UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549


FORM 10-Q


[X]☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 20182019
  
 orOr
  
[   ]☐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 0-11129001-31220


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


Kentucky61-0979818
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)

346 North Mayo Trail
Pikeville, Kentucky
41501
(Address of principal executive offices)
41501
(Zip code)


(606) 432-1414
(Registrant’sRegistrant’s telephone number)


Securities registered pursuant to Section 12(b) of the Act:

Common Stock
(Title of class)

ctbiNASDAQ
(Trading symbol)(Name of exchange on which registered)

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 Fileinteractive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)


Yes  ✓☑
No☐

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


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


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐


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


Yes☐
   No ✓☑


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


Common stock – 17,729,21017,777,251 shares outstanding at July 31, 20182019



CAUTIONARY STATEMENT

REGARDING FORWARD LOOKING STATEMENTS


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



PART I - FINANCIAL INFORMATION


Item 1.          Condensed Consolidated Financial Statements


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


The accompanying condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Registrant’s annual report on Form 10-K.  Accordingly, the reader of the Form 10-Q should refer to the Registrant’s Form 10-K for the year ended December 31, 20172018 for further information in this regard.



Community Trust Bancorp, Inc.
Condensed Consolidated Balance Sheets


(dollars in thousands) 
(unaudited)
June 30
2018
  
December 31
2017
  
(unaudited)
June 30
2019
  
December 31
2018
 
Assets:            
Cash and due from banks $54,987  $47,528  $52,545  $64,632 
Interest bearing deposits  143,398   127,746   269,094   75,718 
Federal funds sold  0   1,100 
Cash and cash equivalents  198,385   175,274   321,639   141,450 
                
Certificates of deposit in other banks  5,635   9,800   245   3,920 
Securities available-for-sale at fair value (amortized cost of $597,020 and $590,199, respectively)  585,764   585,761 
Securities held-to-maturity at amortized cost (fair value of $660 and $660, respectively)  659   659 
Securities available-for-sale at fair value (amortized cost of $587,314 and $602,114, respectively)  591,586   593,746 
Securities held-to-maturity at amortized cost (fair value of $619 and $649, respectively)  619   649 
Equity securities at fair value  1,727   1,173 
Loans held for sale  1,093   1,033   1,067   2,461 
                
Loans  3,169,042   3,122,940   3,192,207   3,208,638 
Allowance for loan and lease losses  (35,771)  (36,151)  (34,998)  (35,908)
Net loans  3,133,271   3,086,789   3,157,209   3,172,730 
                
Premises and equipment, net  46,483   46,318   44,404   45,291 
Right-of-use asset  15,028   0 
Federal Home Loan Bank stock  17,927   17,927   11,360   14,713 
Federal Reserve Bank stock  4,887   4,887   4,887   4,887 
Goodwill  65,490   65,490   65,490   65,490 
Bank owned life insurance  63,867   65,354   67,304   67,076 
Mortgage servicing rights  3,772   3,484   3,119   3,607 
Other real estate owned  30,262   31,996   22,536   27,273 
Other assets  47,691   41,459   69,037   57,150 
Total assets $4,205,186  $4,136,231  $4,377,257  $4,201,616 
                
Liabilities and shareholders’ equity:                
Deposits:                
Noninterest bearing $819,525  $790,930  $833,044  $803,316 
Interest bearing  2,489,883   2,472,933   2,604,137   2,502,634 
Total deposits  3,309,408   3,263,863   3,437,181   3,305,950 
                
Repurchase agreements  248,781   243,814   233,238   232,712 
Federal funds purchased  7,978   7,312   3,900   1,180 
Advances from Federal Home Loan Bank  802   845   426   436 
Long-term debt  59,341   59,341   59,341   59,341 
Deferred taxes  3,030   4,434   3,621   3,363 
Lease liability  15,544   0 
Other liabilities  33,671   25,923   29,298   34,484 
Total liabilities  3,663,011   3,605,532   3,782,549   3,637,466 
                
Shareholders’ equity:                
Preferred stock, 300,000 shares authorized and unissued  -   -   -   - 
Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2018 – 17,725,313; 2017 – 17,692,912  88,626   88,465 
Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2019 – 17,772,309; 2018 – 17,732,853  88,862   88,665 
Capital surplus  222,486   221,472   223,833   223,161 
Retained earnings  239,955   224,268   278,960   258,935 
Accumulated other comprehensive loss, net of tax  (8,892)  (3,506)
Accumulated other comprehensive income (loss), net of tax  3,053   (6,611)
Total shareholders’ equity  542,175   530,699   594,708   564,150 
                
Total liabilities and shareholders’ equity $4,205,186  $4,136,231  $4,377,257  $4,201,616 


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  
Three Months Ended
June 30
  
Six Months Ended
June 30
 
(in thousands except per share data) 2018  2017  2018  2017  2019  2018  2019  2018 
Interest income:                        
Interest and fees on loans, including loans held for sale $37,791  $34,880  $74,368  $68,355  $41,318  $37,791  $82,228  $74,368 
Interest and dividends on securities                                
Taxable  2,422   2,230   4,892   4,260   3,089   2,422   6,252   4,892 
Tax exempt  706   721   1,403   1,470   580   706   1,258   1,403 
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock  328   283   661   559   261   328   557   661 
Interest on Federal Reserve Bank deposits  713   239   1,152   455   1,525   713   2,311   1,152 
Other, including interest on federal funds sold  65   58   129   80   44   65   100   129 
Total interest income  42,025   38,411   82,605   75,179   46,817   42,025   92,706   82,605 
                                
Interest expense:                                
Interest on deposits  5,585   3,181   10,457   6,122   8,956   5,585   17,031   10,457 
Interest on repurchase agreements  723   411   1,358   749 
Interest on repurchase agreements and federal funds purchased  1,191   723   2,347   1,358 
Interest on advances from Federal Home Loan Bank  2   165   4   168   0   2   39   4 
Interest on long-term debt  567   414   1,047   810   643   567   1,279   1,047 
Total interest expense  6,877   4,171   12,866   7,849   10,790   6,877   20,696   12,866 
                                
Net interest income  35,148   34,240   69,739   67,330   36,027   35,148   72,010   69,739 
Provision for loan losses  1,929   2,764   2,875   3,993   1,563   1,929   1,753   2,875 
Net interest income after provision for loan losses  33,219   31,476   66,864   63,337   34,464   33,219   70,257   66,864 
                                
Noninterest income:                                
Service charges on deposit accounts  6,480   6,199   12,701   12,159   6,525   6,480   12,645   12,701 
Gains on sales of loans, net  304   251   583   507   518   304   848   583 
Trust and wealth management income  2,856   2,649   5,814   5,235   2,765   2,856   5,340   5,814 
Loan related fees  919   773   2,063   1,778   440   919   1,013   2,063 
Bank owned life insurance  793   526   2,557   1,050   689   793   1,247   2,557 
Brokerage revenue  440   423   723   735   299   440   560   723 
Securities gains (losses)  2   18   (286)  10   204   2   560   (286)
Other noninterest income  1,946   1,472   2,895   2,416   812   1,946   2,209   2,895 
Total noninterest income  13,740   12,311   27,050   23,890   12,252   13,740   24,422   27,050 
                                
Noninterest expense:                                
Officer salaries and employee benefits  3,220   2,663   6,434   5,927   3,297   3,220   6,671   6,434 
Other salaries and employee benefits  12,202   11,381   24,607   23,041   12,790   12,202   25,375   24,607 
Occupancy, net  2,043   1,972   4,159   3,999   1,812   2,043   3,863   4,159 
Equipment  727   748   1,444   1,534   749   727   1,488   1,444 
Data processing  1,634   1,757   3,270   3,546   1,789   1,634   3,552   3,270 
Bank franchise tax  1,577   1,521   3,278   3,041   1,683   1,577   3,398   3,278 
Legal fees  428   385   902   827   424   428   854   902 
Professional fees  495   551   997   1,047   546   495   1,077   997 
Advertising and marketing  876   708   1,608   1,393   874   876   1,666   1,608 
FDIC insurance  279   315   593   607   369   279   546   593 
Other real estate owned provision and expense  1,315   1,827   2,254   2,743   1,024   1,315   1,795   2,254 
Repossession expense  304   227   713   428   112   304   489   713 
Amortization of limited partnership investments  716   604   1,216   1,209   1,166   716   1,943   1,216 
Other noninterest expense  6,623   2,907   9,645   5,868   3,395   6,623   6,396   9,645 
Total noninterest expense  32,439   27,566   61,120   55,210   30,030   32,439   59,113   61,120 
                                
Income before income taxes  14,520   16,221   32,794   32,017   16,686   14,520   35,566   32,794 
Income taxes  2,921   4,680   5,381   9,199   (1,638)  2,921   2,303   5,381 
Net income  11,599   11,541   27,413   22,818   18,324   11,599   33,263   27,413 
                                
Other comprehensive income (loss):                                
Unrealized holding gains (losses) on securities available-for-sale:                                
Unrealized holding gains (losses) arising during the period  (1,811)  1,630   (7,309)  2,745   6,522   (1,811)  12,646   (7,309)
Less: Reclassification adjustments for realized gains included in net income  2   18   151   10   5   2   6   151 
Tax expense (benefit)  (381)  564   (1,567)  957   1,690   (381)  2,976   (1,567)
Unrealized holding gains (losses) on securities available-for-sale, net of tax  (1,432)  1,048   (5,893)  1,778 
Implementation of ASU 2016-01  0   0   507   0 
Other comprehensive income (loss), net of tax  (1,432)  1,048   (5,386)  1,778   4,827   (1,432)  9,664   (5,893)
Comprehensive income $10,167  $12,589  $22,027  $24,596  $23,151  $10,167  $42,927  $21,520 
                                
Basic earnings per share $0.66  $0.65  $1.55  $1.29  $1.03  $0.66  $1.88  $1.55 
Diluted earnings per share $0.66  $0.65  $1.55  $1.29  $1.03  $0.66  $1.88  $1.55 
                                
Weighted average shares outstanding-basic  17,687   17,626   17,679   17,621   17,721   17,687   17,717   17,679 
Weighted average shares outstanding-diluted  17,703   17,645   17,695   17,641   17,733   17,703   17,728   17,695 
                
Dividends declared per share $0.33  $0.32  $0.66  $0.64 


See notes to condensed consolidated financial statements.


Consolidated Statements of Changes in Shareholders’ Equity
Quarterly

(in thousands except per share and share amounts) 
Common
Shares
  
Common
Stock
  
Capital
Surplus
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
  Total 
Balance, December 31, 2017  17,692,912  $88,465  $221,472  $224,268  $(3,506) $530,699 
Net income              15,814       15,814 
Other comprehensive loss, net of tax of $(1,186)                  (4,461)  (4,461)
Cash dividends declared ($0.33 per share)              (5,836)      (5,836)
Issuance of common stock  29,087   145   451           596 
Vesting of restricted stock  (12,582)  (63)  63           0 
Issuance of restricted stock  11,435   57   (57)          0 
Forfeiture of restricted stock  (115)  (1)  1           0 
Stock-based compensation          224           224 
Implementation of ASU 2014-09              453       453 
Implementation of ASU 2016-01              (507)  507   0 
Balance, March 31, 2018  17,720,737  $88,603  $222,154  $234,192  $(7,460) $537,489 
Net income              11,599       11,599 
Other comprehensive loss, net of tax of
 $(381)
                  (1,432)  (1,432)
Cash dividends declared ($0.33 per share)              (5,836)      (5,836)
Issuance of common stock  3,991   20   184           204 
Vesting of restricted stock  585   3   (3)          0 
Stock-based compensation          151           151 
Balance, June 30, 2018  17,725,313  $88,626  $222,486  $239,955  $(8,892) $542,175 

(in thousands except per share and share amounts) 
Common
Shares
  
Common
Stock
  
Capital
Surplus
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
  Total 
Balance, December 31, 2018  17,732,853  $88,665  $223,161  $258,935  $(6,611) $564,150 
Net income              14,939       14,939 
Other comprehensive income, net of tax of $1,286                  4,837   4,837 
Cash dividends declared ($0.36 per share)              (6,378)      (6,378)
Issuance of common stock  19,065   95   163           258 
Vesting of restricted stock  (12,186)  (61)  61           0 
Issuance of restricted stock  27,921   140   (140)          0 
Forfeiture of restricted stock  (59)  0   0           0 
Stock-based compensation          181           181 
Implementation of ASU 2016-02              (480)  0   (480)
Balance, March 31, 2019  17,767,594  $88,839  $223,426  $267,016  $(1,774) $577,507 
Net income              18,324       18,324 
Other comprehensive income, net of tax of
 $1,690
                  4,827   4,827 
Cash dividends declared ($0.36 per share)              (6,380)      (6,380)
Issuance of common stock  5,718   28   188           216 
Vesting of restricted stock  (474)  (2)  2           0 
Forfeiture of restricted stock  (529)  (3)  3           0 
Stock-based compensation          214           214 
Balance, June 30, 2019  17,772,309  $88,862  $223,833  $278,960  $3,053  $594,708 

See notes to condensed consolidated financial statements.
Consolidated Statements of Changes in Shareholders’ Equity
Year-to-Date

(in thousands except per share and share amounts) 
Common
Shares
  
Common
Stock
  
Capital
Surplus
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
  Total 
Balance, December 31, 2017  17,692,912  $88,465  $221,472  $224,268  $(3,506) $530,699 
Net income              27,413       27,413 
Other comprehensive loss, net of tax of $(1,567)                  (5,893)  (5,893)
Cash dividends declared ($0.66 per share)              (11,672)      (11,672)
Issuance of common stock  33,078   165   635           800 
Vesting of restricted stock  (11,997)  (60)  60           0 
Issuance of restricted stock  11,435   57   (57)          0 
Forfeiture of restricted stock  (115)  (1)  1           0 
Stock-based compensation          375           375 
Implementation of ASU 2014-09              453       453 
Implementation of ASU 2016-01              (507)  507   0 
Balance, June 30, 2018  17,725,313  $88,626  $222,486  $239,955  $(8,892) $542,175 

(in thousands except per share and share amounts) 
Common
Shares
  
Common
Stock
  
Capital
Surplus
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
  Total 
Balance, December 31, 2018  17,732,853  $88,665  $223,161  $258,935  $(6,611) $564,150 
Net income              33,263       33,263 
Other comprehensive income, net of tax of $2,976                  9,664   9,664 
Cash dividends declared ($0.72 per share)              (12,758)      (12,758)
Issuance of common stock  24,783   123   351           474 
Vesting of restricted stock  (12,660)  (63)  63           0 
Issuance of restricted stock  27,921   140   (140)          0 
Forfeiture of restricted stock  (588)  (3)  3           0 
Stock-based compensation          395           395 
Implementation of ASU 2016-02              (480)  0   (480)
Balance, June 30, 2019  17,772,309  $88,862  $223,833  $278,960  $3,053  $594,708 

See notes to condensed consolidated financial statements.

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


 Six Months Ended 
 June 30  
Six Months Ended
June 30
 
(in thousands) 2018  2017  2019  2018 
Cash flows from operating activities:            
Net income $27,413  $22,818  $33,263  $27,413 
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization  1,918   2,023   2,689   1,918 
Deferred taxes  163   123   (2,588)  163 
Stock-based compensation  400   302   432   400 
Provision for loan losses  2,875   3,993   1,753   2,875 
Write-downs of other real estate owned and other repossessed assets  1,320   1,987   1,181   1,320 
Gains on sale of mortgage loans held for sale  (583)  (507)  (848)  (583)
Securities (gains) losses  286   (10)
Gain on debt repurchase  0   (560)
Securities (gains) losses, net  (6)  286 
Change in fair market value of equity securities  (554)  0 
(Gains) losses on sale of assets, net  (69)  10   38   (69)
Proceeds from sale of mortgage loans held for sale  26,254   22,859   44,665   26,254 
Funding of mortgage loans held for sale  (25,731)  (25,732)  (42,423)  (25,731)
Amortization of securities premiums and discounts, net  2,407   1,551   2,361   2,407 
Change in cash surrender value of bank owned life insurance  (2,191)  (708)  (843)  (2,191)
Payment of operating lease liabilities  (848)  0 
Mortgage servicing rights:                
Fair value adjustments  (77)  301   795   (77)
New servicing assets created  (211)  (172)  (307)  (211)
Changes in:                
Other assets  (6,288)  (1,966)  (11,913)  (6,288)
Other liabilities  8,179   2,756   (5,211)  8,179 
Net cash provided by operating activities  36,065   29,068   21,636   36,065 
                
Cash flows from investing activities:                
Certificates of deposit in other banks:                
Purchase of certificates of deposit  0   (11,515)
Maturity of certificates of deposit  4,165   235   3,675   4,165 
Securities available-for-sale (AFS):                
Purchase of AFS securities  (131,770)  (77,344)  (111,117)  (131,770)
Proceeds from the sales of AFS securities  57,079   3,261   25,734   57,079 
Proceeds from prepayments and maturities of AFS securities  64,535   70,304   97,829   64,535 
Securities held-to-maturity (HTM):                
Proceeds from maturities of HTM securities  0   8   30   0 
Change in loans, net  (49,769)  (151,624)  15,176   (49,769)
Purchase of premises and equipment  (2,083)  (1,187)  (1,042)  (2,083)
Proceeds from sale and retirement of premises and equipment  23   25   13   23 
Redemption of stock by Federal Home Loan Bank  3,353   0 
Proceeds from sale of other real estate and repossessed assets  928   1,128   2,123   928 
Proceeds from settlement of bank owned life insurance  3,678   0   615   3,678 
Net cash used in investing activities  (53,214)  (166,709)
Net cash provided by (used in) investing activities  36,389   (53,214)
                
Cash flows from financing activities:                
Change in deposits, net  45,545   24,302   131,231   45,545 
Change in repurchase agreements and federal funds purchased, net  5,633   8,547   3,246   5,633 
Proceeds from Federal Home Loan Bank advances  0   100,000   30,000   0 
Payments on advances from Federal Home Loan Bank  (43)  (50)  (30,010)  (43)
Repurchase of long-term debt  0   (1,440)
Payment of finance lease liabilities  (7)  0 
Issuance of common stock  800   708   474   800 
Dividends paid  (11,675)  (11,312)  (12,770)  (11,675)
Net cash provided by financing activities  40,260   120,755   122,164   40,260 
Net increase (decrease) in cash and cash equivalents  23,111   (16,886)
Net increase in cash and cash equivalents  180,189   23,111 
Cash and cash equivalents at beginning of period  175,274   144,716   141,450   175,274 
Cash and cash equivalents at end of period $198,385   127,830  $321,639   198,385 
                
Supplemental disclosures:                
Income taxes paid $5,100  $6,400  $6,500  $5,100 
Interest paid  10,898   6,912   18,218   10,898 
Non-cash activities:                
Loans to facilitate the sale of other real estate owned and repossessed assets  2,406   1,574   2,650   2,406 
Common stock dividends accrued, paid in subsequent quarter  202   204   208   202 
Real estate acquired in settlement of loans  2,843   1,434   1,242   2,843 

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 adjustments) necessary, to present fairly the condensed consolidated financial position as of June 30, 2018,2019, the results of operations, other comprehensive income, and changes in shareholders’ equity for the three and six months ended June 30, 20182019 and 20172018, and the cash flows for the six months ended June 30, 20182019 and 2017.2018.  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, 20182019 and 20172018 and the cash flows for the six months ended June 30, 20182019 and 20172018 are not necessarily indicative of the results to be expected for the full year.  The condensed consolidated balance sheet as of December 31, 20172018 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, 2017,2018, included in our annual report on Form 10-K.



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



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



New Accounting Standards –


ØFinancial Instruments – Overall – In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10).   The amendments in this Update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee).  The amendments in this Update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.  In addition, the amendments in this Update eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities.  Public business entities will be required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.  This Update is the final version of Proposed ASU 2013-220—Financial Instruments—Overall (Subtopic 825-10) and Proposed ASU 2013-221—Financial Instruments—Overall (Subtopic 825-10).  For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption.  The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption.  At December 31, 2017, we had $25 million in equity securities with a net unrealized loss of $0.6 million.  Accordingly, an adjustment has been made as a cumulative effect adjustment to our consolidated balance sheet effective January 1, 2018.  Note 8 below has been modified to reflect the changes in disclosure and the use of a notional exit price.

