CTBI 10-Q Quarterly Report Sept. 30, 2018

COMMUNITY TRUST BANCORP INC /KY/

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10-Q 1 ctbi10q0918.htm CTBI SEPTEMBER 30, 2018 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 September 30, 2018

	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 0-11129

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 (Address of principal executive offices)	41501 (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 ✓

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 ✓

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 – 17,732,578 shares outstanding at October 31, 2018

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, 2017 for further information in this regard.

Community Trust Bancorp, Inc.

Condensed Consolidated Balance Sheets

(dollars in thousands)	(unaudited) September 30 2018			December 31 2017
Assets:
Cash and due from banks	$	53,912		$	47,528
Interest bearing deposits		110,121			127,746
Federal funds sold		7,300			0
Cash and cash equivalents		171,333			175,274

Certificates of deposit in other banks		5,145			9,800
Securities available-for-sale at fair value (amortized cost of $582,983 and $590,199, respectively)		569,208			585,761
Securities held-to-maturity at amortized cost (fair value of $660 and $660, respectively)		659			659
Loans held for sale		1,029			1,033

Loans		3,177,888			3,122,940
Allowance for loan and lease losses		(35,791	)		(36,151	)
Net loans		3,142,097			3,086,789

Premises and equipment, net		45,808			46,318
Federal Home Loan Bank stock		14,713			17,927
Federal Reserve Bank stock		4,887			4,887
Goodwill		65,490			65,490
Bank owned life insurance		66,715			65,354
Mortgage servicing rights		3,815			3,484
Other real estate owned		29,666			31,996
Other assets		53,278			41,459
Total assets	$	4,173,843		$	4,136,231

Liabilities and shareholders’ equity:
Deposits:
Noninterest bearing	$	826,804		$	790,930
Interest bearing		2,446,842			2,472,933
Total deposits		3,273,646			3,263,863

Repurchase agreements		250,983			243,814
Federal funds purchased		1,305			7,312
Advances from Federal Home Loan Bank		787			845
Long-term debt		59,341			59,341
Deferred taxes		2,497			4,434
Other liabilities		35,020			25,923
Total liabilities		3,623,579			3,605,532

Shareholders’ equity:
Preferred stock, 300,000 shares authorized and unissued		-			-
Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2018 – 17,728,075; 2017 – 17,692,912		88,641			88,465
Capital surplus		222,814			221,472
Retained earnings		249,691			224,268
Accumulated other comprehensive loss, net of tax		(10,882	)		(3,506	)
Total shareholders’ equity		550,264			530,699

Total liabilities and shareholders’ equity	$	4,173,843		$	4,136,231

See notes to condensed consolidated financial statements.

Community Trust Bancorp, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30						September 30
(in thousands except per share data)	2018			2017			2018			2017
Interest income:
Interest and fees on loans, including loans held for sale	$	39,420		$	36,288		$	113,788		$	104,643
Interest and dividends on securities
Taxable		2,422			2,198			7,314			6,458
Tax exempt		699			741			2,102			2,211
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock		341			308			1,002			867
Interest on Federal Reserve Bank deposits		659			240			1,811			695
Other, including interest on federal funds sold		66			69			195			149
Total interest income		43,607			39,844			126,212			115,023

Interest expense:
Interest on deposits		6,051			3,754			16,508			9,876
Interest on repurchase agreements		818			466			2,176			1,215
Interest on advances from Federal Home Loan Bank		3			226			7			394
Interest on long-term debt		599			428			1,646			1,238
Total interest expense		7,471			4,874			20,337			12,723

Net interest income		36,136			34,970			105,875			102,300
Provision for loan losses		1,543			666			4,418			4,659
Net interest income after provision for loan losses		34,593			34,304			101,457			97,641

Noninterest income:
Service charges on deposit accounts		6,671			6,499			19,372			18,658
Gains on sales of loans, net		319			390			902			897
Trust and wealth management income		2,836			2,534			8,650			7,769
Loan related fees		1,022			792			3,085			2,570
Bank owned life insurance		555			583			3,112			1,633
Brokerage revenue		331			297			1,054			1,032
Securities gains (losses)		(2	)		48			(288	)		58
Other noninterest income		931			1,059			3,826			3,475
Total noninterest income		12,663			12,202			39,713			36,092

Noninterest expense:
Officer salaries and employee benefits		3,475			2,933			9,909			8,860
Other salaries and employee benefits		11,789			11,146			36,396			34,187
Occupancy, net		2,019			2,043			6,178			6,042
Equipment		725			741			2,169			2,275
Data processing		1,695			1,772			4,965			5,318
Bank franchise tax		1,618			1,205			4,896			4,246
Legal fees		373			429			1,275			1,256
Professional fees		507			478			1,504			1,525
Advertising and marketing		744			705			2,352			2,098
FDIC insurance		314			316			907			923
Other real estate owned provision and expense		1,094			1,313			3,348			4,056
Repossession expense		246			269			959			697
Amortization of limited partnership investments		609			605			1,825			1,814
Other noninterest expense		2,898			2,977			12,543			8,845
Total noninterest expense		28,106			26,932			89,226			82,142

Income before income taxes		19,150			19,574			51,944			51,591
Income taxes		3,044			5,811			8,425			15,010
Net income		16,106			13,763			43,519			36,581

Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during the period		(2,521	)		(522	)		(9,830	)		2,223
Less: Reclassification adjustments for realized gains (losses) included in net income		(2	)		48			149			58
Tax expense (benefit)		(529	)		(199	)		(2,096	)		758
Unrealized holding gains (losses) on securities available-for-sale, net of tax		(1,990	)		(371	)		(7,883	)		1,407
Implementation of ASU 2016-01		0			0			507			0
Other comprehensive income (loss), net of tax		(1,990	)		(371	)		(7,376	)		1,407
Comprehensive income	$	14,116		$	13,392		$	36,143		$	37,988

Basic earnings per share	$	0.91		$	0.78		$	2.46		$	2.08
Diluted earnings per share	$	0.91		$	0.78		$	2.46		$	2.07

Weighted average shares outstanding-basic		17,691			17,633			17,683			17,625
Weighted average shares outstanding-diluted		17,710			17,653			17,700			17,645

Dividends declared per share	$	0.36		$	0.33		$	1.02		$	0.97

See notes to condensed consolidated financial statements.

