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

FORM 10-Q

☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended 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)

Kentucky
61-0979818
(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)

ctbi
NASDAQ
(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  ☐
Non-accelerated Filer  ☐
     
Smaller Reporting Company ☐
Emerging 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 – 17,777,251 shares outstanding at July 31, 2019

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)
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
June 30
   
Six Months Ended
June 30
 
(in thousands except per share data)
 
2019
   
2018
   
2019
   
2018
 
Interest income:
                       
Interest and fees on loans, including loans held for sale
 
$
41,318
   
$
37,791
   
$
82,228
   
$
74,368
 
Interest and dividends on securities
                               
Taxable
   
3,089
     
2,422
     
6,252
     
4,892
 
Tax exempt
   
580
     
706
     
1,258
     
1,403
 
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock
   
261
     
328
     
557
     
661
 
Interest on Federal Reserve Bank deposits
   
1,525
     
713
     
2,311
     
1,152
 
Other, including interest on federal funds sold
   
44
     
65
     
100
     
129
 
Total interest income
   
46,817
     
42,025
     
92,706
     
82,605
 
                                 
Interest expense:
                               
Interest on deposits
   
8,956
     
5,585
     
17,031
     
10,457
 
Interest on repurchase agreements and federal funds purchased
   
1,191
     
723
     
2,347
     
1,358
 
Interest on advances from Federal Home Loan Bank
   
0
     
2
     
39
     
4
 
Interest on long-term debt
   
643
     
567
     
1,279
     
1,047
 
Total interest expense
   
10,790
     
6,877
     
20,696
     
12,866
 
                                 
Net interest income
   
36,027
     
35,148
     
72,010
     
69,739
 
Provision for loan losses
   
1,563
     
1,929
     
1,753
     
2,875
 
Net interest income after provision for loan losses
   
34,464
     
33,219
     
70,257
     
66,864
 
                                 
Noninterest income:
                               
Service charges on deposit accounts
   
6,525
     
6,480
     
12,645
     
12,701
 
Gains on sales of loans, net
   
518
     
304
     
848
     
583
 
Trust and wealth management income
   
2,765
     
2,856
     
5,340
     
5,814
 
Loan related fees
   
440
     
919
     
1,013
     
2,063
 
Bank owned life insurance
   
689
     
793
     
1,247
     
2,557
 
Brokerage revenue
   
299
     
440
     
560
     
723
 
Securities gains (losses)
   
204
     
2
     
560
     
(286
)
Other noninterest income
   
812
     
1,946
     
2,209
     
2,895
 
Total noninterest income
   
12,252
     
13,740
     
24,422
     
27,050
 
                                 
Noninterest expense:
                               
Officer salaries and employee benefits
   
3,297
     
3,220
     
6,671
     
6,434
 
Other salaries and employee benefits
   
12,790
     
12,202
     
25,375
     
24,607
 
Occupancy, net
   
1,812
     
2,043
     
3,863
     
4,159
 
Equipment
   
749
     
727
     
1,488
     
1,444
 
Data processing
   
1,789
     
1,634
     
3,552
     
3,270
 
Bank franchise tax
   
1,683
     
1,577
     
3,398
     
3,278
 
Legal fees
   
424
     
428
     
854
     
902
 
Professional fees
   
546
     
495
     
1,077
     
997
 
Advertising and marketing
   
874
     
876
     
1,666
     
1,608
 
FDIC insurance
   
369
     
279
     
546
     
593
 
Other real estate owned provision and expense
   
1,024
     
1,315
     
1,795
     
2,254
 
Repossession expense
   
112
     
304
     
489
     
713
 
Amortization of limited partnership investments
   
1,166
     
716
     
1,943
     
1,216
 
Other noninterest expense
   
3,395
     
6,623
     
6,396
     
9,645
 
Total noninterest expense
   
30,030
     
32,439
     
59,113
     
61,120
 
                                 
Income before income taxes
   
16,686
     
14,520
     
35,566
     
32,794
 
Income taxes
   
(1,638
)
   
2,921
     
2,303
     
5,381
 
Net income
   
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
   
6,522
     
(1,811
)
   
12,646
     
(7,309
)
Less: Reclassification adjustments for realized gains included in net income
   
5
     
2
     
6
     
151
 
Tax expense (benefit)
   
1,690
     
(381
)
   
2,976
     
(1,567
)
Other comprehensive income (loss), net of tax
   
4,827
     
(1,432
)
   
9,664
     
(5,893
)
Comprehensive income
 
$
23,151
   
$
10,167
   
$
42,927
   
$
21,520
 
                                 
Basic earnings per share
 
$
1.03
   
$
0.66
   
$
1.88
   
$
1.55
 
Diluted earnings per share
 
$
1.03
   
$
0.66
   
$
1.88
   
$
1.55
 
                                 
Weighted average shares outstanding-basic
   
17,721
     
17,687
     
17,717
     
17,679
 
Weighted average shares outstanding-diluted
   
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
 
Balance, December 31, 2017
   
17,692,912
   
$
88,465
   
$
221,472
   
$
224,268
   
$
(3,506
)
 
$
530,699
 
Net income
                           
15,814
             
15,814
 
Other comprehensive loss, net of tax of $ (1,186)
                                   
(4,461
)
   
(4,461
)
Cash dividends declared ($ 0.33 per share)
                           
(5,836
)
           
(5,836
)
Issuance of common stock
   
29,087
     
145
     
451
                     
596
 
Vesting of restricted stock
   
(12,582
)
   
(63
)
   
63
                     
0
 
Issuance of restricted stock
   
11,435
     
57
     
(57
)
                   
0
 
Forfeiture of restricted stock
   
(115
)
   
(1
)
   