Ø➢Leases – In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).   ASU 2016-02 establishes a right of useright-of-use model that requires a lessee to record a right of useright-of-use asset and a lease liability for all leases with terms longer than 12 months.  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.  For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases.  A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee.  If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor does not convey risks and rewards or control, an operating lease results.  The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities.  Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available.  Early adoption is permitted.  CTBI has an implementation team working through the provisions of ASU 2016-02 including reviewing all leases to assess the impact on its accounting and disclosures.  CTBI does not anticipate a significant increase in leasing activity between now and the date of adoption.  We have calculated the minimum and maximum net present value of all potential lease payments to be between $10.1 million and $20.3 million.  We have determined the renewal periods reasonably expected to be exercised.  We are now in the process of determining the amount to recognize as right of use assets and the corresponding lease liabilities.


ØRevenue from Contracts with Customers –
In May 2014,August 2018, the FASB issued ASU No. 2014-09, Revenue from Contracts2018-11, Leases (Topic 842):  Targeted Improvements.  This ASU is intended to reduce costs and ease implementation of the leases standard for financial statement preparers.  ASU 2018-11 provides a new transition method and a practical expedient for separating components of a contract.


Transition: Comparative Reporting at Adoption


The amendments in ASU 2018-11 provide entities with Customers.  The core principle of ASU 2014-09 is thatan additional (and optional) transition method to adopt the new leases standard.  Under this new transition method, an entity should recognizeinitially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption consistent with preparers’ requests.  Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP in Topic 840, Leases.  An entity that elects this additional (and optional) transition method must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840.  The amendments do not change the existing disclosure requirements in Topic 840 (for example, they do not create interim disclosure requirements that entities previously were not required to provide).

Separating Components of a Contract


The amendments in ASU 2018-11 provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue to depictguidance (Topic 606) and both of the following are met:

The timing and pattern of transfer of promised goodsthe non-lease component(s) and associated lease component are the same.
The lease component, if accounted for separately, would be classified as an operating lease.


An entity electing this practical expedient (including an entity that accounts for the combined component entirely in Topic 606) is required to disclose certain information, by class of underlying asset, as specified in the ASU.


We elected the optional transition method of the modified retrospective approach provided in ASU 2018-11 which was applied on January 1, 2019.  CTBI also elected certain relief options offered in ASU 2016-02, including the package of practical expedients, the option not to separate lease and non-lease components, and instead to account for them as a single lease component for all classes of assets, the hindsight practical expedient to allow entities to use hindsight when determining lease term and impairment of right-of-use assets, and the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or servicesless).  Refer to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchangenote 6, Leases, below for those goods or services.  The guidance also specifies the accounting for some costs to obtain or fulfill a contract with a customer, as well as enhanced disclosure requirements.  In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 to fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2017.  In March 2016, the FASB issued ASU 2016-08 which clarified the revenue recognition implementation guidance on principal versus agent considerations and is effective during the same period as ASU 2014-09.  In April 2016, the FASB issued ASU 2016-10 which clarified the revenue recognition guidancefurther information regarding the identificationimpact of performance obligations and the licensing implementation and is effective during the same period as ASU 2014-09.  In May 2016, the FASB issued ASU 2016-12 which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax, and transition.  ASU 2016-12 is effective during the same period as ASU 2014-09.  We adopted these Updates effective January 1, 2018 with no material change to the timing or amounts of income recognized, as the majority of the revenues earned by CTBI are not within the scope of ASU 2014-09.adoption.


Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers.  The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other generally accepted accounting principles (“GAAP”) discussed elsewhere within our disclosures.  Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of noninterest income are as follows:

·Service charges on deposit accounts represents general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue.  Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed.  Payment for such performance obligations is generally received at the time the performance obligations are satisfied.

·Trust and wealth management income represents monthly or quarterly fees due from wealth management customers as consideration for managing the customers’ assets.  Wealth management and trust services include custody of assets, investment management, escrow services, fees for trust services, and similar fiduciary activities.  Revenue is recognized when our performance obligation is completed each month or quarter, which is generally the time that payment is received.

·Brokerage revenue is transaction based and collected upon the settlement of the transaction.  Other sales, such as life insurance, generate commissions from other third parties.  These fees are generally collected monthly.

·Other noninterest income primarily includes items such as letter of credit fees, gains on sale of loans held for sale and servicing fees related to mortgage and commercial loans, none of which are subject to the requirements of ASC 606.

Ø➢Accounting for Credit Losses – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The provisions of ASU 2016-13 were issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date.  This ASU requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis.  The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses.  The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.




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



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



ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. CTBI has an implementation team working through the provisions of ASU 2016-13 including assessing the impact on its accounting and disclosures.  The team has established the historical data that will be available and has identified the potential loan segments to be analyzed.  We are continuing data analysis, including the analysis of historical charge-off and recovery data.

ØStatement of Cash Flows – In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.Stakeholders indicated that thereThe team is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statementprocess of cash flows under Topic 230, Statementdetermining the portfolio methodologies to be utilized and plans to begin running parallel with its current model in the third quarter of Cash Flows, and other Topics.  This ASU addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle.  The amendments in this Update apply to all entities that are required to present a statement of cash flows under Topic 230.  This Update is the final version of Proposed Accounting Standards Update EITF-15F—Statement of Cash Flows—Classification of Certain Cash Receipts and Cash Payments (Topic 230), which has been deleted.  The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  The amendments in this Update should be applied using a retrospective transition method to each period presented.  If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable.  We adopted this ASU effective January 1, 2018 with no material impact on CTBI’s consolidated financial statements.2019.


Ø
➢Simplifying the Test for Goodwill Impairment – In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment.  These amendments eliminate Step 2 from the goodwill impairment test.  The amendments also eliminate the requirements from any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.  An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.  The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods with those fiscal years.  ASU 2017-04 should be implemented on a prospective basis.  Management does not expect ASU 2017-04 to have an impact on CTBI’s consolidated financial statements.


ØReceivables – Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities
➢Changes to the Disclosure Requirements for Fair Value Measurement – In April 2017, the FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.  The ASU shortens the amortization period for certain callable debt securities held at a premium to the earliest call date.  However, the amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.  The amendments are effective for public business entities for fiscal periods beginning after December 15, 2018, including interim periods within those fiscal periods.  Entities are required to apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.  We adopted this ASU effective January 1, 2018 with no material impact on CTBI’s consolidated financial statements.

ØIncome Statement—Reporting Comprehensive Income – In FebruaryAugust 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.  ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220).  On December 22, 2017,2018-13 modifies the U.S. federal government enacted a tax bill,disclosure requirements on fair value measurements in Topic 820 as follows:

Removals


The following disclosure requirements were removed from Topic 820:

The amount of and reasons for transfers between Level 1 and Level 2 of the Tax Cutsfair value hierarchy
The policy for timing of transfers between levels
The valuation processes for Level 3 fair value measurements

Modifications


The following disclosure requirements were modified in Topic 820:

For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and Jobs Actthe date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and
The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of 2017.  the reporting date.


Additions


The guidancefollowing disclosure requirements were added to Topic 820:

The changes in GAAP requires deferred tax liabilitiesunrealized gains and assets to be adjustedlosses for the effect of a change in tax laws or rates with the effectperiod included in income from continuing operations in the reporting period that includes the enactment date.  That guidance was applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income (rather thanfor recurring Level 3 fair value measurements held at the end of the reporting period; and
The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.  For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in net income).  Becauselieu of the adjustmentweighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of deferred taxes dueunobservable inputs used to develop Level 3 fair value measurements.


In addition, the amendments eliminate “at a minimum” from the phrase “an entity shall disclose at a minimum” to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements.


CTBI plans to adopt ASU 2018-13 effective January 1, 2020 with minimal changes to our current reporting.


➢Accounting for Costs of Implementing a Cloud Computing Service Agreement– In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):  Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which reduces complexity for the accounting for costs of implementing a cloud computing service arrangement.  This standard aligns the accounting for implementation costs of hosting arrangements, regardless of whether they convey a license to the reduction ofhosted software.


The ASU aligns the historical corporate income tax ratefollowing requirements for capitalizing implementation costs:

Those incurred in a hosting arrangement that is a service contract, and
Those incurred to the newly enacted corporate income tax rate of 21 percent was requireddevelop or obtain internal-use software (and hosting arrangements that include an internal-use software license).


This ASU will be effective beginning January 1, 2020.  We do not anticipate a significant impact to be included in income from continuing operations, the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects for purposes of this Update) did not reflect the appropriate tax rate.  The amendments in this ASU requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate.  The amount of the reclassification is the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate.  Consequently, the amendments in this Update eliminate the stranded tax effects associated with the change in the federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 and improve the usefulness of information reported to financial statement users.  The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption is permitted for public business entities for reporting periods for which financial statements have not yet been issued by applying retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 is recognized.  We elected to early adopt this ASU, and therefore, have adjusted our consolidated financial statements effective December 31, 2017 with minimal effect to our financial position.statements.

ØIncome Taxes—Amendments to SEC Paragraphs – The FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118 in March 2018.  ASU 2018-05 amends the Accounting Standards Codification to incorporate various SEC paragraphs pursuant to the issuance of SAB 118.  SAB 118 addresses the application of generally accepted accounting principles in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act.  We do not, nor do we expect to have, any situations where we do not have the necessary information available, prepared, and analyzed in reasonable detail to complete the accounting for the tax effects of the Tax Cuts and Jobs Act.


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 debt 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 Accounting Standards Codification (“ASC”) 320, InvestmentInvestments – Debt 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.


Beginning in January 1, 2018, upon adoption of ASU 2016-01, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in net income.  For periods prior to January 1, 2018, equity securities were classified as available-for-sale and stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income, net of tax.  Equity securities without a readily determinable fair value are recorded at cost less impairment, if any, adjusted for subsequent observable price changes.


Gains or losses on disposition of debt securities are computed by specific identification for all securities except for shares in mutual funds, which are computed by average cost.those securities.  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.



Subsequent to the January 1, 2018 effective date of ASU 2016-01, ASC 320 applies only to debt securities and ASC 321, Investments – Equity Securities, applies to equity securities.  ASC 321 requires equity investments (except those accounted for under the equity method and those that result in the consolidation of the investee) to be measured at fair value, with changes in fair values recognized in net income.


Equity securities with a readily determinable fair value are required to be measured at fair value, with changes in fair value recognized through net income.  Equity securities without a readily determinable fair value are carried at cost, less any impairment, if any, plus or minus changes resulting from observable price changes for identical or similar investments.  An election can be made, as permitted by ASC 321-10-35-2, to subsequently measure an equity security without a readily determinable fair value, at fair value.  Equity securities held by CTBI include securities without readily determinable fair values.  CTBI has elected to account for these securities at fair value.  The fair value of these securities was determined by a third party service provider using Level 3 inputs as defined in ASC 820, Fair Value Measurement, and changes in fair value are recognized in income.



Loans– Loans with the ability and the intent to be held until maturity and/or payoff are reported at the carrying value of unpaid principal reduced by unearned interest, an allowance for loan and lease losses, and unamortized deferred fees or costs.  Income is recorded on the level yield basis.  Interest accrual is discontinued when management believes, after considering economic and business conditions, collateral value, and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful.  Any loan greater than 90 days past due must be well secured and in the process of collection to continue accruing interest.  Cash payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured.  Loans are not reclassified as accruing until principal and interest payments remain current for a period of time, generally six months, and future payments appear reasonably certain.  Included in certain loan categories of impaired loans are troubled debt restructurings that were classified as impaired.  A restructuring of a debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.



Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized over the estimated life of the related loans, leases, or commitments as a yield adjustment.



Allowance for Loan and Lease Losses– We maintain an allowance for loan and lease losses (“ALLL”) at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio.  Credit losses are charged and recoveries are credited to the ALLL.



We utilize an internal risk grading system for commercial credits.  Those larger commercial credits that exhibit probable or observed credit weaknesses are subject to individual review.  The borrower’s cash flow, adequacy of collateral coverage, and other options available to CTBI, including legal remedies, are evaluated.  The review of individual loans includes those loans that are impaired as defined by ASC 310-10-35, Impairment of a Loan.  We evaluate the collectability of both principal and interest when assessing the need for loss provision.  Historical loss rates are analyzed and applied to other commercial loans not subject to specific allocations.  The ALLL allocation for this pool of commercial loans is established based on the historical average, maximum, minimum, and median loss ratios.



A loan is considered impaired when, based on current information and events, it is probable that CTBI will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.



Homogenous loans, such as consumer installment, residential mortgages, and home equity lines are not individually risk graded.  The associated ALLL for these loans is measured under ASC 450, Contingencies.




When any secured commercial loan is considered uncollectable, whether past due or not, a current assessment of the value of the underlying collateral is made.  If the balance of the loan exceeds the fair value of the collateral, the loan is placed on nonaccrual and the loan is charged down to the value of the collateral less estimated cost to sell or a specific reserve equal to the difference between book value of the loan and the fair value assigned to the collateral is created until such time as the loan is foreclosed.  When the foreclosed collateral has been legally assigned to CTBI, the estimated fair value of the collateral less costs to sell is then transferred to other real estate owned or other repossessed assets, and a charge-off is taken for any remaining balance.  When any unsecured commercial loan is considered uncollectable the loan is charged off no later than at 90 days past due.



All closed-end consumer loans (excluding conventional 1-4 family residential loans and installment and revolving loans secured by real estate) are charged off no later than 120 days (5 monthly payments) delinquent.  If a loan is considered uncollectable, it is charged off earlier than 120 days delinquent.  For conventional 1-4 family residential loans and installment and revolving loans secured by real estate, when a loan is 90 days past due, a current assessment of the value of the real estate is made.  If the balance of the loan exceeds the fair value of the property, the loan is placed on nonaccrual.  Foreclosure proceedings are normally initiated after 120 days.  When the foreclosed property has been legally assigned to CTBI, the fair value less estimated costs to sell is transferred to other real estate owned and the remaining balance is taken as a charge-off.



Historical loss rates for loans are adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition.  We use twelve rolling quarters for our historical loss rate analysis.  Factors that we consider include delinquency trends, current economic conditions and trends, strength of supervision and administration of the loan portfolio, levels of underperforming loans, level of recoveries to prior year’s charge-offs, trends in loan losses, industry concentrations and their relative strengths, amount of unsecured loans, and underwriting exceptions.  Management continually reevaluates the other subjective factors included in its ALLL analysis.



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



Income Taxes – Income tax expense is based on the taxes due on the consolidated tax return plus deferred taxes based on the expected future tax benefits and consequences of temporary differences between carrying amounts and tax bases of assets and liabilities, using enacted tax rates.  Any interest and penalties incurred in connection with income taxes are recorded as a component of income tax expense in the consolidated financial statements.  During the three and six months ended June 30, 20182019 and 2017,2018, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes.



As a bank doing business in Kentucky, CTB is subject to a capital-based Kentucky bank franchise tax and exempt from Kentucky corporate income tax.  However, in March 2019, Kentucky enacted HB354, which will transition CTB from the bank franchise tax to a corporate income tax beginning January 1, 2021.  The current Kentucky corporate income tax rate is 5%.  As of March 31, 2019, CTBI recorded a deferred tax liability, net of the federal benefit, of $1.0 million due to the enactment of HB354.



In April 2019, Kentucky enacted HB458.  HB458 allows for combined state income tax filing with CTBI, CTB, and CTIC.  CTBI had previously filed a separate company return and generated net operating losses, in which it had maintained a valuation allowance against the related deferred tax asset.  HB458 also allows for certain net operating losses to be utilized on a combined return.  CTBI expects to file a combined return, beginning in 2021, and to utilize these previously generated losses.  The tax benefit recorded in the second quarter 2019 to reverse the valuation allowance on the deferred tax asset for these losses was $3.6 million. 

Note 2 – Stock-Based Compensation



CTBI’s compensation expense related to stock option grants was $10$10 thousand and $63$21 thousand, respectively, for the three and six months ended June 30, 2018, compared to $142019, and $10 thousand  and $28$63 thousand respectively, for the three and six months ended June 30, 2017.2018.  Restricted stock expense for the three and six months ended June 30, 20182019 was $154$222 thousand and $337$411 thousand, respectively, including $13$18 thousand and $25$37 thousand in dividends paid for each period.  Restricted stock expense for the three and six months ended June 30, 20172018 was $142$154 thousand and $274$337 thousand, respectively, including $13$13 thousand and $27$25 thousand in dividends paid for each period.  As of June 30, 2018,2019, there was a total of $0.1 million$16 thousand of unrecognized compensation expense related to unvested stock option awards that will be recognized as expense as the awards vest over a weighted average period of 1.40.5 years and a total of $1.4$1.8 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 2.82.9 years.



There were no stock options granted in the first six months of 2018both 2019 and 2017, and there were no restricted stock grants made during the three months ended June 30, 2018 and 2017.2018.  There were 11,32027,921 and 23,66811,320 shares of restricted stock granted during the six months ended June 30, 20182019 and 2017,2018, respectively.  The restricted stock was issued pursuant to the terms of CTBI’s 2015 Stock Ownership Incentive Plan.  The restrictions on the restricted stock will lapse ratably over four years except for a 5,000 management retention restricted stock award granted in 2017 which will cliff vest at the end of five years..  However, in the event of certain participant employee termination events occurring within 24 months of a change in control of CTBI or the death of the participant, the restrictions will lapse, and in the event of the participant’s disability, the restrictions will lapse on a pro rata basis.  The Compensation Committee will have discretion to review and revise restrictions applicable to a participant’s restricted stock in the event of the participant’s retirement.



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, 20182019 are summarized as follows:


Available-for-Sale


(in thousands) Amortized Cost  Gross Unrealized Gains  Gross Unrealized Losses  Fair Value  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  Fair Value 
U.S. Treasury and government agencies $249,625  $29  $(2,881) $246,773  $150,573  $638  $(469) $150,742 
State and political subdivisions  129,628   875   (3,014)  127,489   103,304   2,385   (250)  105,439 
U.S. government sponsored agency mortgage-backed securities  217,260   194   (6,454)  211,000   331,036   3,757   (1,788)  333,005 
Other debt securities  507   0   (5)  502   2,401   0   (1)  2,400 
Total debt securities  597,020   1,098   (12,354)  585,764 
CRA investment funds  0   0   0   0 
Total available-for-sale securities $597,020  $1,098  $(12,354) $585,764  $587,314  $6,780  $(2,508) $591,586 

Held-to-Maturity


(in thousands) Amortized Cost  Gross Unrealized Gains  Gross Unrealized Losses  Fair Value  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  Fair Value 
State and political subdivisions $659  $1  $0  $660  $619  $0  $0  $619 
Total held-to-maturity securities $659  $1  $0  $660  $619  $0  $0  $619 



The amortized cost and fair value of securities at December 31, 20172018 are summarized as follows:


Available-for-Sale


(in thousands) Amortized Cost  Gross Unrealized Gains  Gross Unrealized Losses  Fair Value  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  Fair Value 
U.S. Treasury and government agencies $211,574  $170  $(1,172) $210,572  $219,358  $48  $(1,468) $217,938 
State and political subdivisions  144,159   2,017   (1,161)  145,015   126,280   633   (2,425)  124,488 
U.S. government sponsored agency mortgage-backed securities  208,959   357   (4,007)  205,309   255,969   397   (5,547)  250,819 
Other debt securities  507   0   0   507   507   0   (6)  501 
Total debt securities  565,199   2,544   (6,340)  561,403 
CRA investment funds  25,000   76   (718)  24,358 
Total available-for-sale securities $590,199  $2,620  $(7,058) $585,761  $602,114  $1,078  $(9,446) $593,746 


Held-to-Maturity


(in thousands) Amortized Cost  Gross Unrealized Gains  Gross Unrealized Losses  Fair Value  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  Fair Value 
State and political subdivisions $659  $1  $0  $660  $649  $0  $0  $649 
Total held-to-maturity securities $659  $1  $0  $660  $649  $0  $0  $649 



The amortized cost and fair value of debt securities at June 30, 20182019 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 $45,792  $45,586  $0  $0 
Due after one through five years  133,474   131,738   659   660 
Due after five through ten years  66,356   65,169   0   0 
Due after ten years  133,631   131,769   0   0 
U.S. government sponsored agency mortgage-backed securities  217,260   211,000   0   0 
Other debt securities  507   502   0   0 
Total securities $597,020  $585,764  $659  $660 



 Available-for-Sale  Held-to-Maturity 
(in thousands) 
Amortized
Cost
  Fair Value  
Amortized
Cost
  Fair Value 
Due in one year or less $11,295  $11,322  $619  $619 
Due after one through five years  78,460   79,028   0   0 
Due after five through ten years  73,117   73,319   0   0 
Due after ten years  91,005   92,512   0   0 
U.S. government sponsored agency mortgage-backed securities  331,036   333,005   0   0 
Other debt securities  2,401   2,400   0   0 
Total debt securities $587,314  $591,586  $619  $619 


During the three months ended June 30, 2018,2019, there was a net securities gain of $2$204 thousand.  There was a pre-tax gain of $5 thousand realized on sales and calls of AFS securities consisting of a pre-tax gain of $3$78 thousand and a pre-tax loss of $1 thousand.$73 thousand, and an unrealized gain of $199 thousand from the fair market value adjustment of equity securities.  During the three months ended June 30, 2017,2018, there was a net gain of $18$2 thousand realized on sales and calls of AFS securities, consisting of a pre-tax gain of $30$3 thousand and a pre-tax loss of $12$1 thousand.