Community Trust Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended
	September 30
(in thousands)	2018			2017
Cash flows from operating activities:
Net income	$	43,519		$	36,581
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,853			3,019
Deferred taxes		159			122
Stock-based compensation		553			447
Provision for loan losses		4,418			4,659
Write-downs of other real estate owned and other repossessed assets		1,990			2,871
Gains on sale of mortgage loans held for sale		(902	)		(897	)
Securities (gains) losses		288			(58	)
Gain on debt repurchase		0			(560	)
Gains on sale of assets, net		(107	)		(2	)
Proceeds from sale of mortgage loans held for sale		40,284			40,130
Funding of mortgage loans held for sale		(39,378	)		(39,594	)
Amortization of securities premiums and discounts, net		3,648			2,375
Change in cash surrender value of bank owned life insurance		(2,563	)		(1,117	)
Mortgage servicing rights:
Fair value adjustments		(2	)		419
New servicing assets created		(329	)		(269	)
Changes in:
Other assets		(11,904	)		(3,412	)
Other liabilities		9,497			1,181
Net cash provided by operating activities		52,024			45,895

Cash flows from investing activities:
Certificates of deposit in other banks:
Purchase of certificates of deposit		0			(11,515	)
Maturity of certificates of deposit		4,655			1,225
Securities available-for-sale (AFS):
Purchase of AFS securities		(144,177	)		(146,822	)
Proceeds from the sales of AFS securities		57,079			66,359
Proceeds from prepayments and maturities of AFS securities		89,735			82,672
Securities held-to-maturity (HTM):
Proceeds from maturities of HTM securities		0			8
Change in loans, net		(60,707	)		(181,282	)
Purchase of premises and equipment		(2,343	)		(1,681	)
Proceeds from sale and retirement of premises and equipment		23			25
Redemption of stock by Federal Home Loan Bank		3,214			0
Proceeds from sale of other real estate and repossessed assets		1,491			3,073
Proceeds from settlement of bank owned life insurance		1,202			0
Net cash used in investing activities		(49,828	)		(187,938	)

Cash flows from financing activities:
Change in deposits, net		9,783			119,058
Change in repurchase agreements and federal funds purchased, net		1,162			12,322
Proceeds from Federal Home Loan Bank advances		0			150,000
Payments on advances from Federal Home Loan Bank		(58	)		(100,075	)
Repurchase of long-term debt		0			(1,440	)
Issuance of common stock		1,003			1,017
Dividends paid		(18,027	)		(17,139	)
Net cash provided by (used in) financing activities		(6,137	)		163,743
Net increase (decrease) in cash and cash equivalents		(3,941	)		21,700
Cash and cash equivalents at beginning of period		175,274			144,716
Cash and cash equivalents at end of period	$	171,333			166,416

Supplemental disclosures:
Income taxes paid	$	8,700	$	16,250
Interest paid		18,185		11,151
Non-cash activities:
Loans to facilitate the sale of other real estate owned and repossessed assets		2,680		2,250
Common stock dividends accrued, paid in subsequent quarter		220		208
Real estate acquired in settlement of loans		3,693		4,156

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 September 30, 2018, the results of operations for the three and nine months ended September 30, 2018 and 2017 and the cash flows for the nine months ended September 30, 2018 and 2017. In accordance with accounting principles generally accepted in the United States of America for interim financial information, these statements do not include certain information and footnote disclosures required by accounting principles generally accepted in the United States of America for complete annual financial statements. The results of operations for the three and nine months ended September 30, 2018 and 2017 and the cash flows for the nine months ended September 30, 2018 and 2017 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet as of December 31, 2017 has been derived from the audited consolidated financial statements of Community Trust Bancorp, Inc. (“CTBI”) for that period. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2017, 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. 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 Financial Instruments – Overall – In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) . The amendments in this Update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this Update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this Update eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. Public business entities will be required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. This Update is the final version of Proposed ASU 2013-220—Financial Instruments—Overall (Subtopic 825-10) and Proposed ASU 2013-221—Financial Instruments—Overall (Subtopic 825-10). For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. At December 31, 2017, we had $25 million in equity securities with a net unrealized loss of $0.6 million. Accordingly, an adjustment has been made as a cumulative effect adjustment to our consolidated balance sheet effective January 1, 2018. Note 8 below has been modified to reflect the changes in disclosure and the use of a notional exit price.

Ø Leases – In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . ASU 2016-02 establishes a right of 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. Early adoption is permitted. CTBI has an implementation team working through the provisions of ASU 2016-02 including reviewing all leases to assess the impact on its accounting and disclosures. CTBI does not anticipate a significant increase in leasing activity between now and the date of adoption. We have calculated the minimum and maximum net present value of all potential lease payments to be between $10.1 million and $20.3 million. We have determined the renewal periods reasonably expected to be exercised. We are now in the process of determining the amount to recognize as right of use assets and the corresponding lease liabilities. We have purchased software in order to finalize the impact of this ASU and provide tracking going forward.

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 nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease 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 nonlease 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 will determine which method we will elect to use as we progress through the implementation phase.

Ø Revenue from Contracts with Customers – In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers . The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for some costs to obtain or fulfill a contract with a customer, as well as enhanced disclosure requirements. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 to fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08 which clarified the revenue recognition implementation guidance on principal versus agent considerations and is effective during the same period as ASU 2014-09. In April 2016, the FASB issued ASU 2016-10 which clarified the revenue recognition guidance regarding the identification of performance obligations and the licensing implementation and is effective during the same period as ASU 2014-09. In May 2016, the FASB issued ASU 2016-12 which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax, and transition. ASU 2016-12 is effective during the same period as ASU 2014-09. We adopted these Updates effective January 1, 2018 with no material change to the timing or amounts of income recognized, as the majority of the revenues earned by CTBI are not within the scope of ASU 2014-09.

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

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

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

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

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

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

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

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

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

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

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

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

Ø Income Statement—Reporting Comprehensive Income – In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220) . On December 22, 2017, the U.S. federal government enacted a tax bill, the Tax Cuts and Jobs Act of 2017. The guidance in GAAP requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. That guidance was applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income (rather than in net income). Because the adjustment of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate of 21 percent was required to be included in income from continuing operations, the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects for purposes of this Update) did not reflect the appropriate tax rate. The amendments in this ASU requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate. The amount of the reclassification is the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate. Consequently, the amendments in this Update eliminate the stranded tax effects associated with the change in the federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 and improve the usefulness of information reported to financial statement users. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for public business entities for reporting periods for which financial statements have not yet been issued by applying retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 is recognized. We elected to early adopt this ASU, and therefore, have adjusted our consolidated financial statements effective December 31, 2017 with minimal effect to our financial position.

