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 March 31,June 30, 2019
  
 Or
  
[   ]☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _____________ to _____________


Commission file number 001-31220


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)(Zip code)

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

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

Common Stock
(Title of class)

ctbiNASDAQ
(606) 432-1414
(Registrant’s telephone number)
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 every interactive data file required to be submitted 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 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  ☐
   
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 – 17,772,77017,777,251 shares outstanding at April 30,July 31, 2019


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

Common Stock
(Title of class)

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





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, 2018 for further information in this regard.



Community Trust Bancorp, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands) 
(unaudited)
March 31
2019
  
December 31
2018
 
Assets:      
Cash and due from banks $49,302  $64,632 
Interest bearing deposits  200,058   75,718 
Federal funds sold  4,500   1,100 
Cash and cash equivalents  253,860   141,450 
         
Certificates of deposit in other banks  1,470   3,920 
Securities available-for-sale at fair value (amortized cost of $601,544 and $602,114, respectively)  599,299   593,746 
Securities held-to-maturity at amortized cost (fair value of $619 and $649, respectively)  619   649 
Equity securities at fair value  1,528   1,173 
Loans held for sale  13,649   2,461 
         
Loans  3,189,732   3,208,638 
Allowance for loan and lease losses  (35,004)  (35,908)
Net loans  3,154,728   3,172,730 
         
Premises and equipment, net  44,554   45,291 
Right-of-use asset  15,128   0 
Federal Home Loan Bank stock  12,261   14,713 
Federal Reserve Bank stock  4,887   4,887 
Goodwill  65,490   65,490 
Bank owned life insurance  67,433   67,076 
Mortgage servicing rights  3,390   3,607 
Other real estate owned  24,970   27,273 
Other assets  50,027   57,150 
Total assets $4,313,293  $4,201,616 
         
Liabilities and shareholders’ equity:        
Deposits:        
Noninterest bearing $841,996  $803,316 
Interest bearing  2,541,107   2,502,634 
Total deposits  3,383,103   3,305,950 
         
Repurchase agreements  237,506   232,712 
Federal funds purchased  1,800   1,180 
Advances from Federal Home Loan Bank  431   436 
Long-term debt  59,341   59,341 
Deferred taxes  6,529   3,363 
Lease liability  15,743   0 
Other liabilities  31,333   34,484 
Total liabilities  3,735,786   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 2019 – 17,767,594; 2018 – 17,732,853  88,839   88,665 
Capital surplus  223,426   223,161 
Retained earnings  267,016   258,935 
Accumulated other comprehensive loss, net of tax  (1,774)  (6,611)
Total shareholders’ equity  577,507   564,150 
         
Total liabilities and shareholders’ equity $4,313,293  $4,201,616 


(dollars in thousands) 
(unaudited)
June 30
2019
  
December 31
2018
 
Assets:      
Cash and due from banks $52,545  $64,632 
Interest bearing deposits  269,094   75,718 
Federal funds sold  0   1,100 
Cash and cash equivalents  321,639   141,450 
         
Certificates of deposit in other banks  245   3,920 
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  1,067   2,461 
         
Loans  3,192,207   3,208,638 
Allowance for loan and lease losses  (34,998)  (35,908)
Net loans  3,157,209   3,172,730 
         
Premises and equipment, net  44,404   45,291 
Right-of-use asset  15,028   0 
Federal Home Loan Bank stock  11,360   14,713 
Federal Reserve Bank stock  4,887   4,887 
Goodwill  65,490   65,490 
Bank owned life insurance  67,304   67,076 
Mortgage servicing rights  3,119   3,607 
Other real estate owned  22,536   27,273 
Other assets  69,037   57,150 
Total assets $4,377,257  $4,201,616 
         
Liabilities and shareholders’ equity:        
Deposits:        
Noninterest bearing $833,044  $803,316 
Interest bearing  2,604,137   2,502,634 
Total deposits  3,437,181   3,305,950 
         
Repurchase agreements  233,238   232,712 
Federal funds purchased  3,900   1,180 
Advances from Federal Home Loan Bank  426   436 
Long-term debt  59,341   59,341 
Deferred taxes  3,621   3,363 
Lease liability  15,544   0 
Other liabilities  29,298   34,484 
Total liabilities  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 2019 – 17,772,309; 2018 – 17,732,853  88,862   88,665 
Capital surplus  223,833   223,161 
Retained earnings  278,960   258,935 
Accumulated other comprehensive income (loss), net of tax  3,053   (6,611)
Total shareholders’ equity  594,708   564,150 
         
Total liabilities and shareholders’ equity $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 
 March 31  
Three Months Ended
June 30
  
Six Months Ended
June 30
 
(in thousands except per share data) 2019  2018  2019  2018  2019  2018 
Interest income:                  
Interest and fees on loans, including loans held for sale $40,910  $36,577  $41,318  $37,791  $82,228  $74,368 
Interest and dividends on securities                        
Taxable  3,163   2,470   3,089   2,422   6,252   4,892 
Tax exempt  678   697   580   706   1,258   1,403 
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock  296   333   261   328   557   661 
Interest on Federal Reserve Bank deposits  786   439   1,525   713   2,311   1,152 
Other, including interest on federal funds sold  56   64   44   65   100   129 
Total interest income  45,889   40,580   46,817   42,025   92,706   82,605 
                        
Interest expense:                        
Interest on deposits  8,075   4,872   8,956   5,585   17,031   10,457 
Interest on repurchase agreements and federal funds purchased  1,156   635   1,191   723   2,347   1,358 
Interest on advances from Federal Home Loan Bank  39   2   0   2   39   4 
Interest on long-term debt  636   480   643   567   1,279   1,047 
Total interest expense  9,906   5,989   10,790   6,877   20,696   12,866 
                        
Net interest income  35,983   34,591   36,027   35,148   72,010   69,739 
Provision for loan losses  190   946   1,563   1,929   1,753   2,875 
Net interest income after provision for loan losses  35,793   33,645   34,464   33,219   70,257   66,864 
                        
Noninterest income:                        
Service charges on deposit accounts  6,120   6,221   6,525   6,480   12,645   12,701 
Gains on sales of loans, net  330   279   518   304   848   583 
Trust and wealth management income  2,575   2,958   2,765   2,856   5,340   5,814 
Loan related fees  573   1,144   440   919   1,013   2,063 
Bank owned life insurance  558   1,764   689   793   1,247   2,557 
Brokerage revenue  261   283   299   440   560   723 
Securities gains (losses)  356   (288)  204   2   560   (286)
Other noninterest income  1,397   949   812   1,946   2,209   2,895 
Total noninterest income  12,170   13,310   12,252   13,740   24,422   27,050 
                        
Noninterest expense:                        
Officer salaries and employee benefits  3,374   3,214   3,297   3,220   6,671   6,434 
Other salaries and employee benefits  12,585   12,405   12,790   12,202   25,375   24,607 
Occupancy, net  2,051   2,116   1,812   2,043   3,863   4,159 
Equipment  739   717   749   727   1,488   1,444 
Data processing  1,763   1,636   1,789   1,634   3,552   3,270 
Bank franchise tax  1,715   1,701   1,683   1,577   3,398   3,278 
Legal fees  430   474   424   428   854   902 
Professional fees  531   502   546   495   1,077   997 
Advertising and marketing  792   732   874   876   1,666   1,608 
FDIC insurance  177   314   369   279   546   593 
Other real estate owned provision and expense  771   939   1,024   1,315   1,795   2,254 
Repossession expense  377   409   112   304   489   713 
Amortization of limited partnership investments  777   500   1,166   716   1,943   1,216 
Other noninterest expense  3,001   3,022   3,395   6,623   6,396   9,645 
Total noninterest expense  29,083   28,681   30,030   32,439   59,113   61,120 
                        
Income before income taxes  18,880   18,274   16,686   14,520   35,566   32,794 
Income taxes  3,941   2,460   (1,638)  2,921   2,303   5,381 
Net income  14,939   15,814   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  6,124   (5,498)  6,522   (1,811)  12,646   (7,309)
Less: Reclassification adjustments for realized gains included in net income  1   149   5   2   6   151 
Tax expense (benefit)  1,286   (1,186)  1,690   (381)  2,976   (1,567)
Other comprehensive income (loss), net of tax  4,837   (4,461)  4,827   (1,432)  9,664   (5,893)
Comprehensive income $19,776  $11,353  $23,151  $10,167  $42,927  $21,520 
                        
Basic earnings per share $0.84  $0.89  $1.03  $0.66  $1.88  $1.55 
Diluted earnings per share $0.84  $0.89  $1.03  $0.66  $1.88  $1.55 
                        
Weighted average shares outstanding-basic  17,712   17,671   17,721   17,687   17,717   17,679 
Weighted average shares outstanding-diluted  17,723   17,687   17,733   17,703   17,728   17,695 


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  
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   17,692,912  $88,465  $221,472  $224,268  $(3,506) $530,699 
Net income              15,814       15,814               15,814       15,814 
Other comprehensive loss, net of tax of $(1,186)                  (4,461)  (4,461)                  (4,461)  (4,461)
Cash dividends declared ($0.33 per share)              (5,836)      (5,836)              (5,836)      (5,836)
Issuance of common stock  29,087   145   451           596   29,087   145   451           596 
Vesting of restricted stock  (12,582)  (63)  63           0   (12,582)  (63)  63           0 
Issuance of restricted stock  11,435   57   (57)          0   11,435   57   (57)          0 
Forfeiture of restricted stock  (115)  (1)  1           0   (115)  (1)  1           0 
Stock-based compensation          224           224           224           224 
Implementation of ASU 2014-09              453       453               453       453 
Implementation of ASU 2016-01              (507)  507   0               (507)  507   0 
Balance, March 31, 2018  17,720,737  $88,603  $222,154  $234,192  $(7,460) $537,489   17,720,737  $88,603  $222,154  $234,192  $(7,460) $537,489 
                        