During the six months ended June 30, 2018,2019, there was a combined lossnet securities gain of $286$560 thousand.  There was a pre-tax gain of $6 thousand realized on sales and calls of AFS securities consisting of a pre-tax gain of $284$79 thousand and a pre-tax loss of $570 thousand.  This combined loss included a loss$73 thousand, and an unrealized gain of $436$554 thousand from the salefair market value adjustment of CTBI’s CRA investment funds in the first quarter of 2018.equity securities.  During the six months ended June 30, 2017,2018, there was a combined gainloss of $10$286 thousand realized on sales and calls of AFS securities, consisting of a pre-tax gain of $29$284 thousand and a pre-tax loss of $19$570 thousand.


Equity Securities at Fair Value


In 2008, Visa distributed 9,918 shares of Visa Class B restricted stock to CTBI which, upon resolution of certain pending legal matters, will become unrestricted and convertible into Visa Class A shares.  Following this distribution, significant concern existed about the ultimate realizable value of these shares, and because CTBI did not have a basis in the stock, the shares were previously not recorded as an asset on CTBI’s balance sheet.  In recent years, the concern over the realizable value has stabilized, and in late 2017 and 2018, several sales of Visa Class B shares have occurred.  While not traded in observable markets, these sales were reported by several financial institutions in various SEC 8-K and 10-K filings.  In 2018, FASB issued a technical correction to its guidance regarding equity securities, ASC 321-10-35-2, allowing an entity to subsequently elect to record an equity security without a readily determinable fair value.  In 2018, CTBI made the election permitted by ASC 321-10-35-2 to record its Visa Class B shares at fair value.  On December 31, 2018, CTBI recorded a $1.2 million gain on the recognition of the fair value of 9,918 Visa Class B shares held in its portfolio.  Equity securities at fair value as of June 30, 2019 were $1.7 million, as a result of a fair market value increase in the second quarter 2019.


The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $237.7$238.5 million at June 30, 20182019 and $225.7$258.8 million at December 31, 2017.2018.



The amortized cost of securities sold under agreements to repurchase amounted to $295.7$272.2 million at June 30, 20182019 and $296.4$289.1 million at December 31, 2017.2018.




CTBI evaluates its investment portfolio on a quarterly basis for impairment.  The analysis performed as of June 30, 20182019 indicates that all impairment is considered temporary, market and interest rate driven, and not credit-related.  The percentage of total investmentsdebt securities with unrealized losses as of June 30, 20182019 was 81.2%41.4% compared to 69.5%75.7% as of December 31, 2017.2018.  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, 20182019 that are not deemed to be other-than-temporarily impaired.  There were no held-to-maturity securities that were deemed to be impaired as of June 30, 2018.2019.


Available-for-Sale

(in thousands) 
Amortized
Cost
  
Gross
Unrealized
Losses
  Fair Value 
Less Than 12 Months         
U.S. Treasury and government agencies $1,840  $(6) $1,834 
State and political subdivisions  0   0   0 
U.S. government sponsored agency mortgage-backed securities  0   0   0 
Other debt securities  2,401   (1)  2,400 
Total <12 months temporarily impaired AFS securities  4,241   (7)  4,234 
             
12 Months or More            
U.S. Treasury and government agencies  91,976   (463)  91,513 
State and political subdivisions  19,407   (250)  19,157 
U.S. government sponsored agency mortgage-backed securities  132,104   (1,788)  130,316 
Other debt securities  0   0   0 
Total ≥12 months temporarily impaired AFS securities  243,487   (2,501)  240,986 
             
Total            
U.S. Treasury and government agencies  93,816   (469)  93,347 
State and political subdivisions  19,407   (250)  19,157 
U.S. government sponsored agency mortgage-backed securities  132,104   (1,788)  130,316 
Other debt securities  2,401   (1)  2,400 
Total temporarily impaired AFS securities $247,728  $(2,508) $245,220 

Available-for-Sale

(in thousands) Amortized Cost  Gross Unrealized Losses  Fair Value 
Less Than 12 Months         
U.S. Treasury and government agencies $170,250  $(2,091) $168,159 
State and political subdivisions  55,441   (1,492)  53,949 
U.S. government sponsored agency mortgage-backed securities  73,073   (1,599)  71,474 
Other debt securities  507   (5)  502 
Total <12 months temporarily impaired AFS securities  299,271   (5,187)  294,084 
             
12 Months or More            
U.S. Treasury and government agencies  44,226   (790)  43,436 
State and political subdivisions  18,219   (1,522)  16,697 
U.S. government sponsored agency mortgage-backed securities  127,030   (4,855)  122,175 
Other debt securities  0   0   0 
Total ≥12 months temporarily impaired AFS securities  189,475   (7,167)  182,308 
             
Total            
U.S. Treasury and government agencies  214,476   (2,881)  211,595 
State and political subdivisions  73,660   (3,014)  70,646 
U.S. government sponsored agency mortgage-backed securities  200,103   (6,454)  193,649 
Other debt securities  507   (5)  502 
Total temporarily impaired AFS securities $488,746  $(12,354) $476,392 


The analysis performed as of December 31, 20172018 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, 20172018 that are not deemed to be other-than-temporarily impaired.  There were no held-to-maturity securities that were deemed to be impaired as of December 31, 2017.2018.


Available-for-Sale


(in thousands) Amortized Cost  Gross Unrealized Losses  Fair Value  
Amortized
Cost
  
Gross
Unrealized
Losses
  Fair Value 
Less Than 12 Months                  
U.S. Treasury and government agencies $136,688  $(840) $135,848  $78,905  $(271) $78,634 
State and political subdivisions  34,283   (416)  33,867   21,707   (194)  21,513 
U.S. government sponsored agency mortgage-backed securities  62,768   (643)  62,125   61,940   (377)  61,563 
Total debt securities  233,739   (1,899)  231,840 
CRA investment funds  7,500   (105)  7,395 
Other debt securities  507   (6)  501 
Total <12 months temporarily impaired AFS securities  241,239   (2,004)  239,235   163,059   (848)  162,211 
                        
12 Months or More                        
U.S. Treasury and government agencies  23,885   (332)  23,553   97,955   (1,197)  96,758 
State and political subdivisions  16,930   (745)  16,185   51,911   (2,231)  49,680 
U.S. government sponsored agency mortgage-backed securities  117,827   (3,364)  114,463   147,658   (5,170)  142,488 
Total debt securities  158,642   (4,441)  154,201 
CRA investment funds  15,000   (613)  14,387 
Other debt securities  0   0   0 
Total ≥12 months temporarily impaired AFS securities  173,642   (5,054)  168,588   297,524   (8,598)  288,926 
                        
Total                        
U.S. Treasury and government agencies  160,573   (1,172)  159,401   176,860   (1,468)  175,392 
State and political subdivisions  51,213   (1,161)  50,052   73,618   (2,425)  71,193 
U.S. government sponsored agency mortgage-backed securities  180,595   (4,007)  176,588   209,598   (5,547)  204,051 
Total debt securities  392,381   (6,340)  386,041 
CRA investment funds  22,500   (718)  21,782 
Other debt securities  507   (6)  501 
Total temporarily impaired AFS securities $414,881  $(7,058) $407,823  $460,583  $(9,446) $451,137 


U.S. Treasury and Government Agencies



The unrealized losses in U.S. Treasury and government agencies were caused by interest rate increases.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than par which will equal amortized cost at maturity.  CTBI does not consider those investments to be other-than-temporarily impaired at June 30, 2018,2019, because CTBI does not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost, which may be maturity.


State and Political Subdivisions



The unrealized losses in securities of state and political subdivisions were caused by interest rate increases.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than par which will equal amortized cost at maturity.  CTBI does not consider those investments to be other-than-temporarily impaired at June 30, 2018,2019, because CTBI does not intend to sell the investments before recovery of their amortized cost and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost, which may be maturity.



U.S. Government Sponsored Agency Mortgage-Backed Securities



The unrealized losses in U.S. government sponsored agency mortgage-backed securities were caused by interest rate increases.  CTBI expects to recover the amortized cost basis over the term of the securities.  CTBI does not consider those investments to be other-than-temporarily impaired at June 30, 2018,2019, because (i) the decline in market value is attributable to changes in interest rates and not credit quality, (ii) CTBI does not intend to sell the investments, and (iii) it is not more likely than not we will be required to sell the investments before recovery of their amortized cost, which may be maturity.


Other Debt Securities



The unrealized losses in other debt securities were caused by interest rate increases.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than par which will equal amortized cost at maturity.  CTBI does not consider those investments to be other-than-temporarily impaired at June 30, 2018,2019, because CTBI does not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost, which may be maturity.


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
2018
  
December 31
2017
  
June 30
2019
  
December 31
2018
 
Commercial construction $81,196  $76,479  $65,771  $82,715 
Commercial secured by real estate  1,191,711   1,188,680   1,192,768   1,183,093 
Equipment lease financing  2,354   3,042   962   1,740 
Commercial other  352,410   351,034   390,048   377,198 
Real estate construction  64,817   67,358   57,017   57,160 
Real estate mortgage  720,696   709,570   722,573   722,417 
Home equity  102,432   99,356   109,831   106,299 
Consumer direct  145,376   137,754   145,149   144,289 
Consumer indirect  508,050   489,667   508,088   533,727 
Total loans $3,169,042  $3,122,940  $3,192,207  $3,208,638 



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 or variable 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 a mixture of fixed rate and adjustable 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 includedincluded in the loan balances above were loans held for sale in the amount of $1.1 million at June 30, 20182019  and $1.0$2.5 million at December 31, 2017.2018.



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
2018
  
December 31
2017
  
June 30
2019
  
December 31
2018
 
Commercial:            
Commercial construction $573  $1,207  $510  $639 
Commercial secured by real estate  5,921   7,028   5,655   4,537 
Commercial other  682   934   1,001   797 
                
Residential:                
Real estate construction  43   318   280   22 
Real estate mortgage  7,169   8,243   4,776   5,395 
Home equity  424   389   680   477 
Total nonaccrual loans $14,812  $18,119  $12,902  $11,867 



The following tables present CTBI’s loan portfolio aging analysis, segregated by class, as of June 30, 20182019 and December 31, 2017:2018:


 June 30, 2018  June 30, 2019 
(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*  
30-59 Days
Past Due
  
60-89 Days
Past Due
  
90+ Days
Past Due
  
Total Past
Due
  Current  Total Loans  
90+ and
Accruing*
 
Commercial:                                          
Commercial construction $0  $32  $588  $620  $80,576  $81,196  $15  $56  $30  $546  $632  $65,139  $65,771  $36 
Commercial secured by real estate  9,973   984   8,146   19,103   1,172,608   1,191,711   3,242   4,593   10,933   10,720   26,246   1,166,522   1,192,768   5,816 
Equipment lease financing  0   0   0   0   2,354   2,354   0   0   0   0   0   962   962   0 
Commercial other  951   503   430   1,884   350,526   352,410   219   988   2,742   822   4,552   385,496   390,048   174 
Residential:                                                        
Real estate construction  241   47   83   371   64,446   64,817   74   290   21   285   596   56,421   57,017   5 
Real estate mortgage  1,025   5,290   8,246   14,561   706,135   720,696   3,082   1,104   5,170   7,401   13,675   708,898   722,573   4,529 
Home equity  999   123   365   1,487   100,945   102,432   179   709   325   575   1,609   108,222   109,831   258 
Consumer:                                                        
Consumer direct  875   177   56   1,108   144,268   145,376   57   926   178   40   1,144   144,005   145,149   40 
Consumer indirect  3,464   841   321   4,626   503,424   508,050   321   3,514   850   218   4,582   503,506   508,088   218 
Total $17,528  $7,997  $18,235  $43,760  $3,125,282  $3,169,042  $7,189  $12,180  $20,249  $20,607  $53,036  $3,139,171  $3,192,207  $11,076 


 December 31, 2017  December 31, 2018 
(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*  
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 $138  $0  $1,238  $1,376  $75,103  $76,479  $31  $87  $58  $698  $843  $81,872  $82,715  $58 
Commercial secured by real estate  4,047   1,599   8,514   14,160   1,174,520   1,188,680   2,665   6,287   1,204   8,776   16,267   1,166,826   1,183,093   4,632 
Equipment lease financing  430   0   0   430   2,612   3,042   0   0   0   0   0   1,740   1,740   0 
Commercial other  835   77   652   1,564   349,470   351,034   87   1,057   94   1,067   2,218   374,980   377,198   581 
Residential:                                                        
Real estate construction  224   202   223   649   66,709   67,358   223   144   438   28   610   56,550   57,160   6 
Real estate mortgage  2,064   5,029   11,605   18,698   690,872   709,570   6,293   1,272   5,645   7,607   14,524   707,893   722,417   4,095 
Home equity  595   178   428   1,201   98,155   99,356   167   898   365   441   1,704   104,595   106,299   246 
Consumer:                                                        
Consumer direct  983   148   62   1,193   136,561   137,754   62   918   191   74   1,183   143,106   144,289   74 
Consumer indirect  
4,085
   1,399   648   6,132   483,535   489,667   648   4,715   975   507   6,197   527,530   533,727   506 
Total $13,401  $8,632  $23,370  $45,403  $3,077,537  $3,122,940  $10,176  $15,378  $8,970  $19,198  $43,546  $3,165,092  $3,208,638  $10,198 


*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 limited recourse agreements with CTB.



Credit Quality Indicators:



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


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



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



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



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



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



The following tables present the credit risk profile of CTBI’s commercial loan portfolio based on rating category and payment activity, segregated by class of loans, as of June 30, 20182019 and December 31, 2017:2018:


(in thousands) Commercial Construction  Commercial Secured by Real Estate  Equipment Leases  Commercial Other  Total  
Commercial
Construction
  
Commercial
Secured by
Real Estate
  
Equipment
Leases
  
Commercial
Other
  Total 
June 30, 2018               
June 30, 2019               
Pass $72,673  $1,042,821  $2,354  $308,248  $1,426,096  $58,755  $1,048,466  $962  $354,284  $1,462,467 
Watch  3,584   84,787   0   29,211   117,582   2,878   64,145   0   13,995   81,018 
OAEM  1,325   11,120   0   3,115   15,560   835   19,764   0   5,295   25,894 
Substandard  3,614   52,889   0   11,639   68,142   3,303   60,305   0   16,406   80,014 
Doubtful  0   94   0   197   291   0   88   0   68   156 
Total $81,196  $1,191,711  $2,354  $352,410  $1,627,671  $65,771  $1,192,768  $962  $390,048  $1,649,549 
                                        
December 31, 2017                    
December 31, 2018                    
Pass $67,846  $1,053,701  $3,005  $305,655  $1,430,207  $74,222  $1,038,309  $1,740  $327,431  $1,441,702 
Watch  3,323   65,182   0   29,008   97,513   3,070   71,834   0   28,986   103,890 
OAEM  1,304   22,401   37   3,206   26,948   1,594   19,734   0   5,735   27,063 
Substandard  3,828   47,223   0   12,947   63,998   3,829   53,125   0   14,970   71,924 
Doubtful  178   173   0   218   569   0   91   0   76   167 
Total $76,479  $1,188,680  $3,042  $351,034  $1,619,235  $82,715  $1,183,093  $1,740  $377,198  $1,644,746 



The following tables present the credit risk profile of CTBI’s residential real estate and consumer loan portfolios based on performing or nonperforming status, segregated by class, as of  June 30, 20182019 and December 31, 2017:2018:


(in thousands) Real Estate Construction  Real Estate Mortgage  Home Equity  Consumer Direct  
Consumer
Indirect
  Total  
Real Estate
Construction
  
Real Estate
Mortgage
  Home Equity  
Consumer
Direct
  
Consumer
Indirect
  Total 
June 30, 2018                  
June 30, 2019                  
Performing $64,700  $710,445  $101,829  $145,319  $507,729  $1,530,022  $56,732  $713,268  $108,893  $145,109  $507,870  $1,531,872 
Nonperforming (1)  117   10,251   603   57   321   11,349   285   9,305   938   40   218   10,786 
Total $64,817  $720,696  $102,432  $145,376  $508,050  $1,541,371  $57,017  $722,573  $109,831  $145,149  $508,088  $1,542,658 
                                                
December 31, 2017                        
December 31, 2018                        
Performing $66,817  $695,034  $98,800  $137,692  $489,019  $1,487,362  $57,132  $712,927  $105,576  $144,215  $533,221  $1,553,071 
Nonperforming (1)  541   14,536   556   62   648   16,343   28   9,490   723   74   506   10,821 
Total $67,358  $709,570  $99,356  $137,754  $489,667  $1,503,705  $57,160  $722,417  $106,299  $144,289  $533,727  $1,563,892 


(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 $4.5$2.9 million at June 30, 20182019 compared to $3.7$3.3 million at December 31, 2017.2018.



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



The following table presents impaired loans, the average investment in impaired loans, and interest income recognized on impaired loans for the periods ended June 30, 2018,2019, December 31, 2017,2018, and June 30, 2017:2018:


 June 30, 2018  June 30, 2019 
(in thousands) Recorded Balance  Unpaid Contractual Principal Balance  Specific Allowance  
Recorded
Balance
  
Unpaid
Contractual
Principal
Balance
  
Specific
Allowance
 
Loans without a specific valuation allowance:                  
Commercial construction $4,299  $4,299  $0  $3,313  $3,383  $0 
Commercial secured by real estate  29,718   31,653   0   35,043   36,740   0 
Commercial other  8,606   10,250   0   10,992   13,249   0 
Real estate mortgage  1,621   1,621   0   2,570   2,570   0 
                        
Loans with a specific valuation allowance:                        
Commercial construction  174   174   99 
Commercial secured by real estate  2,156   3,277   807   1,985   3,473   594 
Commercial other  343   343   100   516   516   182 
                        
Totals:                        
Commercial construction  4,299   4,299   0   3,487   3,557   99 
Commercial secured by real estate  31,874   34,930   807   37,028   40,213   594 
Commercial other  8,949   10,593   100   11,508   13,765   182 
Real estate mortgage  1,621   1,621   0   2,570   2,570   0 
Total $46,743  $51,443  $907  $54,593  $60,105  $875 


 Three Months Ended  Six Months Ended 
 June 30, 2018  June 30, 2018  
Three Months Ended
June 30, 2019
  
Six Months Ended
June 30, 2019
 
(in thousands) Average Investment in Impaired Loans  *Interest Income Recognized  Average Investment in Impaired Loans  
*Interest Income Recognized
  
Average
Investment
in Impaired
Loans
  
*Interest
Income
Recognized
  
Average
Investment
in Impaired
Loans
  
*Interest
Income
Recognized
 
Loans without a specific valuation allowance:                        
Commercial construction $4,353  $69  $4,261  $106  $3,419  $49  $3,537  $95 
Commercial secured by real estate  29,982   372   30,774   724   35,259   403   34,035   750 
Commercial other  8,722   128   9,027   280   11,546   149   10,206   288 
Real estate construction  0   0   159   0 
Real estate mortgage  1,621   11   1,453   11   2,572   22   2,451   41 
                                
Loans with a specific valuation allowance:                                
Commercial construction  189   3   257   6 
Commercial secured by real estate  2,199   1   2,166   1   2,314   5   2,140   15 
Commercial other  321   4   161   4   514   6   842   23 
                                
Totals:                                
Commercial construction  4,353   69   4,261   106   3,608   52   3,794   101 
Commercial secured by real estate  32,181   373   32,940   725   37,573   408   36,175   765 
Commercial other  9,043   132   9,188   284   12,060   155   11,048   311 
Real estate construction  0   0   159   0 
Real estate mortgage  1,621   11   1,453   11   2,572   22   2,451   41 
Total $47,198  $585  $48,001  $1,126  $55,813  $637  $53,468  $1,218 

  
Year Ended
December 31, 2017
 
(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 $4,431  $4,439  $0  $4,835  $200 
Commercial secured by real estate  28,480   30,365   0   27,753   1,344 
Equipment lease financing  0   0   0   34   0 
Commercial other  9,481   11,252   0   10,444   539 
Real estate construction  318   318   0   534   0 
Real estate mortgage  1,564   1,570   0   1,591   36 
                     