1
                     
0
 
Stock-based compensation
                   
224
                     
224
 
Implementation of ASU 2014-09
                           
453
             
453
 
Implementation of ASU 2016-01
                           
(507
)
   
507
     
0
 
Balance, March 31, 2018
   
17,720,737
   
$
88,603
   
$
222,154
   
$
234,192
   
$
(7,460
)
 
$
537,489
 
Net income
                           
11,599
             
11,599
 
Other comprehensive loss, net of tax of
 $ (381)
                                   
(1,432
)
   
(1,432
)
Cash dividends declared ($ 0.33 per share)
                           
(5,836
)
           
(5,836
)
Issuance of common stock
   
3,991
     
20
     
184
                     
204
 
Vesting of restricted stock
   
585
     
3
     
(3
)
                   
0
 
Stock-based compensation
                   
151
                     
151
 
Balance, June 30, 2018
   
17,725,313
   
$
88,626
   
$
222,486
   
$
239,955
   
$
(8,892
)
 
$
542,175
 

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

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

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

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

See notes to condensed consolidated financial statements.

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

 
Six Months Ended
June 30
 
(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 June 30, 2019, 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 six months ended 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 six months ended 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 –


➢              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 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.


➢              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.


➢              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.


➢              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 policy for timing of transfers between levels
•
The valuation processes for Level 3 fair value measurements

Modifications


The following disclosure requirements were modified in Topic 820:

•
For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and 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.


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 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.


➢            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 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 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. 

Note 2 – Stock-Based Compensation


CTBI’s compensation expense related to stock option grants was $ 10 thousand and $ 21 thousand, respectively, for the three and six months ended June 30, 2019, and $ 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 June 30, 2019 was $ 222 thousand and $ 411 thousand, respectively, including $ 18 thousand and $ 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 June 30, 2019, there was a total of $ 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 0.5 years and a total of $ 1.8 million of unrecognized compensation expense related to restricted stock grants that will be recognized as expense as the awards vest over a weighted average period of 2.9 years.


There were no stock options granted in the first six months of both 2019 and 2018.  There were 27,921 and 11,320 shares of restricted stock granted during the six months ended 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 .  However, in the event of certain participant employee termination events occurring within 24 months of a change in control of CTBI or the death of the participant, the restrictions will lapse, and in the event of the participant’s disability, the restrictions will lapse on a pro rata basis.  The Compensation Committee will have discretion to review and revise restrictions applicable to a participant’s restricted stock in the event of the participant’s retirement.


Note 3 – Securities


Securities are classified into held-to-maturity and available-for-sale categories.  Held-to-maturity (HTM) securities are those that CTBI has the positive intent and ability to hold to maturity and are reported at amortized cost.  Available-for-sale (AFS) securities are those that CTBI may decide to sell if needed for liquidity, asset-liability management or other reasons.  Available-for-sale securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax.


The amortized cost and fair value of securities at June 30, 2019 are summarized as follows:  

Available-for-Sale

(in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
U.S. Treasury and government agencies
 
$
150,573
   
$
638
   
$
(469
)
 
$
150,742
 
State and political subdivisions
   
103,304
     
2,385
     
(250
)
   
105,439
 
U.S. government sponsored agency mortgage-backed securities
   
331,036
     
3,757
     
(1,788
)
   
333,005
 
Other debt securities
   
2,401
     
0
     
(1
)
   
2,400
 
Total available-for-sale securities
 
$
587,314
   
$
6,780
   
$
(2,508
)
 
$
591,586
 

Held-to-Maturity

(in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
State and political subdivisions
 
$
619
   
$
0
   
$
0
   
$
619
 
Total held-to-maturity securities
 
$
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
 
U.S. Treasury and government agencies
 
$
219,358
   
$
48
   
$
(1,468
)
 
$
217,938
 
State and political subdivisions
   
126,280
     
633
     
(2,425
)
   
124,488
 
U.S. government sponsored agency mortgage-backed securities
   
255,969
     
397
     
(5,547
)
   
250,819
 
Other debt securities
   
507
     
0
     
(6
)
   
501
 
Total available-for-sale securities
 
$
602,114
   
$
1,078
   
$
(9,446
)
 
$
593,746
 

Held-to-Maturity

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



The amortized cost and fair value of debt securities at 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
 
$
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 $ 204 thousand.  There was a pre-tax gain of $ 5 thousand realized on sales and calls of AFS securities consisting of a pre-tax gain of $ 78 thousand and a pre-tax loss of $ 73 thousand, and an unrealized gain of $ 199 thousand from the fair market value adjustment of equity securities.  During the three months ended June 30, 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 million gain on the recognition of the fair value of 9,918 Visa Class B shares held in its portfolio.  Equity securities at fair value as of June 30, 2019 were $ 1.7 million, as a result of a fair market value increase in the second quarter 2019.


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


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



CTBI evaluates its investment portfolio on a quarterly basis for impairment.  The analysis performed as of 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 June 30, 2019 was 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 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 June 30, 2019.

