value of the underlying collateral and the strength and willingness of the guarantor(s). CTBI analyzes commercial loans individually by classifying the loans as to credit risk. Loans classified as loss, doubtful, substandard, or special mention are reviewed quarterly by CTBI for further deterioration or improvement to determine if appropriately classified and valued if deemed impaired. All other commercial loan reviews are completed every 12 to 18 months. In addition, during the renewal process of any loan, as well as if a loan becomes past due or if other information becomes available, CTBI will evaluate the loan grade. CTBI uses the following definitions for risk ratings: Ø Pass Ø Watch Ø Other assets especially mentioned (OAEM) Ø Substandard Ø Doubtful The following tables present the credit risk profile of CTBI’s commercial loan portfolio based on rating category and payment activity, segregated by class of loans, as of December 31, 2016 and 2015: (in thousands) Commercial Construction Commercial Secured by Real Estate Equipment Leases Commercial Other Total December 31, 2016 Pass $ 55,315 $ 975,383 $ 5,206 $ 299,301 $ 1,335,205 Watch 3,366 51,932 137 32,780 88,215 OAEM 2,535 25,772 169 7,913 36,389 Substandard 5,592 31,945 0 9,599 47,136 Doubtful 190 396 0 566 1,152 Total $ 66,998 $ 1,085,428 $ 5,512 $ 350,159 $ 1,508,097 December 31, 2015 Pass $ 62,978 $ 937,196 $ 8,514 $ 312,100 $ 1,320,788 Watch 4,931 71,830 0 37,670 114,431 OAEM 2,206 13,765 0 963 16,934 Substandard 6,780 29,232 0 7,072 43,084 Doubtful 1,125 896 0 1,093 3,114 Total $ 78,020 $ 1,052,919 $ 8,514 $ 358,898 $ 1,498,351 The following tables present the credit risk profile of CTBI’s residential real estate and consumer loan portfolios based on performing or nonperforming status, segregated by class, as of December 31, 2016 and 2015: (in thousands) Real Estate Construction Real Estate Mortgage Home Equity Consumer Direct Consumer Indirect Total December 31, 2016 Performing $ 57,803 $ 690,414 $ 90,489 $ 133,025 $ 444,054 $ 1,415,785 Nonperforming (1) 163 12,555 1,022 68 681 14,489 Total $ 57,966 $ 702,969 $ 91,511 $ 133,093 $ 444,735 $ 1,430,274 December 31, 2015 Performing $ 61,446 $ 695,743 $ 88,819 $ 126,170 $ 389,735 $ 1,361,913 Nonperforming (1) 304 12,131 631 236 395 13,697 Total $ 61,750 $ 707,874 $ 89,450 $ 126,406 $ 390,130 $ 1,375,610 (1) A loan is considered nonperforming if it is 90 days or more past due or on nonaccrual. The total of consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings are in process totaled $3.5 million at December 31, 2016 compared to $4.4 million at December 31, 2015. A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable CTBI will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection. The following table presents impaired loans, the average investment in impaired loans, and interest income recognized on impaired loans for the years ended December 31, 2016, 2015, and 2014: December 31, 2016 (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 $ 4,102 $ 4,123 $ 0 $ 4,367 $ 218 Commercial secured by real estate 29,025 29,594 0 31,136 1,609 Commercial other 11,215 13,155 0 11,561 632 Real estate mortgage 1,483 1,483 0 1,691 52 Loans with a specific valuation allowance: Commercial construction 1,507 1,509 213 2,290 0 Commercial secured by real estate 4,731 5,885 1,035 4,151 19 Commercial other 139 139 65 483 0 Totals: Commercial construction 5,609 5,632 213 6,657 218 Commercial secured by real estate 33,756 35,479 1,035 35,287 1,628 Commercial other 11,354 13,294 65 12,044 632 Real estate mortgage 1,483 1,483 0 1,691 52 Total $ 52,202 $ 55,888 $ 1,313 $ 55,679 $ 2,530 December 31, 2015 (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 $ 2,861 $ 2,862 $ 0 $ 4,574 $ 200 Commercial secured by real estate 30,761 32,166 0 30,605 1,378 Commercial other 7,500 9,148 0 8,802 316 Real estate mortgage 1,744 1,744 0 1,179 50 Loans with a specific valuation allowance: Commercial construction 3,402 3,402 831 3,631 0 Commercial secured by real estate 2,660 2,768 1,227 2,349 7 Commercial other 960 1,153 403 836 1 Totals: Commercial construction 6,263 6,264 831 8,205 200 Commercial secured by real estate 33,421 34,934 1,227 32,954 1,385 Commercial other 8,460 10,301 403 9,638 317 Real estate mortgage 1,744 1,744 0 1,179 50 Total $ 49,888 $ 53,243 $ 2,461 $ 51,976 $ 1,952 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 *Cash basis interest is substantially the same as interest income recognized. Included in certain loan categories of impaired loans are certain loans and leases that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral of principal and/or interest payments, regardless of the period of the modification. All of the loans identified as troubled debt restructuring were modified due to financial stress of the borrower. In order to determine if a borrower is experiencing financial difficulty, an evaluation is performed to determine the probability that the borrower will be in payment default on any of its debt in the foreseeable future with the modification. This evaluation is performed under CTBI’s internal underwriting policy. When we modify loans and leases in a troubled debt restructuring, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, we evaluate all troubled debt restructuring, including those that have payment defaults, for possible impairment and recognize impairment through the allowance. During 2016, Year Ended December 31, 2016 (in thousands) Number of Loans Term Modification Rate Modification Combination Post-Modification Outstanding Balance Commercial: Commercial construction 1 $ 1,288 $ 0 $ 0 $ 1,288 Commercial secured by real estate 27 8,827 0 581 9,408 Commercial other 14 5,088 0 87 5,175 Residential: Real estate mortgage 1 0 0 281 281 Total troubled debt restructurings 43 $ 15,203 $ 0 $ 949 $ 16,152 Year Ended December 31, 2015 (in thousands) Number of Loans Term Modification Rate Modification Combination Post-Modification Outstanding Balance Commercial: Commercial construction 3 $ 428 $ 0 $ 0 $ 428 Commercial secured by real estate 21 4,244 0 1,760 6,004 Commercial other 7 3,847 0 0 3,847 Residential: Real estate mortgage 3 0 0 848 848 Total troubled debt restructurings 34 $ 8,519 $ 0 $ 2,608 $ 11,127 No charge-offs have resulted from modifications for any of the presented periods. We have commitments to extend additional credit in the amount of $0.1 million on loans that are considered troubled debt restructurings. Loans retain their accrual status at the time of their modification. As a result, if a loan is on nonaccrual at the time it is modified, it stays as nonaccrual, and if a loan is on accrual at the time of the modification, it generally stays on accrual. Commercial and consumer loans modified in a troubled debt restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a troubled debt restructuring subsequently default, CTBI evaluates the loan for possible further impairment. The allowance for loan and lease losses may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. Presented below, segregated by class of loans, are loans that were modified as troubled debt restructurings within the past twelve months which have subsequently defaulted. CTBI considers a loan in default when it is 90 days or more past due or transferred to nonaccrual. (in thousands) Year Ended December 31, 2016 Number of Loans Recorded Balance Commercial: Commercial secured by real estate 1 $ 67 Commercial other 1 12 Total defaulted restructured loans 2 $ 79 (in thousands) Year Ended December 31, 2015 Number of Loans Recorded Balance Commercial: Commercial secured by real estate 3 $ 114 Total defaulted restructured loans 3 $ 114 |