Loans with a specific valuation allowance:                    
Commercial construction  153   173   25   155   0 
Commercial secured by real estate  2,985   4,095   966   3,932   8 
Commercial other  0   0   0   65   0 
                     
Totals:                    
Commercial construction  4,584   4,612   25   4,990   200 
Commercial secured by real estate  31,465   34,460   966   31,685   1,352 
Equipment lease financing  0   0   0   34   0 
Commercial other  9,481   11,252   0   10,509   539 
Real estate construction  318   318   0   534   0 
Real estate mortgage  1,564   1,570   0   1,591   36 
Total $47,412  $52,212  $991  $49,343  $2,127 
  June 30, 2017 
(in thousands) Recorded Balance  Unpaid Contractual Principal Balance  Specific Allowance 
Loans without a specific valuation allowance:         
Commercial construction $4,707  $4,709  $0 
Commercial secured by real estate  27,509   28,195   0 
Equipment lease financing  130   130   0 
Commercial other  10,719   12,619   0 
Real estate construction  846   846   0 
Real estate mortgage  1,803   1,803   0 
             
Loans with a specific valuation allowance:            
Commercial construction  153   174   25 
Commercial secured by real estate  4,731   5,833   1,227 
Commercial other  131   134   67 
             
Totals:            
Commercial construction  4,860   4,883   25 
Commercial secured by real estate  32,240   34,028   1,227 
Equipment lease financing  130   130   0 
Commercial other  10,850   12,753   67 
Real estate construction  846   846   0 
Real estate mortgage  1,803   1,803   0 
Total $50,729  $54,443  $1,319 

  Three Months Ended  Six Months Ended 
  June 30, 2017  June 30, 2017 
(in thousands) Average Investment in Impaired Loans  *Interest Income Recognized  Average Investment in Impaired Loans  
*Interest Income Recognized
 
Loans without a specific valuation allowance:            
Commercial construction $5,041  $49  $5,101  $86 
Commercial secured by real estate  27,858   343   28,252   704 
Equipment lease financing  135   0   68   0 
Commercial other  10,882   133   10,981   273 
Real estate construction  846   0   423   0 
Real estate mortgage  1,803   11   1,804   22 
                 
Loans with a specific valuation allowance:                
Commercial construction  153   0   157   0 
Commercial secured by real estate  4,745   5   4,362   5 
Commercial other  131   0   66   0 
                 
Totals:                
Commercial construction  5,194   49   5,258   86 
Commercial secured by real estate  32,603   348   32,614   709 
Equipment lease financing  135   0   68   0 
Commercial other  11,013   133   11,047   273 
Real estate construction  846   0   423   0 
Real estate mortgage  1,803   11   1,804   22 
Total $51,594  $541  $51,214  $1,090 



 December 31, 2018 
(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 $4,100  $4,100  $0  $3,923  $171 
Commercial secured by real estate  29,645   31,409   0   30,250   1,412 
Commercial other  8,285   9,982   0   8,774   530 
Real estate construction  0   0   0   106   0 
Real estate mortgage  1,882   1,882   0   1,666   41 
                     
Loans with a specific valuation allowance:                    
Commercial construction  127   127   50   42   0 
Commercial secured by real estate  1,854   2,983   605   2,051   1 
Commercial other  473   473   146   285   16 
                     
Totals:                    
Commercial construction  4,227   4,227   50   3,965   171 
Commercial secured by real estate  31,499   34,392   605   32,301   1,413 
Commercial other  8,758   10,455   146   9,059   546 
Real estate construction  0   0   0   106   0 
Real estate mortgage  1,882   1,882   0   1,666   41 
Total $46,366  $50,956  $801  $47,097  $2,171 



 June 30, 2018 
(in thousands) 
Recorded
Balance
  
Unpaid
Contractual
Principal
Balance
  
Specific
Allowance
 
Loans without a specific valuation allowance:         
Commercial construction $4,299  $4,299  $0 
Commercial secured by real estate  29,718   31,653   0 
Commercial other  8,606   10,250   0 
Real estate mortgage  1,621   1,621   0 
             
Loans with a specific valuation allowance:            
Commercial secured by real estate  2,156   3,277   807 
Commercial other  343   343   100 
             
Totals:            
Commercial construction  4,299   4,299   0 
Commercial secured by real estate  31,874   34,930   807 
Commercial other  8,949   10,593   100 
Real estate mortgage  1,621   1,621   0 
Total $46,743  $51,443  $907 


 
Three Months Ended
June 30, 2018
  
Six Months Ended
June 30, 2018
 
(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 $4,353  $69  $4,261  $106 
Commercial secured by real estate  29,982   372   30,774   724 
Commercial other  8,722   128   9,027   280 
Real estate construction  0   0   159   0 
Real estate mortgage  1,621   11   1,453   11 
                 
Loans with a specific valuation allowance:                
Commercial secured by real estate  2,199   1   2,166   1 
Commercial other  321   4   161   4 
                 
Totals:                
Commercial construction  4,353   69   4,261   106 
Commercial secured by real estate  32,181   373   32,940   725 
Commercial other  9,043   132   9,188   284 
Real estate construction  0   0   159   0 
Real estate mortgage  1,621   11   1,453   11 
Total $47,198  $585  $48,001  $1,126 

*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 without 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 2018, 2019, certain loans were modified in troubled debt restructurings, where economic concessions were granted to borrowers consisting of reductions in the interest rates, payment extensions, forgiveness of principal, and forbearances.  Presented below, segregated by class of loans, are troubled debt restructurings that occurred during the three and six months ended June 30, 20182019 and 20172018 and the year ended December 31, 2017:2018:


 
Three Months Ended
June 30, 2018
  
Three Months Ended
June 30, 2019
 
(in thousands) Number of Loans  Term Modification  Rate Modification  
Combination
  
Post-Modification Outstanding Balance
  
Number of
Loans
  
Term
Modification
  
Rate
Modification
  Combination  
Post-
Modification
Outstanding
Balance
 
Commercial:                              
Commercial construction  2  $411  $0  $0  $411 
Commercial secured by real estate  8   1,773   0   0   1,773   5  $3,686  $0  $37  $3,723 
Commercial other  3   283   0   0   283   4   138   0   0   138 
Residential:                    
Real estate mortgage  1   0   0   243   243 
Total troubled debt restructurings  13  $2,467  $0  $0  $2,467   10  $3,824  $0  $280  $4,104 
  
Six Months Ended
June 30, 2018
 
(in thousands) Number of Loans  Term Modification  Rate Modification  
Combination
  
Post-Modification Outstanding Balance
 
Commercial:               
Commercial construction  4  $443  $0  $15  $458 
Commercial secured by real estate  17   2,559   0   983   3,542 
Commercial other  8   465   0   0   465 
Total troubled debt restructurings  29  $3,467  $0  $998  $4,465 

  
Year Ended
December 31, 2017
 
(in thousands) Number of Loans  Term Modification  Rate Modification  
Combination
  
Post-Modification Outstanding Balance
 
Commercial:               
Commercial construction  2  $0  $0  $114  $114 
Commercial secured by real estate  15   2,199   0   192   2,391 
Commercial other  22   1,072   0   136   1,208 
Residential:                    
Real estate construction  1   846   0   0   846 
Real estate mortgage  3   988   0   0   988 
Total troubled debt restructurings  43  $5,105  $0  $442  $5,547 

  
Three Months Ended
June 30, 2017
 
(in thousands) Number of Loans  Term Modification  Rate Modification  
Combination
  
Post-Modification Outstanding Balance
 
Commercial:               
Commercial construction  2  $0  $0  $114  $114 
Commercial secured by real estate  4   530   0   192   722 
Commercial other  7   82   0   136   218 
Residential:                    
Real estate construction  1   846   0   0   846 
Total troubled debt restructurings  14  $1,458  $0  $442  $1,900 
  
Six Months Ended
June 30, 2017
 
(in thousands) Number of Loans  Term Modification  Rate Modification  
Combination
  
Post-Modification Outstanding Balance
 
Commercial:               
Commercial construction  2  $0  $0  $114  $114 
Commercial secured by real estate  5   579   0   192   771 
Commercial other  9   135   0   136   271 
Residential:                    
Real estate construction  1   846   0   0   846 
Real estate mortgage  1   323   0   0   323 
Total troubled debt restructurings  18  $1,883  $0  $442  $2,325 




 
Six Months Ended
June 30, 2019
 
(in thousands) 
Number of
Loans
  
Term
Modification
  
Rate
Modification
  Combination  
Post-
Modification
Outstanding
Balance
 
Commercial:               
Commercial secured by real estate  10  $4,514  $0  $679  $5,193 
Commercial other  11   1,260   0   140   1,400 
Residential:                    
Real estate mortgage  2   463   0   243   706 
Total troubled debt restructurings  23  $6,237  $0  $1,062  $7,299 


 
Year Ended
December 31, 2018
 
(in thousands) 
Number of
Loans
  
Term
Modification
  
Rate
Modification
  Combination  
Post-
Modification
Outstanding
Balance
 
Commercial:               
Commercial construction  5  $2,182  $0  $15  $2,197 
Commercial secured by real estate  24   4,004   0   1,383   5,387 
Commercial other  8   465   0   0   465 
Residential:                    
Real estate construction  0   0   0   0   0 
Real estate mortgage  3   264   0   704   968 
Total troubled debt restructurings  40  $6,915  $0  $2,102  $9,017 


 
Three Months Ended
June 30, 2018
 
(in thousands) 
Number of
Loans
  
Term
Modification
  
Rate
Modification
  Combination  
Post-
Modification
Outstanding
Balance
 
Commercial:               
Commercial construction  2  $411  $0  $0  $411 
Commercial secured by real estate  8   1,773   0   0   1,773 
Commercial other  3   283   0   0   283 
Total troubled debt restructurings  13  $2,467  $0  $0  $2,467 



 
Six Months Ended
June 30, 2018
 
(in thousands) 
Number of
Loans
  
Term
Modification
  
Rate
Modification
  Combination  
Post-
Modification
Outstanding
Balance
 
Commercial:               
Commercial construction  4  $443  $0  $15  $458 
Commercial secured by real estate  17   2,559   0   983   3,542 
Commercial other  8   465   0   0   465 
Total troubled debt restructurings  29  $3,467  $0  $998  $4,465 


No charge-offs have resulted from modifications for any of the presented periods.  We had nocommitments to extend additional credit in the amount of $0.1 million on loans that were considered troubled debt restructurings at June 30, 2018.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 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) 
Three Months Ended
June 30, 2018
  
Three Months Ended
June 30, 2017
  
Three Months Ended
June 30, 2019
  
Three Months Ended
June 30, 2018
 
 Number of Loans  Recorded Balance  Number of Loans  Recorded Balance  
Number of
Loans
  
Recorded
Balance
  
Number of
Loans
  
Recorded
Balance
 
Commercial:                        
Commercial secured by real estate  1  $17   0  $0   0  $0   1  $17 
Commercial other  1   25   0   0   0   0   1   25 
Total defaulted restructured loans  2  $42   0  $0   0  $0   2  $42 


 (in thousands) 
Six Months Ended
June 30, 2018
  
Six Months Ended
June 30, 2017
 
  Number of Loans  Recorded Balance  Number of Loans  Recorded Balance 
Commercial:            
Commercial secured by real estate  1  $17   0  $0 
Commercial other  1   25   0   0 
Total defaulted restructured loans  2  $42   0  $0 
 (in thousands) 
Six Months Ended
June 30, 2019
  
Six Months Ended
June 30, 2018
 
  
Number of
Loans
  
Recorded
Balance
  
Number of
Loans
  
Recorded
Balance
 
Commercial:            
Commercial secured by real estate  0  $0   1  $17 
Commercial other  0   0   1   25 
Total defaulted restructured loans  0  $0   2  $42 


Note 5 – Allowance for Loan and Lease Losses



The following tables present the balance in the allowance for loan and lease losses (“ALLL”) and the recorded investment in loans based on portfolio segment and impairment method as of June 30, 2018,2019, December 31, 20172018 and June 30, 2017:2018:


 
Three Months Ended
June 30, 2018
  
Three Months Ended
June 30, 2019
 
(in thousands) Commercial Construction  Commercial Secured by Real Estate  Equipment Lease Financing  Commercial Other  Real Estate Construction  Real Estate Mortgage  
Home
Equity
  Consumer Direct  Consumer Indirect  Total  
Commercial
Construction
  
Commercial
Secured by
Real Estate
  
Equipment
Lease
Financing
  
Commercial
Other
  
Real Estate
Construction
  
Real Estate
Mortgage
  
Home
Equity
  
Consumer
Direct
  
Consumer
Indirect
  Total 
Allowance for loan losses                                                            
Beginning balance $686  $14,133  $23  $4,229  $633  $5,936  $862  $1,798  $6,889  $35,189  $903  $14,800  $10  $5,217  $396  $4,053  $901  $1,635  $7,089  $35,004 
Provision charged to expense  51   788   (6)  668   (11)  (493)  22   264   646   1,929   (36)  533   (3)  238   (38)  299   65   400   105   1,563 
Losses charged off  0   (266)  0   (322)  (4)  (222)  (18)  (276)  (1,418)  (2,526)  (71)  (345)  0   (824)  0   (180)  (34)  (331)  (1,012)  (2,797)
Recoveries  3   3   0   62   0   13   0   124   974   1,179   3   110   0   258   0   15   1   63   778   1,228 
Ending balance $740  $14,658  $17  $4,637  $618  $5,234  $866  $1,910  $7,091  $35,771  $799  $15,098  $7  $4,889  $358  $4,187  $933  $1,767  $6,960  $34,998 
                                                                                
Ending balance:                                                                                
Individually evaluated for impairment $0  $807  $0  $100  $0  $0  $0  $0  $0  $907  $99  $594  $0  $182  $0  $0  $0  $0  $0  $875 
Collectively evaluated for impairment $740  $13,851  $17  $4,537  $618  $5,234  $866  $1,910  $7,091  $34,864  $700  $14,504  $7  $4,707  $358  $4,187  $933  $1,767  $6,960  $34,123 
                                                                                
Loans                                                                                
Ending balance:                                                                                
Individually evaluated for impairment $4,299  $31,874  $0  $8,949  $0  $1,621  $0  $0  $0  $46,743  $3,487  $37,028  $0  $11,508  $0  $2,570  $0  $0  $0  $54,593 
Collectively evaluated for impairment $76,897  $1,159,837  $2,354  $343,461  $64,817  $719,075  $102,432  $145,376  $508,050  $3,122,299  $62,284  $1,155,740  $962  $378,540  $57,017  $720,003  $109,831  $145,149  $508,088  $3,137,614 

  
Six Months Ended
June 30, 2018
 
(in thousands) Commercial Construction  Commercial Secured by Real Estate  Equipment Lease Financing  Commercial Other  Real Estate Construction  Real Estate Mortgage  
Home
Equity
  Consumer Direct  Consumer Indirect  Total 
Allowance for loan losses                              
Beginning balance $686  $14,509  $18  $5,039  $660  $5,688  $857  $1,863  $6,831  $36,151 
Provision charged to expense  37   597   (1)  16   (14)  (58)  27   343   1,928   2,875 
Losses charged off  0   (477)  0   (557)  (28)  (415)  (19)  (491)  (3,516)  (5,503)
Recoveries  17   29   0   139   0   19   1   195   1,848   2,248 
Ending balance $740  $14,658  $17  $4,637  $618  $5,234  $866  $1,910  $7,091  $35,771 
                                         
Ending balance:                                        
Individually evaluated for impairment $0  $807  $0  $100  $0  $0  $0  $0  $0  $907 
Collectively evaluated for impairment $740  $13,851  $17  $4,537  $618  $5,234  $866  $1,910  $7,091  $34,864 
                                         
Loans                                        
Ending balance:                                        
Individually evaluated for impairment $4,299  $31,874  $0  $8,949  $0  $1,621  $0  $0  $0  $46,743 
Collectively evaluated for impairment $76,897  $1,159,837  $2,354  $343,461  $64,817  $719,075  $102,432  $145,376  $508,050  $3,122,299 
  
Three Months Ended
June 30, 2017
 
(in thousands) Commercial Construction  Commercial Secured by Real Estate  Equipment Lease Financing  Commercial Other  Real Estate Construction  Real Estate Mortgage  
Home
Equity
  Consumer Direct  Consumer Indirect  Total 
Allowance for loan losses                              
Beginning balance $644  $14,177  $40  $4,736  $571  $5,877  $757  $1,844  $7,067  $35,713 
Provision charged to expense  22   1,435   (7)  599   10   (128)  (11)  102   742   2,764 
Losses charged off  0   (318)  0   (417)  0   (97)  0   (239)  (1,118)  (2,189)
Recoveries  3   5   0   75   0   10   1   159   592   845 
Ending balance $669  $15,299  $33  $4,993  $581  $5,662  $747  $1,866  $7,283  $37,133 
                                         
Ending balance:                                        
Individually evaluated for impairment $25  $1,227  $0  $67  $0  $0  $0  $0  $0  $1,319 
Collectively evaluated for impairment $644  $14,072  $33  $4,926  $581  $5,662  $747  $1,866  $7,283  $35,814 
                                         
Loans                                        
Ending balance:                                        
Individually evaluated for impairment $4,860  $32,240  $130  $10,850  $846  $1,803  $0  $0  $0  $50,729 
Collectively evaluated for impairment $67,194  $1,146,989  $4,773  $341,323  $57,720  $706,664  $93,721  $135,228  $483,001  $3,036,613 
  
Six Months Ended
June 30, 2017
 
(in thousands) Commercial Construction  Commercial Secured by Real Estate  Equipment Lease Financing  Commercial Other  Real Estate Construction  Real Estate Mortgage  
Home
Equity
  Consumer Direct  Consumer Indirect  Total 
Allowance for loan losses                              
Beginning balance $884  $14,191  $42  $4,656  $629  $6,027  $774  $1,885  $6,845  $35,933 
Provision charged to expense  (220)  1,624   (9)  1,019   (48)  (275)  (27)  196   1,733   3,993 
Losses charged off  (4)  (528)  0   (836)  0   (164)  (3)  (509)  (2,636)  (4,680)
Recoveries  9   12   0   154   0   74   3   294   1,341   1,887 
Ending balance $669  $15,299  $33  $4,993  $581  $5,662  $747  $1,866  $7,283  $37,133 
                                         
Ending balance:                                        
Individually evaluated for impairment $25  $1,227  $0  $67  $0  $0  $0  $0  $0  $1,319 
Collectively evaluated for impairment $644  $14,072  $33  $4,926  $581  $5,662  $747  $1,866  $7,283  $35,814 
                                         
Loans                                        
Ending balance:                                        
Individually evaluated for impairment $4,860  $32,240  $130  $10,850  $846  $1,803  $0  $0  $0  $50,729 
Collectively evaluated for impairment $67,194  $1,146,989  $4,773  $341,323  $57,720  $706,664  $93,721  $135,228  $483,001  $3,036,613 
  
Year Ended
December 31, 2017
 
(in thousands) Commercial Construction  Commercial Secured by Real Estate  Equipment Lease Financing  Commercial Other  Real Estate Construction  Real Estate Mortgage  
Home
Equity
  Consumer Direct  Consumer Indirect  Total 
Allowance for loan losses                              
Beginning balance $884  $14,191  $42  $4,656  $629  $6,027  $774  $1,885  $6,845  $35,933 
Provision charged to expense  (237)  2,281   (24)  1,744   31   189   257   418   2,862   7,521 
Losses charged off  (10)  (2,038)  0   (1,893)  0   (615)  (178)  (965)  (5,386)  (11,085)
Recoveries  49   75   0   532   0   87   4   525   2,510   3,782 
Ending balance $686  $14,509  $18  $5,039  $660  $5,688  $857  $1,863  $6,831  $36,151 
                                         
Ending balance:                                        
Individually evaluated for impairment $25  $966  $0  $0  $0  $0  $0  $0  $0  $991 
Collectively evaluated for impairment $661  $13,543  $18  $5,039  $660  $5,688  $857  $1,863  $6,831  $35,160 
                                         
Loans                                        
Ending balance:                                        
Individually evaluated for impairment $4,584  $31,465  $0  $9,481  $318  $1,564  $0  $0  $0  $47,412 
Collectively evaluated for impairment $71,895  $1,157,215  $3,042  $341,553  $67,040  $708,006  $99,356  $137,754  $489,667  $3,075,528 