Available-for-Sale

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



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
 
Less Than 12 Months
                 
U.S. Treasury and government agencies
 
$
78,905
   
$
(271
)
 
$
78,634
 
State and political subdivisions
   
21,707
     
(194
)
   
21,513
 
U.S. government sponsored agency mortgage-backed securities
   
61,940
     
(377
)
   
61,563
 
Other debt securities
   
507
     
(6
)
   
501
 
Total <12 months temporarily impaired AFS securities
   
163,059
     
(848
)
   
162,211
 
                         
12 Months or More
                       
U.S. Treasury and government agencies
   
97,955
     
(1,197
)
   
96,758
 
State and political subdivisions
   
51,911
     
(2,231
)
   
49,680
 
U.S. government sponsored agency mortgage-backed securities
   
147,658
     
(5,170
)
   
142,488
 
Other debt securities
   
0
     
0
     
0
 
Total ≥12 months temporarily impaired AFS securities
   
297,524
     
(8,598
)
   
288,926
 
                         
Total
                       
U.S. Treasury and government agencies
   
176,860
     
(1,468
)
   
175,392
 
State and political subdivisions
   
73,618
     
(2,425
)
   
71,193
 
U.S. government sponsored agency mortgage-backed securities
   
209,598
     
(5,547
)
   
204,051
 
Other debt securities
   
507
     
(6
)
   
501
 
Total temporarily impaired AFS securities
 
$
460,583
   
$
(9,446
)
 
$
451,137
 

U.S. Treasury and Government Agencies


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

State and Political Subdivisions


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


U.S. Government Sponsored Agency Mortgage-Backed Securities


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

Other Debt Securities


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

Note 4 – Loans


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

(in thousands)
 
June 30
2019
   
December 31
2018
 
Commercial construction
 
$
65,771
   
$
82,715
 
Commercial secured by real estate
   
1,192,768
     
1,183,093
 
Equipment lease financing
   
962
     
1,740
 
Commercial other
   
390,048
     
377,198
 
Real estate construction
   
57,017
     
57,160
 
Real estate mortgage
   
722,573
     
722,417
 
Home equity
   
109,831
     
106,299
 
Consumer direct
   
145,149
     
144,289
 
Consumer indirect
   
508,088
     
533,727
 
Total loans
 
$
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 included in the loan balances above were loans held for sale in the amount of $1.1 million at 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)
 
June 30
2019
   
December 31
2018
 
Commercial:
           
Commercial construction
 
$
510
   
$
639
 
Commercial secured by real estate
   
5,655
     
4,537
 
Commercial other
   
1,001
     
797
 
                 
Residential:
               
Real estate construction
   
280
     
22
 
Real estate mortgage
   
4,776
     
5,395
 
Home equity
   
680
     
477
 
Total nonaccrual loans
 
$
12,902
   
$
11,867
 



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


 
June 30, 2019
 
(in thousands)
 
30-59 Days
Past Due
   
60-89 Days
Past Due
   
90+ Days
Past Due
   
Total Past
Due
   
Current
   
Total Loans
   
90+ and
Accruing*
 
Commercial:
                                         
Commercial construction
 
$
56
   
$
30
   
$
546
   
$
632
   
$
65,139
   
$
65,771
   
$
36
 
Commercial secured by real estate
   
4,593
     
10,933
     
10,720
     
26,246
     
1,166,522
     
1,192,768
     
5,816
 
Equipment lease financing
   
0
     
0
     
0
     
0
     
962
     
962
     
0
 
Commercial other
   
988
     
2,742
     
822
     
4,552
     
385,496
     
390,048
     
174
 
Residential:
                                                       
Real estate construction
   
290
     
21
     
285
     
596
     
56,421
     
57,017
     
5
 
Real estate mortgage
   
1,104
     
5,170
     
7,401
     
13,675
     
708,898
     
722,573
     
4,529
 
Home equity
   
709
     
325
     
575
     
1,609
     
108,222
     
109,831
     
258
 
Consumer:
                                                       
Consumer direct
   
926
     
178
     
40
     
1,144
     
144,005
     
145,149
     
40
 
Consumer indirect
   
3,514
     
850
     
218
     
4,582
     
503,506
     
508,088
     
218
 
Total
 
$
12,180
   
$
20,249
   
$
20,607
   
$
53,036
   
$
3,139,171
   
$
3,192,207
   
$
11,076
 


 
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*
 
Commercial:
                                         
Commercial construction
 
$
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
 
Equipment lease financing
   
0
     
0
     
0
     
0
     
1,740
     
1,740
     
0
 
Commercial other
   
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
 
Real estate mortgage
   
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
 
Consumer:
                                                       
Consumer direct
   
918
     
191
     
74
     
1,183
     
143,106
     
144,289
     
74
 
Consumer indirect
   
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
 

*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:

➢
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.


➢
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.


➢
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.


➢
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.


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



The following tables present the credit risk profile of CTBI’s commercial loan portfolio based on rating category and payment activity, segregated by class of loans, as of June 30, 2019 and December 31, 2018:

 (in thousands)
 
Commercial
Construction
   
Commercial
Secured by
Real Estate
   
Equipment
Leases
   
Commercial
Other
   
Total
 
June 30, 2019
                             
Pass
 
$
58,755
   
$
1,048,466
   
$
962
   
$
354,284
   
$
1,462,467
 
Watch
   
2,878
     
64,145
     
0
     
13,995
     
81,018
 
OAEM
   
835
     
19,764
     
0
     
5,295
     
25,894
 
Substandard
   
3,303
     
60,305
     
0
     
16,406
     
80,014
 
Doubtful
   
0
     
88
     
0
     
68
     
156
 
Total
 
$
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
 
Watch
   
3,070
     
71,834
     
0
     
28,986
     
103,890
 
OAEM
   
1,594
     
19,734
     
0
     
5,735
     
27,063
 
Substandard
   
3,829
     
53,125
     
0
     
14,970
     
71,924
 
Doubtful
   
0
     
91
     
0
     
76
     
167
 
Total
 
$
82,715
   
$
1,183,093
   
$
1,740
   
$
377,198
   
$
1,644,746
 


The following tables present the credit risk profile of CTBI’s residential real estate and consumer loan portfolios based on performing or nonperforming status, segregated by class, as of  June 30, 2019 and December 31, 2018:

(in thousands)
 