Balance, December 31, 2018  17,732,853  $88,665  $223,161  $258,935  $(6,611) $564,150 
Net income              14,939       14,939               11,599       11,599 
Other comprehensive income, net of tax of $1,286                  4,837   4,837 
Cash dividends declared ($0.36 per share)              (6,378)      (6,378)
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  19,065   95   163           258   3,991   20   184           204 
Vesting of restricted stock  (12,186)  (61)  61           0   585   3   (3)          0 
Issuance of restricted stock  27,921   140   (140)          0 
Forfeiture of restricted stock  (59)  0   0           0 
Stock-based compensation          181           181           151           151 
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 
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)


  Three Months Ended 
  March 31 
(in thousands) 2019  2018 
Cash flows from operating activities:      
Net income $14,939  $15,814 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  1,427   965 
Deferred taxes  2,008   163 
Stock-based compensation  200   236 
Provision for loan losses  190   946 
Write-downs of other real estate owned and other repossessed assets  489   467 
Gains on sale of mortgage loans held for sale  (330)  (279)
Securities (gains) losses  (1)  288 
Change in fair market value of equity securities  (355)  0 
Gains on sale of assets, net  (51)  (68)
Proceeds from sale of mortgage loans held for sale  14,927   12,811 
Funding of mortgage loans held for sale  (25,785)  (12,644)
Amortization of securities premiums and discounts, net  1,112   1,132 
Change in cash surrender value of bank owned life insurance  (357)  (1,580)
Mortgage servicing rights:        
 Fair value adjustments  (116)  (122)
 New servicing assets created  333   (100)
Changes in:        
 Other assets  7,082   (28,246)
 Other liabilities  (3,622)  (2,380)
Net cash provided by (used in) operating activities  12,090   (12,597)
         
Cash flows from investing activities:        
Certificates of deposit in other banks:        
 Maturity of certificates of deposit  2,450   1,715 
Securities available-for-sale (AFS):        
 Purchase of AFS securities  (59,583)  (113,781)
 Proceeds from the sales of AFS securities  12,550   50,327 
 Proceeds from prepayments and maturities of AFS securities  46,491   37,258 
Securities held-to-maturity (HTM):        
 Proceeds from maturities of HTM securities  30   0 
Change in loans, net  18,755   1,945 
Purchase of premises and equipment  (226)  (507)
Proceeds from sale and retirement of premises and equipment  0   19 
Redemption of stock by Federal Home Loan Bank  2,452   0 
Proceeds from sale of other real estate and repossessed assets  964   457 
Proceeds from settlement of bank owned life insurance  0   3,038 
Net cash provided by (used in) investing activities  23,883   (19,529)
         
Cash flows from financing activities:        
Change in deposits, net  77,153   55,807 
Change in repurchase agreements and federal funds purchased, net  5,414   774 
Proceeds from Federal Home Loan Bank advances  30,000   0 
Payments on advances from Federal Home Loan Bank  (30,005)  (23)
Issuance of common stock  258   596 
Dividends paid  (6,383)  (5,834)
Net cash provided by financing activities  76,437   51,320 
Net increase in cash and cash equivalents  112,410   19,194 
Cash and cash equivalents at beginning of period  141,450   175,274 
Cash and cash equivalents at end of period $253,860   194,468 
         
Supplemental disclosures:      
Interest paid $8,830  $5,290 
Non-cash activities:        
Loans to facilitate the sale of other real estate owned and repossessed assets  1,797   432 
Common stock dividends accrued, paid in subsequent quarter  215   207 
Real estate acquired in settlement of loans  854   1,284 
 
Six Months Ended
June 30
 
(in thousands) 2019  2018 
Cash flows from operating activities:      
Net income $33,263  $27,413 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  2,689   1,918 
Deferred taxes  (2,588)  163 
Stock-based compensation  432   400 
Provision for loan losses  1,753   2,875 
Write-downs of other real estate owned and other repossessed assets  1,181   1,320 
Gains on sale of mortgage loans held for sale  (848)  (583)
Securities (gains) losses, net  (6)  286 
Change in fair market value of equity securities  (554)  0 
(Gains) losses on sale of assets, net  38   (69)
Proceeds from sale of mortgage loans held for sale  44,665   26,254 
Funding of mortgage loans held for sale  (42,423)  (25,731)
Amortization of securities premiums and discounts, net  2,361   2,407 
Change in cash surrender value of bank owned life insurance  (843)  (2,191)
Payment of operating lease liabilities  (848)  0 
Mortgage servicing rights:        
Fair value adjustments  795   (77)
New servicing assets created  (307)  (211)
Changes in:        
Other assets  (11,913)  (6,288)
Other liabilities  (5,211)  8,179 
Net cash provided by operating activities  21,636   36,065 
         
Cash flows from investing activities:        
Certificates of deposit in other banks:        
Maturity of certificates of deposit  3,675   4,165 
Securities available-for-sale (AFS):        
Purchase of AFS securities  (111,117)  (131,770)
Proceeds from the sales of AFS securities  25,734   57,079 
Proceeds from prepayments and maturities of AFS securities  97,829   64,535 
Securities held-to-maturity (HTM):        
Proceeds from maturities of HTM securities  30   0 
Change in loans, net  15,176   (49,769)
Purchase of premises and equipment  (1,042)  (2,083)
Proceeds from sale and retirement of premises and equipment  13   23 
Redemption of stock by Federal Home Loan Bank  3,353   0 
Proceeds from sale of other real estate and repossessed assets  2,123   928 
Proceeds from settlement of bank owned life insurance  615   3,678 
Net cash provided by (used in) investing activities  36,389   (53,214)
         
Cash flows from financing activities:        
Change in deposits, net  131,231   45,545 
Change in repurchase agreements and federal funds purchased, net  3,246   5,633 
Proceeds from Federal Home Loan Bank advances  30,000   0 
Payments on advances from Federal Home Loan Bank  (30,010)  (43)
Payment of finance lease liabilities  (7)  0 
Issuance of common stock  474   800 
Dividends paid  (12,770)  (11,675)
Net cash provided by financing activities  122,164   40,260 
Net increase in cash and cash equivalents  180,189   23,111 
Cash and cash equivalents at beginning of period  141,450   175,274 
Cash and cash equivalents at end of period $321,639   198,385 
         
Supplemental disclosures:        
Income taxes paid $6,500  $5,100 
Interest paid  18,218   10,898 
Non-cash activities:        
Loans to facilitate the sale of other real estate owned and repossessed assets  2,650   2,406 
Common stock dividends accrued, paid in subsequent quarter  208   202 
Real estate acquired in settlement of loans  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 March 31,June 30, 2019, and the results of operations, other comprehensive income, and changes in shareholders’ equity for the three and six months ended June 30, 2019 and 2018, and the cash flows for the threesix months ended March 31,June 30, 2019 and 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, 2019 and 2018 and the cash flows for the threesix months ended March 31,June 30, 2019 and 2018 are not necessarily indicative of the results to be expected for the full year.  The condensed consolidated balance sheet as of December 31, 2018 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, 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 (“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 –


Ø
➢Leases – In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).   ASU 2016-02 establishes a right-of-use model that requires a lessee to record a right-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.



In August 2018, the FASB issued ASU 2018-11, 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 an additional (and optional) transition method to adopt the new leases standard.  Under this new transition method, an entity initially 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 guidance (Topic 606) and both of the following are met:


·The timing and pattern of transfer of the non-lease component(s) and associated lease component are the same.
The timing and pattern of transfer of the 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.
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 less).  Refer to note 6, Leases, below for further information regarding the impact of adoption.


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.  The team is in the process of determining the portfolio methodologies to be utilized and plans to begin running parallel with its current model in the third quarter of 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.


Ø
➢Changes to the Disclosure Requirements for Fair Value Measurement – In August 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. 2018-13 modifies the 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 fair value hierarchy
The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy
·The policy for timing of transfers between levels
The policy for timing of transfers between levels
·The valuation processes for Level 3 fair value measurements
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 the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and
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 the 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 the reporting date.
The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.


Additions


Additions


The following disclosure requirements were added to Topic 820:


·The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and
The changes in unrealized gains and losses for the period included in other comprehensive income for 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 lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.
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 lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable 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.


Ø
➢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 hosted software.



The ASU aligns the following requirements for capitalizing implementation costs:


·Those incurred in a hosting arrangement that is a service contract, and
Those incurred in a hosting arrangement that is a service contract, and
·
Those incurred to develop 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 our consolidated financial statements.


Critical Accounting Policies and Estimates



The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our consolidated financial statements and related notes.  Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates.  Such differences could be material to the consolidated financial statements.



We believe the application of accounting policies and the estimates required therein are reasonable.  These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change.  Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.




We have identified the following critical accounting policies:



Investments– Management determines the classification of securities at purchase.  We classify 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, Investments – Debt Securities, investments in debt securities that are not classified as held-to-maturity shall be classified in one of the following categories and measured at fair value in the statement of financial position:
a. Trading securities. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) shall be classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price.
b. Available-for-sale securities. Investments not classified as trading securities (nor as held-to-maturity securities) shall be classified as available-for-sale securities.
We do not have any securities that are classified as trading securities.  Available-for-sale securities are reported at fair value, with unrealized gains and losses included as a separate component of shareholders’ equity, net of tax.  If declines in fair value are other than temporary, the carrying value of the securities is written down to fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not credit related.



