Company Quick10K Filing
Quick10K
Community Trust Bancorp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$41.99 18 $746
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-07-28 Quarter: 2016-07-28
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-08-01 Quarter: 2014-08-01
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-30 Earnings, Exhibits
8-K 2019-04-23 Shareholder Vote
8-K 2019-03-31 Earnings, Exhibits
8-K 2019-03-31 Regulation FD, Exhibits
8-K 2019-01-29 Enter Agreement, Officers, Exhibits
8-K 2018-12-31 Earnings, Exhibits
8-K 2018-09-30 Regulation FD, Exhibits
8-K 2018-09-04 Regulation FD, Exhibits
8-K 2018-07-26 Enter Agreement, Exhibits
8-K 2018-07-24 Other Events
8-K 2018-06-30 Earnings, Exhibits
8-K 2018-06-14 Other Events
8-K 2018-04-24 Shareholder Vote
8-K 2018-04-17 Earnings, Exhibits
8-K 2018-01-23 Enter Agreement, Officers, Exhibits
8-K 2017-12-31 Regulation FD, Exhibits
UGI UGI 9,410
EQM EQM Midstream Partners 8,530
GPK Graphic Packaging Holding 4,000
WRI Weingarten Realty Investors 3,710
THO Thor Industries 3,420
RDNT Radnet 662
TRNS Transcat 174
EQFN Equitable Financial 0
DLCR Kibush Capital 0
SEP Spectra Energy Partners 0
CTBI 2019-03-31
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Note 2 - Stock-Based Compensation
Note 3 - Securities
Note 4 - Loans
Note 5 - Allowance for Loan and Lease Losses
Note 6 - Leases
Note 7 - Other Real Estate Owned
Note 8 - Repurchase Agreements
Note 9 - Fair Market Value of Financial Assets and Liabilities
Note 10 - Earnings per Share
Note 11 - Accumulated Other Comprehensive Income
Note 12 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition And
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
EX-31.1 ctbi10q0319ex31-1.htm
EX-31.2 ctbi10q0319ex31-2.htm
EX-32.1 ctbi10q0319ex32-1.htm
EX-32.2 ctbi10q0319ex32-2.htm

Community Trust Bancorp Earnings 2019-03-31

CTBI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 ctbi10q0319.htm CTBI MARCH 31, 2019 FORM 10-Q



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

FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 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)

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 – 17,772,770 shares outstanding at April 30, 2019

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)







CAUTIONARY STATEMENT
REGARDING FORWARD LOOKING STATEMENTS

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


PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

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

The accompanying condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Registrant’s annual report on Form 10-K.  Accordingly, the reader of the Form 10-Q should refer to the Registrant’s Form 10-K for the year ended December 31, 2018 for further information in this regard.


Community Trust Bancorp, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands)
 
(unaudited)
March 31
2019
   
December 31
2018
 
Assets:
           
Cash and due from banks
 
$
49,302
   
$
64,632
 
Interest bearing deposits
   
200,058
     
75,718
 
Federal funds sold
   
4,500
     
1,100
 
Cash and cash equivalents
   
253,860
     
141,450
 
                 
Certificates of deposit in other banks
   
1,470
     
3,920
 
Securities available-for-sale at fair value (amortized cost of $601,544 and $602,114, respectively)
   
599,299
     
593,746
 
Securities held-to-maturity at amortized cost (fair value of $619 and $649, respectively)
   
619
     
649
 
Equity securities at fair value
   
1,528
     
1,173
 
Loans held for sale
   
13,649
     
2,461
 
                 
Loans
   
3,189,732
     
3,208,638
 
Allowance for loan and lease losses
   
(35,004
)
   
(35,908
)
Net loans
   
3,154,728
     
3,172,730
 
                 
Premises and equipment, net
   
44,554
     
45,291
 
Right-of-use asset
   
15,128
     
0
 
Federal Home Loan Bank stock
   
12,261
     
14,713
 
Federal Reserve Bank stock
   
4,887
     
4,887
 
Goodwill
   
65,490
     
65,490
 
Bank owned life insurance
   
67,433
     
67,076
 
Mortgage servicing rights
   
3,390
     
3,607
 
Other real estate owned
   
24,970
     
27,273
 
Other assets
   
50,027
     
57,150
 
Total assets
 
$
4,313,293
   
$
4,201,616
 
                 
Liabilities and shareholders’ equity:
               