Real Estate
Construction
   
Real Estate
Mortgage
   
Home Equity
   
Consumer
Direct
   
Consumer
Indirect
   
Total
 
June 30, 2019
                                   
Performing
 
$
56,732
   
$
713,268
   
$
108,893
   
$
145,109
   
$
507,870
   
$
1,531,872
 
Nonperforming (1)
   
285
     
9,305
     
938
     
40
     
218
     
10,786
 
Total
 
$
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
 
Nonperforming (1)
   
28
     
9,490
     
723
     
74
     
506
     
10,821
 
Total
 
$
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 $2.9 million at 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 June 30, 2019, December 31, 2018, and June 30, 2018:


 
June 30, 2019
 
(in thousands)
 
Recorded
Balance
   
Unpaid
Contractual
Principal
Balance
   
Specific
Allowance
 
Loans without a specific valuation allowance:
                 
Commercial construction
 
$
3,313
   
$
3,383
   
$
0
 
Commercial secured by real estate
   
35,043
     
36,740
     
0
 
Commercial other
   
10,992
     
13,249
     
0
 
Real estate mortgage
   
2,570
     
2,570
     
0
 
                         
Loans with a specific valuation allowance:
                       
Commercial construction
   
174
     
174
     
99
 
Commercial secured by real estate
   
1,985
     
3,473
     
594
 
Commercial other
   
516
     
516
     
182
 
                         
Totals:
                       
Commercial construction
   
3,487
     
3,557
     
99
 
Commercial secured by real estate
   
37,028
     
40,213
     
594
 
Commercial other
   
11,508
     
13,765
     
182
 
Real estate mortgage
   
2,570
     
2,570
     
0
 
Total
 
$
54,593
   
$
60,105
   
$
875
 


 
Three Months Ended
June 30, 2019
   
Six Months Ended
June 30, 2019
 
(in thousands)
 
Average
Investment
in Impaired
Loans
   
*Interest
Income
Recognized
   
Average
Investment
in Impaired
Loans
   
*Interest
Income
Recognized
 
Loans without a specific valuation allowance:
                       
Commercial construction
 
$
3,419
   
$
49
   
$
3,537
   
$
95
 
Commercial secured by real estate
   
35,259
     
403
     
34,035
     
750
 
Commercial other
   
11,546
     
149
     
10,206
     
288
 
Real estate mortgage
   
2,572
     
22
     
2,451
     
41
 
                                 
Loans with a specific valuation allowance:
                               
Commercial construction
   
189
     
3
     
257
     
6
 
Commercial secured by real estate
   
2,314
     
5
     
2,140
     
15
 
Commercial other
   
514
     
6
     
842
     
23
 
                                 
Totals:
                               
Commercial construction
   
3,608
     
52
     
3,794
     
101
 
Commercial secured by real estate
   
37,573
     
408
     
36,175
     
765
 
Commercial other
   
12,060
     
155
     
11,048
     
311
 
Real estate mortgage
   
2,572
     
22
     
2,451
     
41
 
Total
 
$
55,813
   
$
637
   
$
53,468
   
$
1,218
 



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


 
Three 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
   
5
   
$
3,686
   
$
0
   
$
37
   
$
3,723
 
Commercial other
   
4
     
138
     
0
     
0
     
138
 
Residential:
                                       
Real estate mortgage
   
1
     
0
     
0
     
243
     
243
 
Total troubled debt restructurings
   
10
   
$
3,824
   
$
0
   
$
280
   
$
4,104
 



 
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 no commitments to extend additional credit 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.  Presented below, segregated by class of loans, are loans that were modified as troubled debt restructurings within the past twelve months which have subsequently defaulted.  CTBI considers a loan in default when it is 90 days or more past due or transferred to nonaccrual.

 (in thousands)
 
Three Months Ended
June 30, 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 June 30, 2019, December 31, 2018 and June 30, 2018:


 
Three Months Ended
June 30, 2019
 
(in thousands)
 
Commercial
Construction
   
Commercial
Secured by
Real Estate
   
Equipment
Lease
Financing
   
Commercial
Other
   
Real Estate
Construction
   
Real Estate
Mortgage
   
Home
Equity
   
Consumer
Direct
   
Consumer
Indirect
   
Total
 
Allowance for loan losses
                                                           
Beginning balance
 
$
903
   
$
14,800
   
$
10
   
$
5,217
   
$
396
   
$
4,053
   
$
901
   
$
1,635
   
$
7,089
   
$
35,004
 
Provision charged to expense
   
(36
)
   
533
     
(3
)
   
238
     
(38
)
   
299
     
65
     
400
     
105
     
1,563
 
Losses charged off
   
(71
)
   
(345
)
   
0
     
(824
)
   
0
     
(180
)
   
(34
)
   
(331
)
   
(1,012
)
   
(2,797
)
Recoveries
   
3
     
110
     
0
     
258
     
0
     
15
     
1
     
63
     
778
     
1,228
 
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
 



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



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



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



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


Note 6 – Leases


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


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


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

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


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

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



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

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


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

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

Note 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)
 
2019
   
2018
   
2019
   
2018
 
Beginning balance of other real estate owned
 
$
24,970
   
$
32,004
   
$
27,273
   
$
31,996
 
New assets acquired
   
388
     
1,559
     
1,242
     
2,843
 
Fair value adjustments
   
(692
)
   
(853
)
   
(1,139
)
   
(1,320
)
Sale of assets
   
(2,130
)
   
(2,448
)
   
(4,840
)
   
(3,257
)
Ending balance of other real estate owned
 
$
22,536
   
$
30,262
   
$
22,536
   
$
30,262
 


Carrying costs and fair value adjustments associated with foreclosed properties for the three months ended June 30, 2019 and 2018 were $1.0 million and $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)
 