Gains or losses on disposition of debt securities are computed by specific identification for 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 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 March 31,June 30, 2019 and 2018, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes.


In

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 legislation requiring financial institutions toHB354, which will transition CTB from athe bank franchise tax to thea corporate income tax beginning January 1, 2021.  The current Kentucky corporate income tax beginning in 2021.rate is 5%.  As a result, we booked a one-time charge of $1.0 million, or $0.06 per basic share, to income tax expense to recognize our KentuckyMarch 31, 2019, CTBI recorded a deferred tax liability, at March 31, 2019.  While this liability willnet 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 adjusted periodically, we do not anticipate any further adjustmentsutilized on a combined return.  CTBI expects to havefile a significant impactcombined return, beginning in 2021, and to income.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 $53$21 thousand, respectively, for the three and six months ended March 31,June 30, 2019, and 2018, respectively.$10 thousand  and $63 thousand for the three and six months ended June 30, 2018.  Restricted stock expense for the three and six months ended March 31,June 30, 2019 and 2018 was $190$222 thousand and $183$411 thousand, respectively, including $19$18 thousand and $12$37 thousand in dividends paid for each period.  Restricted stock expense for the three and six months ended June 30, 2018 was $154 thousand and $337 thousand, respectively, including $13 thousand and $25 thousand in dividends paid for each period.  As of March 31,June 30, 2019, there was a total of $27$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 0.70.5 years and a total of $2.0$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 3.12.9 years.



There were no stock options granted in the first threesix months of both 2019 and 2018.  There were 27,921 and 11,320 shares of restricted stock granted during the threesix months ended March 31,June 30, 2019 and 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.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 March 31,June 30, 2019 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 $178,233  $195  $(951) $177,477  $150,573  $638  $(469) $150,742 
State and political subdivisions  123,147   1,524   (942)  123,729   103,304   2,385   (250)  105,439 
U.S. government sponsored agency mortgage-backed securities  299,658   2,036   (4,103)  297,591   331,036   3,757   (1,788)  333,005 
Other debt securities  506   0   (4)  502   2,401   0   (1)  2,400 
Total available-for-sale securities $601,544  $3,755  $(6,000) $599,299  $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 $619  $0  $0  $619  $619  $0  $0  $619 
Total held-to-maturity securities $619  $0  $0  $619  $619  $0  $0  $619 



The amortized cost and fair value of securities at December 31, 2018 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 $219,358  $48  $(1,468) $217,938  $219,358  $48  $(1,468) $217,938 
State and political subdivisions  126,280   633   (2,425)  124,488   126,280   633   (2,425)  124,488 
U.S. government sponsored agency mortgage-backed securities  255,969   397   (5,547)  250,819   255,969   397   (5,547)  250,819 
Other debt securities  507   0   (6)  501   507   0   (6)  501 
Total available-for-sale securities $602,114  $1,078  $(9,446) $593,746  $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 $649  $0  $0  $649  $649  $0  $0  $649 
Total held-to-maturity securities $649  $0  $0  $649  $649  $0  $0  $649 




The amortized cost and fair value of debt securities at March 31,June 30, 2019 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 $29,546  $29,499  $619  $619 
Due after one through five years  93,079   93,111   0   0 
Due after five through ten years  80,646   80,248   0   0 
Due after ten years  98,109   98,348   0   0 
U.S. government sponsored agency mortgage-backed securities  299,658   297,591   0   0 
Other debt securities  506   502   0   0 
Total debt securities $601,544  $599,299  $619  $619 

As of March 31,

 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, 2019, there was a net securities gain of $356$204 thousand.  There was a pre-tax gain of $1 thousand realized on sales of AFS securities, and an unrealized gain of $355 thousand from the fair market value adjustment of equity securities.  As of March 31, 2018, there was a net securities loss of $288 thousand.  There was a net gain of $148$5 thousand realized on sales and calls of AFS securities consisting of a pre-tax gain of $281$78 thousand and a pre-tax loss of $133 thousand.  This net securities loss included a loss$73 thousand, and an unrealized gain of $436$199 thousand from the salefair market value adjustment of CTBI’s CRA investment funds.equity securities.  During the three months ended June 30, 2018, there was a net gain of $2 thousand realized on sales and calls of AFS securities, consisting of a pre-tax gain of $3 thousand and a pre-tax loss of $1 thousand.



During the six months ended June 30, 2019, there was a net securities gain of $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 $79 thousand and a pre-tax loss of $73 thousand, and an unrealized gain of $554 thousand from the fair market value adjustment of equity securities.  During the six months ended June 30, 2018, there was a combined loss of $286 thousand realized on sales and calls of AFS securities, consisting of a pre-tax gain of $284 thousand and a pre-tax loss of $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$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 March 31,June 30, 2019 were $1.5$1.7 million, as a result of a fair market value increase in the firstsecond quarter 2019.



The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $234.8$238.5 million at March 31,June 30, 2019 and $258.8$258.8 million at December 31, 2018.



The amortized cost of securities sold under agreements to repurchase amounted to $278.0$272.2 million at March 31,June 30, 2019 and $289.1$289.1 million at December 31, 2018.




CTBI evaluates its investment portfolio on a quarterly basis for impairment.  The analysis performed as of March 31,June 30, 2019 indicates that all impairment is considered temporary, market and interest rate driven, and not credit-related.  The percentage of total debt securities with unrealized losses as of March 31,June 30, 2019 was 55.9%41.4% compared to 75.7% as of December 31, 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 March 31,June 30, 2019 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 March 31,June 30, 2019.


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 $22,910  $(8) $22,902  $1,840  $(6) $1,834 
State and political subdivisions  0   0   0   0   0   0 
U.S. government sponsored agency mortgage-backed securities  935   (3)  932   0   0   0 
Other debt securities  506   (4)  502   2,401   (1)  2,400 
Total <12 months temporarily impaired AFS securities  24,351   (15)  24,336   4,241   (7)  4,234 
                        
12 Months or More                        
U.S. Treasury and government agencies  120,811   (943)  119,868   91,976   (463)  91,513 
State and political subdivisions  39,558   (942)  38,616   19,407   (250)  19,157 
U.S. government sponsored agency mortgage-backed securities  156,877   (4,100)  152,777   132,104   (1,788)  130,316 
Other debt securities  0   0   0   0   0   0 
Total ≥12 months temporarily impaired AFS securities  317,246   (5,985)  311,261   243,487   (2,501)  240,986 
                        
Total                        
U.S. Treasury and government agencies  143,721   (951)  142,770   93,816   (469)  93,347 
State and political subdivisions  39,558   (942)  38,616   19,407   (250)  19,157 
U.S. government sponsored agency mortgage-backed securities  157,812   (4,103)  153,709   132,104   (1,788)  130,316 
Other debt securities  506   (4)  502   2,401   (1)  2,400 
Total temporarily impaired AFS securities $341,597  $(6,000) $335,597  $247,728  $(2,508) $245,220 




The analysis performed as of December 31, 2018 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, 2018 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, 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 $78,905  $(271) $78,634  $78,905  $(271) $78,634 
State and political subdivisions  21,707   (194)  21,513   21,707   (194)  21,513 
U.S. government sponsored agency mortgage-backed securities  61,940   (377)  61,563   61,940   (377)  61,563 
Other debt securities  507   (6)  501   507   (6)  501 
Total <12 months temporarily impaired AFS securities  163,059   (848)  162,211   163,059   (848)  162,211 
                        
12 Months or More                        
U.S. Treasury and government agencies  97,955   (1,197)  96,758   97,955   (1,197)  96,758 
State and political subdivisions  51,911   (2,231)  49,680   51,911   (2,231)  49,680 
U.S. government sponsored agency mortgage-backed securities  147,658   (5,170)  142,488   147,658   (5,170)  142,488 
Other debt securities  0   0   0   0   0   0 
Total ≥12 months temporarily impaired AFS securities  297,524   (8,598)  288,926   297,524   (8,598)  288,926 
                        
Total                        
U.S. Treasury and government agencies  176,860   (1,468)  175,392   176,860   (1,468)  175,392 
State and political subdivisions  73,618   (2,425)  71,193   73,618   (2,425)  71,193 
U.S. government sponsored agency mortgage-backed securities  209,598   (5,547)  204,051   209,598   (5,547)  204,051 
Other debt securities  507   (6)  501   507   (6)  501 
Total temporarily impaired AFS securities $460,583  $(9,446) $451,137  $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 March 31,June 30, 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 March 31,June 30, 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 March 31,June 30, 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 March 31,June 30, 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)
 
March 31
2019
  
December 31
2018
  
June 30
2019
  
December 31
2018
 
Commercial construction $75,364  $82,715  $65,771  $82,715 
Commercial secured by real estate  1,182,804   1,183,093   1,192,768   1,183,093 
Equipment lease financing  1,354   1,740   962   1,740 
Commercial other  388,060   377,198   390,048   377,198 
Real estate construction  54,013   57,160   57,017   57,160 
Real estate mortgage  720,292   722,417   722,573   722,417 
Home equity  108,018   106,299   109,831   106,299 
Consumer direct  141,855   144,289   145,149   144,289 
Consumer indirect  517,972   533,727   508,088   533,727 
Total loans $3,189,732  $3,208,638  $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 $13.6$1.1 million at March 31,June 30, 2019  and $2.5 million at December 31, 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) 
March 31
2019
  
December 31
2018
  
June 30
2019
  
December 31
2018
 
Commercial:            
Commercial construction $546  $639  $510  $639 
Commercial secured by real estate  4,967   4,537   5,655   4,537 
Commercial other  1,402   797   1,001   797 
                