 
Six Months Ended
June 30, 2019
 
(in thousands) 
Commercial
Construction
  
Commercial
Secured by
Real Estate
  
Equipment
Lease
Financing
  
Commercial
Other
  
Real Estate
Construction
  
Real Estate
Mortgage
  
Home
Equity
  
Consumer
Direct
  
Consumer
Indirect
  Total 
Allowance for loan losses                              
Beginning balance $862  $14,531  $12  $4,993  $512  $4,433  $841  $1,883  $7,841  $35,908 
Provision charged to expense  2   821   (5)  619   (154)  21   150   281   18   1,753 
Losses charged off  (71)  (380)  0   (1,065)  0   (300)  (60)  (577)  (2,399)  (4,852)
Recoveries  6   126   0   342   0   33   2   180   1,500   2,189 
Ending balance $799  $15,098  $7  $4,889  $358  $4,187  $933  $1,767  $6,960  $34,998 
                                         
Ending balance:                                        
Individually evaluated for impairment $99  $594  $0  $182  $0  $0  $0  $0  $0  $875 
Collectively evaluated for impairment $700  $14,504  $7  $4,707  $358  $4,187  $933  $1,767  $6,960  $34,123 
                                         
Loans                                        
Ending balance:                                        
Individually evaluated for impairment $3,487  $37,028  $0  $11,508  $0  $2,570  $0  $0  $0  $54,593 
Collectively evaluated for impairment $62,284  $1,155,740  $962  $378,540  $57,017  $720,003  $109,831  $145,149  $508,088  $3,137,614 



 December 31, 2018 
(in thousands) 
Commercial
Construction
  
Commercial
Secured by
Real Estate
  
Equipment
Lease
Financing
  
Commercial
Other
  
Real Estate
Construction
  
Real Estate
Mortgage
  
Home
Equity
  
Consumer
Direct
  
Consumer
Indirect
  Total 
Allowance for loan losses                              
Beginning balance $686  $14,509  $18  $5,039  $660  $5,688  $857  $1,863  $6,831  $36,151 
Provision charged to expense  115   786   (6)  824   (115)  (336)  39   572   4,288   6,167 
Losses charged off  0   (988)  0   (1,513)  (33)  (1,004)  (69)  (997)  (6,394)  (10,998)
Recoveries  61   224   0   643   0   85   14   445   3,116   4,588 
Ending balance $862  $14,531  $12  $4,993  $512  $4,433  $841  $1,883  $7,841  $35,908 
                                         
Ending balance:                                        
Individually evaluated for impairment $50  $605  $0  $146  $0  $0  $0  $0  $0  $801 
Collectively evaluated for impairment $812  $13,926  $12  $4,847  $512  $4,433  $841  $1,883  $7,841  $35,107 
                                         
Loans                                        
Ending balance:                                        
Individually evaluated for impairment $4,227  $31,499  $0  $8,758  $0  $1,882  $0  $0  $0  $46,366 
Collectively evaluated for impairment $78,488  $1,151,594  $1,740  $368,440  $57,160  $720,535  $106,299  $144,289  $533,727  $3,162,272 



 
Three Months Ended
June 30, 2018
 
(in thousands) 
Commercial
Construction
  
Commercial
Secured by
Real Estate
  
Equipment
Lease
Financing
  
Commercial
Other
  
Real Estate
Construction
  
Real Estate
Mortgage
  
Home
Equity
  
Consumer
Direct
  
Consumer
Indirect
  Total 
Allowance for loan losses                              
Beginning balance $686  $14,133  $23  $4,229  $633  $5,936  $862  $1,798  $6,889  $35,189 
Provision charged to expense  51   788   (6)  668   (11)  (493)  22   264   646   1,929 
Losses charged off  0   (266)  0   (322)  (4)  (222)  (18)  (276)  (1,418)  (2,526)
Recoveries  3   3   0   62   0   13   0   124   974   1,179 
Ending balance $740  $14,658  $17  $4,637  $618  $5,234  $866  $1,910  $7,091  $35,771 
                                         
Ending balance:                                        
Individually evaluated for impairment $0  $807  $0  $100  $0  $0  $0  $0  $0  $907 
Collectively evaluated for impairment $740  $13,851  $17  $4,537  $618  $5,234  $866  $1,910  $7,091  $34,864 
                                         
Loans                                        
Ending balance:                                        
Individually evaluated for impairment $4,299  $31,874  $0  $8,949  $0  $1,621  $0  $0  $0  $46,743 
Collectively evaluated for impairment $76,897  $1,159,837  $2,354  $343,461  $64,817  $719,075  $102,432  $145,376  $508,050  $3,122,299 



 
Six Months Ended
June 30, 2018
 
(in thousands) 
Commercial
Construction
  
Commercial
Secured by
Real Estate
  
Equipment
Lease
Financing
  
Commercial
Other
  
Real Estate
Construction
  
Real Estate
Mortgage
  
Home
Equity
  
Consumer
Direct
  
Consumer
Indirect
  Total 
Allowance for loan losses                              
Beginning balance $686  $14,509  $18  $5,039  $660  $5,688  $857  $1,863  $6,831  $36,151 
Provision charged to expense  37   597   (1)  16   (14)  (58)  27   343   1,928   2,875 
Losses charged off  0   (477)  0   (557)  (28)  (415)  (19)  (491)  (3,516)  (5,503)
Recoveries  17   29   0   139   0   19   1   195   1,848   2,248 
Ending balance $740  $14,658  $17  $4,637  $618  $5,234  $866  $1,910  $7,091  $35,771 
                                         
Ending balance:                                        
Individually evaluated for impairment $0  $807  $0  $100  $0  $0  $0  $0  $0  $907 
Collectively evaluated for impairment $740  $13,851  $17  $4,537  $618  $5,234  $866  $1,910  $7,091  $34,864 
                                         
Loans                                        
Ending balance:                                        
Individually evaluated for impairment $4,299  $31,874  $0  $8,949  $0  $1,621  $0  $0  $0  $46,743 
Collectively evaluated for impairment $76,897  $1,159,837  $2,354  $343,461  $64,817  $719,075  $102,432  $145,376  $508,050  $3,122,299 


Note 6 – Leases


Effective January 1, 2019, CTBI adopted ASU No. 2016-02, Leases, (Topic 842) and all subsequent ASUs that modified Topic 842.  Based on leases outstanding at December 31, 2018, the impact of adoption was recording a lease liability of approximately $16.1 million, a right-of-use asset of approximately $15.5 million, and a cumulative-effect adjustment to retained earnings of approximately $0.5 million, net of a $0.1 million adjustment to our deferred tax liability.  CTBI has one finance lease for property but no material subleases or leasing arrangements for which it is the lessor of property or equipment.


CTBI has operating leases for banking and ATM locations.  These leases have remaining lease terms of 1 year to 45 years, some of which include options to extend the leases for up to 5 years.  We evaluated the original lease terms for each operating lease, some of which include options to extend the leases for up to 5 years, using hindsight.  These options, some of which include variable costs related to rent escalations based on recent financial indices, such as the Consumer Price Index, where CTBI estimates future rent increases, are included in the calculation of the lease liability and right-of-use asset when management determines it is reasonably certain the option will be exercised.  CTBI determines this on each lease by considering all relevant contract-based, asset-based, market-based, and entity-based economic factors. Right-of-use assets and lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate on a collateralized basis, over a similar term at the lease commencement date.  Right-of-use assets are further adjusted for prepaid rent, lease incentives, and initial direct costs, if any.


The components of lease expense for the three and six months ended June 30, 2019 were as follows:

(in thousands) 
Three Months Ended
June 30, 2019
  
Six Months Ended
June 30, 2019
 
Finance lease cost:      
Amortization of right-of-use assets – finance leases $9  $17 
Interest on lease liabilities – finance leases  13   27 
Total finance lease cost  22   44 
         
Short-term lease cost  68   139 
Operating lease cost  442   888 
         
Sublease income  63   131 
         
Total lease cost $469  $940 


Supplemental cash flow information related to CTBI’s operating and finance leases for the three and six months ended June 30, 2019 was as follows:

(in thousands) 
Three Months Ended
June 30, 2019
  
Six Months Ended
June 30, 2019
 
Finance lease – operating cash flows $13  $27 
Finance lease – financing cash flows  4   7 
Operating lease – operating cash flows (fixed payments)  407   848 
Weighted average lease term – financing leases 26.5 years  26.92 years 
Weighted average lease term – operating leases 14.17 years  14.34 years 
Weighted average discount rate – financing leases  3.70%  3.70%
Weighted average discount rate – operating leases  3.26%  3.00%



Maturities of lease liabilities as of June 30, 2019 are as follows:

(in thousands) Operating Leases  Finance Leases 
2019 $813  $34 
2020  1,647   67 
2021  1,668   75 
2022  1,654   75 
2023  1,575   75 
Thereafter  10,895   2,060 
Total lease payments  18,252   2,386 
Less imputed interest  (4,171)  (923)
Total $14,081  $1,463 


At December 31, 2018, minimum non-cancellable rental payments were as follows:

(in thousands) 
Operating Lease
Payments
 
2019 $1,999 
2020  1,710 
2021  1,737 
2022  1,760 
2023  1,696 
Thereafter  13,031 
Total $21,933 

Note 67 – Other Real Estate Owned



Activity for other real estate owned was as follows:


 Three Months Ended  Six Months Ended 
 June 30  June 30  
Three Months Ended
June 30
  
Six Months Ended
June 30
 
(in thousands) 2018  2017  2018  2017  2019  2018  2019  2018 
Beginning balance of other real estate owned $32,004  $35,812  $31,996  $35,856  $24,970  $32,004  $27,273  $31,996 
New assets acquired  1,559   577   2,843   1,581   388   1,559   1,242   2,843 
Capitalized costs  0   0   0   0 
Fair value adjustments  (853)  (1,449)  (1,320)  (1,987)  (692)  (853)  (1,139)  (1,320)
Sale of assets  (2,448)  (2,155)  (3,257)  (2,665)  (2,130)  (2,448)  (4,840)  (3,257)
Ending balance of other real estate owned $30,262  $32,785  $30,262  $32,785  $22,536  $30,262  $22,536  $30,262 



Carrying costs and fair value adjustments associated with foreclosed properties for the three months ended June 30, 2019 and 2018 were $1.0 million and 2017 were $1.3 million, and $1.8 million, respectively. Carrying costs and fair value adjustments associated with foreclosed properties for the six months ended June 30, 20182019 and 20172018 were $2.3$1.8 million and $2.7$2.3 million, respectively. See note 1 for a description of our accounting policies relative to foreclosed properties and other real estate owned.



The major classifications of foreclosed properties are shown in the following table:


(in thousands) 
June 30
2018
  
December 31
2017
  
June 30
2019
  
December 31
2018
 
1-4 family $5,426  $5,908  $3,273  $5,253 
Agricultural/farmland  0   68   0   0 
Construction/land development/other  15,640   16,158   13,495   15,017 
Multifamily  108   176   88   88 
Non-farm/non-residential  9,088   9,686   5,680   6,915 
Total foreclosed properties $30,262  $31,996  $22,536  $27,273 



Note 78 – Repurchase Agreements



We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and provide additional funding to our balance sheet.  Repurchase agreements are transactions whereby we offer to sell to a counterparty an undivided interest in an eligible security at an agreed upon purchase price, and which obligates CTBI to repurchase the security on an agreed upon date at an agreed upon repurchase price plus interest at an agreed upon rate.  Securities sold under agreements to repurchase are recorded at the amount of cash received in connection with the transaction and are reflected in the accompanying consolidated balance sheets.



We monitor collateral levels on a continuous basis and maintain records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and we segregate the security from its general assets in accordance with regulations governing custodial holdings of securities.  The primary risk with our repurchase agreements is market risk associated with the securities securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying securities.  Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.  The carrying value of investment securities available-for-sale pledged as collateral under repurchase agreements totaled $290.1$275.1 million and $295.4$285.2 million at June 30, 20182019 and December 31, 2017,2018, respectively.


The remaining contractual maturity of the securities sold under agreements to repurchase by class of collateral pledged included in the accompanying consolidated balance sheets as of June 30, 20182019 and December 31, 20172018 is presented in the following tables:


 June 30, 2018  June 30, 2019 
 Remaining Contractual Maturity of the Agreements  Remaining Contractual Maturity of the Agreements 
(in thousands) 
Overnight and
Continuous
  Up to 30 days  30-90 days  
Greater Than
90 days
  Total  
Overnight and
Continuous
  Up to 30 days  30-90 days  
Greater Than
90 days
  Total 
Repurchase agreements and
repurchase-to-maturity transactions:
                              
U.S. Treasury and government agencies $39,871  $8,042  $21,402  $48,108  $117,423  $16,713  $7,584  $19,766  $33,000  $77,063 
State and political subdivisions  61,685   2,379   1,430   9,325   74,819   48,816   1,671   1,486   10,086   62,059 
U.S. government sponsored agency mortgage-backed securities  13,829   579   12,668   29,463   56,539   41,755   1,745   14,254   36,362   94,116 
Total $115,385  $11,000  $35,500  $86,896  $248,781  $107,284  $11,000  $35,506  $79,448  $233,238 


 December 31, 2017  December 31, 2018 
 Remaining Contractual Maturity of the Agreements  Remaining Contractual Maturity of the Agreements 
(in thousands) 
Overnight and
Continuous
  Up to 30 days  30-90 days  
Greater Than
90 days
  Total  
Overnight and
Continuous
  Up to 30 days  30-90 days  
Greater Than
90 days
  Total 
Repurchase agreements and
repurchase-to-maturity transactions:
                              
U.S. Treasury and government agencies $24,957  $0  $16,771  $67,867  $109,595  $25,346  $0  $2,548  $60,699  $88,593 
State and political subdivisions  62,620   0   567   12,161   75,348   58,864   0   2,995   10,384   72,243 
U.S. government sponsored agency mortgage-backed securities  13,360   0   4,662   40,849   58,871   22,076   0   1,877   47,923   71,876 
Total $100,937  $0  $22,000  $120,877  $243,814  $106,286  $0  $7,420  $119,006  $232,712 



Note 89 – Fair Market Value of Financial Assets and Liabilities


Fair Value Measurements



ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances.  Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs.  In this standard, the FASB clarifies the principle that fair value should be based on the exit price when pricing the asset or liability.  In support of this principle, ASC 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.  The fair value hierarchy is as follows:


Level 1 Inputs – Quoted prices in active markets for identical assets or liabilities.


Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.


Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in determining an exit price for the assets or liabilities.


Recurring Measurements



The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis as of June 30, 20182019 and December 31, 20172018 and indicate the level within the fair value hierarchy of the valuation techniques.


    
Fair Value Measurements at
June 30, 2018 Using
     
Fair Value Measurements at
June 30, 2019 Using
 
(in thousands) Fair Value  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
  Fair Value  
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Assets measured – recurring basis                        
Available-for-sale securities:                        
U.S. Treasury and government agencies $246,773  $89,360  $157,413  $0  $150,742  $35,668  $115,074  $0 
State and political subdivisions  127,489   0   127,489   0   105,439   0   105,439   0 
U.S. government sponsored agency mortgage-backed securities
  211,000   0   211,000   0 
U.S. government sponsored agency mortgage-backed securities  333,005   0   333,005   0 
Other debt securities  502   0   502   0   2,400   0   2,400   0 
Equity securities at fair value  1,727   0   0   1,727 
Mortgage servicing rights  3,772   0   0   3,772   3,119   0   0   3,119 


(in thousands)    
Fair Value Measurements at
December 31, 2017 Using
 
  Fair Value  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
 
Assets measured – recurring basis            
Available-for-sale securities:            
U.S. Treasury and government agencies $210,572  $64,598  $145,974  $0 
State and political subdivisions  145,015   0   145,015   0 
U.S. government sponsored agency mortgage-backed securities
  205,309   0   205,309   0 
Other debt securities  507   0   507   0 
CRA investment funds  24,358   24,358   0   0 
Mortgage servicing rights  3,484   0   0   3,484 



    
Fair Value Measurements at
December 31, 2018 Using
 
(in thousands) Fair Value  
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Assets measured – recurring basis            
Available-for-sale securities:            
U.S. Treasury and government agencies $217,938  $91,028  $126,910  $0 
State and political subdivisions  124,488   0   124,488   0 
U.S. government sponsored agency mortgage-backed securities  250,819   0   250,819   0 
Other debt securities  501   0   501   0 
Equity securities at fair value  1,173   0   0   1,173 
Mortgage servicing rights  3,607   0   0   3,607 


Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.  These valuation methodologies were applied to all of CTBI’s financial assets carried at fair value.  CTBI had no liabilities measured and recorded at fair value as of June 30, 20182019 and December 31, 2017.2018.  There have been no significant changes in the valuation techniques during the quarter or six months ended June 30, 2018.2019.  For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available-for-Sale Securities



Securities classified as available-for-sale are reported at fair value on a recurring basis.  U.S. Treasury and government agencies are classified as Level 1 of the valuation hierarchy where quoted market prices are available in the active market on which the individual securities are traded.



If quoted market prices are not available, CTBI obtains fair value measurements from an independent pricing service, such as Interactive Data, which utilizes pricing models to determine fair value measurement.  CTBI reviews the pricing quarterly to verify the reasonableness of the pricing.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other factors.  U.S. Treasury and government agencies, state and political subdivisions, U.S. government sponsored agency mortgage-backed securities, and other debt securities are classified as Level 2 inputs.



In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.  Fair value determinations for Level 3 measurements are estimated on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States.


Equity Securities at Fair Value


As of June 30, 2018 and December 31, 2017,2019, the only securities owned by CTBI does not own any securitiesthat were valued using Level 3 inputs.criteria are Visa Class B Stock (included in equity securities at fair value).  In determining fair value for Visa Class B Stock, CTBI utilizes the expertise of an independent third party.  Accordingly, fair value is determined by the independent third party using an income approach by utilizing assumptions about factors such as quarterly common stock dividend payments, the conversion of the securities to the relevant Class A Stock shares subject to the prevailing conversion rate and conversion date.  We have reviewed the assumptions, processes, and conclusions of the third party provider.  We have determined these assumptions, processes, and conclusions to be reasonable and appropriate in determining the fair value of this asset.  See the table below for inputs and valuation techniques used for Level 3 equity securities.


Mortgage Servicing Rights



Mortgage servicing rights do not trade in an active, open market with readily observable prices.  CTBI reports mortgage servicing rights at fair value on a recurring basis with subsequent remeasurement of MSRs based on change in fair value.



In determining fair value, CTBI utilizes the expertise of an independent third party.  Accordingly, fair value is determined by the independent third party by utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand.  Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.  Fair value determinations for Level 3 measurements of mortgage servicing rights are tested for impairment on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States.  We have reviewed the assumptions, processes, and conclusions of the third party provider.  We have determined these assumptions, processes, and conclusions to be reasonable and appropriate in determining the fair value of this asset.  See the table below for inputs and valuation techniques used for Level 3 mortgage servicing rights.


Transfers between Levels



There were no transfers between Levels 1, 2, and 3 as of June 30, 2018.2019.

Level 3 Reconciliation



Following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs for the three and six months ended June 30, 20182019 and 2017:2018:


Mortgage Servicing Rights      
(in thousands) 
Three Months Ended
June 30, 2019
  
Three Months Ended
June 30, 2018
 
 Three Months Ended  Six Months Ended  
Equity
Securities at
Fair Value
  
Mortgage
Servicing
Rights
  
Equity
Securities at
Fair Value
  
Mortgage
Servicing
Rights
 
 June 30  June 30 
(in thousands) 2018  2017  2018  2017 
Beginning balance $3,706  $3,474  $3,484  $3,433  $1,528  $3,390  $0  $3,706 
Total recognized gains (losses)                
Total unrealized gains (losses)                
Included in net income  68   (163)  296   (78)  199   (348)  0   68 
Issues  111   88   211   171   0   191   0   111 
Settlements  (113)  (95)  (219)  (222)  0   (114)  0   (113)
Ending balance $3,772  $3,304  $3,772  $3,304  $1,727  $3,119  $0  $3,772 
                                
Total gains (losses) for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date $68  $(163) $296  $(78) $199  $(348) $0  $68 



(in thousands) 
Six Months Ended
June 30, 2019
  
Six Months Ended
June 30, 2018
 
  
Equity
Securities at
Fair Value
  
Mortgage
Servicing
Rights
  
Equity
Securities at
Fair Value
  
Mortgage
Servicing
Rights
 
Beginning balance $1,173  $3,607  $0  $3,484 
Total unrealized gains (losses)                
Included in net income  554   (582)  0   296 
Issues  0   307   0   211 
Settlements  0   (213)  0   (219)
Ending balance $1,727  $3,119  $0  $3,772 
                 
Total gains (losses) for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date $554  $(582) $0  $296 


Realized and unrealized gains and losses for items reflected in the table above are included in net income in the consolidated statements of income as follows:


Noninterest Income               
 Three Months Ended  Six Months Ended 
 June 30  June 30  
Three Months Ended
June 30
  
Six Months Ended
June 30
 
(in thousands) 2018  2017  2018  2017  2019  2018  2019  2018 
Total gains (losses) $(45) $(258) $77  $(301) $(263) $(45) $(241) $77 


Nonrecurring Measurements



The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a nonrecurring basis as of June 30, 20182019 and December 31, 20172018 and indicate the level within the fair value hierarchy of the valuation techniques.