June 30
2019
   
December 31
2018
 
1-4 family
 
$
3,273
   
$
5,253
 
Agricultural/farmland
   
0
     
0
 
Construction/land development/other
   
13,495
     
15,017
 
Multifamily
   
88
     
88
 
Non-farm/non-residential
   
5,680
     
6,915
 
Total foreclosed properties
 
$
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 $275.1 million and $285.2 million at 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 June 30, 2019 and December 31, 2018 is presented in the following tables:


 
June 30, 2019
 
   
Remaining Contractual Maturity of the Agreements
 
(in thousands)
 
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
 
$
16,713
   
$
7,584
   
$
19,766
   
$
33,000
   
$
77,063
 
State and political subdivisions
   
48,816
     
1,671
     
1,486
     
10,086
     
62,059
 
U.S. government sponsored agency mortgage-backed securities
   
41,755
     
1,745
     
14,254
     
36,362
     
94,116
 
Total
 
$
107,284
   
$
11,000
   
$
35,506
   
$
79,448
   
$
233,238
 


 
December 31, 2018
 
   
Remaining Contractual Maturity of the Agreements
 
(in thousands)
 
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
 
State and political subdivisions
   
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
 
Total
 
$
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 June 30, 2019 and December 31, 2018 and indicate the level within the fair value hierarchy of the valuation techniques.


       
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)
 
Assets measured – recurring basis
                       
Available-for-sale securities:
                       
U.S. Treasury and government agencies
 
$
150,742
   
$
35,668
   
$
115,074
   
$
0
 
State and political subdivisions
   
105,439
     
0
     
105,439
     
0
 
U.S. government sponsored agency mortgage-backed securities
   
333,005
     
0
     
333,005
     
0
 
Other debt securities
   
2,400
     
0
     
2,400
     
0
 
Equity securities at fair value
   
1,727
     
0
     
0
     
1,727
 
Mortgage servicing rights
   
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
 


Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.  These valuation methodologies were applied to all of CTBI’s financial assets carried at fair value.  CTBI had no liabilities measured and recorded at fair value as of June 30, 2019 and December 31, 2018.  There have been no significant changes in the valuation techniques during the quarter or six months ended 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 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.  Accordingly, fair value is determined by the independent third party using an income approach by utilizing assumptions about factors such as quarterly common stock dividend payments, the conversion of the securities to the relevant Class A Stock shares subject to the prevailing conversion rate and conversion date.  We have reviewed the assumptions, processes, and conclusions of the third party provider.  We have determined these assumptions, processes, and conclusions to be reasonable and appropriate in determining the fair value of this asset.  See the table below for inputs and valuation techniques used for Level 3 equity securities.

Mortgage Servicing Rights


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


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

Transfers between Levels


There were no transfers between Levels 1, 2, and 3 as of June 30, 2019.

Level 3 Reconciliation


Following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs for the three and six months ended June 30,   2019 and 2018 :

(in thousands)
 
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
 
Beginning balance
 
$
1,528
   
$
3,390
   
$
0
   
$
3,706
 
Total unrealized gains (losses)
                               
Included in net income
   
199
     
(348
)
   
0
     
68
 
Issues
   
0
     
191
     
0
     
111
 
Settlements
   
0
     
(114
)
   
0
     
(113
)
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
 
$
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
June 30
   
Six Months Ended
June 30
 
(in thousands)
 
2019
   
2018
   
2019
   
2018
 
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 June 30, 2019 and December 31, 2018 and indicate the level within the fair value hierarchy of the valuation techniques.


       
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)
 
Assets measured – nonrecurring basis
                       
Impaired loans (collateral dependent)
 
$
1,343
   
$
0
   
$
0
   
$
1,343
 
Other real estate owned
   
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
 


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

Impaired Loans (Collateral Dependent)


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


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


Loans considered impaired under ASC 310-35, Impairment of a Loan, are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans are subject to nonrecurring fair value adjustments to reflect subsequent (i) partial write-downs that are based on the observable market price or current appraised value of the collateral or (ii) the full charge-off of the loan carrying value.  Quarter-to-date fair value adjustments on impaired loans disclosed above were $0.2 million for the quarter ended June 30, 2019, $0.3 million for the quarter ended December 31, 2018, and $0.2 million for the quarter ended 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 $0.6 million, $0.4 million, and $0.8 million for the quarters ended June 30, 2019, December 31, 2018, and 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 June 30, 2019 and December 31, 2018.

(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
$1,727
Discount cash flows, computer pricing model
Discount rate
8.0% - 12.0%
(10.0%)
     
Conversion date
Dec 2022 – Dec 2026
(Dec 2024)
         
Mortgage servicing rights
$3,119
Discount cash flows, computer pricing model
Constant 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)
$1,343
Market comparable properties
Marketability discount
0.6% - 97.1%
(62.0%)
         
Other real estate owned
$2,271
Market comparable properties
Comparability 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 model
Discount 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 model
Constant 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 properties
Marketability discount
0.0% - 95.1%
(41.5%)
         
Other real estate owned
$6,500
Market comparable properties
Comparability adjustments
6.0% - 47.6%
(14.9%)

Sensitivity of Significant Unobservable Inputs


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

Equity Securities at Fair Value


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

Mortgage Servicing Rights


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


Fair Value of Financial Instruments


The following table presents estimated fair value of CTBI’s financial instruments as of June 30, 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 June 30, 2019 were measured using an exit price notion.