Residential:                
Real estate construction  289   22   280   22 
Real estate mortgage  4,691   5,395   4,776   5,395 
Home equity  483   477   680   477 
Total nonaccrual loans $12,378  $11,867  $12,902  $11,867 




The following tables present CTBI’s loan portfolio aging analysis, segregated by class, as of March 31,June 30, 2019 and December 31, 2018:


 March 31, 2019  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 $449  $0  $618  $1,067  $74,297  $75,364  $72  $56  $30  $546  $632  $65,139  $65,771  $36 
Commercial secured by real estate  7,829   1,460   12,335   21,624   1,161,180   1,182,804   7,794   4,593   10,933   10,720   26,246   1,166,522   1,192,768   5,816 
Equipment lease financing  0   0   0   0   1,354   1,354   0   0   0   0   0   962   962   0 
Commercial other  1,005   772   726   2,503   385,557   388,060   261   988   2,742   822   4,552   385,496   390,048   174 
Residential:                                                        
Real estate construction  258   149   295   702   53,311   54,013   6   290   21   285   596   56,421   57,017   5 
Real estate mortgage  1,145   4,836   6,854   12,835   707,457   720,292   4,203   1,104   5,170   7,401   13,675   708,898   722,573   4,529 
Home equity  818   277   499   1,594   106,424   108,018   260   709   325   575   1,609   108,222   109,831   258 
Consumer:                                                        
Consumer direct  735   215   30   980   140,875   141,855   30   926   178   40   1,144   144,005   145,149   40 
Consumer indirect  2,854   611   390   3,855   514,117   517,972   390   3,514   850   218   4,582   503,506   508,088   218 
Total $15,093  $8,320  $21,747  $45,160  $3,144,572  $3,189,732  $13,016  $12,180  $20,249  $20,607  $53,036  $3,139,171  $3,192,207  $11,076 


 December 31, 2018  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 $87  $58  $698  $843  $81,872  $82,715  $58  $87  $58  $698  $843  $81,872  $82,715  $58 
Commercial secured by real estate  6,287   1,204   8,776   16,267   1,166,826   1,183,093   4,632   6,287   1,204   8,776   16,267   1,166,826   1,183,093   4,632 
Equipment lease financing  0   0   0   0   1,740   1,740   0   0   0   0   0   1,740   1,740   0 
Commercial other  1,057   94   1,067   2,218   374,980   377,198   581   1,057   94   1,067   2,218   374,980   377,198   581 
Residential:                                                        
Real estate construction  144   438   28   610   56,550   57,160   6   144   438   28   610   56,550   57,160   6 
Real estate mortgage  1,272   5,645   7,607   14,524   707,893   722,417   4,095   1,272   5,645   7,607   14,524   707,893   722,417   4,095 
Home equity  898   365   441   1,704   104,595   106,299   246   898   365   441   1,704   104,595   106,299   246 
Consumer:                                                        
Consumer direct  918   191   74   1,183   143,106   144,289   74   918   191   74   1,183   143,106   144,289   74 
Consumer indirect  4,715   975   507   6,197   527,530   533,727   506   4,715   975   507   6,197   527,530   533,727   506 
Total $15,378  $8,970  $19,198  $43,546  $3,165,092  $3,208,638  $10,198  $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 March 31,June 30, 2019 and December 31, 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 
March 31, 2019               
June 30, 2019               
Pass $67,224  $1,031,325  $1,354  $338,695  $1,438,598  $58,755  $1,048,466  $962  $354,284  $1,462,467 
Watch  2,932   75,404   0   27,317   105,653   2,878   64,145   0   13,995   81,018 
OAEM  1,823   18,501   0   5,811   26,135   835   19,764   0   5,295   25,894 
Substandard  3,385   57,485   0   16,166   77,036   3,303   60,305   0   16,406   80,014 
Doubtful  0   89   0   71   160   0   88   0   68   156 
Total $75,364  $1,182,804  $1,354  $388,060  $1,647,582  $65,771  $1,192,768  $962  $390,048  $1,649,549 
                                        
December 31, 2018                                        
Pass $74,222  $1,038,309  $1,740  $327,431  $1,441,702  $74,222  $1,038,309  $1,740  $327,431  $1,441,702 
Watch  3,070   71,834   0   28,986   103,890   3,070   71,834   0   28,986   103,890 
OAEM  1,594   19,734   0   5,735   27,063   1,594   19,734   0   5,735   27,063 
Substandard  3,829   53,125   0   14,970   71,924   3,829   53,125   0   14,970   71,924 
Doubtful  0   91   0   76   167   0   91   0   76   167 
Total $82,715  $1,183,093  $1,740  $377,198  $1,644,746  $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  March 31,June 30, 2019 and December 31, 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 
March 31, 2019                  
June 30, 2019                  
Performing $53,718  $711,398  $107,275  $141,825  $517,582  $1,531,798  $56,732  $713,268  $108,893  $145,109  $507,870  $1,531,872 
Nonperforming (1)  295   8,894   743   30   390   10,352   285   9,305   938   40   218   10,786 
Total $54,013  $720,292  $108,018  $141,855  $517,972  $1,542,150  $57,017  $722,573  $109,831  $145,149  $508,088  $1,542,658 
                                                
December 31, 2018                                                
Performing $57,132  $712,927  $105,576  $144,215  $533,221  $1,553,071  $57,132  $712,927  $105,576  $144,215  $533,221  $1,553,071 
Nonperforming (1)  28   9,490   723   74   506   10,821   28   9,490   723   74   506   10,821 
Total $57,160  $722,417  $106,299  $144,289  $533,727  $1,563,892  $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 $3.0$2.9 million at March 31,June 30, 2019 compared to $3.3 million at December 31, 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 March 31,June 30, 2019, December 31, 2018, and March 31,June 30, 2018:


 March 31, 2019  June 30, 2019 
(in thousands) Recorded Balance  Unpaid Contractual Principal Balance  Specific Allowance  
Average Investment in Impaired Loans
  
*Interest Income Recognized
  
Recorded
Balance
  
Unpaid
Contractual
Principal
Balance
  
Specific
Allowance
 
Loans without a specific valuation allowance:                        
Commercial construction $3,308  $3,308  $0  $3,655  $46  $3,313  $3,383  $0 
Commercial secured by real estate  32,407   34,098   0   32,811   347   35,043   36,740   0 
Commercial other  8,903   10,598   0   8,866   139   10,992   13,249   0 
Real estate construction  0   0   0   0   0 
Real estate mortgage  2,337   2,337   0   2,329   19   2,570   2,570   0 
                                
Loans with a specific valuation allowance:                                
Commercial construction  324   324   164   324   3   174   174   99 
Commercial secured by real estate  1,922   3,060   847   1,966   10   1,985   3,473   594 
Commercial other  1,154   1,154   620   1,169   17   516   516   182 
                                
Totals:                                
Commercial construction  3,632   3,632   164   3,979   49   3,487   3,557   99 
Commercial secured by real estate  34,329   37,158   847   34,777   357   37,028   40,213   594 
Commercial other  10,057   11,752   620   10,035   156   11,508   13,765   182 
Real estate construction  0   0   0   0   0 
Real estate mortgage  2,337   2,337   0   2,329   19   2,570   2,570   0 
Total $50,355  $54,879  $1,631  $51,120  $581  $54,593  $60,105  $875 


 December 31, 2018  
Three Months Ended
June 30, 2019
  
Six Months Ended
June 30, 2019
 
(in thousands) Recorded Balance  Unpaid Contractual Principal Balance  Specific Allowance  
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 $4,100  $4,100  $0  $3,923  $171  $3,419  $49  $3,537  $95 
Commercial secured by real estate  29,645   31,409   0   30,250   1,412   35,259   403   34,035   750 
Commercial other  8,285   9,982   0   8,774   530   11,546   149   10,206   288 
Real estate construction  0   0   0   106   0 
Real estate mortgage  1,882   1,882   0   1,666   41   2,572   22   2,451   41 
                                    
Loans with a specific valuation allowance:                                    
Commercial construction  127   127   50   42   0   189   3   257   6 
Commercial secured by real estate  1,854   2,983   605   2,051   1   2,314   5   2,140   15 
Commercial other  473   473   146   285   16   514   6   842   23 
                                    
Totals:                                    
Commercial construction  4,227   4,227   50   3,965   171   3,608   52   3,794   101 
Commercial secured by real estate  31,499   34,392   605   32,301   1,413   37,573   408   36,175   765 
Commercial other  8,758   10,455   146   9,059   546   12,060   155   11,048   311 
Real estate construction  0   0   0   106   0 
Real estate mortgage  1,882   1,882   0   1,666   41   2,572   22   2,451   41 
Total $46,366  $50,956  $801  $47,097  $2,171  $55,813  $637  $53,468  $1,218 


  March 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 $4,009  $4,009  $0  $4,168  $37 
Commercial secured by real estate  31,284   33,377   0   31,566   352 
Commercial other  9,183   10,913   0   9,332   152 
Real estate construction  318   318   0   318   0 
Real estate mortgage  1,286   1,294   0   1,284   0 
                     
Loans with a specific valuation allowance:                    
Commercial secured by real estate  2,105   3,221   739   2,132   0 
                     
Totals:                    
Commercial construction  4,009   4,009   0   4,168   37 
Commercial secured by real estate  33,389   36,598   739   33,698   352 
Commercial other  9,183   10,913   0   9,332   152 
Real estate construction  318   318   0   318   0 
Real estate mortgage  1,286   1,294   0   1,284   0 
Total $48,185  $53,132  $739  $48,800  $541 



 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 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 March 31,June 30, 2019 and 2018 and the year ended December 31, 2018:


 
Three Months Ended
March 31, 2019
  
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 secured by real estate  5   828   0   642   1,470   5  $3,686  $0  $37  $3,723 
Commercial other  7   1,122   0   140   1,262   4   138   0   0   138 
Residential:                                        
Real estate mortgage  1   463   0   0   463   1   0   0   243   243 
Total troubled debt restructurings  13  $2,413  $0  $782  $3,195   10  $3,824  $0  $280  $4,104 

  
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
March 31, 2018
 
(in thousands) Number of Loans  Term Modification  Rate Modification  
Combination
  
Post-Modification Outstanding Balance
 
Commercial:               
Commercial construction  2  $32  $0  $15  $47 
Commercial secured by real estate  9   786   0   983   1,769 
Commercial other  5   182   0   0   182 
Total troubled debt restructurings  16  $1,000  $0  $998  $1,998 




 
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 $45 thousand on loans that were considered troubled debt restructurings.