Deposits:
               
Noninterest bearing
 
$
841,996
   
$
803,316
 
Interest bearing
   
2,541,107
     
2,502,634
 
Total deposits
   
3,383,103
     
3,305,950
 
                 
Repurchase agreements
   
237,506
     
232,712
 
Federal funds purchased
   
1,800
     
1,180
 
Advances from Federal Home Loan Bank
   
431
     
436
 
Long-term debt
   
59,341
     
59,341
 
Deferred taxes
   
6,529
     
3,363
 
Lease liability
   
15,743
     
0
 
Other liabilities
   
31,333
     
34,484
 
Total liabilities
   
3,735,786
     
3,637,466
 
                 
Shareholders’ equity:
               
Preferred stock, 300,000 shares authorized and unissued
   
-
     
-
 
Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2019 – 17,767,594; 2018 – 17,732,853
   
88,839
     
88,665
 
Capital surplus
   
223,426
     
223,161
 
Retained earnings
   
267,016
     
258,935
 
Accumulated other comprehensive loss, net of tax
   
(1,774
)
   
(6,611
)
Total shareholders’ equity
   
577,507
     
564,150
 
                 
Total liabilities and shareholders’ equity
 
$
4,313,293
   
$
4,201,616
 


See notes to condensed consolidated financial statements.



Community Trust Bancorp, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(unaudited)

   
Three Months Ended
 
   
March 31
 
(in thousands except per share data)
 
2019
   
2018
 
Interest income:
           
Interest and fees on loans, including loans held for sale
 
$
40,910
   
$
36,577
 
Interest and dividends on securities
               
Taxable
   
3,163
     
2,470
 
Tax exempt
   
678
     
697
 
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock
   
296
     
333
 
Interest on Federal Reserve Bank deposits
   
786
     
439
 
Other, including interest on federal funds sold
   
56
     
64
 
Total interest income
   
45,889
     
40,580
 
                 
Interest expense:
               
Interest on deposits
   
8,075
     
4,872
 
Interest on repurchase agreements and federal funds purchased
   
1,156
     
635
 
Interest on advances from Federal Home Loan Bank
   
39
     
2
 
Interest on long-term debt
   
636
     
480
 
Total interest expense
   
9,906
     
5,989
 
                 
Net interest income
   
35,983
     
34,591
 
Provision for loan losses
   
190
     
946
 
Net interest income after provision for loan losses
   
35,793
     
33,645
 
                 
Noninterest income:
               
Service charges on deposit accounts
   
6,120
     
6,221
 
Gains on sales of loans, net
   
330
     
279
 
Trust and wealth management income
   
2,575
     
2,958
 
Loan related fees
   
573
     
1,144
 
Bank owned life insurance
   
558
     
1,764
 
Brokerage revenue
   
261
     
283
 
Securities gains (losses)
   
356
     
(288
)
Other noninterest income
   
1,397
     
949
 
Total noninterest income
   
12,170
     
13,310
 
                 
Noninterest expense:
               
Officer salaries and employee benefits
   
3,374
     
3,214
 
Other salaries and employee benefits
   
12,585
     
12,405
 
Occupancy, net
   
2,051
     
2,116
 
Equipment
   
739
     
717
 
Data processing
   
1,763
     
1,636
 
Bank franchise tax
   
1,715
     
1,701
 
Legal fees
   
430
     
474
 
Professional fees
   
531
     
502
 
Advertising and marketing
   
792
     
732
 
FDIC insurance
   
177
     
314
 
Other real estate owned provision and expense
   
771
     
939
 
Repossession expense
   
377
     
409
 
Amortization of limited partnership investments
   
777
     
500
 
Other noninterest expense
   
3,001
     
3,022
 
Total noninterest expense
   
29,083
     
28,681
 
                 
Income before income taxes
   
18,880
     
18,274
 
Income taxes
   
3,941
     
2,460
 
Net income
   
14,939
     
15,814
 
                 
Other comprehensive income (loss):
               
Unrealized holding gains (losses) on securities available-for-sale:
               
Unrealized holding gains (losses) arising during the period
   
6,124
     
(5,498
)
Less: Reclassification adjustments for realized gains included in net income
   