    
Fair Value Measurements at
June 30, 2018 Using
     
Fair Value Measurements at
June 30, 2019 Using
 
(in thousands) Fair Value  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
  Fair Value  
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Assets measured – nonrecurring basis                        
Impaired loans (collateral dependent) $357  $0  $0  $357  $1,343  $0  $0  $1,343 
Other real estate owned  4,499   0   0   4,499   2,271   0   0   2,271 

     
Fair Value Measurements at
December 31, 2017 Using
 
(in thousands) Fair Value  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
 
Assets measured – nonrecurring basis            
Impaired loans (collateral dependent) $2,709  $0  $0  $2,709 
Other real estate owned  18,951   0   0   18,951 



    
Fair Value Measurements at
December 31, 2018 Using
 
(in thousands) Fair Value  
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Assets measured – nonrecurring basis            
Impaired loans (collateral dependent) $747  $0  $0  $747 
Other real estate owned  6,500   0   0   6,500 


Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheet, as well as the general classification of such assets pursuant to the valuation hierarchy.  For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.


Impaired Loans (Collateral Dependent)



The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell.  Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.



CTBI considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value.  Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Chief Credit Officer.  Appraisals are reviewed for accuracy and consistency by the Chief Credit Officer.  Appraisers are selected from the list of approved appraisers maintained by management.  The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral.  These discounts and estimates are developed by the Chief Credit Officer by comparison to historical results.



Loans considered impaired under ASC 310-35, Impairment of a Loan, are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans are subject to nonrecurring fair value adjustments to reflect subsequent (i) partial write-downs that are based on the observable market price or current appraised value of the collateral or (ii) the full charge-off of the loan carrying value.  Quarter-to-date fair value adjustments on impaired loans disclosed above were $0.2 million for the quarter ended June 30, 2019, $0.3 million, and $0.4 million for the quartersquarter ended December 31, 2018, and $0.2 million for the quarter ended June 30, 2018, December 31, 2017, and June 30, 2017, respectively.2018.  Year-to-date fair value adjustments were $0.2$0.5 million for the six months ended June 30, 2018, $1.02019,$0.3 million for the year ended December 31, 2017,2018, and $0.5$0.2 million for the six months ended June 30, 2017.2018.



Other Real Estate Owned



In accordance with the provisions of ASC 360, Property, Plant, and Equipment, other real estate owned (“OREO”) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired.  Estimated fair value of OREO is based on appraisals or evaluations.  OREO is classified within Level 3 of the fair value hierarchy.  Long-lived assets are subject to nonrecurring fair value adjustments to reflect subsequent partial write-downs that are based on the observable market price or current appraised value of the collateral.  Quarter-to-date fair value adjustments on other real estate owned disclosed above were $0.8$0.6 million, $0.2$0.4 million, and $1.4$0.8 million for the quarters ended June 30, 2018,2019, December 31, 2017,2018, and June 30, 2017,2018, respectively. Year-to-date adjustments were $1.2$1.0 million for the six months ended June 30, 2018, $2.52019,$1.8 million for the year ended December 31, 2017,2018, and $1.9$1.2 million for the six months ended June 30, 2017.2018.



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.  Appraisers are selected from the list of approved appraisers maintained by management.


Unobservable (Level 3) Inputs



The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at June 30, 20182019 and December 31, 2017.2018.


(in thousands) Quantitative Information about Level 3 Fair Value Measurements
  Fair Value at June 30, 2018 Valuation Technique(s)Unobservable Input Range (Weighted Average)
Mortgage servicing rights $3,772 Discount cash flows, computer pricing modelConstant prepayment rate  
7.0% - 27.5%
(8.5%)
        Probability of default  
0.0% - 100.0%
(2.8%)
        Discount rate  
10.0% - 11.5%
(10.1%)
          
Impaired loans (collateral-dependent) $357 Market comparable propertiesMarketability discount  
5.9% - 92.5%
(53.6%)
          
Other real estate owned $4,499 Market comparable propertiesComparability adjustments  
1.0% - 30.0%
(12.7%)
(in thousands)Quantitative Information about Level 3 Fair Value Measurements
Fair Value at
June 30, 2019
Valuation Technique(s)Unobservable Input
Range
(Weighted
Average)
Equity securities at fair value$1,727Discount cash flows, computer pricing modelDiscount rate
8.0% - 12.0%
(10.0%)
Conversion date
Dec 2022 – Dec 2026
(Dec 2024)
Mortgage servicing rights$3,119Discount cash flows, computer pricing modelConstant prepayment rate
7.0% - 23.6%
(12.9%)
Probability of default
0.0% - 100.0%
(2.1%)
Discount rate
10.0% - 11.5%
(10.1%)
Impaired loans (collateral-dependent)$1,343Market comparable propertiesMarketability discount
0.6% - 97.1%
(62.0%)
Other real estate owned$2,271Market comparable propertiesComparability adjustments
10.0% - 34.4%
(12.7%)


(in thousands) Quantitative Information about Level 3 Fair Value Measurements
  Fair Value at December 31, 2017 Valuation Technique(s)Unobservable Input Range (Weighted Average)
Mortgage servicing rights $3,484 Discount cash flows, computer pricing modelConstant prepayment rate  
7.0% - 45.0%
(10.0%)
        Probability of default  
0.0% - 100.0%
(3.0%)
        Discount rate  
10.0% - 11.5%
(10.1%)
          
Impaired loans (collateral-dependent) $2,709 Market comparable propertiesMarketability discount  
1.9% - 89.8%
(38.5%)
          
Other real estate owned $18,951 Market comparable propertiesComparability adjustments  
6.0% - 58.6%
(15.0%)


 (in thousands)Quantitative Information about Level 3 Fair Value Measurements
Fair Value at
December 31, 2018
Valuation Technique(s)Unobservable Input
Range
(Weighted
Average)
Equity securities at fair value$1,173Discount cash flows, computer pricing modelDiscount rate
8.0% - 12.0%
(10.0%)
Conversion date
Dec 2022 – Dec 2026
(Dec 2024)
Mortgage servicing rights$3,607Discount cash flows, computer pricing modelConstant prepayment rate
7.0% - 28.1%
(9.5%)
Probability of default
0.0% - 100.0%
(2.6%)
Discount rate
10.0% - 11.5%
(10.1%)
Impaired loans (collateral-dependent)$747Market comparable propertiesMarketability discount
0.0% - 95.1%
(41.5%)
Other real estate owned$6,500Market comparable propertiesComparability adjustments
6.0% - 47.6%
(14.9%)

Sensitivity of Significant Unobservable Inputs



The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

Equity Securities at Fair Value


Fair market value for equity securities is derived based on unobservable inputs, such as the discount rate, quarterly dividend payments payable to the Visa Class B common stock and the prevailing conversion rate at the conversion date.  The most recent conversion rate of 1.6298 and the most recent dividend rate of 0.4074 were used to derive the fair value estimate.  Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value measurement.  Generally, a change in the assumption used for discount rate is accompanied by a directionally opposite change in the fair value estimate.

Mortgage Servicing Rights



Fair market value for mortgage servicing rights is derived based on unobservable inputs, such as prepayment speeds of the underlying loans generated using the Andrew Davidson Prepayment Model, FHLMC/FNMA guidelines, the weighted average life of the loan, the discount rate, the weighted average coupon, and the weighted average default rate.  Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value measurement.  Generally, a change in the assumption used for prepayment speeds is accompanied by a directionally opposite change in the assumption for interest rates.



Fair Value of Financial Instruments



The following table presents estimated fair value of CTBI’s financial instruments as of June 30, 20182019 and indicates the level within the fair value hierarchy of the valuation techniques.  In accordance with the prospective adoption of ASU 2016-01, the fair values as of June 30, 20182019 were measured using an exit price notion.


    
Fair Value Measurements
at June 30, 2018 Using
     
Fair Value Measurements
at June 30, 2019 Using
 
(in thousands) Carrying Amount  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Other Observable Inputs (Level 2)  
Significant Unobservable Inputs
(Level 3)
  
Carrying
Amount
  
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs (Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Financial assets:                        
Cash and cash equivalents $198,385  $198,385  $0  $0  $321,639  $321,639  $0  $0 
Certificates of deposit in other banks  5,635   0   5,612   0   245   0   245   0 
Securities available-for-sale  585,764   89,360   496,404   0   591,586   35,668   555,918   0 
Securities held-to-maturity  659   0   660   0   619   0   619   0 
Equity securities at fair value  1,727   0   0   1,727 
Loans held for sale  1,093   1,115   0   0   1,067   1,093   0   0 
Loans, net  3,133,271   0   0   3,159,639   3,157,209   0   0   3,189,802 
Federal Home Loan Bank stock  17,927   0   17,927   0   11,360   0   11,360   0 
Federal Reserve Bank stock  4,887   0   4,887   0   4,887   0   4,887   0 
Accrued interest receivable  13,049   0   13,049   0   14,923   0   14,923   0 
Mortgage servicing rights  3,772   0   0   3,772   3,119   0   0   3,119 
                                
Financial liabilities:                                
Deposits $3,309,408  $819,525  $2,516,279  $0  $3,437,181  $833,044  $2,624,918  $0 
Repurchase agreements  248,781   0   0   248,920   233,238   0   0   233,245 
Federal funds purchased  7,978   0   7,978   0   3,900   0   3,900   0 
Advances from Federal Home Loan Bank  802   0   869   0   426   0   458   0 
Long-term debt  59,341   0   0   44,166   59,341   0   0   44,166 
Accrued interest payable  4,196   0   4,196   0   5,600   0   5,600   0 
                                
Unrecognized financial instruments:                                
Letters of credit $0  $0  $0  $0  $0  $0  $0  $0 
Commitments to extend credit  0   0   0   0   0   0   0   0 
Forward sale commitments  0   0   0   0   0   0   0   0 


The following table presents estimated fair value of CTBI’s financial instruments as of December 31, 20172018 and indicates the level within the fair value hierarchy of the valuation techniques.


 
(in thousands)
    
Fair Value Measurements
at December 31, 2017 Using
 
  Carrying Amount  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Other Observable Inputs (Level 2)  
Significant Unobservable Inputs
(Level 3)
 
Financial assets:            
Cash and cash equivalents $175,274  $175,274  $0  $0 
Certificates of deposit in other banks  9,800   0   9,772   0 
Securities available-for-sale  585,761   88,956   496,805   0 
Securities held-to-maturity  659   0   660   0 
Loans held for sale  1,033   1,060   0   0 
Loans, net  3,086,789   0   0   3,092,437 
Federal Home Loan Bank stock  17,927   0   17,927   0 
Federal Reserve Bank stock  4,887   0   4,887   0 
Accrued interest receivable  13,338   0   13,338   0 
Mortgage servicing rights  3,484   0   0   3,484 
                 
Financial liabilities:                
Deposits $3,263,863  $790,930  $2,319,278  $0 
Repurchase agreements  243,814   0   0   243,932 
Federal funds purchased  7,312   0   7,312   0 
Advances from Federal Home Loan Bank  845   0   841   0 
Long-term debt  59,341   0   0   44,166 
Accrued interest payable  2,228   0   2,228   0 
                 
Unrecognized financial instruments:                
Letters of credit $0  $0  $0  $0 
Commitments to extend credit  0   0   0   0 
Forward sale commitments  0   0   0   0 



    
Fair Value Measurements
at December 31, 2018 Using
 
(in thousands) 
Carrying
Amount
  
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  
Significant
Other
Observable
Inputs (Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
Financial assets:            
Cash and cash equivalents $141,450  $141,450  $0  $0 
Certificates of deposit in other banks  3,920   0   3,914   0 
Securities available-for-sale  593,746   91,028   502,718   0 
Securities held-to-maturity  649   0   649   0 
Equity securities at fair value  1,173   0   0   1,173 
Loans held for sale  2,461   2,518   0   0 
Loans, net  3,172,730   0   0   3,175,908 
Federal Home Loan Bank stock  14,713   0   14,713   0 
Federal Reserve Bank stock  4,887   0   4,887   0 
Accrued interest receivable  14,432   0   14,432   0 
Mortgage servicing rights  3,607   0   0   3,607 
                 
Financial liabilities:                
Deposits $3,305,950  $803,316  $2,513,084  $0 
Repurchase agreements  232,712   0   0   232,796 
Federal funds purchased  1,180   0   1,180   0 
Advances from Federal Home Loan Bank  436   0   468   0 
Long-term debt  59,341   0   0   44,166 
Accrued interest payable  2,902   0   2,902   0 
                 
Unrecognized financial instruments:                
Letters of credit $0  $0  $0  $0 
Commitments to extend credit  0   0   0   0 
Forward sale commitments  0   0   0   0 

Note 910 – Earnings Per Share



The following table sets forth the computation of basic and diluted earnings per share:


 Three Months Ended  Six Months Ended 
 June 30  June 30  
Three Months Ended
June 30
  
Six Months Ended
June 30
 
(in thousands except per share data) 2018  2017  2018  2017  2019  2018  2019  2018 
Numerator:                        
Net income $11,599  $11,541  $27,413  $22,818  $18,324  $11,599  $33,263  $27,413 
                                
Denominator:                                
Basic earnings per share:                                
Weighted average shares  17,687   17,626   17,679   17,621   17,721   17,687   17,717   17,679 
Diluted earnings per share:                                
Effect of dilutive stock options and restricted stock grants  16   19   16   20   12   16   11   16 
Adjusted weighted average shares  17,703   17,645   17,695   17,641   17,733   17,703   17,728   17,695 
                                
Earnings per share:                                
Basic earnings per share $0.66  $0.65  $1.55  $1.29  $1.03  $0.66  $1.88  $1.55 
Diluted earnings per share  0.66   0.65   1.55   1.29   1.03   0.66   1.88   1.55 




There were no options to purchase common shares that were excluded from the diluted calculations above for the three and six months ended June 30, 20182019 and 2017.2018.  In addition to in-the-money stock options, unvested restricted stock grants were also used in the calculation of diluted earnings per share based on the treasury method.


Note 1011 – Accumulated Other Comprehensive Income


Unrealized gains on AFS securities



Amounts reclassified from accumulated other comprehensive income (AOCI) and the affected line items in the statements of income during the three and six months ended June 30, 20182019 and 20172018 were:


 Amounts Reclassified from AOCI  Amounts Reclassified from AOCI 
(in thousands) 
Three Months Ended
June 30
  
Six Months Ended
June 30
 
 
Three Months Ended
June 30
  
Six Months Ended
June 30
 
(in thousands) 2018  2017  2018  2017  2019  2018  2019  2018 
 
Securities gains $2  $18  $151  $10  $5  $2  $6  $151 
Tax expense  0   6   32   4   1   0   2   32 
Total reclassifications out of AOCI $2  $12  $119  $6  $4  $2  $4  $119 

Note 11 – Commitments and Contingencies

As of July 25, 2018, Community Trust Bank, Inc. (“CTB”), the bank subsidiary of CTBI, entered into a Consent Order with the Board of Governors of the Federal Reserve System (“FRB”).  Pursuant to the Consent Order, the FRB ordered CTB to cease and desist and take certain affirmative actions related to specified deposit add-on products.  The Consent Order requires CTB to deposit an amount of not less than $4.75 million in a segregated account for the purpose of funding restitution, although the actual amount of such reimbursement may vary from the deposited amount.  As CTBI previously disclosed in a Form 8-K filed on June 14, 2018, CTBI increased its related accrual from $1.2 million to $4.75 million on June 14, 2018 based on communications with regulatory agency representatives.  As a result of the increased accrual, a charge to earnings was reflected in the second quarter 2018 financial results of $2.8 million after-tax, or $0.16 per share.

CTBI and subsidiaries, and from time to time, our officers, are named defendants in legal actions rising from ordinary business activities.  Management, after consultation with legal counsel, believes any pending actions are without merit or that the ultimate liability, if any, will not materially affect our consolidated financial position or results of operations.


Item 2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Overview


The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Community Trust Bancorp, Inc., our operations, and our present business environment.  The MD&A is provided as a supplement to – and should be read in conjunction with – our condensed consolidated financial statements and the accompanying notes contained in this quarterly report.  The MD&A includes the following sections:

v Our Business
❖Our Business
v Results of Operations and Financial Condition
v Dividends
❖Results of Operations and Financial Condition

v Liquidity and Market Risk
❖Dividends
v Interest Rate Risk
v Capital Resources
❖Liquidity and Market Risk

v Impact of Inflation, Changing Prices, and Economic Conditions
❖Interest Rate Risk
v Stock Repurchase Program
v Critical Accounting Policies and Estimates
❖Capital Resources


❖Impact of Inflation, Changing Prices, and Economic Conditions

❖Stock Repurchase Program

❖Critical Accounting Policies and Estimates

Our Business


Community Trust Bancorp, Inc. (“CTBI”) is a bank holding company headquartered in Pikeville, Kentucky.  Currently, we own one commercial bank, Community Trust Bank, Inc. (“CTB”) and one trust company, Community Trust and Investment Company, Inc. (“CTIC”).  Through our subsidiaries, we have eightyseventy-nine banking locations in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee, four trust offices across Kentucky, and one trust office in northeastern Tennessee.  At June 30, 2018,2019, we had total consolidated assets of $4.2$4.4 billion and total consolidated deposits, including repurchase agreements, of $3.6$3.7 billion.  Total shareholders’ equity at June 30, 20182019 was $542.2$594.7 million.  Trust assets under management, which are excluded from CTBI’s total consolidated assets, at June 30, 2018,2019, were $2.2$2.1 billion.  Trust assets under management include CTB’s investment portfolio totaling $0.6 billion.


Through its subsidiaries, CTBI engages in a wide range of commercial and personal banking and trust and wealth management activities, which include accepting time and demand deposits; making secured and unsecured loans to corporations, individuals and others; providing cash management services to corporate and individual customers; issuing letters of credit; renting safe deposit boxes; and providing funds transfer services.  The lending activities of CTB include making commercial, construction, mortgage, and personal loans.  Lease-financing, lines of credit, revolving lines of credit, term loans, and other specialized loans, including asset-based financing, are also available.  Our corporate subsidiaries act as trustees of personal trusts, as executors of estates, as trustees for employee benefit trusts, as paying agents for bond and stock issues, as investment agent, as depositories for securities, and as providers of full service brokerage and insurance services.  For further information, see Item 1 of our annual report on Form 10-K for the year ended December 31, 2017.2018.


Results of Operations and Financial Condition


We reported record earnings for the second quarter 20182019 of $11.6$18.3 million, or $0.66$1.03 per basic share, compared to $15.8$14.9 million, or $0.89$0.84 per basic share, earned during the first quarter 20182019 and $11.5$11.6 million, or $0.65$0.66 per basic share, earned during the second quarter 2017.2018.  Earnings for the six months ended June 30, 20182019 were $33.3 million, or $1.88 per basic share, compared to $27.4 million, or $1.55 per basic share, compared to $22.8 million, or $1.29 per basic share earned forduring the six months ended June 30, 2017.2018.


We reported earnings for the second quarter 2018 of $11.6 million, or $0.66 per basic share, compared to $15.8 million, or $0.89 per basic share, earned during the first quarter 2018 and $11.5 million, or $0.65 per basic share, earned during the second quarter 2017.  Earnings for the six months ended June 30, 2018 were $27.4 million, or $1.55 per basic share, compared to $22.8 million, or $1.29 per basic share earned for the six months ended June 30, 2017.

As of July 25, 2018, Community Trust Bank, Inc. (“CTB”), the bank subsidiary of CTBI, entered into a Consent Order with the Board of Governors of the Federal Reserve System (“FRB”).  Pursuant to the Consent Order, the FRB ordered CTB to cease and desist and take certain affirmative actions related to specified deposit add-on products.  Among the required actions are the following: (i) continuation of actions to correct specified violations of the Federal Trade Commission Act; (ii) development of a plan designed to ensure that CTB’s marketing, servicing and billing of deposit account add-on products or similar products comply with applicable law and the terms of the Consent Order; (iii) development of a plan to strengthen the CTB Board of Directors’ oversight of CTB’s compliance risk management program; (iv) adoption of a plan to enhance the consumer compliance risk management program to facilitate compliance of the marketing, processing and servicing of consumer products and services offered through third parties with consumer protection laws and regulations; and (v) establishment of a restitution plan to reimburse accountholders who did not receive all component benefits of specified deposit add-on products.