Loans retain their accrual status at the time of their modification. As a result, if a loan is on nonaccrual at the time it is modified, it stays as nonaccrual, and if a loan is on accrual at the time of the modification, it generally stays on accrual.  Commercial and consumer loans modified in a troubled debt restructuring are closely monitored for delinquency as an early indicator of possible future default.  If loans modified in a troubled debt restructuring subsequently default, CTBI evaluates the loan for possible further impairment.  The allowance for loan 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.  There were no  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 as of March 31, 2019 or 2018.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, 2019
  
Three 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 

 (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 March 31,June 30, 2019, December 31, 2018 and March 31,June 30, 2018:


 March 31, 2019  
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 $862  $14,531  $12  $4,993  $512  $4,433  $841  $1,883  $7,841  $35,908  $903  $14,800  $10  $5,217  $396  $4,053  $901  $1,635  $7,089  $35,004 
Provision charged to expense  38   287   (2)  382   (116)  (278)  84   (119)  (86)  190   (36)  533   (3)  238   (38)  299   65   400   105   1,563 
Losses charged off  0   (35)  0   (242)  0   (120)  (25)  (246)  (1,387)  (2,055)  (71)  (345)  0   (824)  0   (180)  (34)  (331)  (1,012)  (2,797)
Recoveries  3   17   0   84   0   18   1   117   721   961   3   110   0   258   0   15   1   63   778   1,228 
Ending balance $903  $14,800  $10  $5,217  $396  $4,053  $901  $1,635  $7,089  $35,004  $799  $15,098  $7  $4,889  $358  $4,187  $933  $1,767  $6,960  $34,998 
                                                                                
Ending balance:                                                                                
Individually evaluated for impairment $164  $847  $0  $620  $0  $0  $0  $0  $0  $1,631  $99  $594  $0  $182  $0  $0  $0  $0  $0  $875 
Collectively evaluated for impairment $739  $13,953  $10  $4,597  $396  $4,053  $901  $1,635  $7,089  $33,373  $700  $14,504  $7  $4,707  $358  $4,187  $933  $1,767  $6,960  $34,123 
                                                                                
Loans                                                                                
Ending balance:                                                                                
Individually evaluated for impairment $3,632  $34,329  $0  $10,057  $0  $2,337  $0  $0  $0  $50,355  $3,487  $37,028  $0  $11,508  $0  $2,570  $0  $0  $0  $54,593 
Collectively evaluated for impairment $71,732  $1,148,475  $1,354  $378,003  $54,013  $717,955  $108,018  $141,855  $517,972  $3,139,377  $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 

  March 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  (14)  (191)  5   (651)  (4)  435   5   80   1,281   946 
Losses charged off  0   (210)  0   (236)  (23)  (193)  (1)  (216)  (2,098)  (2,977)
Recoveries  14   25   0   77   0   6   1   71   875   1,069 
Ending balance $686  $14,133  $23  $4,229  $633  $5,936  $862  $1,798  $6,889  $35,189 
                                         
Ending balance:                                        
Individually evaluated for impairment $0  $739  $0  $0  $0  $0  $0  $0  $0  $739 
Collectively evaluated for impairment $686  $13,394  $23  $4,229  $633  $5,936  $862  $1,798  $6,889  $34,450 
                                         
Loans                                        
Ending balance:                                        
Individually evaluated for impairment $4,009  $33,389  $0  $9,183  $318  $1,286  $0  $0  $0  $48,185 
Collectively evaluated for impairment $74,638  $1,158,239  $2,683  $329,452  $63,575  $717,472  $99,593  $136,576  $487,828  $3,070,056 



 
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 noone finance leases orlease 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 March 31,June 30, 2019 were as follows:


(in thousands) 2019  
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 $71   68   139 
Operating lease cost  461   442   888 
        
Sublease income  (68)  63   131 
        
Total lease cost $464  $469  $940 



Supplemental cash flow information related to CTBI’s operating and finance leases for the three and six months ended March 31,June 30, 2019 was as follows:


(in thousands) 2019  
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) $458   407   848 
Right-of-use assets obtained in exchange for new operating lease liabilities $0 
Weighted average lease term – financing leases 26.5 years  26.92 years 
Weighted average lease term – operating leases 15.35 years  14.17 years  14.34 years 
Weighted average discount rate – financing leases  3.70%  3.70%
Weighted average discount rate – operating leases  3.47%  3.26%  3.00%




Maturities of lease liabilities as of March 31,June 30, 2019 are as follows:


(in thousands) Operating Leases  Operating Leases  Finance Leases 
2019 $1,271  $813  $34 
2020  1,715   1,647   67 
2021  1,744   1,668   75 
2022  1,729   1,654   75 
2023  1,650   1,575   75 
Thereafter  12,822   10,895   2,060 
Total lease payments  20,931   18,252   2,386 
Less imputed interest  (5,188)  (4,171)  (923)
Total $15,743  $14,081  $1,463 



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


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


Note 7 – Other Real Estate Owned



Activity for other real estate owned was as follows:



 
Three Months Ended
June 30
  
Six Months Ended
June 30
 
(in thousands) March 31, 2019  March 31, 2018  2019  2018  2019  2018 
Beginning balance of other real estate owned $27,273  $31,996  $24,970  $32,004  $27,273  $31,996 
New assets acquired  854   1,284   388   1,559   1,242   2,843 
Fair value adjustments  (447)  (467)  (692)  (853)  (1,139)  (1,320)
Sale of assets  (2,710)  (809)  (2,130)  (2,448)  (4,840)  (3,257)
Ending balance of other real estate owned $24,970  $32,004  $22,536  $30,262  $22,536  $30,262 



Carrying costs and fair value adjustments associated with foreclosed properties for the three months ended March 31,June 30, 2019 and 2018 were $0.8$1.0 million and $0.9$1.3 million, respectively.Carrying costs and fair value adjustments associated with foreclosed properties for the six months ended June 30,2019 and 2018 were $1.8 million and $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) 
March 31
2019
  
December 31
2018
  
June 30
2019
  
December 31
2018
 
1-4 family $4,761  $5,253  $3,273  $5,253 
Agricultural/farmland  0   0   0   0 
Construction/land development/other  14,201   15,017   13,495   15,017 
Multifamily  88   88   88   88 
Non-farm/non-residential  5,920   6,915   5,680   6,915 
Total foreclosed properties $24,970  $27,273  $22,536  $27,273 



Note 8 – 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 $277.6$275.1 million and $285.2 million at March 31,June 30, 2019 and December 31, 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 March 31,June 30, 2019 and December 31, 2018 is presented in the following tables:


 March 31, 2019  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 $25,358  $0  $0  $61,703  $87,061  $16,713  $7,584  $19,766  $33,000  $77,063 
State and political subdivisions  56,322   500   0   13,366   70,188   48,816   1,671   1,486   10,086   62,059 
U.S. government sponsored agency mortgage-backed securities  29,388   0   0   50,869   80,257   41,755   1,745   14,254   36,362   94,116 
Total $111,068  $500  $0  $125,938  $237,506  $107,284  $11,000  $35,506  $79,448  $233,238 


 December 31, 2018  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 $25,346  $0  $2,548  $60,699  $88,593  $25,346  $0  $2,548  $60,699  $88,593 
State and political subdivisions  58,864   0   2,995   10,384   72,243   58,864   0   2,995   10,384   72,243 
U.S. government sponsored agency mortgage-backed securities  22,076   0   1,877   47,923   71,876   22,076   0   1,877   47,923   71,876 
Total $106,286  $0  $7,420  $119,006  $232,712  $106,286  $0  $7,420  $119,006  $232,712 



Note 9 – 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 March 31,June 30, 2019 and December 31, 2018 and indicate the level within the fair value hierarchy of the valuation techniques.


    
Fair Value Measurements at
March 31, 2019 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 $177,477  $56,744  $120,733  $0  $150,742  $35,668  $115,074  $0 
State and political subdivisions  123,729   0   123,729   0   105,439   0   105,439   0 
U.S. government sponsored agency mortgage-backed securities
  297,591   0   297,591   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  1,528   0   0   1,528   1,727   0   0   1,727 
Mortgage servicing rights  3,390   0   0   3,390   3,119   0   0   3,119 


     
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 



    
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 March 31,June 30, 2019 and December 31, 2018.  There have been no significant changes in the valuation techniques during the quarter or six months ended March 31,June 30, 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 March 31,June 30, 2019, the only securities owned by CTBI that were valued using Level 3 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.  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 March 31,June 30, 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:inputs for the three and six months ended June 30,2019 and 2018:


(in thousands) 
Three Months Ended
March 31, 2019
  
Three Months Ended
March 31, 2018
  
Three Months Ended
June 30, 2019
  
Three Months Ended
June 30, 2018
 
 Equity Securities at Fair Value  Mortgage Servicing Rights  Equity Securities at Fair Value  Mortgage Servicing Rights  
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  $1,528  $3,390  $0  $3,706 
Total unrealized gains (losses)                                
Included in net income  355   (234)  0   228   199   (348)  0   68 
Issues  0   116   0   100   0   191   0   111 
Settlements  0   (99)  0   (106)  0   (114)  0   (113)
Ending balance $1,528  $3,390  $0  $3,706  $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 $355  $(234) $0  $228  $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  
Three Months Ended
June 30
  
Six Months Ended
June 30
 
 March 31 
(in thousands) 2019  2018  2019  2018  2019  2018 
Total gains $116  $122 
Total gains (losses) $(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 March 31,June 30, 2019 and December 31, 2018 and indicate the level within the fair value hierarchy of the valuation techniques.