       
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)
 
Financial assets:
                       
Cash and cash equivalents
 
$
321,639
   
$
321,639
   
$
0
   
$
0
 
Certificates of deposit in other banks
   
245
     
0
     
245
     
0
 
Securities available-for-sale
   
591,586
     
35,668
     
555,918
     
0
 
Securities held-to-maturity
   
619
     
0
     
619
     
0
 
Equity securities at fair value
   
1,727
     
0
     
0
     
1,727
 
Loans held for sale
   
1,067
     
1,093
     
0
     
0
 
Loans, net
   
3,157,209
     
0
     
0
     
3,189,802
 
Federal Home Loan Bank stock
   
11,360
     
0
     
11,360
     
0
 
Federal Reserve Bank stock
   
4,887
     
0
     
4,887
     
0
 
Accrued interest receivable
   
14,923
     
0
     
14,923
     
0
 
Mortgage servicing rights
   
3,119
     
0
     
0
     
3,119
 
                                 
Financial liabilities:
                               
Deposits
 
$
3,437,181
   
$
833,044
   
$
2,624,918
   
$
0
 
Repurchase agreements
   
233,238
     
0
     
0
     
233,245
 
Federal funds purchased
   
3,900
     
0
     
3,900
     
0
 
Advances from Federal Home Loan Bank
   
426
     
0
     
458
     
0
 
Long-term debt
   
59,341
     
0
     
0
     
44,166
 
Accrued interest payable
   
5,600
     
0
     
5,600
     
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
 


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
 

Note 10 – Earnings Per Share


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


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



There were no options to purchase common shares that were excluded from the diluted calculations above for the three and six months ended June 30, 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 June 30, 2019 and 2018 were:


 
Amounts Reclassified from AOCI
 
   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
(in thousands)
 
2019
   
2018
   
2019
   
2018
 
Affected line item in the statements of income
                       
Securities gains
 
$
5
   
$
2
   
$
6
   
$
151
 
Tax expense
   
1
     
0
     
2
     
32
 
Total reclassifications out of AOCI
 
$
4
   
$
2
   
$
4
   
$
119
 


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

❖
Results of Operations and Financial Condition

❖
Dividends

❖
Liquidity and Market Risk

❖
Interest Rate Risk

❖
Capital Resources

❖
Impact of Inflation, Changing Prices, and Economic Conditions

❖
Stock Repurchase Program

❖
Critical Accounting Policies and Estimates

Our Business

Community Trust Bancorp, Inc. (“CTBI”) is a bank holding company headquartered in Pikeville, Kentucky.  Currently, we own one commercial bank, Community Trust Bank, Inc. (“CTB”) and one trust company, Community Trust and Investment Company, Inc. (“CTIC”).  Through our subsidiaries, we have 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 June 30, 2019, we had total consolidated assets of $4.4 billion and total consolidated deposits, including repurchase agreements, of $3.7 billion.  Total shareholders’ equity at June 30, 2019 was $594.7 million.  Trust assets under management, which are excluded from CTBI’s total consolidated assets, at 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 second quarter 2019 of $18.3 million, or $1.03 per basic share, compared to $14.9 million, or $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 flat to prior quarter, but an increase of $0.9 million, or 2.5%, from second quarter 2018.

❖
Provision for loan losses for the quarter ended June 30, 2019 increased $1.4 million from prior quarter but decreased $0.4 million from prior year same quarter.

❖
Our loan portfolio increased $2.5 million, an annualized 0.3%, during the quarter but decreased $16.4 million, or an annualized 1.0%, from December 31, 2018.

❖
Net loan charge-offs for the quarter ended June 30, 2019 were $1.6 million, or 0.20% of average loans annualized, compared to $1.1 million, or 0.14%, experienced for the first quarter 2019 and $1.3 million, or 0.17%, for the second quarter 2018.

❖
Nonperforming loans at $24.0 million decreased $1.4 million from March 31, 2019 but increased $1.9 million from December 31, 2018.  Nonperforming assets at $46.5 million decreased $3.9 million from March 31, 2019 and $2.9 million from December 31, 2018.

❖
Deposits, including repurchase agreements, increased $49.8 million, an annualized 5.5%, during the quarter and $131.8 million, or an annualized 7.5%, from December 31, 2018.

❖
Noninterest income for the quarter ended June 30, 2019 of $12.3 million was a $0.1 million increase over prior quarter, but a decrease of $1.5 million, or 10.8%, from prior year same quarter .

❖
Noninterest expense for the quarter ended June 30, 2019 of $30.0 million increased $0.9 million, or 3.3%, from prior quarter, but decreased $2.4 million, or 7.4%, from prior year same quarter.

❖
In April 2019, Kentucky enacted HB458.  HB458 allows for combined filing of state income taxes with CTBI and its subsidiaries, Community Trust Bank, Inc. and Community Trust and Investment Company, Inc.  CTBI had previously filed a separate company return and generated net operating losses, in which it had maintained a valuation allowance against the related deferred tax asset.  HB458 also allows for certain net operating losses to be utilized on a combined return.  CTBI expects to file a combined return, beginning in 2021, and to utilize these previously generated losses.  The 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 $0.21 per basic share.

Income Statement Review

(dollars in thousands)
 
 
 
 
 
 
 
Change 2019 vs. 2018
 
Six Months Ended June 30
 
2019
 
 
2018
 
 
Amount
 
 
Percent
 
Net interest income
 
$
72,010
 
 
$
69,739
 
 
$
2,271
 
 
 
3.3
%
Provision for loan losses
 
 
1,753
 
 
 
2,875
 
 
 
(1,122
)
 
 
(39.0
)
Noninterest income
 
 
24,422
 
 
 
27,050
 
 
 
(2,628
)
 
 
(9.7
)
Noninterest expense
 
 
59,113
 
 
 
61,120
 
 
 
(2,007
)
 
 
(3.3
)
Income taxes
 
 
2,303
 
 
 
5,381
 
 
 
(3,078
)
 
 
(57.2
)
Net income
 
$
33,263
 
 
$
27,413
 
 
$
5,850
 
 
 