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

Ø Changes to the Disclosure Requirements for Fair Value Measurement – In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement . ASU No. 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820 as follows:

Removals

The following disclosure requirements were removed from Topic 820:

·	The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy

·	The 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 January1, 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 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, Investment Securities , investments in debt securities that are not classified as held-to-maturity and equity securities that have readily determinable fair values shall be classified in one of the following categories and measured at fair value in the statement of financial position:

a. Trading securities . Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) shall be classified as trading securities . Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price.

b. Available-for-sale securities. Investments not classified as trading securities (nor as held-to-maturity securities) shall be classified as available-for-sale securities.

We do not have any securities that are classified as trading securities. Available-for-sale securities are reported at fair value, with unrealized gains and losses included as a separate component of shareholders’ equity, net of tax. If declines in fair value are other than temporary, the carrying value of the securities is written down to fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not credit related.

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

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

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 nine months ended September 30, 2018 and 2017, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes.

Note 2 – Stock-Based Compensation

CTBI’s compensation expense related to stock option grants was $11 thousand and $74 thousand, respectively, for the three and nine months ended September 30, 2018, compared to $14 thousand and $42 thousand, respectively, for the three and nine months ended September 30, 2017. Restricted stock expense for the three and nine months ended September 30, 2018 was $143 thousand and $479 thousand, respectively, including $13 thousand and $38 thousand in dividends paid for each period. Restricted stock expense for the three and nine months ended September 30, 2017 was $131 thousand and $405 thousand, respectively, including $13 thousand and $40 thousand in dividends paid for each period. As of September 30, 2018, there was a total of $48 thousand of unrecognized compensation expense related to unvested stock option awards that will be recognized as expense as the awards vest over a weighted average period of 1.2 years and a total of $1.2 million of unrecognized compensation expense related to restricted stock grants that will be recognized as expense as the awards vest over a weighted average period of 2.6 years.

There were no stock options granted in the first nine months of 2018 and 2017, and there were no restricted stock grants made during the three months ended September 30, 2018 and 2017. There were 11,320 and 23,668 shares of restricted stock granted during the nine months ended September 30, 2018 and 2017, respectively. The restricted stock was issued pursuant to the terms of CTBI’s 2015 Stock Ownership Incentive Plan. The restrictions on the restricted stock will lapse ratably over four years, except for a 5,000 management retention restricted stock award granted in 2017 which will cliff vest at the end of five years. However, in the event of certain participant employee termination events occurring within 24 months of a change in control of CTBI or the death of the participant, the restrictions will lapse, and in the event of the participant’s disability, the restrictions will lapse on a pro rata basis. The Compensation Committee will have discretion to review and revise restrictions applicable to a participant’s restricted stock in the event of the participant’s retirement.

Note 3 – Securities

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

The amortized cost and fair value of securities at September 30, 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	$	246,153	$	0	$	(3,354	)	$	242,799
State and political subdivisions		127,423		480		(3,911	)		123,992
U.S. government sponsored agency mortgage-backed securities		208,900		146		(7,135	)		201,911
Other debt securities		507		0		(1	)		506
Total debt securities		582,983		626		(14,401	)		569,208
CRA investment funds		0		0		0			0
Total available-for-sale securities	$	582,983	$	626	$	(14,401	)	$	569,208

Held-to-Maturity

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

The amortized cost and fair value of securities at December 31, 2017 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	$	211,574	$	170	$	(1,172	)	$	210,572
State and political subdivisions		144,159		2,017		(1,161	)		145,015
U.S. government sponsored agency mortgage-backed securities		208,959		357		(4,007	)		205,309
Other debt securities		507		0		0			507
Total debt securities		565,199		2,544		(6,340	)		561,403
CRA investment funds		25,000		76		(718	)		24,358
Total available-for-sale securities	$	590,199	$	2,620	$	(7,058	)	$	585,761

Held-to-Maturity

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

The amortized cost and fair value of securities at September 30, 2018 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	$	46,660	$	46,471	$	0	$	0
Due after one through five years		133,244		131,223		659		660
Due after five through ten years		76,825		75,192		0		0
Due after ten years		116,847		113,905		0		0
U.S. government sponsored agency mortgage-backed securities		208,900		201,911		0		0
Other debt securities		507		506		0		0
Total securities	$	582,983	$	569,208	$	659	$	660

During the three months ended September 30, 2018, there was a pre-tax loss of $2 thousand realized on sales and calls of AFS securities. During the three months ended September 30, 2017, there was a net gain of $48 thousand realized on sales of AFS securities, consisting of a pre-tax gain of $150 thousand and a pre-tax loss of $102 thousand.

During the nine months ended September 30, 2018, there was a combined loss of $288 thousand realized on sales and calls of AFS securities, consisting of a pre-tax gain of $284 thousand and a pre-tax loss of $572 thousand. This combined loss included a loss of $436 thousand from the sale of CTBI’s CRA investment funds in the first quarter of 2018. During the nine months ended September 30, 2017, there was a combined gain of $58 thousand realized on sales and calls of AFS securities, consisting of a pre-tax gain of $179 thousand and a pre-tax loss of $121 thousand.

The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $235.9 million at September 30, 2018 and $225.7 million at December 31, 2017.

The amortized cost of securities sold under agreements to repurchase amounted to $297.0 million at September 30, 2018 and $296.4 million at December 31, 2017.

CTBI evaluates its investment portfolio on a quarterly basis for impairment. The analysis performed as of September 30, 2018 indicates that all impairment is considered temporary, market and interest rate driven, and not credit-related. The percentage of total investments with unrealized losses as of September 30, 2018 was 90.5% compared to 69.5% as of December 31, 2017. 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 September 30, 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 September 30, 2018.

Available-for-Sale

(in thousands)	Amortized Cost		Gross Unrealized Losses			Fair Value
Less Than 12 Months
U.S. Treasury and government agencies	$	132,224	$	(1,300	)	$	130,924
State and political subdivisions		59,535		(1,511	)		58,024
U.S. government sponsored agency mortgage-backed securities		32,681		(674	)		32,007
Other debt securities		507		(1	)		506
Total <12 months temporarily impaired AFS securities		224,947		(3,486	)		221,461

12 Months or More
U.S. Treasury and government agencies		113,929		(2,054	)		111,875
State and political subdivisions		29,021		(2,400	)		26,621
U.S. government sponsored agency mortgage-backed securities		162,034		(6,461	)		155,573
Other debt securities		0		0			0
Total ≥12 months temporarily impaired AFS securities		304,984		(10,915	)		294,069

Total
U.S. Treasury and government agencies		246,153		(3,354	)		242,799
State and political subdivisions		88,556		(3,911	)		84,645
U.S. government sponsored agency mortgage-backed securities		194,715		(7,135	)		187,580
Other debt securities		507		(1	)		506
Total temporarily impaired AFS securities	$	529,931	$	(14,401	)	$	515,530

The analysis performed as of December 31, 2017 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, 2017 that are not deemed to be other-than-temporarily impaired. There were no held-to-maturity securities that were deemed to be impaired as of December 31, 2017.