    
Fair Value Measurements at
March 31, 2019 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) $1,078  $0  $0  $1,078  $1,343  $0  $0  $1,343 
Other real estate owned  2,345   0   0   2,345   2,271   0   0   2,271 


     
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 



    
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 $0.4$0.2 million andfor the quarter ended June 30, 2019, $0.3 million for the quartersquarter ended March 31, 2019 and December 31, 2018, respectively.  There were no fair value adjustments on impaired loansand $0.2 million for the quarter ended March June 30,2018.  Year-to-date fair value adjustments were $0.5 million for the six months ended June 30,2019,$0.3 million for the year ended December 31,2018, and $0.2 million for the six months ended June 30,2018.



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 $0.4$0.6 million, $0.4 million, and $0.5$0.8 million for the quarters ended March 31,June 30, 2019, December 31, 2018, and March 31,June 30, 2018, respectively.Year-to-date adjustments were $1.0 million for the six months ended June 30,2019,$1.8 million for the year ended December 31,2018, and $1.2 million for the six months ended June 30,2018.



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 March 31,June 30, 2019 and December 31, 2018.


(in thousands) Quantitative Information about Level 3 Fair Value Measurements
  Fair Value at March 31, 2019 Valuation Technique(s)Unobservable Input Range (Weighted Average)
Equity securities at fair value $1,528 Discount cash flows, computer pricing modelDiscount rate  
8.0% - 12.0%
(10.0%)
        Conversion date 
Dec 2022 – Dec 2026
(Dec 2024)
          
Mortgage servicing rights $3,390 Discount cash flows, computer pricing modelConstant prepayment rate  
7.0% - 21.8%
(10.5%)
        Probability of default  
0.0% - 100.0%
(2.8%)
        Discount rate  
10.0% - 11.5%
(10.1%)
          
Impaired loans (collateral-dependent) $1,078 Market comparable propertiesMarketability discount  
0.0% - 96.3%
(45.6%)
          
Other real estate owned $2,345 Market comparable propertiesComparability adjustments  
10.0% - 55.2%
(14.9%)
(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, 2018 Valuation Technique(s)Unobservable Input Range (Weighted Average)
Equity securities at fair value $1,173 Discount cash flows, computer pricing modelDiscount rate  
8.0% - 12.0%
(10.0%)
        Conversion date 
Dec 2022 – Dec 2026
(Dec 2024)
          
Mortgage servicing rights $3,607 Discount 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) $747 Market comparable propertiesMarketability discount  
0.0% - 95.1%
(41.5%)
          
Other real estate owned $6,500 Market comparable propertiesComparability adjustments  
6.0% - 47.6%
(14.9%)


 (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 March 31,June 30, 2019 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 March 31,June 30, 2019 were measured using an exit price notion.


    
Fair Value Measurements
at March 31, 2019 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 $253,860  $253,860  $0  $0  $321,639  $321,639  $0  $0 
Certificates of deposit in other banks  1,470   0   1,470   0   245   0   245   0 
Securities available-for-sale  599,299   56,744   542,555   0   591,586   35,668   555,918   0 
Securities held-to-maturity  619   0   619   0   619   0   619   0 
Equity securities at fair value  1,528   0   0   1,528   1,727   0   0   1,727 
Loans held for sale  13,649   13,752   0   0   1,067   1,093   0   0 
Loans, net  3,154,728   0   0   3,150,772   3,157,209   0   0   3,189,802 
Federal Home Loan Bank stock  12,261   0   12,261   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  15,188   0   15,188   0   14,923   0   14,923   0 
Mortgage servicing rights  3,390   0   0   3,390   3,119   0   0   3,119 
                                
Financial liabilities:                                
Deposits $3,383,103  $841,996  $2,559,903  $0  $3,437,181  $833,044  $2,624,918  $0 
Repurchase agreements  237,506   0   0   237,556   233,238   0   0   233,245 
Federal funds purchased  1,800   0   1,800   0   3,900   0   3,900   0 
Advances from Federal Home Loan Bank  431   0   461   0   426   0   458   0 
Long-term debt  59,341   0   0   44,166   59,341   0   0   44,166 
Accrued interest payable  3,983   0   3,983   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, 2018 and indicates the level within the fair value hierarchy of the valuation techniques.


     
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 



    
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 10 – Earnings Per Share



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


 Three Months Ended 
 March 30  
Three Months Ended
June 30
  
Six Months Ended
June 30
 
(in thousands except per share data) 2019  2018  2019  2018  2019  2018 
Numerator:                  
Net income $14,939  $15,814  $18,324  $11,599  $33,263  $27,413 
                        
Denominator:                        
Basic earnings per share:                        
Weighted average shares  17,712   17,671   17,721   17,687   17,717   17,679 
Diluted earnings per share:                        
Effect of dilutive stock options and restricted stock grants  11   16   12   16   11   16 
Adjusted weighted average shares  17,723   17,687   17,733   17,703   17,728   17,695 
                        
Earnings per share:                        
Basic earnings per share $0.84  $0.89  $1.03  $0.66  $1.88  $1.55 
Diluted earnings per share  0.84   0.89   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 March 31,June 30, 2019 and 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 11 – 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 March 31,June 30, 2019 and 2018 were:


 Amounts Reclassified from AOCI  Amounts Reclassified from AOCI 
(in thousands) 
Three Months Ended
March 31
 
 
Three Months Ended
June 30
  
Six Months Ended
June 30
 
(in thousands) 2019  2018  2019  2018  2019  2018 
 
Securities gains $1  $149  $5  $2  $6  $151 
Tax expense  0   31   1   0   2   32 
Total reclassifications out of AOCI $1  $118  $4  $2  $4  $119 


Note 12 – Subsequent Events

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.


Subsequent to quarter end, in April 2019, Kentucky enacted HB458.  HB458 allows for combined 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 estimated tax benefit to reverse the valuation allowance on the deferred tax asset for these losses is expected to be approximately $3.0 million and will be recorded in the second quarter 2019. 


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:


● Our Business

❖Our Business

● Results of Operations and Financial Condition

❖Results of Operations and Financial Condition

● Dividends

❖Dividends

● Liquidity and Market Risk

❖Liquidity and Market Risk

● Interest Rate Risk

❖Interest Rate Risk

● Capital Resources

❖Capital Resources

● Impact of Inflation, Changing Prices, and Economic Conditions

❖Impact of Inflation, Changing Prices, and Economic Conditions

● Stock Repurchase Program

❖Stock Repurchase Program

● Critical Accounting Policies and Estimates

❖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 seventy-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 March 31,June 30, 2019, we had total consolidated assets of $4.3$4.4 billion and total consolidated deposits, including repurchase agreements, of $3.6$3.7 billion.  Total shareholders’ equity at March 31,June 30, 2019 was $577.5$594.7 million.  Trust assets under management, which are excluded from CTBI’s total consolidated assets, at March 31,June 30, 2019, were $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, 2018.


Results of Operations and Financial Condition


We reported record earnings for the firstsecond quarter 2019 of $14.9$18.3 million, or $0.84$1.03 per basic share, compared to $15.7$14.9 million, or $0.89 per basic share, earned during the fourth quarter 2018 and $15.8 million, or $0.89$0.84 per basic share, earned during the first quarter 2019 and $11.6 million, or $0.66 per basic share, earned during the second quarter 2018.  Earnings for the six months ended June 30, 2019 were $33.3 million, or $1.88 per basic share, compared to $27.4 million, or $1.55 per basic share, earned during the six months ended June 30, 2018.


Quarterly Highlights


●❖Net interest income for the quarter of $36.0 million was a decrease of $0.3 million, or 0.8%, from fourthflat to prior quarter, 2018 but an increase of $1.4$0.9 million, or 4.0%2.5%, from prior year first quarter.second quarter 2018.


●❖Provision for loan losses for the quarter ended March 31,June 30, 2019 decreased $1.6increased $1.4 million from prior quarter and $0.8but decreased $0.4 million from prior year same quarter with improvement in charge-offs and credit metrics combined with a decline in loan volume during the quarter.


●❖Our loan portfolio decreased $18.9increased $2.5 million, an annualized 2.4%0.3%, during the quarter but increased $71.5decreased $16.4 million, or 2.3%an annualized 1.0%, from MarchDecember 31, 2018.


●❖Net loan charge-offs for the quarter ended March 31,June 30, 2019 were $1.1$1.6 million, or 0.14%0.20% of average loans annualized, compared to $1.6$1.1 million, or 0.20%0.14%, experienced for the fourthfirst quarter 20182019 and $1.9$1.3 million, or 0.25%0.17%, for the firstsecond quarter 2018.


●❖Nonperforming loans at $25.4$24.0 million increased $3.3decreased $1.4 million from DecemberMarch 31, 20182019 but decreased $0.6increased $1.9 million from MarchDecember 31, 2018.  Nonperforming assets at $50.4$46.5 million increased $1.0decreased $3.9 million from March 31, 2019 and $2.9 million from December 31, 2018 but decreased $7.7 million from March 31, 2018.