21.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average earning assets
 
$
4,018,187
 
 
$
3,899,314
 
 
$
118,873
 
 
 
3.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Yield on average earnings assets, tax equivalent*
 
 
4.67
%
 
 
4.30
%
 
 
0.37
%
 
 
8.8
%
Cost of interest bearing funds
 
 
1.46
%
 
 
0.93
%
 
 
0.53
%
 
 
58.1
%
Net interest margin, tax equivalent*
 
 
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 relatively flat to prior quarter, but an increase of $0.9 million, or 2.5%, from second quarter 2018.  Our net interest margin at 3.57% declined 13 basis points from prior quarter and 4 basis points from prior year same quarter, while our average earning assets increased $102.8 million and $141.3 million, respectively, during those same periods.  Our yield on average earning assets decreased 8 basis points from prior quarter but increased 32 basis points from prior year same quarter, and our cost of funds increased 7 basis points from prior quarter and 52 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 and 88.1% for the quarter ended June 30, 2018.  Net interest income for the six months ended 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 second quarter 2019 was $1.6 million compared to $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 and 162.6% at June 30, 2018.  Our loan loss reserve as a percentage of total loans outstanding remained at 1.10% from March 31, 2019 to June 30, 2019, down from the 1.13% at June 30, 2018.

Noninterest Income

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

Noninterest Expense

Noninterest expense for the quarter ended June 30, 2019 of $30.0 million increased $0.9 million, or 3.3%, from prior quarter, but decreased $2.4 million, or 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 the result of increased amortization expense related to tax credits.  The decrease from prior year was due to the previously disclosed $3.6 million accrual in June 2018 for customer reimbursements, partially offset by a $0.7 million increase in personnel expense.  The increase in personnel expense included a $0.9 million increase in salaries, partially offset by a $0.3 million decrease in the cost of group medical 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 $4.4 billion increased $64.0 million, or 5.9% annualized, from March 31, 2019 and $175.6 million, or 8.4% annualized, from December 31, 2018.  Loans outstanding at June 30, 2019 were $3.2 billion, an increase of $2.5 million, an annualized 0.3%, from March 31, 2019 but a decrease of $16.4 million, or 1.0% annualized, from December 31, 2018.  We experienced increases during the quarter of $2.0 million in the commercial loan portfolio, $7.1 million in the residential loan portfolio, and $3.3 million in the direct consumer loan portfolio, offset by a decrease of $9.9 million in the indirect consumer loan portfolio.  CTBI’s investment portfolio decreased $7.5 million, or an annualized 5.0%, from March 31, 2019 and $2.2 million, or 0.7% annualized, from December 31, 2018.  Deposits in other banks increased $67.8 million from March 31, 2019 and $189.7 million from December 31, 2018, as the yield earned was favorable to other investment alternatives.  Deposits, including repurchase agreements, at $3.7 billion increased $49.8 million, or an annualized 5.5%, from March 31, 2019 and $131.8 million, or 7.5% annualized, from December 31, 2018.

Shareholders’ equity at June 30, 2019 was $594.7 million, a 11.9% annualized increase from the $577.5 million at March 31, 2019 and a 10.9% annualized increase from the $564.2 million at December 31, 2018.  Our tangible common equity/tangible assets ratio at June 30, 2019 was 12.27%.

Loans

(in thousands)
 
June 30, 2019
 
Loan Category
 
Balance
 
 
Variance
from Prior
Year-End
 
 
YTD
Net Charge-
Offs
 
 
Nonperforming
 
 
ALLL
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
$
65,771
 
 
 
(20.5
)%
 
$
(65
)
 
$
546
 
 
$
799
 
Secured by real estate
 
 
1,192,768
 
 
 
0.8
 
 
 
(254
)
 
 
11,471
 
 
 
15,098
 
Equipment lease financing
 
 
962
 
 
 
(44.7
)
 
 
0
 
 
 
0
 
 
 
7
 
Commercial other
 
 
390,048
 
 
 
3.4
 
 
 
(723
)
 
 
1,175
 
 
 
4,889
 
Total commercial
 
 
1,649,549
 
 
 
0.3
 
 
 
(1,042
)
 
 
13,192
 
 
 
20,793
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate construction
 
 
57,017
 
 
 
(0.3
)
 
 
0
 
 
 
285
 
 
 
358
 
Real estate mortgage
 
 
722,573
 
 
 
0.0
 
 
 
(267
)
 
 
9,305
 
 
 
4,187
 
Home equity
 
 
109,831
 
 
 
3.3
 
 
 
(58
)
 
 
938
 
 
 
933
 
Total residential
 
 
889,421
 
 
 
0.4
 
 
 
(325
)
 
 
10,528
 
 
 
5,478
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer direct
 
 
145,149
 
 
 
0.6
 
 
 
(397
)
 
 
40
 
 
 
1,767
 
Consumer indirect
 
 
508,088
 
 
 
(4.8
)
 
 
(899
)
 
 
218
 
 
 
6,960
 
Total consumer
 
 
653,237
 
 
 
(3.7
)
 
 
(1,296
)
 
 
258
 
 
 
8,727
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
 
$
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 and $22.1 million, or 0.69% of total loans, at December 31, 2018.  Accruing loans 90+ days past due decreased $1.9 million from prior quarter but increased $0.9 million from December 31, 2018.  Nonaccrual loans increased $0.5 million during the quarter and $1.0 million from December 31, 2018.  Accruing loans 30-89 days past due at $30.6 million was an increase of $8.8 million from prior quarter and $7.9 million from December 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 June 30, 2019 totaled $54.6 million, compared to $50.4 million at March 31, 2018 and $46.4 million at December 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 and a $4.8 million decrease from the $27.3 million at December 31, 2018.  Sales of foreclosed properties for the six months ended June 30, 2019 totaled $4.8 million while new foreclosed properties totaled $1.2 million.  At June 30, 2019, the book value of properties under contracts to sell was $1.6 million; however, the closings had not occurred at quarter-end.