1
     
149
 
Tax expense (benefit)
   
1,286
     
(1,186
)
Other comprehensive income (loss), net of tax
   
4,837
     
(4,461
)
Comprehensive income
 
$
19,776
   
$
11,353
 
                 
Basic earnings per share
 
$
0.84
   
$
0.89
 
Diluted earnings per share
 
$
0.84
   
$
0.89
 
                 
Weighted average shares outstanding-basic
   
17,712
     
17,671
 
Weighted average shares outstanding-diluted
   
17,723
     
17,687
 

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
 
                                                 
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
 
See notes to condensed consolidated financial statements.


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

   
Three Months Ended
 
   
March 31
 
(in thousands)
 
2019
   
2018
 
Cash flows from operating activities:
           
Net income
 
$
14,939
   
$
15,814
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
1,427
     
965
 
Deferred taxes
   
2,008
     
163
 
Stock-based compensation
   
200
     
236
 
Provision for loan losses
   
190
     
946
 
Write-downs of other real estate owned and other repossessed assets
   
489
     
467
 
Gains on sale of mortgage loans held for sale
   
(330
)
   
(279
)
Securities (gains) losses
   
(1
)
   
288
 
Change in fair market value of equity securities
   
(355
)
   
0
 
Gains on sale of assets, net
   
(51
)
   
(68
)
Proceeds from sale of mortgage loans held for sale
   
14,927
     
12,811
 
Funding of mortgage loans held for sale
   
(25,785
)
   
(12,644
)
Amortization of securities premiums and discounts, net
   
1,112
     
1,132
 
Change in cash surrender value of bank owned life insurance
   
(357
)
   
(1,580
)
Mortgage servicing rights:
               
 Fair value adjustments
   
(116
)
   
(122
)
 New servicing assets created
   
333
     
(100
)
Changes in:
               
 Other assets
   
7,082
     
(28,246
)
 Other liabilities
   
(3,622
)
   
(2,380
)
Net cash provided by (used in) operating activities
   
12,090
     
(12,597
)
                 
Cash flows from investing activities:
               
Certificates of deposit in other banks:
               
 Maturity of certificates of deposit
   
2,450
     
1,715
 
Securities available-for-sale (AFS):
               
 Purchase of AFS securities
   
(59,583
)
   
(113,781
)
 Proceeds from the sales of AFS securities
   
12,550
     
50,327
 
 Proceeds from prepayments and maturities of AFS securities
   
46,491
     
37,258
 
Securities held-to-maturity (HTM):
               
 Proceeds from maturities of HTM securities
   
30
     
0
 
Change in loans, net
   
18,755
     
1,945
 
Purchase of premises and equipment
   
(226
)
   
(507
)
Proceeds from sale and retirement of premises and equipment
   
0
     
19
 
Redemption of stock by Federal Home Loan Bank
   
2,452
     
0
 
Proceeds from sale of other real estate and repossessed assets
   
964
     
457
 
Proceeds from settlement of bank owned life insurance
   
0
     
3,038
 
Net cash provided by (used in) investing activities
   
23,883
     
(19,529
)
                 
Cash flows from financing activities:
               
Change in deposits, net
   
77,153
     
55,807
 
Change in repurchase agreements and federal funds purchased, net
   
5,414
     
774
 
Proceeds from Federal Home Loan Bank advances
   
30,000
     
0
 
Payments on advances from Federal Home Loan Bank
   
(30,005
)
   
(23
)
Issuance of common stock
   
258
     
596
 
Dividends paid
   
(6,383
)
   
(5,834
)
Net cash provided by financing activities
   
76,437
     
51,320
 
Net increase in cash and cash equivalents
   
112,410
     
19,194
 
Cash and cash equivalents at beginning of period
   
141,450
     
175,274
 
Cash and cash equivalents at end of period
 
$
253,860
     
194,468
 
                 
Supplemental disclosures:
           
Interest paid
 
$
8,830
   
$
5,290
 
Non-cash activities:
               
Loans to facilitate the sale of other real estate owned and repossessed assets
   
1,797
     
432
 
Common stock dividends accrued, paid in subsequent quarter
   
215
     
207
 
Real estate acquired in settlement of loans
   
854
     
1,284
 
See notes to condensed consolidated financial statements.