Available-for-Sale

(in thousands)	Amortized Cost		Gross Unrealized Losses			Fair Value
Less Than 12 Months
U.S. Treasury and government agencies	$	136,688	$	(840	)	$	135,848
State and political subdivisions		34,283		(416	)		33,867
U.S. government sponsored agency mortgage-backed securities		62,768		(643	)		62,125
Total debt securities		233,739		(1,899	)		231,840
CRA investment funds		7,500		(105	)		7,395
Total <12 months temporarily impaired AFS securities		241,239		(2,004	)		239,235

12 Months or More
U.S. Treasury and government agencies		23,885		(332	)		23,553
State and political subdivisions		16,930		(745	)		16,185
U.S. government sponsored agency mortgage-backed securities		117,827		(3,364	)		114,463
Total debt securities		158,642		(4,441	)		154,201
CRA investment funds		15,000		(613	)		14,387
Total ≥12 months temporarily impaired AFS securities		173,642		(5,054	)		168,588

Total
U.S. Treasury and government agencies		160,573		(1,172	)		159,401
State and political subdivisions		51,213		(1,161	)		50,052
U.S. government sponsored agency mortgage-backed securities		180,595		(4,007	)		176,588
Total debt securities		392,381		(6,340	)		386,041
CRA investment funds		22,500		(718	)		21,782
Total temporarily impaired AFS securities	$	414,881	$	(7,058	)	$	407,823

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 September 30, 2018, 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 September 30, 2018, 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 September 30, 2018, 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 September 30, 2018, 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)	September 30 2018		December 31 2017
Commercial construction	$	81,472	$	76,479
Commercial secured by real estate		1,183,632		1,188,680
Equipment lease financing		1,986		3,042
Commercial other		346,645		351,034
Real estate construction		61,782		67,358
Real estate mortgage		722,022		709,570
Home equity		103,805		99,356
Consumer direct		146,002		137,754
Consumer indirect		530,542		489,667
Total loans	$	3,177,888	$	3,122,940

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 i ncluded in the loan balances above were loans held for sale in the amount of $1.0 million at September 30, 2018 and December 31, 2017.

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)	September 30 2018		December 31 2017
Commercial:
Commercial construction	$	619	$	1,207
Commercial secured by real estate		5,061		7,028
Commercial other		443		934

Residential:
Real estate construction		22		318
Real estate mortgage		6,401		8,243
Home equity		486		389
Total nonaccrual loans	$	13,032	$	18,119

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

	September 30, 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	$	127	$	116	$	551	$	794	$	80,678	$	81,472	$	47
Commercial secured by real estate		5,962		8,174		6,673		20,809		1,162,823		1,183,632		2,453
Equipment lease financing		0		0		0		0		1,986		1,986		0
Commercial other		549		794		287		1,630		345,015		346,645		90
Residential:
Real estate construction		420		218		33		671		61,111		61,782		11
Real estate mortgage		939		4,658		9,291		14,888		707,134		722,022		4,413
Home equity		917		293		593		1,803		102,002		103,805		310
Consumer:
Consumer direct		828		355		36		1,219		144,783		146,002		36
Consumer indirect		4,405		841		645		5,891		524,651		530,542		645
Total	$	14,147	$	15,449	$	18,109	$	47,705	$	3,130,183	$	3,177,888	$	8,005

	December 31, 2017
(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	$	138	$	0	$	1,238	$	1,376	$	75,103	$	76,479	$	31
Commercial secured by real estate		4,047		1,599		8,514		14,160		1,174,520		1,188,680		2,665
Equipment lease financing		430		0		0		430		2,612		3,042		0
Commercial other		835		77		652		1,564		349,470		351,034		87
Residential:
Real estate construction		224		202		223		649		66,709		67,358		223
Real estate mortgage		2,064		5,029		11,605		18,698		690,872		709,570		6,293
Home equity		595		178		428		1,201		98,155		99,356		167
Consumer:
Consumer direct		983		148		62		1,193		136,561		137,754		62
Consumer indirect		4,085		1,399		648		6,132		483,535		489,667		648
Total	$	13,401	$	8,632	$	23,370	$	45,403	$	3,077,537	$	3,122,940	$	10,176

*90+ and Accruing are also included in 90+ Days Past Due column.

The risk characteristics of CTBI’s material portfolio segments are as follows:

Commercial construction loans generally are made to customers for the purpose of building income-producing properties. Personal guarantees of the principals are generally required. Such loans are made on a projected cash flow basis and are secured by the project being constructed. Construction loan draw procedures are included in each specific loan agreement, including required documentation items and inspection requirements. Construction loans may convert to term loans at the end of the construction period, or may be repaid by the take-out commitment from another financing source. If the loan is to convert to a term loan, the repayment ability is based on the borrower’s projected cash flow. Risk is mitigated during the construction phase by requiring proper documentation and inspections whenever a draw is requested. Loans in amounts greater than $500,000 generally require a performance bond to be posted by the general contractor to assure completion of the project.

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Management monitors and evaluates commercial real estate loans based on collateral and risk grade criteria.

Equipment lease financing is underwritten by our commercial lenders using the same underwriting standards as would be applied to a secured commercial loan requesting 100% financing. The pricing for equipment lease financing is comparable to that of borrowers with similar quality commercial credits with similar collateral. Maximum terms of equipment leasing are determined by the type and expected life of the equipment to be leased. Residual values are determined by appraisals or opinion letters from industry experts. Leases must be in conformity with our consolidated annual tax plan. As we underwrite our equipment lease financing in a manner similar to our commercial loan portfolio described below, the risk characteristics for this portfolio mirror that of the commercial loan portfolio.

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, CTBI generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences. Residential construction loans are handled through the home mortgage area of the bank. The repayment ability of the borrower and the maximum loan-to-value ratio are calculated using the normal mortgage lending criteria. Draws are processed based on percentage of completion stages including normal inspection procedures. Such loans generally convert to term loans after the completion of construction.

Consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Our determination of a borrower’s ability to repay these loans is primarily dependent on the personal income and credit rating of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

The indirect lending area of the bank generally deals with purchasing/funding consumer contracts with new and used automobile dealers. The dealers generate consumer loan applications which are forwarded to the indirect loan processing area for approval or denial. Loan approvals or denials are based on the creditworthiness and repayment ability of the borrower, and on the collateral value. The dealers may have limited recourse agreements with CTB.