When foreclosed properties are acquired, appraisals are obtained and the properties are booked at the current market value less expected sales costs.  Additionally, periodic updated appraisals are obtained on unsold foreclosed properties.  When an updated appraisal reflects a fair market value below the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected sales costs.   Charges to earnings in the second quarter 2019 to reflect the decrease in current market values of foreclosed properties totaled $0.7 million.  There were six properties reappraised during the second quarter 2019.  Of these, four properties were written down by a total of $0.1 million.  Charges to earnings during the quarters ended March 31, 2019 and June 30, 2018 were $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-five percent of our OREO properties have appraisals dated within the past 18 months.  Management anticipates that our foreclosed properties will remain elevated as we work through current market conditions.

The appraisal aging analysis of foreclosed properties, as well as the holding period, at June 30, 2019 is shown below:

(in thousands)
 
Appraisal Aging Analysis
Holding Period Analysis
Days Since Last
Appraisal
Number of
Properties
Current Book
Value
Holding Period
Current Book
Value
Up to 3 months
7
$897
Less than one year
$2,819
3 to 6 months
19
2,583
1 year
1,559
6 to 9 months
8
361
2 years
437
9 to 12 months
31
2,450
3 years
5,663
12 to 18 months
37
5,423
4 years
922
18 to 24 months
2
3,315
5 years
1,004
Over 24 months
3
7,507
6 years*
6
Total
107
$22,536
7 years*
8,600
     
8 years*
963
     
9 years*
563
     
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 June 30, 2019, foreclosed property with a total book value of $0.6 million, representing 2.5% or our foreclosed properties (based on book value), had been held by us for at least nine years.  The book value at June 30, 2019 represents management’s best estimate of realizable value of the properties.
 
Net loan charge-offs for the quarter ended June 30, 2019 were $1.6 million, or 0.20% of average loans annualized, compared to $1.1 million, or 0.14%, experienced for the first quarter 2019 and $1.3 million, or 0.17%, for the second 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 six months, $1.1 million were in commercial loans, $0.9 million were in indirect consumer loans, $0.3 million were in residential loans, and $0.4 million were in direct consumer loans.

Dividends

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

Pay Date
Record Date
Amount Per Share
July 1, 2019
June 15, 2019
$0.36
April 1, 2019
March 15, 2019
$0.36
January 1, 2019
December 15, 2018
$0.36
October 1, 2018
September 15, 2018
$0.36
July 1, 2018
June 15, 2018
$0.33
April 1, 2018
March 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 June 30, 2019, we had approximately $321.6 million in cash and cash equivalents and approximately $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 June 30, 2019, we had wholesale brokered deposits outstanding of $42.3 million with a weighted average maturity of 1.08 years compared to $42.3 million with a weighted average maturity of 1.58 years at December 31, 2018.  We also rely on Federal Home Loan Bank advances for both liquidity and management of our asset/liability position.  Federal Home Loan Bank advances were $0.4 million at June 30, 2019 and December 31, 2018.  As of June 30, 2019, we had a $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 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 June 30, 2019 were deposits with the Federal Reserve of $265.0 million compared to $73.5 million at December 31, 2018.  At December 31, 2018, cash and cash equivalents included federal funds sold of $1.1 million; however, we had no federal funds sold as of June 30, 2019.  Additionally, we project cash flows from our investment portfolio to generate additional liquidity over the next 90 days.

The investment portfolio consists of investment grade short-term issues suitable for bank investments.  The majority of the investment portfolio is in U.S. government and government sponsored agency issuances.  At June 30, 2019, available-for-sale (“AFS”) securities comprised substantially all   of the total investment portfolio, and the AFS portfolio   was approximately 99%   of equity capital.  Eighty-nine percent   of 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 $594.7 million at June 30, 2019 and $564.2 million at December 31, 2018.  CTBI’s annualized dividend yield to shareholders as of June 30, 2019 was 3.41%.  Our primary source of capital growth is the retention of earnings.  Cash dividends were $0.72 per share and $0.66 per share for the six months ended June 30, 2019 and 2018, respectively.  We retained 61.7% of our earnings for the first six months of 2019 compared to 57.4% for the first six 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 June 30, 2019, CTBI had a common equity Tier 1 capital ratio of 16.83%, a Tier 1 capital ratio of 18.67%, a total capital ratio of 19.80%, and a Tier 1 leverage ratio of 13.61%.  Our capital conservation buffer at June 30, 2019 was 11.80%.

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

As of June 30, 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, 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 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 5.87 percent over one year and 8.52 percent over two years.  A 200 basis point decrease in the yield curve would decrease net interest income by an estimated 5.82 percent over one year and 9.42 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

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

CTBI’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.  As of the end of the period covered by this report, an evaluation was carried out by CTBI’s management, with the participation of our Chief Executive Officer and the Executive Vice President, Chief Financial Officer, and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on this evaluation, management concluded that disclosure controls and procedures as of June 30, 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 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 Proceedings
None
 
 
 
Item 1A.
Risk Factors
 

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 Proceeds
 
None
 
 
 
 
Item 3.
Defaults Upon Senior Securities
 
None
 
 
 
 
Item 4.
Mine Safety Disclosure
 
Not applicable
 
 
 
 
Item 5.
Other Information:
 
 
 
CTBI’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
 
 
(2)   Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 

SIGNATURES

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

 
COMMUNITY TRUST BANCORP, INC.
 
 
Date:  August 8, 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

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