The Consent Order requires CTB to deposit an amount of not less than $4.75 million in a segregated account for the purpose of funding restitution, although the actual amount of such reimbursement may vary from the deposited amount.  As CTBI previously disclosed in a Form 8-K filed on June 14, 2018, CTBI increased its related accrual from $1.2 million to $4.75 million on June 14, 2018 based on communications with regulatory agency representatives.  As a result of the increased accrual, a charge to earnings was reflected in the second quarter 2018 financial results of $2.8 million after-tax, or $0.16 per share.

Quarterly Highlights


v❖Net interest income for the quarter of $35.1$36.0 million was flat to prior quarter, but an increase of $0.6 million, or 1.6%, from first quarter 2018 and $0.9 million, or 2.7%2.5%, from prior year second quarter.quarter 2018.


v❖Provision for loan losses for the quarter ended June 30, 20182019 increased $1.0$1.4 million from prior quarter but decreased $0.8$0.4 million from prior year same quarter.


v❖Our loan portfolio increased $50.8$2.5 million, an annualized 6.5%0.3%, during the quarter and $46.1but decreased $16.4 million, or an annualized 3.0%1.0%, from December 31, 2017.2018.


v❖Net loan charge-offs for the quarter ended June 30, 20182019 were $1.3$1.6 million, or 0.17%0.20% of average loans annualized, compared to $1.9$1.1 million, or 0.25%0.14%, experienced for the first quarter 20182019 and $1.3 million, or 0.18%0.17%, for the second quarter 2017.2018.


v❖Nonperforming loans at $22.0$24.0 million decreased $1.4 million from March 31, 2019 but increased $1.9 million from December 31, 2018.  Nonperforming assets at $46.5 million decreased $3.9 million from March 31, 20182019 and $6.3$2.9 million from December 31, 2017.  Nonperforming assets at $52.3 million decreased $5.7 million from March 31, 2018 and $8.1 million from December 31, 2017.2018.


v❖Deposits, including repurchase agreements, decreased $6.3increased $49.8 million, an annualized 5.5%, during the quarter but increased $50.5and $131.8 million, or an annualized 7.5%, from December 31, 2017.2018.


v❖
Noninterest income for the quarter ended June 30, 20182019 of $13.7$12.3 million was ana $0.1 million increase over prior quarter, but a decrease of $0.4$1.5 million, or 3.2%, from prior quarter and $1.4 million, or 11.6%10.8%, from prior year same quarter.  The increase in noninterest income was primarily due to a gain on the sale of a partnership interest resulting from a low income housing tax credit recapture and an increase in deposit service charges.quarter.


v❖Noninterest expense for the quarter ended June 30, 20182019 of $32.4$30.0 million increased $3.8$0.9 million, or 13.1%3.3%, from prior quarter, and $4.9but decreased $2.4 million, or 17.7%7.4%, from prior year same quarter.

❖In April 2019, Kentucky enacted HB458.  HB458 allows for combined filing of state income taxes with CTBI and its subsidiaries, Community Trust Bank, Inc. and Community Trust and Investment Company, Inc.  CTBI had previously filed a separate company return and generated net operating losses, in which it had maintained a valuation allowance against the related deferred tax asset.  HB458 also allows for certain net operating losses to be utilized on a combined return.  CTBI expects to file a combined return, beginning in 2021, and to utilize these previously generated losses.  The variance in noninterest expense from prior quarter was primarily due to the above mentioned increasetax benefit recorded in the customer reimbursement accrual.  Additionally, personnel expense increased from prior year samesecond quarter with increases in bonuses and2019 to reverse the cost of group medical and life insurance.valuation allowance on the deferred tax asset for these losses was $3.6 million, or $0.21 per basic share.


vIncome tax expense continues to be positively impacted by the change in the corporate income tax rate from 35% to 21%.  We utilize various tax exempt investments and loans, including municipal bonds, bank owned life insurance, and low income housing projects, to lower our effective income tax rate.  With the current tax laws, our effective tax rate for the six months ended June 30, 2018 was 16% compared to 28% for the six months ended June 30, 2017.

Income Statement Review


(dollars in thousands)       Change 2018 vs. 2017      Change 2019 vs. 2018 
Six Months Ended June 30 2018  2017  Amount  Percent  2019 2018 Amount Percent 
Net interest income $69,739  $67,330  $2,409   3.6% $72,010 $69,739 $2,271 3.3%
Provision for loan losses  2,875   3,993   (1,118)  (28.0) 1,753 2,875 (1,122) (39.0)
Noninterest income  27,050   23,890   3,160   13.2  24,422 27,050 (2,628) (9.7)
Noninterest expense  61,120   55,210   5,910   10.7  59,113 61,120 (2,007) (3.3)
Income taxes  5,381   9,199   (3,818)  (41.5)  2,303 5,381 (3,078) (57.2)
Net income $27,413  $22,818  $4,595   20.1% $33,263 $27,413 $5,850 21.3%
                         
Average earning assets $3,899,301  $3,743,834  $155,467   4.2% $4,018,187 $3,899,314 $118,873 3.0%
                         
Yield on average earnings assets,
tax equivalent*
  4.30%  4.10%  0.20%  4.7% 4.67% 4.30% 0.37% 8.8%
Cost of interest bearing funds  0.93%  0.59%  0.34%  57.8% 1.46% 0.93% 0.53% 58.1%
Net interest margin, tax equivalent*  3.63%  3.68%  (0.05)%  (1.4)% 3.63% 3.63% 0.00% 0.0%


*Yield on average earning assets and net interest margin were computed on a tax equivalent basis using a 21% tax rate for 2018 and a 35% tax rate for 2017.rate.


Net Interest Income


Net interest income for the quarter of $35.1$36.0 million was relatively flat to prior quarter, but an increase of $0.6 million, or 1.6%, from first quarter 2018 and $0.9 million, or 2.7%2.5%, from prior year second quarter.  Net interest income for the six months ended June 30, 2018 of $69.7 million was an increase of $2.4 million, or 3.6%, over the first six months of 2017.quarter 2018.  Our year-to-date net interest margin at 3.63% decreased 53.57% declined 13 basis points from June 30, 2017,prior quarter and 4 basis points from prior year same quarter, while our average earning assets increased $155.5 million.$102.8 million and $141.3 million, respectively, during those same periods.  Our yield on average earning assets for the six months ended June 30, 2018 increased 20decreased 8 basis points from prior quarter but increased 32 basis points from prior year same quarter, and our cost of funds increased 347 basis points from prior year.quarter and 52 basis points from prior year same quarter.  Our ratio of average loans to deposits, including repurchase agreements, was 88.3%87.3% for the quarter ended June 30, 2019 compared to 89.9% for the quarter ended March 31, 2019 and 88.1% for the quarter ended June 30, 2018.  Net interest income for the six months ended June 30, 2018 compared to 88.9% for the six months ended2019 increased $2.3 million, or 3.3%, from June 30, 2017.2018.


Provision for Loan Losses


The provision for loan losses that was added to the allowance for the second quarter 20182019 was $1.9$1.6 million compared to $0.9$0.2 million for the quarter ended March 31, 20182019 and $2.8$1.9 million for the quarter ended June 30, 2017.2018.  Year-to-date allocations to the reserve were $1.8 million at June 30, 2019 compared to $2.9 million at June 30, 2018 compared to $4.0 million at June 30, 2017.2018.  This provision represented a charge against current earnings in order to maintain the allowance at an appropriate level determined using the accounting estimates described in the Critical Accounting Policies and Estimates section.  Our reserve coverage (allowance for loan and lease loss reserve to nonperforming loans) at June 30, 20182019 was 162.6%146.0% compared to 135.6%137.8% at March 31, 20182019 and 132.6%162.6% at June 30, 2017.2018.  Our loan loss reserve as a percentage of total loans outstanding remained at 1.13%1.10% from March 31, 20182019 to June 30, 2018,2019, down from the 1.20%1.13% at June 30, 2017.  The decline in the loan loss reserve is primarily attributable to a reduction in our soft factor allocation for long-term trends in delinquencies. 2018.


Noninterest Income


Noninterest income for the quarter ended June 30, 20182019 of $13.7$12.3 million was ana $0.1 million increase over prior quarter, but a decrease of $0.4$1.5 million, or 3.2%10.8%, from prior year same quarter.  The decrease in noninterest income from prior year was primarily the result of a $0.5 million decrease in loan related fees due to a decline in the fair market value of our mortgage servicing rights, along with a $1.0 million decrease in other operating revenue.  Other operating revenue for the second quarter 2018 included a gain on the sale of a partnership interest resulting from a low income housing tax credit recapture.  Noninterest income for the six months ended June 30, 2019 was a $2.6 million, or 9.7%, decrease from prior year.

Noninterest Expense

Noninterest expense for the quarter ended June 30, 2019 of $30.0 million increased $0.9 million, or 3.3%, from prior quarter, and $1.4but decreased $2.4 million, or 11.6%7.4%, from prior year same quarter.  The increase in noninterest income was primarily due to a gain on the sale of a partnership interest totaling $1.0 million related to one of our tax credit investments.  As a result of the sale of this interest, a portion of the tax credits previously claimed was recaptured during the current quarter totaling $0.8 million, which was recorded in income tax expense.   The variance in noninterest incomeexpense from prior quarter was also impactedconsisted of increases in FDIC insurance ($0.2 million), net other real estate owned expense ($0.3 million), operating losses ($0.2 million), loan related expense ($0.2 million), and other direct expense ($0.4 million), partially offset by a $0.3 million increase in deposit service charges and a $0.3 million decrease in losses onrepossession expense.  The $0.4 million increase in other direct expense was the sale of securities, offset by a $1.0 million decrease in bank owned life insurance income and a $0.2 million decrease in loan related fees as a result of fluctuations in the fair value adjustments of our mortgage servicing rights.increased amortization expense related to tax credits.  The increasedecrease from prior year same quarter was also positively impacteddue to the previously disclosed $3.6 million accrual in June 2018 for customer reimbursements, partially offset by a $0.2$0.7 million increase in trust revenue.  Additionally, noninterest income for the second quarter 2017personnel expense.  The increase in personnel expense included a $0.6 million gain on the repurchase of trust preferred securities.  Noninterest income for the six months ended June 30, 2018 was a $3.2 million, or 13.2%, increase from prior year.

Noninterest Expense

Noninterest expense for the quarter ended June 30, 2018 of $32.4 million increased $3.8 million, or 13.1%, from prior quarter, and $4.9 million, or 17.7%, from prior year same quarter.  The variance in noninterest expense from prior quarter was primarily due to the above mentioned $3.6$0.9 million increase in the customer reimbursement accrual.  Personnel expense increased from prior year same quarter with increasessalaries, partially offset by a $0.3 million decrease in bonuses ($0.7 million) and the cost of group medical and life insurance ($0.4 million).insurance.  Noninterest expense for the six months ended June 30, 20182019 was $61.1$59.1 million, a $5.9$2.0 million, or 10.7% increase over3.3%, decrease from the first six months of 2017, primarily due to the same items detailed above.2018.


Balance Sheet Review


CTBI’s total assets at $4.2$4.4 billion increased $9.4$64.0 million, or 0.9%5.9% annualized, from March 31, 20172019 and $69.0$175.6 million, or 3.4%8.4% annualized, from December 31, 2017.2018.  Loans outstanding at June 30, 20182019 were $3.2 billion, an increase of $50.8$2.5 million, or an annualized 6.5%0.3%, from March 31, 2017 and an increase2019 but a decrease of $46.1$16.4 million, or an1.0% annualized, 3.0%, from December 31, 2017.2018.  We experienced an increaseincreases during the quarter of $16.1$2.0 million in the commercial loan portfolio, $20.2$7.1 million in the residential loan portfolio, and $3.3 million in the direct consumer loan portfolio, offset by a decrease of $9.9 million in the indirect loan portfolio, $8.8 million in the consumer direct loan portfolio, and $5.7 million in the residential loan portfolio.  CTBI’s investment portfolio decreased $19.1$7.5 million, or an annualized 12.7%5.0%, from March 31, 2018 but remained relatively flat to2019 and $2.2 million, or 0.7% annualized, from December 31, 2017.2018.  Deposits in other banks increased $67.8 million from March 31, 2019 and $189.7 million from December 31, 2018, as the yield earned was favorable to other investment alternatives.  Deposits, including repurchase agreements, at $3.6$3.7 billion decreased $6.3increased $49.8 million, or an annualized 0.7%5.5%, from March 31, 2018 but increased $50.52019 and $131.8 million, or an7.5% annualized, 2.9%, from December 31, 2017.  None of the additional deposits acquired during the six months ended June 30, 2018 were attributable to brokered deposits.2018.


Shareholders’ equity at June 30, 20182019 was $542.2$594.7 million, a 3.5%11.9% annualized increase from the $537.5$577.5 million at March 31, 20182019 and a 4.4%10.9% annualized increase from the $530.7$564.2 million at December 31, 2017.2018.  Our tangible common equity/tangible assets ratio at June 30, 20182019 was 11.51%12.27%.

Loans


(in thousands) June 30, 2018  June 30, 2019 
Loan Category Balance  Variance from Prior Year-End  
YTD
Net Charge-Offs
  Nonperforming  ALLL  Balance 
Variance
from Prior
Year-End
 
YTD
Net Charge-
Offs
 Nonperforming ALLL 
Commercial:                          
Construction $81,196   6.2% $17  $588  $740  $65,771 (20.5)% $(65) $546 $799 
Secured by real estate  1,191,711   0.3   (448)  9,163   14,658  1,192,768 0.8 (254) 11,471 15,098 
Equipment lease financing  2,354   (22.6)  0   0   17  962 (44.7) 0 0 7 
Commercial other  352,410   0.4   (418)  901   4,637  390,048 3.4 (723) 1,175 4,889 
Total commercial  1,627,671   0.5   (849)  10,652   20,052  1,649,549 0.3 (1,042) 13,192 20,793 
                               
Residential:                               
Real estate construction  64,817   (3.8)  (28)  117   618  57,017 (0.3) 0 285 358 
Real estate mortgage  720,696   1.6   (396)  10,251   5,234  722,573 0.0 (267) 9,305 4,187 
Home equity  102,432   3.1   (18)  603   866  109,831 3.3 (58) 938 933 
Total residential  887,945   1.3   (442)  10,971   6,718  889,421 0.4 (325) 10,528 5,478 
                               
Consumer:                               
Consumer direct  145,376   5.5   (296)  57   1,910  145,149 0.6 (397) 40 1,767 
Consumer indirect  508,050   3.8   (1,668)  321   7,091  508,088 (4.8) (899) 218 6,960 
Total consumer  653,426   4.1   (1,964)  378   9,001  653,237 (3.7) (1,296) 258 8,727 
                               
Total loans $3,169,042   1.5% $(3,255) $22,001  $35,771  $3,192,207 (0.5)% $(2,663) $23,978 $34,998 


Asset Quality


CTBI’s total nonperforming loans, not including performing troubled debt restructurings, were $22.0$24.0 million, or 0.75% of total loans, at June 30, 2019 compared to $25.4 million, or 0.80% of total loans, at March 31, 2019 and $22.1 million, or 0.69% of total loans, at June 30, 2018 compared to $25.9 million, or 0.83% of total loans, at March 31, 2018 and $28.3 million, or 0.91% of total loans, at December 31, 2017.2018.  Accruing loans 90+ days past due decreased $1.8$1.9 million from prior quarter and $3.0but increased $0.9 million from December 31, 2017.2018.  Nonaccrual loans decreased $2.1increased $0.5 million during the quarter and $3.3$1.0 million from December 31, 2017.2018.  Accruing loans 30-89 days past due at $23.5$30.6 million was an increase of $6.6$8.8 million from March 31, 2018prior quarter and $4.1$7.9 million from December 31, 2017.2018.  The increase in past due loans 30-89 days past due is due to one relationshipprimarily two credits, both of which is well-collateralized, and no loss is expected.are well collateralized.  Our loan portfolio management processes focus on the immediate identification, management, and resolution of problem loans to maximize recovery and minimize loss.   Our loan risk management processes include weekly delinquent loan review meetings at the market levels and monthly delinquent loan review meetings involving senior corporate management to review all nonaccrual loans and loans 30 days or more past due.  Any activity regarding a criticized/classified loan (i.e. problem loan) must be approved by CTB’s Watch List Asset Committee (i.e. Problem Loan Committee).  CTB’s Watch List Asset Committee also meets on a quarterly basis and reviews every criticized/classified loan of $100,000 or greater.  We also have a Loan Review Department that reviews every market within CTB annually and performs extensive testing of the loan portfolio to assure the accuracy of loan grades and classifications for delinquency, troubled debt restructuring, impaired status, impairment, nonaccrual status, and adequate loan loss reserves.


Impaired loans, loans not expected to meet contractual principal and interest payments other than insignificant delays, at June 30, 20182019 totaled $46.7$54.6 million, a $1.5 million decrease from the $48.2compared to $50.4 million at March 31, 2018 and a $0.7 million decrease from the $47.4$46.4 million at December 31, 2017.  2018.Management evaluates all impaired loans for the amount of impairment, if any, and records a direct charge-off or provides specific reserves when necessary.


For further information regarding nonperforming and impaired loans, see note 4 to the condensed consolidated financial statements.

CTBI generally does not offer high risk loans such as option ARM products, high loan to value ratio mortgages, interest-only loans, loans with initial teaser rates, or loans with negative amortizations, and therefore, CTBI would have no significant exposure to these products.


Our level of foreclosed properties at $30.3$22.5 million at June 30, 20182019 was a $1.7$2.5 million decrease from the $32.0$25.0 million at March 31, 20182019 and a $4.8 million decrease from the $27.3 million at December 31, 2017.2018.  Sales of foreclosed properties for the six months ended June 30, 20182019 totaled $3.3$4.8 million while new foreclosed properties totaled $2.8$1.2 million.  At June 30, 2018,2019, the book value of properties under contracts to sell was $1.9$1.6 million; however, the closings had not occurred at quarter-end.


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 fair 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.   Charges to earnings in the second quarter 20182019 to reflect the decrease in current market values of foreclosed properties totaled $0.9$0.7 million.  There were fortysix properties reappraised during the second quarter 2018.2019.  Of these, fourteenfour properties were written down by a total of $0.2$0.1 million.  Charges to earnings during the quarters ended March 31, 20182019 and June 30, 20172018 were $0.5$0.4 million and $1.4$0.9 million, respectively.  Charges to earnings for the six months ended June 30, 20182019 were $1.3$1.1 million compared to $2.0$1.3 million for the six months ended June 30, 2017.2018.  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.  Approximately ninety-eightninety-five percent of our OREO properties have appraisals dated within the past 18 months.  Management anticipates that our foreclosed properties will remain elevated as we work through current market conditions.


The appraisal aging analysis of foreclosed properties, as well as the holding period, at June 30, 20182019 is shown below:


(in thousands)(in thousands)   (in thousands) 
Appraisal Aging AnalysisAppraisal Aging Analysis Holding Period Analysis Appraisal Aging AnalysisHolding Period Analysis
Days Since Last Appraisal Current Book Value Holding Period Current Book Value 
Number of
Properties
Current Book
Value
Holding Period
Current Book
Value
Up to 3 months $3,279 Less than one year $4,989 7$897Less than one year$2,819
3 to 6 months  3,580 1 year  994 192,5831 year1,559
6 to 9 months  2,177 2 years  8,193 83612 years437
9 to 12 months  4,208 3 years  2,164 312,4503 years5,663
12 to 18 months  16,444 4 years  1,117 375,4234 years922
18 to 24 months  543 5 years  79 23,3155 years1,004
Over 24 months  31 6 years*  8,652 37,5076 years*6
Total $30,262 7 years*  1,126 107$22,5367 years*8,600
    8 years*  2,184   8 years*963
    9 years*  764   9 years*563
    Total $30,262   Total$22,536


*Regulatory approval is required and has been obtained to hold these properties beyond the initial period of 5 years.  Additional approval may be required to continue to hold these properties should they not be liquidated during the extension period, which is typically one year.  To the extent we are not able to sell a foreclosed property in 10 years, our banking regulators may require uswe will be required to write down the entire remaining balancerelinquish ownership of suchthat property.


As disclosed above, CTBI is required to dispose of any foreclosed property that has not been sold within 10 years.  As of June 30, 2019, foreclosed property with a total book value of $0.6 million, representing 2.5% or our foreclosed properties (based on book value), had been held by us for at least nine years.  The book value at June 30, 2019 represents management’s best estimate of realizable value of the properties.
Net loan charge-offs for the quarter ended June 30, 20182019 were $1.3$1.6 million, or 0.17%0.20% of average loans annualized, compared to $1.9$1.1 million, or 0.25%0.14%, experienced for the first quarter 20182019 and $1.3 million, or 0.18%0.17%, for the second quarter 2017.2018.  Net loan charge-offs for the six months ended June 30, 20182019 were $2.7 million, or 0.17% of average loans, compared to $3.3 million, or 0.21% of average loans, compared to $2.8 million, or 0.19% of average loans, experienced for the six monthsmonth ended June 30, 2017.2018.  Of the net charge-offs for the six months, $0.9$1.1 million were in commercial loans, $1.7$0.9 million were in indirect autoconsumer loans, $0.4$0.3 million were in residential loans, and $0.3$0.4 million were in direct consumer direct loans.