Credit Quality Indicators:

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

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

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

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

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

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

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

(in thousands)	Commercial Construction		Commercial Secured by Real Estate		Equipment Leases		Commercial Other		Total
September 30, 2018
Pass	$	74,592	$	1,029,800	$	1,986	$	294,562	$	1,400,940
Watch		3,133		74,669		0		30,020		107,822
OAEM		1,626		17,906		0		6,903		26,435
Substandard		2,121		61,146		0		15,080		78,347
Doubtful		0		111		0		80		191
Total	$	81,472	$	1,183,632	$	1,986	$	346,645	$	1,613,735

December 31, 2017
Pass	$	67,846	$	1,053,701	$	3,005	$	305,655	$	1,430,207
Watch		3,323		65,182		0		29,008		97,513
OAEM		1,304		22,401		37		3,206		26,948
Substandard		3,828		47,223		0		12,947		63,998
Doubtful		178		173		0		218		569
Total	$	76,479	$	1,188,680	$	3,042	$	351,034	$	1,619,235

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 September 30, 2018 and December 31, 2017:

(in thousands)	Real Estate Construction		Real Estate Mortgage		Home Equity		Consumer Direct		Consumer Indirect		Total
September 30, 2018
Performing	$	61,749	$	711,208	$	103,009	$	145,966	$	529,897	$	1,551,829
Nonperforming (1)		33		10,814		796		36		645		12,324
Total	$	61,782	$	722,022	$	103,805	$	146,002	$	530,542	$	1,564,153

December 31, 2017
Performing	$	66,817	$	695,034	$	98,800	$	137,692	$	489,019	$	1,487,362
Nonperforming (1)		541		14,536		556		62		648		16,343
Total	$	67,358	$	709,570	$	99,356	$	137,754	$	489,667	$	1,503,705

(1) A loan is considered nonperforming if it is 90 days or more past due and/or on nonaccrual.

The total of consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings are in process totaled $4.4 million at September 30, 2018 compared to $3.7 million at December 31, 2017.

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 September 30, 2018, December 31, 2017, and September 30, 2017:

	September 30, 2018
(in thousands)	Recorded Balance		Unpaid Contractual Principal Balance		Specific Allowance
Loans without a specific valuation allowance:
Commercial construction	$	2,804	$	2,804	$	0
Commercial secured by real estate		31,632		33,538		0
Commercial other		8,268		10,034		0
Real estate mortgage		1,878		1,880		0

Loans with a specific valuation allowance:
Commercial secured by real estate		1,980		3,116		641
Commercial other		321		321		95

Totals:
Commercial construction		2,804		2,804		0
Commercial secured by real estate		33,612		36,654		641
Commercial other		8,589		10,355		95
Real estate mortgage		1,878		1,880		0
Total	$	46,883	$	51,693	$	736

	Three Months Ended				Nine Months Ended
	September 30, 2018				September 30, 2018
(in thousands)	Average Investment in Impaired Loans		*Interest Income Recognized		Average Investment in Impaired Loans		*Interest Income Recognized
Loans without a specific valuation allowance:
Commercial construction	$	2,865	$	26	$	3,795	$	132
Commercial secured by real estate		30,216		349		30,588		1,073
Commercial other		8,518		125		8,857		405
Real estate construction		0		0		106		0
Real estate mortgage		1,882		13		1,596		24

Loans with a specific valuation allowance:
Commercial secured by real estate		2,005		0		2,112		1
Commercial other		339		8		220		12

Totals:
Commercial construction		2,865		26		3,795		132
Commercial secured by real estate		32,221		349		32,700		1,074
Commercial other		8,857		133		9,077		417
Real estate construction		0		0		106		0
Real estate mortgage		1,882		13		1,596		24
Total	$	45,825	$	521	$	47,274	$	1,647

	Year Ended December 31, 2017
(in thousands)	Recorded Balance		Unpaid Contractual Principal Balance		Specific Allowance		Average Investment in Impaired Loans		*Interest Income Recognized
Loans without a specific valuation allowance:
Commercial construction	$	4,431	$	4,439	$	0	$	4,835	$	200
Commercial secured by real estate		28,480		30,365		0		27,753		1,344
Equipment lease financing		0		0		0		34		0
Commercial other		9,481		11,252		0		10,444		539
Real estate construction		318		318		0		534		0
Real estate mortgage		1,564		1,570		0		1,591		36

Loans with a specific valuation allowance:
Commercial construction		153		173		25		155		0
Commercial secured by real estate		2,985		4,095		966		3,932		8
Commercial other		0		0		0		65		0

Totals:
Commercial construction		4,584		4,612		25		4,990		200
Commercial secured by real estate		31,465		34,460		966		31,685		1,352
Equipment lease financing		0		0		0		34		0
Commercial other		9,481		11,252		0		10,509		539
Real estate construction		318		318		0		534		0
Real estate mortgage		1,564		1,570		0		1,591		36
Total	$	47,412	$	52,212	$	991	$	49,343	$	2,127

	September 30, 2017
(in thousands)	Recorded Balance		Unpaid Contractual Principal Balance		Specific Allowance
Loans without a specific valuation allowance:
Commercial construction	$	4,613	$	4,621	$	0
Commercial secured by real estate		25,322		25,916		0
Commercial other		9,994		11,804		0
Real estate construction		873		873		0
Real estate mortgage		1,196		1,196		0

Loans with a specific valuation allowance:
Commercial construction		153		174		25
Commercial secured by real estate		3,918		5,023		1,301
Commercial other		130		133		65

Totals:
Commercial construction		4,766		4,795		25
Commercial secured by real estate		29,240		30,939		1,301
Commercial other		10,124		11,937		65
Real estate construction		873		873		0
Real estate mortgage		1,196		1,196		0
Total	$	46,199	$	49,740	$	1,391

	Three Months Ended				Nine Months Ended
	September 30, 2017				September 30, 2017
(in thousands)	Average Investment in Impaired Loans		*Interest Income Recognized		Average Investment in Impaired Loans		*Interest Income Recognized
Loans without a specific valuation allowance:
Commercial construction	$	4,662	$	50	$	4,955	$	136
Commercial secured by real estate		25,452		276		27,318		980
Equipment lease financing		0		0		45		0
Commercial other		10,191		123		10,717		396
Real estate construction		860		0		569		0
Real estate mortgage		1,197		8		1,601		30

Loans with a specific valuation allowance:
Commercial construction		153		0		156		0
Commercial secured by real estate		3,984		3		4,236		8
Commercial other		130		0		87		0

Totals:
Commercial construction		4,815		50		5,111		136
Commercial secured by real estate		29,436		279		31,554		988
Equipment lease financing		0		0		45		0
Commercial other		10,321		123		10,804		396
Real estate construction		860		0		569		0
Real estate mortgage		1,197		8		1,601		30
Total	$	46,629	$	460	$	49,684	$	1,550

*Cash basis interest is substantially the same as interest income recognized.