Community Trust Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1 - Summary of Significant Accounting Policies

In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (which consist of normal recurring adjustments) necessary, to present fairly the condensed consolidated financial position as of March 31, 2019 and the results of operations and cash flows for the three months ended March 31, 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 and the cash flows for the three months ended March 31, 2019 and 2018 are not necessarily indicative of the results to be expected for the full year.  The condensed consolidated balance sheet as of December 31, 2018 has been derived from the audited consolidated financial statements of Community Trust Bancorp, Inc. (“CTBI”) for that period.  For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2018, included in our annual report on Form 10-K.

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

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

New Accounting Standards

Ø Leases – In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).   ASU 2016-02 establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability for all leases with terms longer than 12 months.  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.  For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases.  A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee.  If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor does not convey risks and rewards or control, an operating lease results.  The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities.  Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available.

In August 2018, the FASB issued ASU 2018-11, Leases (Topic 842):  Targeted Improvements.  This ASU is intended to reduce costs and ease implementation of the leases standard for financial statement preparers.  ASU 2018-11 provides a new transition method and a practical expedient for separating components of a contract.

Transition: Comparative Reporting at Adoption

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

Separating Components of a Contract

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

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

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

We elected the optional transition method of the modified retrospective approach provided in ASU 2018-11 which was applied on January 1, 2019.  CTBI also elected certain relief options offered in ASU 2016-02, including the package of practical expedients, the option not to separate lease and non-lease components, and instead to account for them as a single lease component for all classes of assets, the hindsight practical expedient to allow entities to use hindsight when determining lease term and impairment of right-of-use assets, and the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less).  Refer to note 6, Leases, below for further information regarding the impact of adoption.

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

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

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

ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. CTBI has an implementation team working through the provisions of ASU 2016-13 including assessing the impact on its accounting and disclosures.  The team has established the historical data that will be available and has identified the potential loan segments to be analyzed.  The team is in the process of determining the portfolio methodologies to be utilized and plans to begin running parallel with its current model in the third quarter of 2019.

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

Ø Changes to the Disclosure Requirements for Fair Value Measurement – In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value MeasurementASU 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.

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

The ASU aligns the following requirements for capitalizing implementation costs:

·
Those incurred in a hosting arrangement that is a service contract, and
·
Those incurred 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 months ended March 31, 2019 and 2018, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes.

In March 2019, Kentucky enacted legislation requiring financial institutions to transition from a bank franchise tax to the Kentucky corporate income tax beginning in 2021.  As a result, we booked a one-time charge of $1.0 million, or $0.06 per basic share, to income tax expense to recognize our Kentucky deferred tax liability at March 31, 2019.  While this liability will be adjusted periodically, we do not anticipate any further adjustments to have a significant impact to income.

Note 2 – Stock-Based Compensation

CTBI’s compensation expense related to stock option grants was $10 thousand and $53 thousand, respectively, for the three months ended March 31, 2019 and 2018, respectively.  Restricted stock expense for the three months ended March 31, 2019 and 2018 was $190 thousand and $183 thousand, respectively, including $19 thousand and $12 thousand in dividends paid for each period.  As of March 31, 2019, there was a total of $27 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 0.7 years and a total of $2.0 million of unrecognized compensation expense related to restricted stock grants that will be recognized as expense as the awards vest over a weighted average period of 3.1 years.

There were no stock options granted in the first three months of 2019 and 2018.  There were 27,921 and 11,320 shares of restricted stock granted during the three months ended March 31, 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 March 31, 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
 
$
178,233
   
$
195
   
$
(951
)
 
$
177,477
 
State and political subdivisions
   
123,147
     
1,524
     
(942
)
   
123,729
 
U.S. government sponsored agency mortgage-backed securities
   
299,658
     
2,036
     
(4,103
)
   
297,591
 
Other debt securities
   
506
     
0
     
(4
)
   
502
 
Total available-for-sale securities
 
$
601,544
   
$
3,755
   
$
(6,000
)
 
$
599,299
 

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 March 31, 2019 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Available-for-Sale
   
Held-to-Maturity
 
(in thousands)
 
