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 –

ØLeases – 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.

ØAccounting 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.

ØSimplifying 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.

ØChanges 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.

ØAccounting 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	$	141,855	$	517,972	$	1,542,150
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 $3.0 million at March 31, 2019 compared to $3.3 million at December 31, 2018.

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

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

	March 31, 2019
(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	$	3,308	$	3,308	$	0	$	3,655	$	46