Included in certain loan categories of impaired loans are certain loans and leases that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral of principal and/or interest payments, regardless of the period of the modification. All of the loans identified as troubled debt restructuring were modified due to financial stress of the borrower. In order to determine if a borrower is experiencing financial difficulty, an evaluation is performed to determine the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under CTBI’s internal underwriting policy.

When we modify loans and leases in a troubled debt restructuring, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, we evaluate all troubled debt restructuring, including those that have payment defaults, for possible impairment and recognize impairment through the allowance.

During 2018, certain loans were modified in troubled debt restructurings, where economic concessions were granted to borrowers consisting of reductions in the interest rates, payment extensions, forgiveness of principal, and forbearances. Presented below, segregated by class of loans, are troubled debt restructurings that occurred during the three and nine months ended September 30, 2018 and 2017 and the year ended December 31, 2017:

	Three Months Ended September 30, 2018
(in thousands)	Number of Loans		Term Modification		Rate Modification		Combination		Post-Modification Outstanding Balance
Commercial:
Commercial secured by real estate		6		2,028		0		400		2,428
Residential:
Real estate mortgage		1		264		0		0		264
Total troubled debt restructurings		7	$	2,292	$	0	$	400	$	2,692

	Nine Months Ended September 30, 2018
(in thousands)	Number of Loans		Term Modification		Rate Modification		Combination		Post-Modification Outstanding Balance
Commercial:
Commercial construction		4	$	443	$	0	$	15	$	458
Commercial secured by real estate		23		4,587		0		1,383		5,970
Commercial other		8		465		0		0		465
Residential:
Real estate mortgage		1		264		0		0		264
Total troubled debt restructurings		36	$	5,759	$	0	$	1,398	$	7,157

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

	Three Months Ended September 30, 2017
(in thousands)	Number of Loans		Term Modification		Rate Modification		Combination		Post-Modification Outstanding Balance
Commercial:
Commercial secured by real estate		6	$	295	$	0	$	0	$	295
Commercial other		1		102		0		0		102
Total troubled debt restructurings		7	$	397	$	0	$	0	$	397

	Nine Months Ended September 30, 2017
(in thousands)	Number of Loans		Term Modification		Rate Modification		Combination		Post-Modification Outstanding Balance
Commercial:
Commercial construction		2	$	0	$	0	$	114	$	114
Commercial secured by real estate		11		874		0		192		1,066
Commercial other		10		237		0		136		373
Residential:
Real estate construction		1		846		0		0		846
Real estate mortgage		1		323		0		0		323
Total troubled debt restructurings		25	$	2,280	$	0	$	442	$	2,722

No charge-offs have resulted from modifications for any of the presented periods. We had commitments to extend additional credit in the amount of $42 thousand on loans that were considered troubled debt restructurings at September 30, 2018.

Loans retain their accrual status at the time of their modification. As a result, if a loan is on nonaccrual at the time it is modified, it stays as nonaccrual, and if a loan is on accrual at the time of the modification, it generally stays on accrual. Commercial and consumer loans modified in a troubled debt restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a troubled debt restructuring subsequently default, CTBI evaluates the loan for possible further impairment. The allowance for loan losses may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. Presented below, segregated by class of loans, are loans that were modified as troubled debt restructurings within the past twelve months which have subsequently defaulted. CTBI considers a loan in default when it is 90 days or more past due or transferred to nonaccrual.

(in thousands)	Three Months Ended September 30, 2018				Three Months Ended September 30, 2017
	Number of Loans		Recorded Balance		Number of Loans		Recorded Balance
Commercial:
Commercial construction		2	$	147		0	$	0
Commercial secured by real estate		0		0		2		961
Commercial other		1		6		0		0
Residential:
Real estate construction		0		0		1		846
Total defaulted restructured loans		3	$	153		3	$	1,807

(in thousands)	Nine Months Ended September 30, 2018				Nine Months Ended September 30, 2017
	Number of Loans		Recorded Balance		Number of Loans		Recorded Balance
Commercial:
Commercial construction		2	$	147		0	$	0
Commercial secured by real estate		1		17		2	$	961
Commercial other		2		31		0		0
Residential:
Real estate construction		0		0		1		846
Total defaulted restructured loans		5	$	195		3	$	1,807

Note 5 – Allowance for Loan and Lease Losses

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

	Three Months Ended September 30, 2018
(in thousands)	Commercial Construction		Commercial Secured by Real Estate			Equipment Lease Financing			Commercial Other			Real Estate Construction			Real Estate Mortgage			Home Equity			Consumer Direct			Consumer Indirect			Total
Allowance for loan losses
Beginning balance	$	740	$	14,658		$	17		$	4,637		$	618		$	5,234		$	866		$	1,910		$	7,091		$	35,771
Provision charged to expense		54		298			(2	)		82			(44	)		(566	)		(9	)		59			1,671			1,543
Losses charged off		0		(460	)		0			(521	)		0			(136	)		(19	)		(196	)		(1,496	)		(2,828	)
Recoveries		23		142			0			407			0			7			4			133			589			1,305
Ending balance	$	817	$	14,638		$	15		$	4,605		$	574		$	4,539		$	842		$	1,906		$	7,855		$	35,791

Ending balance:
Individually evaluated for impairment	$	0	$	641		$	0		$	95		$	0		$	0		$	0		$	0		$	0		$	736
Collectively evaluated for impairment	$	817	$	13,997		$	15		$	4,510		$	574		$	4,539		$	842		$	1,906		$	7,855		$	35,055

Loans
Ending balance:
Individually evaluated for impairment	$	2,804	$	33,612		$	0		$	8,589		$	0		$	1,878		$	0		$	0		$	0		$	46,883
Collectively evaluated for impairment	$	78,668	$	1,150,020		$	1,986		$	338,056		$	61,782		$	720,144		$	103,805		$	146,002		$	530,542		$	3,131,005