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
Due in one year or less
 
$
29,546
   
$
29,499
   
$
619
   
$
619
 
Due after one through five years
   
93,079
     
93,111
     
0
     
0
 
Due after five through ten years
   
80,646
     
80,248
     
0
     
0
 
Due after ten years
   
98,109
     
98,348
     
0
     
0
 
U.S. government sponsored agency mortgage-backed securities
   
299,658
     
297,591
     
0
     
0
 
Other debt securities
   
506
     
502
     
0
     
0
 
Total debt securities
 
$
601,544
   
$
599,299
   
$
619
   
$
619
 

As of March 31, 2019, there was a net securities gain of $356 thousand.  There was a pre-tax gain of $1 thousand realized on sales of AFS securities, and an unrealized gain of $355 thousand from the fair market value adjustment of equity securities.  As of March 31, 2018, there was a net securities loss of $288 thousand.  There was a net gain of $148 thousand realized on sales and calls of AFS securities, consisting of a pre-tax gain of $281 thousand and a pre-tax loss of $133 thousand.  This net securities loss included a loss of $436 thousand from the sale of CTBI’s CRA investment funds.

 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 March 31, 2019 were $1.5 million, as a result of a fair market value increase in the first quarter 2019.

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

The amortized cost of securities sold under agreements to repurchase amounted to $278.0 million at March 31, 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 March 31, 2019 indicates that all impairment is considered temporary, market and interest rate driven, and not credit-related.  The percentage of total debt securities with unrealized losses as of March 31, 2019 was 55.9% compared to 75.7% as of December 31, 2018.  The following tables provide the amortized cost, gross unrealized losses, and fair market value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of March 31, 2019 that are not deemed to be other-than-temporarily impaired.  There were no held-to-maturity securities that were deemed to be impaired as of March 31, 2019.

Available-for-Sale

(in thousands)
 
Amortized Cost
   
Gross Unrealized Losses
   
Fair Value
 
Less Than 12 Months
                 
U.S. Treasury and government agencies
 
$
22,910
   
$
(8
)
 
$
22,902
 
State and political subdivisions
   
0
     
0
     
0
 
U.S. government sponsored agency mortgage-backed securities
   
935
     
(3
)
   
932
 
Other debt securities
   
506
     
(4
)
   
502
 
Total <12 months temporarily impaired AFS securities
   
24,351
     
(15
)
   
24,336
 
                         
12 Months or More
                       
U.S. Treasury and government agencies
   
120,811
     
(943
)
   
119,868
 
State and political subdivisions
   
39,558
     
(942
)
   
38,616
 
U.S. government sponsored agency mortgage-backed securities
   
156,877
     
(4,100
)
   
152,777
 
Other debt securities
   
0
     
0
     
0
 
Total ≥12 months temporarily impaired AFS securities
   
317,246
     
(5,985
)
   
311,261
 
                         
Total
                       
U.S. Treasury and government agencies
   
143,721
     
(951
)
   
142,770
 
State and political subdivisions
   
39,558
     
(942
)
   
38,616
 
U.S. government sponsored agency mortgage-backed securities
   
157,812
     
(4,103
)
   
153,709
 
Other debt securities
   
506
     
(4
)
   
502
 
Total temporarily impaired AFS securities
 
$
341,597
   
$
(6,000
)
 
$
335,597
 

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 March 31, 2019, because CTBI does not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost, which may be maturity.

State and Political Subdivisions

The unrealized losses in securities of state and political subdivisions were caused by interest rate increases.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than par which will equal amortized cost at maturity.  CTBI does not consider those investments to be other-than-temporarily impaired at March 31, 2019, because CTBI does not intend to sell the investments before recovery of their amortized cost and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost, which may be maturity.

U.S. Government Sponsored Agency Mortgage-Backed Securities

The unrealized losses in U.S. government sponsored agency mortgage-backed securities were caused by interest rate increases.  CTBI expects to recover the amortized cost basis over the term of the securities.  CTBI does not consider those investments to be other-than-temporarily impaired at March 31, 2019, because (i) the decline in market value is attributable to changes in interest rates and not credit quality, (ii) CTBI does not intend to sell the investments, and (iii) it is not more likely than not we will be required to sell the investments before recovery of their amortized cost, which may be maturity.