●❖Deposits, including repurchase agreements, increased $81.9$49.8 million, an annualized 9.4%5.5%, during the quarter and $56.1$131.8 million, or 1.6%an annualized 7.5%, from MarchDecember 31, 2018.


●❖
Noninterest income for the quarter ended March 31,June 30, 2019 of $12.2$12.3 million was relatively flat toa $0.1 million increase over prior quarter, but a decrease of $1.1$1.5 million, or 8.6%10.8%, from prior year same quarter.  The decrease in noninterest income from prior year was primarily the result of $1.2 million in death benefits received on bank owned life insurance in the first quarter 2018..


●❖Noninterest expense for the quarter ended March 31,June 30, 2019 of $29.1$30.0 million increased $0.9 million, or 3.2%3.3%, from prior quarter, and $0.4but decreased $2.4 million, or 1.4%7.4%, from prior year same quarter.  The increase in noninterest expense was primarily due to increased personnel expense.


●❖In MarchApril 2019, Kentucky enacted legislation requiring financial institutionsHB458.  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 transition frombe utilized on a bank franchise taxcombined return.  CTBI expects to the Kentucky corporate income taxfile a combined return, beginning in 2021.  As a result, we booked a one-time charge of $1.02021, 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, or $0.06$0.21 per basic share, to income tax expense to recognize our Kentucky deferred tax liability at March 31, 2019.  While this liability will be adjusted periodically, we do not anticipate any further adjustments to have a significant impact to income.share.


Subsequent to quarter end, in April 2019, Kentucky enacted HB458.  HB458 allows for combined 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 estimated tax benefit to reverse the valuation allowance on the deferred tax asset for these losses is expected to be approximately $3.0 million and will be recorded in the second quarter 2019.

Income Statement Review


(dollars in thousands)       Change 2019 vs. 2018      Change 2019 vs. 2018 
Three Months Ended March 31 2019  2018  Amount  Percent 
Six Months Ended June 30 2019 2018 Amount Percent 
Net interest income $35,983  $34,591  $1,392   4.0% $72,010 $69,739 $2,271 3.3%
Provision for loan losses  190   946   (756)  (79.9) 1,753 2,875 (1,122) (39.0)
Noninterest income  12,170   13,310   (1,140)  (8.6) 24,422 27,050 (2,628) (9.7)
Noninterest expense  29,083   28,681   402   1.4  59,113 61,120 (2,007) (3.3)
Income taxes  3,941   2,460   1,481   60.2   2,303 5,381 (3,078) (57.2)
Net income $14,939  $15,814  $(875)  (5.5)% $33,263 $27,413 $5,850 21.3%
                         
Average earning assets $3,966,483  $3,870,242  $96,241   2.5% $4,018,187 $3,899,314 $118,873 3.0%
                         
Yield on average earnings assets,
tax equivalent*
  4.71%  4.28%  0.43%  10.3% 4.67% 4.30% 0.37% 8.8%
Cost of interest bearing funds  1.43%  0.87%  0.56%  63.5% 1.46% 0.93% 0.53% 58.1%
Net interest margin, tax equivalent*  3.70%  3.65%  0.05%  1.5% 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.


Net Interest Income


Net interest income for the quarter of $36.0 million was a decrease of $0.3 million, or 0.8%, from fourthrelatively flat to prior quarter, 2018 but an increase of $1.4$0.9 million, or 4.0%2.5%, from prior year first quarter.second quarter 2018.  Our net interest margin at 3.70% was an increase of 23.57% declined 13 basis points from prior quarter and 54 basis points from prior year same quarter, while our average earning assets increased $29.4$102.8 million and $96.2$141.3 million, respectively, during those same periods.  Our yield on average earning assets increased 13decreased 8 basis points from prior quarter and 43but increased 32 basis points from prior year same quarter, and our cost of funds increased 167 basis points from prior quarter and 5652 basis points from prior year same quarter.  Our ratio of average loans to deposits, including repurchase agreements, was 87.3% for the quarter ended June 30, 2019 compared to 89.9% for the quarter ended March 31, 2019 compared to 89.8%and 88.1% for the quarter ended December 31, 2018 and 88.6%June 30, 2018.  Net interest income for the quartersix months ended March 31,June 30, 2019 increased $2.3 million, or 3.3%, from June 30, 2018.


Provision for Loan Losses


The provision for loan losses that was added to the allowance for the firstsecond quarter 2019 was $0.2$1.6 million compared to $1.7 million for the quarter ended December 31, 2018 and $0.9$0.2 million for the quarter ended March 31, 2019 and $1.9 million for the quarter ended June 30, 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.  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, 2019 was 146.0% compared to 137.8% at March 31, 2019 was 137.8% compared to 162.7%and 162.6% at December 31, 2018 and 135.6% at March 31,June 30, 2018.  Our loan loss reserve as a percentage of total loans outstanding remained at 1.10% from March 31, 2019 was 1.10%,to June 30, 2019, down from the 1.12% at December 31, 2018 and 1.13% at March 31,June 30, 2018.  The decrease in our provision for loan losses was driven by the improvement in our twelve quarter performance metrics used in determining the allowance for loan losses, along with the 14 basis points in annualized net charge-offs for the quarter.  The twelve quarter performance metrics that have contributed to the majority of the reduction in required reserves include:  (1) historical losses, (2) delinquency trends, and (3) interest rate risks associated with rising interest rates.


Noninterest Income


Noninterest income for the quarter ended March 31,June 30, 2019 of $12.2$12.3 million was relatively flat toa $0.1 million increase over prior quarter, but a decrease of $1.1$1.5 million, or 8.6%10.8%, from prior year same quarter.  The decrease in noninterest income from prior year was primarily the result of $1.2 million in death benefits received on bank owned life insurance in the first quarter 2018.  Noninterest income for the quarter was also impacted by decreased deposit service charges ($0.1 million), trust revenue ($0.4 million), and loan related fees ($0.6 million) year over year, offset by a positive variance in securities gains of $0.6 million and miscellaneous income of $0.5 million resulting from an adjustment of a mortgage servicing account held by a third party.  The decrease in loan related fees was the result ofdue 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 March 31,June 30, 2019 of $29.1$30.0 million increased $0.9 million, or 3.2%3.3%, from prior quarter, and $0.4but decreased $2.4 million, or 1.4%7.4%, from prior year same quarter.  The increase in noninterest expense from prior quarter consisted 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 decrease in repossession expense.  The $0.4 million increase in other direct expense was primarilythe result of increased amortization expense related to tax credits.  The decrease from prior year was due to increasedthe previously disclosed $3.6 million accrual in June 2018 for customer reimbursements, partially offset by a $0.7 million increase in personnel expense.  The $0.7 million quarter over quarter increase in personnel expense included increasesa $0.9 million increase in salaries, ($0.3 million), bonuses ($0.5 million), and related taxes ($0.2 million), partially offset by a decrease in the cost of group medical and life insurance ($0.3 million).  The $0.3 million prior year same quarter variance in personnel expense was primarily due to increased salaries ($0.5 million) and other employee benefits ($0.1 million), offset by a $0.4 million decrease in the cost of group medical and life insurance.  Noninterest expense for the six months ended June 30, 2019 was $59.1 million, a $2.0 million, or 3.3%, decrease from the first six months of 2018.


Balance Sheet Review


CTBI’s total assets at $4.3$4.4 billion increased $111.7$64.0 million, or 10.8%5.9% annualized, from DecemberMarch 31, 20182019 and $117.6$175.6 million, or 2.8%,8.4% annualized, from MarchDecember 31, 2018.  Loans outstanding at March 31,June 30, 2019 were $3.2 billion, a decreasean increase of $18.9$2.5 million, an annualized 2.4%, from December 31, 2018 but an increase of $71.5 million, or 2.3%0.3%, from March 31, 2019 but a decrease of $16.4 million, or 1.0% annualized, from December 31, 2018.  We experienced an increaseincreases during the quarter of $2.8$2.0 million in the commercial loan portfolio, offset by decreases of $15.7 million in the indirect loan portfolio, $3.6$7.1 million in the residential loan portfolio, and $2.4$3.3 million in the direct consumer loan portfolio, offset by a decrease of $9.9 million in the indirect consumer loan portfolio.  CTBI’s investment portfolio increased $5.9decreased $7.5 million, or an annualized 4.0%5.0%, from DecemberMarch 31, 2018 but decreased $4.12019 and $2.2 million, or 0.7%, annualized, from MarchDecember 31, 2018.  Deposits in other banks increased $121.9$67.8 million from prior quarterMarch 31, 2019 and $43.8$189.7 million from prior year same quarter,December 31, 2018, as the yield earned was favorable to other investment alternatives.  Deposits, including repurchase agreements, at $3.6$3.7 billion increased $81.9$49.8 million, or an annualized 9.4%, from December 31, 2018 and $56.1 million, or 1.6%5.5%, from March 31, 2019 and $131.8 million, or 7.5% annualized, from December 31, 2018.


Shareholders’ equity at March 31,June 30, 2019 was $577.5$594.7 million, a 9.6%11.9% annualized increase from the $564.1$577.5 million at DecemberMarch 31, 20182019 and a 7.4%10.9% annualized increase from the $537.5$564.2 million at MarchDecember 31, 2018.  Our tangible common equity/tangible assets ratio at March 31,June 30, 2019 was 12.05%12.27%.