	Nine Months Ended September 30, 2018
(in thousands)	Commercial Construction		Commercial Secured by Real Estate			Equipment Lease Financing			Commercial Other			Real Estate Construction			Real Estate Mortgage			Home Equity			Consumer Direct			Consumer Indirect			Total
Allowance for loan losses
Beginning balance	$	686	$	14,509		$	18		$	5,039		$	660		$	5,688		$	857		$	1,863		$	6,831		$	36,151
Provision charged to expense		91		895			(3	)		98			(58	)		(625	)		18			402			3,600			4,418
Losses charged off		0		(937	)		0			(1,078	)		(28	)		(550	)		(38	)		(687	)		(5,013	)		(8,331	)
Recoveries		40		171			0			546			0			26			5			328			2,437			3,553
Ending balance	$	817	$	14,638		$	15		$	4,605		$	574		$	4,539		$	842		$	1,906		$	7,855		$	35,791

Ending balance:
Individually evaluated for impairment	$	0	$	641		$	0		$	95		$	0		$	0		$	0		$	0		$	0		$	736
Collectively evaluated for impairment	$	817	$	13,997		$	15		$	4,510		$	574		$	4,539		$	842		$	1,906		$	7,855		$	35,055

Loans
Ending balance:
Individually evaluated for impairment	$	2,804	$	33,612		$	0		$	8,589		$	0		$	1,878		$	0		$	0		$	0		$	46,883
Collectively evaluated for impairment	$	78,668	$	1,150,020		$	1,986		$	338,056		$	61,782		$	720,144		$	103,805		$	146,002		$	530,542		$	3,131,005

	Three Months Ended September 30, 2017
(in thousands)	Commercial Construction			Commercial Secured by Real Estate			Equipment Lease Financing			Commercial Other			Real Estate Construction		Real Estate Mortgage			Home Equity			Consumer Direct			Consumer Indirect			Total
Allowance for loan losses
Beginning balance	$	669		$	15,299		$	33		$	4,993		$	581	$	5,662		$	747		$	1,866		$	7,283		$	37,133
Provision charged to expense		(19	)		(1	)		(14	)		210			49		276			113			47			5			666
Losses charged off		(6	)		(249	)		0			(549	)		0		(158	)		(53	)		(166	)		(1,262	)		(2,443	)
Recoveries		28			53			0			308			0		6			0			110			530			1,035
Ending balance	$	672		$	15,102		$	19		$	4,962		$	630	$	5,786		$	807		$	1,857		$	6,556		$	36,391

Ending balance:
Individually evaluated for impairment	$	25		$	1,301		$	0		$	65		$	0	$	0		$	0		$	0		$	0		$	1,391
Collectively evaluated for impairment	$	647		$	13,801		$	19		$	4,897		$	630	$	5,786		$	807		$	1,857		$	6,556		$	35,000

Loans
Ending balance:
Individually evaluated for impairment	$	4,766		$	29,240		$	0		$	10,124		$	873	$	1,196		$	0		$	0		$	0		$	46,199
Collectively evaluated for impairment	$	69,516		$	1,168,364		$	3,290		$	329,213		$	63,568	$	711,041		$	96,755		$	137,657		$	487,818		$	3,067,222

	Nine Months Ended September 30, 2017
(in thousands)	Commercial Construction			Commercial Secured by Real Estate			Equipment Lease Financing			Commercial Other			Real Estate Construction		Real Estate Mortgage			Home Equity			Consumer Direct			Consumer Indirect			Total
Allowance for loan losses
Beginning balance	$	884		$	14,191		$	42		$	4,656		$	629	$	6,027		$	774		$	1,885		$	6,845		$	35,933
Provision charged to expense		(239	)		1,622			(23	)		1,229			0		1			87			243			1,739			4,659
Losses charged off		(10	)		(776	)		0			(1,386	)		0		(321	)		(57	)		(675	)		(3,898	)		(7,123	)
Recoveries		37			65			0			463			1		79			3			404			1,870			2,922
Ending balance	$	672		$	15,102		$	19		$	4,962		$	630	$	5,786		$	807		$	1,857		$	6,556		$	36,391

Ending balance:
Individually evaluated for impairment	$	25		$	1,301		$	0		$	65		$	0	$	0		$	0		$	0		$	0		$	1,391
Collectively evaluated for impairment	$	647		$	13,801		$	19		$	4,897		$	630	$	5,786		$	807		$	1,857		$	6,556		$	35,000

Loans
Ending balance:
Individually evaluated for impairment	$	4,766		$	29,240		$	0		$	10,124		$	873	$	1,196		$	0		$	0		$	0		$	46,199
Collectively evaluated for impairment	$	69,516		$	1,168,364		$	3,290		$	329,213		$	63,568	$	711,041		$	96,755		$	137,657		$	487,818		$	3,067,222

	Year Ended December 31, 2017
(in thousands)	Commercial Construction			Commercial Secured by Real Estate			Equipment Lease Financing			Commercial Other			Real Estate Construction		Real Estate Mortgage			Home Equity			Consumer Direct			Consumer Indirect			Total
Allowance for loan losses
Beginning balance	$	884		$	14,191		$	42		$	4,656		$	629	$	6,027		$	774		$	1,885		$	6,845		$	35,933
Provision charged to expense		(237	)		2,281			(24	)		1,744			31		189			257			418			2,862			7,521
Losses charged off		(10	)		(2,038	)		0			(1,893	)		0		(615	)		(178	)		(965	)		(5,386	)		(11,085	)
Recoveries		49			75			0			532			0		87			4			525			2,510			3,782
Ending balance	$	686		$	14,509		$	18		$	5,039		$	660	$	5,688		$	857		$	1,863		$	6,831		$	36,151

Ending balance:
Individually evaluated for impairment	$	25		$	966		$	0		$	0		$	0	$	0		$	0		$	0		$	0		$	991
Collectively evaluated for impairment	$	661		$	13,543		$	18		$	5,039		$	660	$	5,688		$	857		$	1,863		$	6,831		$	35,160

Loans
Ending balance:
Individually evaluated for impairment	$	4,584		$	31,465		$	0		$	9,481		$	318	$	1,564		$	0		$	0		$	0		$	47,412
Collectively evaluated for impairment	$	71,895		$	1,157,215		$	3,042		$	341,553		$	67,040	$	708,006		$	99,356		$	137,754		$	489,667		$	3,075,528

Note 6 – Other Real Estate Owned

Activity for other real estate owned was as follows:

	Three Months Ended						Nine Months Ended
	September 30						September 30
(in thousands)	2018			2017			2018			2017
Beginning balance of other real estate owned	$	30,262		$	32,785		$	31,996		$	35,856
New assets acquired		849			2,722			3,692			4,303
Capitalized costs		0			0			0			0
Fair value adjustments		(670	)		(884	)		(1,990	)		(2,871	)
Sale of assets		(775	)		(2,575	)		(4,032	)		(5,240	)
Ending balance of other real estate owned	$	29,666		$	32,048		$	29,666		$	32,048

Carrying costs and fair value adjustments associated with foreclosed properties for the three months ended September 30, 2018 and 2017 were $1.1 million and $1.3 million, respectively. Carrying costs and fair value adjustments associated with foreclosed properties for the nine months ended September 30, 2018 and 2017 were $3.3 million and $4.1 million, respectively. See note 1 for a description of our accounting policies relative to foreclosed properties and other real estate owned.