Dividends


The following schedule shows the quarterly cash dividends paid for the past six quarters:


Pay DateRecord Date Amount Per Share 
July 1, 2018June 15, 2018 $0.33 
April 1, 2018March 15, 2018 $0.33 
January 1, 2018December 15, 2017 $0.33 
October 1, 2017September 15, 2017 $0.33 
July 1, 2017June 15, 2017 $0.32 
April 1, 2017March 15, 2017 $0.32 
Pay DateRecord DateAmount Per Share
July 1, 2019June 15, 2019$0.36
April 1, 2019March 15, 2019$0.36
January 1, 2019December 15, 2018$0.36
October 1, 2018September 15, 2018$0.36
July 1, 2018June 15, 2018$0.33
April 1, 2018March 15, 2018$0.33


On July 24, 2018,23, 2019, the Board of Directors of CTBI declared a quarterly cash dividend of $0.36$0.38 per share to be paid on October 1, 20182019 to shareholders of record on September 15, 2018.2019.  This represents an increase of 9.1%5.6% in the quarterly cash dividend.


Liquidity and Market Risk


The objective of CTBI’s Asset/Liability management function is to maintain consistent growth in net interest income within our policy limits.  This objective is accomplished through management of our consolidated balance sheet composition, liquidity, and interest rate risk exposures arising from changing economic conditions, interest rates, and customer preferences.  The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand or deposit withdrawals.  This is accomplished by maintaining liquid assets in the form of cash and cash equivalents and investment securities, sufficient unused borrowing capacity, and growth in core deposits and wholesale funding (including the use of wholesale brokered deposits).  As of June 30, 2018,2019, we had approximately $198.4$321.6 million in cash and cash equivalents and approximately $585.8$591.6 million in securities valued at estimated fair value designated as available-for-sale and available to meet liquidity needs on a continuing basis compared to $175.3$141.5 million and $585.8$593.7 million at December 31, 2017.2018.  Additional asset-driven liquidity is provided by the remainder of the securities portfolio and the repayment of loans.  In addition to core deposit funding, we also have a variety of other short-term and long-term funding sources available.  As of June 30, 2018 and December 31, 2017,2019, we had wholesale brokered deposits outstanding of $82.3$42.3 million with one, two, and three-year maturities and a weighted average maturity of 1.97 years.1.08 years compared to $42.3 million with a weighted average maturity of 1.58 years at December 31, 2018.  We also rely on Federal Home Loan Bank advances for both liquidity and management of our asset/liability position.  Federal Home Loan Bank advances were $0.8$0.4 million at June 30, 20182019 and December 31, 2017.2018.  As of June 30, 2018,2019, we had a $344.1$341.3 million available borrowing position with the Federal Home Loan Bank compared to $295.5$312.2 million at December 31, 2017.2018.  We generally rely upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash for our investing activities.  As is typical of many financial institutions, significant financing activities include deposit gathering, use of short-term borrowing facilities such as repurchase agreements and federal funds purchased, use of wholesale brokered deposits, and issuance of long-term debt.  At June 30, 20182019 and December 31, 2017,2018, we had $57$45 million in lines of credit with various correspondent banks available to meet any future cash needs.  Our primary investing activities include purchases of securities and loan originations.  We do not rely on any one source of liquidity and manage availability in response to changing consolidated balance sheet needs.  Included in our cash and cash equivalents at June 30, 20182019 were deposits with the Federal Reserve of $139.3$265.0 million compared to $124.3$73.5 million at December 31, 2017.2018.  At December 31, 2018, cash and cash equivalents included federal funds sold of $1.1 million; however, we had no federal funds sold as of June 30, 2019.  Additionally, we project cash flows from our investment portfolio to generate additional liquidity over the next 90 days.


The investment portfolio consists of investment grade short-term issues suitable for bank investments.  The majority of the investment portfolio is in U.S. government and government sponsored agency issuances.  At June 30, 2018,2019, available-for-sale (“AFS”) securities comprised substantially allof the total investment portfolio, and the AFS portfoliowas approximately 108% 99%of equity capital.  Ninety-oneEighty-nine percentof the pledge eligible portfolio was pledged.

Interest Rate Risk


We consider interest rate risk one of our most significant market risks. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates.  Consistency of our net interest revenue is largely dependent upon the effective management of interest rate risk.  We employ a variety of measurement techniques to identify and manage our interest rate risk including the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates.  The model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities.  Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model.  These assumptions are inherently uncertain, and as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income.  Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.


CTBI’s Asset/Liability Management Committee (ALCO), which includes executive and senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk within Board-approved policy limits.  Our current exposure to interest rate risks is determined by measuring the anticipated change in net interest income spread evenly over the twelve-month period.


Capital Resources


Shareholders’ equity was $542.2$594.7 million at June 30, 20182019 and $530.7$564.2 million at December 31, 2017.2018.  CTBI’s annualized dividend yield to shareholders as of June 30, 20182019 was 2.64%3.41%.  Our primary source of capital growth is the retention of earnings.  Cash dividends were $0.66$0.72 per share and $0.64$0.66 per share for the six months ended June 30, 20182019 and 2017,2018, respectively.  We retained 57.4%61.7% of our earnings for the first six months of 20182019 compared to 50.4%57.4% for the first six months of 2017.2018.


On July 2, 2013, the Federal Reserve approved final rules that substantially amendamended the regulatory risk-based capital rules applicable to CTBI and CTB.  The FDIC subsequently approved these rules.  The final rules implementimplemented the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.

The rules includeincluded new risk-based capital and leverage ratios, which are beingwere phased in from 2015 to January 2019, and refinerefined the definition of what constitutes “capital” for purposes of calculating those ratios.  The new minimum capital level requirements applicable to CTBI and CTB under the final rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions.  The final rules also establishestablished a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital.  The capital conservation buffer began to be phased in on January 1, 2016 at 0.625% of risk-weighted assets and will increaseincreased by 0.625% annually until fully implemented in January 2019.  An institution is subject to limitations on certain activities including payment of dividends, share repurchases, and discretionary bonuses to executive officers if its capital level is below the total capital plus capital conservation buffer amount.

The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses (which are not considered a component of Tier 1 capital), as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time.  However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes CTBI) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.


The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including CTB, if their capital levels begin to show signs of weakness.  These revisions took effect January 1, 2015.  Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from previous rules).

The final rules set forth certain changes for the calculation of risk-weighted assets, which we were required to utilize beginning January 1, 2015.  The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets.  We currently satisfy the well-capitalized and the capital conservation standards, and based on our current capital composition and levels, we anticipate that our capital ratios, on a Basel III basis, will continue to exceed the well-capitalized minimum capital requirements and capital conservation buffer standards.


As of June 30, 2019, CTBI had a common equity Tier 1 capital ratio of 16.83%, a Tier 1 capital ratio of 18.67%, a total capital ratio of 19.80%, and a Tier 1 leverage ratio of 13.61%.  Our capital conservation buffer at June 30, 2019 was 11.80%.

In December 2017, the Basel Committee on Banking Supervision unveiled the latest round of its regulatory framework, commonly referred to as Basel IV.  The framework makes changes to the capital framework of Basel III and is targeted for a timeframe of 2022-2027 for implementation.  The new framework appears designed to limit the flexibility of financial institutions using advanced approaches to calculate credit and other risks and also makes significant amendments to the standardized approaches to credit risk, credit valuation adjustment risk, and operational risk.  The manner and the form in which the Basel IV framework will be implemented in the U.S. are uncertain.


As of June 30, 2018, CTBI had a common equity Tier 1 capital ratio of 15.80%, a Tier 1 capital ratio of 17.67%, a total capital ratio of 18.84%, and a Tier 1 leverage ratio of 13.11%, all above the required levels to be considered “well-capitalized.”  Our capital conservation buffer at June 30, 2018 was 10.84%.

As of June 30, 2018,2019, we are not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material adverse impact on our liquidity, capital resources, or operations.


Impact of Inflation, Changing Prices, and Economic Conditions


The majority of our assets and liabilities are monetary in nature. Therefore, CTBI differs greatly from most commercial and industrial companies that have significant investment in nonmonetary assets, such as fixed assets and inventories.  However, inflation does have an important impact on the growth of assets in the banking industry and on the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio.  Inflation also affects other expenses, which tend to rise during periods of general inflation.


We believe one of the most significant impacts on financial and operating results is our ability to react to changes in interest rates.  We seek to maintain an essentially balanced position between interest rate sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations.

Beginning in 2008, the U.S. economy faced a severe economic crisis including a major recession from which it is recovering.recovery was slow and uneven.  Commerce and business growth in certain regions in the U.S. remains reduced and local governments and many businesses continue to experience financial difficulty.  In some areas of the U.S., including certain parts of our service area, unemployment levels remain elevated.  There can be no assurance that these conditions will continue to improve and these conditions could worsen.  In addition, the level of U.S. debt, the Federal Open Market Committee’s monetary policy, potential volatility in oil prices, recent U.S. tax law modifications, political events, and the possible healthcare reformtrade policies may have a destabilizing effect on financial markets or a negative effect on the economy.


Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent upon the business environment in the markets where we operate, in the states of Kentucky, West Virginia, and Tennessee and in the United States as a whole.  While unemployment rates have improved in all of the markets in which we operate, unemployment rates in our markets remain high compared to the national average.  A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings.  Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors.


While economic conditions in the United States and worldwide have improved since the recession, there can be no assurance that this improvement will continue or that another recession will not occur.  Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in consumer and business spending, borrowing, and savings habits.  Such conditions could adversely affect the credit quality of our loans and our business, financial condition, and results of operations.


Stock Repurchase Program


CTBI has not acquired any shares of common stock through the stock repurchase program since February 2008.  There are 67,371 shares remaining under CTBI’s current repurchase authorization.


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 debt 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 Accounting Standards Codification (“ASC”) 320, InvestmentInvestments – Debt 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.

Beginning in January 1, 2018, upon adoption of ASU 2016-01, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in net income.  For periods prior to January 1, 2018, equity securities were classified as available-for-sale and stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income, net of tax.  Equity securities without a readily determinable fair value are recorded at cost less impairment, if any, adjusted for subsequent observable price changes.

Gains or losses on disposition of debt securities are computed by specific identification for all securities except for shares in mutual funds, which are computed by average cost.those securities.  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.

Subsequent to the January 1, 2018 effective date of ASU 2016-01, ASC 320 applies only to debt securities and ASC 321, Investments – Equity Securities, applies to equity securities.  ASC 321 requires equity investments (except those accounted for under the equity method and those that result in the consolidation of the investee) to be measured at fair value, with changes in fair values recognized in net income.

Equity securities with a readily determinable fair value are required to be measured at fair value, with changes in fair value recognized through net income.  Equity securities without a readily determinable fair value are carried at cost, less any impairment, if any, plus or minus changes resulting from observable price changes for identical or similar investments.  An election can be made, as permitted by ASC 321-10-35-2, to subsequently measure an equity security without a readily determinable fair value, at fair value.  Equity securities held by CTBI include securities without readily determinable fair values.  CTBI has elected to account for these securities at fair value.  The fair value of these securities was determined by a third party service provider using Level 3 inputs as defined in ASC 820, Fair Value Measurement, and changes in fair value are recognized in income.
Loans –Loans with the ability and the intent to be held until maturity and/or payoff are reported at the carrying value of unpaid principal reduced by unearned interest, an allowance for loan and lease losses, and unamortized deferred fees or costs.  Income is recorded on the level yield basis.  Interest accrual is discontinued when management believes, after considering economic and business conditions, collateral value, and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful.  Any loan greater than 90 days past due must be well secured and in the process of collection to continue accruing interest.  Cash payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured.  Loans are not reclassified as accruing until principal and interest payments remain current for a period of time, generally six months, and future payments appear reasonably certain.  Included in certain loan categories of impaired loans are troubled debt restructurings that were classified as impaired.  A restructuring of a debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.


Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized over the estimated life of the related loans, leases, or commitments as a yield adjustment.


Allowance for Loan and Lease Losses –We maintain an allowance for loan and lease losses (“ALLL”) at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio.  Credit losses are charged and recoveries are credited to the ALLL.


We utilize an internal risk grading system for commercial credits.  Those larger commercial credits that exhibit probable or observed credit weaknesses are subject to individual review.  The borrower’s cash flow, adequacy of collateral coverage, and other options available to CTBI, including legal remedies, are evaluated.  The review of individual loans includes those loans that are impaired as defined by ASC 310-10-35, Impairment of a Loan.  We evaluate the collectability of both principal and interest when assessing the need for loss provision.  Historical loss rates are analyzed and applied to other commercial loans not subject to specific allocations.  The ALLL allocation for this pool of commercial loans is established based on the historical average, maximum, minimum, and median loss ratios.


A loan is considered impaired when, based on current information and events, it is probable that CTBI will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.


Homogenous loans, such as consumer installment, residential mortgages, and home equity lines are not individually risk graded.  The associated ALLL for these loans is measured under ASC 450, Contingencies.

When any secured commercial loan is considered uncollectable, whether past due or not, a current assessment of the value of the underlying collateral is made.  If the balance of the loan exceeds the fair value of the collateral, the loan is placed on nonaccrual and the loan is charged down to the value of the collateral less estimated cost to sell or a specific reserve equal to the difference between book value of the loan and the fair value assigned to the collateral is created until such time as the loan is foreclosed.  When the foreclosed collateral has been legally assigned to CTBI, the estimated fair value of the collateral less costs to sell is then transferred to other real estate owned or other repossessed assets, and a charge-off is taken for any remaining balance.  When any unsecured commercial loan is considered uncollectable the loan is charged off no later than at 90 days past due.


All closed-end consumer loans (excluding conventional 1-4 family residential loans and installment and revolving loans secured by real estate) are charged off no later than 120 days (5 monthly payments) delinquent.  If a loan is considered uncollectable, it is charged off earlier than 120 days delinquent.  For conventional 1-4 family residential loans and installment and revolving loans secured by real estate, when a loan is 90 days past due, a current assessment of the value of the real estate is made.  If the balance of the loan exceeds the fair value of the property, the loan is placed on nonaccrual.  Foreclosure proceedings are normally initiated after 120 days.  When the foreclosed property has been legally assigned to CTBI, the fair value less estimated costs to sell is transferred to other real estate owned and the remaining balance is taken as a charge-off.


Historical loss rates for loans are adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition.  We use twelve rolling quarters for our historical loss rate analysis.  Factors that we consider include delinquency trends, current economic conditions and trends, strength of supervision and administration of the loan portfolio, levels of underperforming loans, level of recoveries to prior year’s charge-offs, trends in loan losses, industry concentrations and their relative strengths, amount of unsecured loans, and underwriting exceptions.  Management continually reevaluates the other subjective factors included in its ALLL analysis.


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


Income Taxes – Income tax expense is based on the taxes due on the consolidated tax return plus deferred taxes based on the expected future tax benefits and consequences of temporary differences between carrying amounts and tax bases of assets and liabilities, using enacted tax rates.  Any interest and penalties incurred in connection with income taxes are recorded as a component of income tax expense in the consolidated financial statements.  During the three and six months ended June 30, 20182019 and 2017,2018, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes.



As a bank doing business in Kentucky, CTB is subject to a capital-based Kentucky bank franchise tax and exempt from Kentucky corporate income tax.  However, in March 2019, Kentucky enacted HB354, which will transition CTB from the bank franchise tax to a corporate income tax beginning January 1, 2021.  The current Kentucky corporate income tax rate is 5%.  As of March 31, 2019, CTBI recorded a deferred tax liability, net of the federal benefit, of $1.0 million due to the enactment of HB354.
In April 2019, Kentucky enacted HB458.  HB458 allows for combined state income tax filing with CTBI, CTB, and CTIC.  CTBI had previously filed a separate company return and generated net operating losses, in which it had maintained a valuation allowance against the related deferred tax asset.  HB458 also allows for certain net operating losses to be utilized on a combined return.  CTBI expects to file a combined return, beginning in 2021, and to utilize these previously generated losses.  The tax benefit recorded in the second quarter 2019 to reverse the valuation allowance on the deferred tax asset for these losses was $3.6 million.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk


Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits.  CTBI uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates.  Given a 200 basis point increase to the yield curve used in the simulation model, it is estimated net interest income for CTBI would increase by 5.975.87 percent over one year and 11.968.52 percent over two years.  A 200 basis point decrease in the yield curve would decrease net interest income by an estimated 4.235.82 percent over one year and 8.869.42 percent over two years.  For further discussion of CTBI’s market risk, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Market Risk included in the annual report on Form 10-K for the year ended December 31, 2017.
2018.


Item 4.  Controls and Procedures


EVALUATIONEVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES


CTBI’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.  As of the end of the period covered by this report, an evaluation was carried out by CTBI’s management, with the participation of our Chief Executive Officer and the Executive Vice President, Chief Financial Officer, and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on this evaluation, management concluded that disclosure controls and procedures as of June 30, 20182019 were effective in ensuring material information required to be disclosed in this quarterly report on Form 10-Q was recorded, processed, summarized, and reported on a timely basis.


CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING


There were no changes in CTBI’s internal control over financial reporting that occurred during the quarter ended June 30, 20182019 that have materially affected, or are reasonably likely to materially affect, CTBI’s internal control over financial reporting.



PART II - OTHER INFORMATION


Item 1.Legal ProceedingsNone
   
Item 1A.Risk FactorsNone

CTBI is subject to a number of risk factors that may affect our business, results of operations, and financial condition, including those disclosed in CTBI’s Annual Report on Form 10-K for the year ended December 31, 2018, and the following additional risk factor:

Financial institutions, including CTBI, must transition from LIBOR to an alternative reference rate.

LIBOR will cease to exist as a published rate after 2021.  The Federal Reserve through the Alternative Reference Rate Committee has recommended a replacement benchmark rate, the Secured Overnight Financing Rate.  All loans extending beyond 2021 will need to be managed to ensure appropriate benchmark rate replacements are provided for and adopted.  Failure to identify and negotiate a replacement benchmark rate and/or update data processing systems could result in future interest rate risk not being mitigated as intended or interest being miscalculated, which could adversely impact CTBI’s business, financial condition and results of operations.  As of June 30, 2019, CTBI had approximately $29.0 million in variable rate loans and $21.2 million in available-for-sale securities with interest rates tied to LIBOR, substantially all of which have maturity dates beyond December 31, 2021.  In addition, CTBI has debentures outstanding in the principal amount of $59.3 million which mature in 2037 and bear interest at a rate tied to LIBOR.

Moreover, financial institution contracts linked to LIBOR are widespread and intertwined with numerous financial products and services.  The downstream effect of unwinding or transitioning such contracts could cause instability and negatively impact financial markets and individual institutions.  The uncertainty surrounding the transition from LIBOR could adversely affect the U.S. financial system more broadly.

Item 2.Unregistered Sales of Equity Securities and Use of ProceedsNone
   
Item 3.Defaults Upon Senior SecuritiesNone
   
Item 4.Mine Safety DisclosureNot applicable
   
Item 5.Other Information: 
 
CTBI’sCTBI’s Principal Executive Officer and Principal Financial Officer have furnished to the SEC the certifications with respect to this Form 10-Q that are required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002
 
   
Item 6.Exhibits: 
 (1)   Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
Exhibit 31.2
 (2)   Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
Exhibit 32.2
(3)  XBRL Instance DocumentExhibit 101.INS
(4)  XBRL Taxonomy Extension SchemaExhibit 101.SCH
(5)  XBRL Taxonomy Extension Calculation LinkbaseExhibit 101.CAL
(6)  XBRL Taxonomy Extension Definition LinkbaseExhibit 101.DEF
(7)  XBRL Taxonomy Extension Label LinkbaseExhibit 101.LAB
(8)  XBRL Taxonomy Extension Presentation LinkbaseExhibit 101.PRE


SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, CTBI has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 COMMUNITY TRUST BANCORP, INC.
  
Date:  August 8, 2019By:
  
August 8, 2018By:/s/ Jean R. Hale 
 Jean R. Hale 
 Chairman, President, and Chief Executive Officer
 
 /s/ Kevin J. Stumbo 
 KevingKevin J. Stumbo 
 Executive Vice President, Chief Financial Officer,
and Treasurer