Loans


(in thousands) March 31, 2019  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 $75,364   (8.9)% $3  $618  $903  $65,771 (20.5)% $(65) $546 $799 
Secured by real estate  1,182,804   0.0   (18)  12,761   14,800  1,192,768 0.8 (254) 11,471 15,098 
Equipment lease financing  1,354   (22.2)  0   0   10  962 (44.7) 0 0 7 
Commercial other  388,060   2.9   (158)  1,663   5,217  390,048 3.4 (723) 1,175 4,889 
Total commercial  1,647,582   0.2   (173)  15,042   20,930  1,649,549 0.3 (1,042) 13,192 20,793 
                               
Residential:                               
Real estate construction  54,013   (5.5)  0   295   396  57,017 (0.3) 0 285 358 
Real estate mortgage  720,292   (0.3)  (102)  8,894   4,053  722,573 0.0 (267) 9,305 4,187 
Home equity  108,018   1.6   (24)  743   901  109,831 3.3 (58) 938 933 
Total residential  882,323   (0.4)  (126)  9,932   5,350  889,421 0.4 (325) 10,528 5,478 
                               
Consumer:                               
Consumer direct  141,855   (1.7)  (129)  30   1,635  145,149 0.6 (397) 40 1,767 
Consumer indirect  517,972   (3.0)  (666)  390   7,089  508,088 (4.8) (899) 218 6,960 
Total consumer  659,827   (2.7)  (795)  420   8,724  653,237 (3.7) (1,296) 258 8,727 
                               
Total loans $3,189,732   (0.6)% $(1,094) $25,394  $35,004  $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 $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 compared toand $22.1 million, or 0.69% of total loans, at December 31, 2018 and $25.9 million, or 0.83% of total loans, at March 31, 2018.  Accruing loans 90+ days past due increased $2.8decreased $1.9 million from prior quarter and $4.0but increased $0.9 million from MarchDecember 31, 2018.  The increase in accruing loans 90+ days past due is primarily attributable to two commercial credit relationships which are income-producing, well-collateralized, and in the process of collection.  Nonaccrual loans increased $0.5 million during the quarter but decreased $4.5and $1.0 million from December 31, 2018.  Accruing loans 30-89 days past due at $21.8$30.6 million was a decreasean increase of $0.9$8.8 million from prior quarter but an increase of $4.9and $7.9 million from MarchDecember 31, 2018.  The increase in loans 30-89 days past due is primarily two credits, both of which 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 March 31,June 30, 2019 totaled $50.4$54.6 million, compared to $50.4 million at March 31, 2018 and $46.4 million at December 31, 2018 and $48.2 million at March 31, 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 $22.5 million at June 30, 2019 was a $2.5 million decrease from the $25.0 million at March 31, 2019 wasand a $2.3$4.8 million decrease from the $27.3 million at December 31, 2018 and a $7.0 million decrease from the $32.0 million at March 31, 2018.  Sales of foreclosed properties for the quartersix months ended March 31,June 30, 2019 totaled $2.7$4.8 million while new foreclosed properties totaled $0.9$1.2 million.  At March 31,June 30, 2019, the book value of properties under contracts to sell was $3.0$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 firstsecond quarter 2019 to reflect the decrease in current market values of foreclosed properties totaled $0.4$0.7 million.  There were thirteensix properties reappraised during the firstsecond quarter 2019.  Of these, ninefour properties were written down by a total of $0.3$0.1 million.  Charges to earnings during the quarters ended December 31, 2018 and March 31, 2019 and June 30, 2018 were $0.5 million.$0.4 million and $0.9 million, respectively.  Charges to earnings for the six months ended June 30, 2019 were $1.1 million compared to $1.3 million for the six months ended June 30, 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-threeninety-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 March 31,June 30, 2019 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 Number of Properties  Current Book Value Holding Period Current Book Value 
Number of
Properties
Current Book
Value
Holding Period
Current Book
Value
Up to 3 months  17  $2,902 Less than one year $3,059 7$897Less than one year$2,819
3 to 6 months  11   844 1 year  2,189 192,5831 year1,559
6 to 9 months  36   2,675 2 years  773 83612 years437
9 to 12 months  22   4,875 3 years  5,287 312,4503 years5,663
12 to 18 months  21   1,686 4 years  2,310 375,4234 years922
18 to 24 months  7   11,970 5 years  527 23,3155 years1,004
Over 24 months  1   18 6 years*  1,041 37,5076 years*6
Total  115  $24,970 7 years*  8,415 107$22,5367 years*8,600
        8 years*  113   8 years*963
        9 years*  1,256   9 years*563
        Total $24,970   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, we will be required to relinquish ownership of that property.


As disclosed above, CTBI is required to dispose of any foreclosed property that has not been sold within 10 years.  As of December 31, 2018, foreclosed property with a total book value of $2.4 million had been held by us for at least nine years.  During the first quarter 2019, $1.0 million of this total was disposed of with a gain of $0.1 million.  As of March 31,June 30, 2019, foreclosed property with a total book value of $1.3$0.6 million, representing 5% of2.5% or our foreclosed properties (based on book value), had been held by us for at least nine years.  The book value at March 31,June 30, 2019 represents management’s best estimate of realizable value of the properties.

Net loan charge-offs for the quarter ended March 31,June 30, 2019 were $1.1$1.6 million, or 0.14%0.20% of average loans annualized, compared to $1.6$1.1 million, or 0.20%0.14%, experienced for the fourthfirst quarter 20182019 and $1.9$1.3 million, or 0.25%0.17%, for the firstsecond quarter 2018.  Net loan charge-offs for the six months ended June 30, 2019 were $2.7 million, or 0.17% of average loans, compared to $3.3 million, or 0.21% of average loans, experienced for the six month ended June 30, 2018.  Of the net charge-offs for the quarter, $0.2six months, $1.1 million were in commercial loans, $0.7$0.9 million were in indirect autoconsumer loans, $0.1$0.3 million were in residential loans, and $0.1$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 
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 
January 1, 2018December 15, 2017 $0.33 
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 23, 2019, the Board of Directors of CTBI declared a quarterly cash dividend of $0.38 per share to be paid on October 1, 2019 to shareholders of record on September 15, 2019.  This represents an increase of 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 March 31,June 30, 2019, we had approximately $253.9$321.6 million in cash and cash equivalents and approximately $599.3$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 $141.5 million and $593.7 million at December 31, 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 March 31,June 30, 2019, we had wholesale brokered deposits outstanding of $42.3 million with a weighted average maturity of 1.331.08 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 $0.4 million at March 31,June 30, 2019 and December 31, 2018.  As of March 31,June 30, 2019, we had a $329.3$341.3 million available borrowing position with the Federal Home Loan Bank compared to $312.2 million at December 31, 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 March 31,June 30, 2019 and December 31, 2018, we had $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 March 31,June 30, 2019 were deposits with the Federal Reserve of $197.1$265.0 million compared to $73.5 million at December 31, 2018.  At MarchDecember 31, 2019,2018, cash and cash equivalents included federal funds sold of $4.5 million compared to $1.1 million at December 31, 2018.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 March 31,June 30, 2019, available-for-sale (“AFS”) securities comprised substantially allof the total investment portfolio, and the AFS portfoliowas approximately 104% 99%of equity capital.  Eighty-sevenEighty-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 $577.5$594.7 million at March 31,June 30, 2019 and $564.2 million at December 31, 2018.  CTBI’s annualized dividend yield to shareholders as of March 31,June 30, 2019 was 3.51%3.41%.  Our primary source of capital growth is the retention of earnings.  Cash dividends were $0.36$0.72 per share and $0.33$0.66 per share for the threesix months ended March 31,June 30, 2019 and 2018, respectively.  We retained 57.1%61.7% of our earnings for the first threesix months of 2019 compared to 62.9%57.4% for the first threesix months of 2018.


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

The rules included new risk-based capital and leverage ratios, which were phased in from 2015 to January 2019, and refined the definition of what constitutes “capital” for purposes of calculating those ratios.  The minimum capital level requirements applicable to CTBI and CTB under the final rules are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4% for all institutions.  The final rules also established 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 increased 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 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 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%; (iii) a total capital ratio of 10%; and (iv) a Tier 1 leverage ratio of 5%.  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 March 31,June 30, 2019, CTBI had a common equity Tier 1 capital ratio of 16.49%16.83%, a Tier 1 capital ratio of 18.34%18.67%, a total capital ratio of 19.47%19.80%, and a Tier 1 leverage ratio of 13.62%13.61%.  Our capital conservation buffer at March 31,June 30, 2019 was 11.47%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 March 31,June 30, 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 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 trade 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, Investments – Debt Securities, investments in debt securities that are not classified as held-to-maturity shall be classified in one of the following categories and measured at fair value in the statement of financial position:
a. Trading securities. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) shall be classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price.
b. Available-for-sale securities. Investments not classified as trading securities (nor as held-to-maturity securities) shall be classified as available-for-sale securities.
We do not have any securities that are classified as trading securities.  Available-for-sale securities are reported at fair value, with unrealized gains and losses included as a separate component of shareholders’ equity, net of tax.  If declines in fair value are other than temporary, the carrying value of the securities is written down to fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not credit related.

Gains or losses on disposition of debt securities are computed by specific identification for 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 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 March 31,June 30, 2019 and 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 5.715.87 percent over one year and 9.048.52 percent over two years.  A 200 basis point decrease in the yield curve would decrease net interest income by an estimated 5.525.82 percent over one year and 8.989.42 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, 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 March 31,June 30, 2019 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 March 31,June 30, 2019 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:  May 9,August 8, 2019
By:
/s/ Jean R. Hale
 
 Jean R. Hale
 
 Chairman, President, and Chief Executive Officer
 
 
/s/ Kevin J. Stumbo
 
 Kevin J. Stumbo
 
 Executive Vice President, Chief Financial Officer, and Treasurer
 and Treasurer