Other Debt Securities

The unrealized losses in other debt securities were caused by interest rate increases.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than par which will equal amortized cost at maturity.  CTBI does not consider those investments to be other-than-temporarily impaired at March 31, 2019, because CTBI does not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost, which may be maturity.

Note 4 – Loans

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

 
(in thousands)
 
March 31
2019
   
December 31
2018
 
Commercial construction
 
$
75,364
   
$
82,715
 
Commercial secured by real estate
   
1,182,804
     
1,183,093
 
Equipment lease financing
   
1,354
     
1,740
 
Commercial other
   
388,060
     
377,198
 
Real estate construction
   
54,013
     
57,160
 
Real estate mortgage
   
720,292
     
722,417
 
Home equity
   
108,018
     
106,299
 
Consumer direct
   
141,855
     
144,289
 
Consumer indirect
   
517,972
     
533,727
 
Total loans
 
$
3,189,732
   
$
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 $13.6 million at March 31, 2019 and $2.5 million at December 31, 2018.

Refer to note 1 to the condensed consolidated financial statements for further information regarding our nonaccrual policy.  Nonaccrual loans segregated by class of loans were as follows:

 (in thousands)
 
March 31
2019
   
December 31
2018
 
Commercial:
           
Commercial construction
 
$
546
   
$
639
 
Commercial secured by real estate
   
4,967
     
4,537
 
Commercial other
   
1,402
     
797
 
                 
Residential:
               
Real estate construction
   
289
     
22
 
Real estate mortgage
   
4,691
     
5,395
 
Home equity
   
483
     
477
 
Total nonaccrual loans
 
$
12,378
   
$
11,867
 

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

   
March 31, 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
 
$
449
   
$
0
   
$
618
   
$
1,067
   
$
74,297
   
$
75,364
   
$
72
 
Commercial secured by real estate
   
7,829
     
1,460
     
12,335
     
21,624
     
1,161,180
     
1,182,804
     
7,794
 
Equipment lease financing
   
0
     
0
     
0
     
0
     
1,354
     
1,354
     
0
 
Commercial other
   
1,005
     
772
     
726
     
2,503
     
385,557
     
388,060
     
261
 
Residential:
                                                       
Real estate construction
   
258
     
149
     
295
     
702
     
53,311
     
54,013
     
6
 
Real estate mortgage
   
1,145
     
4,836
     
6,854
     
12,835
     
707,457
     
720,292
     
4,203
 
Home equity
   
818
     
277
     
499
     
1,594
     
106,424
     
108,018
     
260
 
Consumer:
                                                       
Consumer direct
   
735
     
215
     
30
     
980
     
140,875
     
141,855
     
30
 
Consumer indirect
   
2,854
     
611
     
390
     
3,855
     
514,117
     
517,972
     
390
 
Total
 
$
15,093
   
$
8,320
   
$
21,747
   
$
45,160
   
$
3,144,572
   
$
3,189,732
   
$
13,016
 

   
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:

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

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

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

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

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

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

 (in thousands)
 
Commercial Construction
   
Commercial Secured by Real Estate
   
Equipment Leases
   
Commercial Other
   
Total
 
March 31, 2019
                             
Pass
 
$
67,224
   
$
1,031,325
   
$
1,354
   
$
338,695
   
$
1,438,598
 
Watch
   
2,932
     
75,404
     
0
     
27,317
     
105,653
 
OAEM
   
1,823
     
18,501
     
0
     
5,811
     
26,135
 
Substandard
   
3,385
     
57,485
     
0
     
16,166
     
77,036
 
Doubtful
   
0
     
89
     
0
     
71
     
160
 
Total
 
$
75,364
   
$
1,182,804
   
$
1,354
   
$
388,060
   
$
1,647,582
 
                                         
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 March 31, 2019 and December 31, 2018:

(in thousands)
 
Real Estate Construction
   
Real Estate Mortgage
   
Home Equity
   
Consumer Direct
   
Consumer
Indirect
   
Total
 
March 31, 2019
                                   
Performing
 
$
53,718
   
$
711,398
   
$
107,275
   
$
141,825
   
$
517,582
   
$
1,531,798
 
Nonperforming (1)
   
295
     
8,894
     
743
     
30
     
390
     
10,352
 
Total
 
$
54,013
   
$
720,292
   
$
108,018