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

(in thousands)	September 30 2018		December 31 2017
1-4 family	$	5,475	$	5,908
Agricultural/farmland		0		68
Construction/land development/other		15,230		16,158
Multifamily		88		176
Non-farm/non-residential		8,873		9,686
Total foreclosed properties	$	29,666	$	31,996

Note 7 – Repurchase Agreements

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

We monitor collateral levels on a continuous basis and maintain records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and we segregate the security from its general assets in accordance with regulations governing custodial holdings of securities. The primary risk with our repurchase agreements is market risk associated with the securities securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. The carrying value of investment securities available-for-sale pledged as collateral under repurchase agreements totaled $289.5 million and $295.4 million at September 30, 2018 and December 31, 2017, respectively.

The remaining contractual maturity of the securities sold under agreements to repurchase by class of collateral pledged included in the accompanying consolidated balance sheets as of September 30, 2018 and December 31, 2017 is presented in the following tables:

	September 30, 2018
	Remaining Contractual Maturity of the Agreements
(in thousands)	Overnight and Continuous		Up to 30 days		30-90 days		Greater Than 90 days		Total
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and government agencies	$	42,375	$	41,540	$	0	$	34,733	$	118,648
State and political subdivisions		61,820		5,961		0		7,306		75,087
U.S. government sponsored agency mortgage-backed securities		13,374		24,499		0		19,375		57,248
Total	$	117,569	$	72,000	$	0	$	61,414	$	250,983

	December 31, 2017
	Remaining Contractual Maturity of the Agreements
(in thousands)	Overnight and Continuous		Up to 30 days		30-90 days		Greater Than 90 days		Total
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and government agencies	$	24,957	$	0	$	16,771	$	67,867	$	109,595
State and political subdivisions		62,620		0		567		12,161		75,348
U.S. government sponsored agency mortgage-backed securities		13,360		0		4,662		40,849		58,871
Total	$	100,937	$	0	$	22,000	$	120,877	$	243,814

Note 8 – Fair Market Value of Financial Assets and Liabilities

Fair Value Measurements

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

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

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

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

Recurring Measurements

The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 and indicate the level within the fair value hierarchy of the valuation techniques.

			Fair Value Measurements at September 30, 2018 Using
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets measured – recurring basis
Available-for-sale securities:
U.S. Treasury and government agencies	$	242,799	$	91,465	$	151,334	$	0
State and political subdivisions		123,992		0		123,992		0
U.S. government sponsored agenc y mortgage-backed securities		201,911		0		201,911		0
Other debt securities		506		0		506		0
Mortgage servicing rights		3,815		0		0		3,815

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

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. These valuation methodologies were applied to all of CTBI’s financial assets carried at fair value. CTBI had no liabilities measured and recorded at fair value as of September 30, 2018 and December 31, 2017. There have been no significant changes in the valuation techniques during the quarter or nine months ended September 30, 2018. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available-for-Sale Securities

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

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

In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements are estimated on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States. As of September 30, 2018 and December 31, 2017, CTBI does not own any securities valued using Level 3 inputs.

Mortgage Servicing Rights

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

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

Transfers between Levels

There were no transfers between Levels 1, 2, and 3 as of September 30, 2018.

Level 3 Reconciliation

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

Mortgage Servicing Rights
	Three Months Ended						Nine Months Ended
	September 30						September 30
(in thousands)	2018			2017			2018			2017
Beginning balance	$	3,772		$	3,304		$	3,484		$	3,433
Total recognized gains (losses)
Included in net income		45			5			341			(73	)
Issues		118			98			329			269
Settlements		(120	)		(124	)		(339	)		(346	)
Ending balance	$	3,815		$	3,283		$	3,815		$	3,283

Total gains (losses) for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date	$	45		$	5		$	341		$	(73	)

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

Noninterest Income
	Three Months Ended						Nine Months Ended
	September 30						September 30
(in thousands)	2018			2017			2018		2017
Total gains (losses)	$	(75	)	$	(119	)	$	2	$	(419	)

Nonrecurring Measurements

The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a nonrecurring basis as of September 30, 2018 and December 31, 2017 and indicate the level within the fair value hierarchy of the valuation techniques.

			Fair Value Measurements at September 30, 2018 Using
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets measured – nonrecurring basis
Impaired loans (collateral dependent)	$	556	$	0	$	0	$	556
Other real estate owned		7,640		0		0		7,640

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

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

Impaired Loans (Collateral Dependent)

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

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

Loans considered impaired under ASC 310-35, Impairment of a Loan, are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are subject to nonrecurring fair value adjustments to reflect subsequent (i) partial write-downs that are based on the observable market price or current appraised value of the collateral or (ii) the full charge-off of the loan carrying value. Quarter-to-date fair value adjustments on impaired loans disclosed above were $0.1 million for the quarter ended September 30, 2018 and $0.3 million for the quarters ended December 31, 2017 and September 30, 2017. Year-to-date fair value adjustments were $0.2 million for the nine months ended September 30, 2018, $1.0 million for the year ended December 31, 2017, and $0.7 million for the nine months ended September 30, 2017.

Other Real Estate Owned

In accordance with the provisions of ASC 360, Property, Plant, and Equipment, other real estate owned (“OREO”) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of OREO is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy. Long-lived assets are subject to nonrecurring fair value adjustments to reflect subsequent partial write-downs that are based on the observable market price or current appraised value of the collateral. Quarter-to-date fair value adjustments on other real estate/assets owned disclosed above were $0.8 million, $0.2 million, and $0.9 million for the quarters ended September 30, 2018, December 31, 2017, and September 30, 2017, respectively. Year-to-date adjustments were $1.8 million for the nine months ended September 30, 2018, $2.5 million for the year ended December 31, 2017, and $2.6 million for the nine months ended September 30, 2017.

Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months. Appraisers are selected from the list of approved appraisers maintained by management.

Unobservable (Level 3) Inputs

The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at September 30, 2018 and December 31, 2017.

(in thousands)	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at September 30, 2018		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Mortgage servicing rights	$	3,815	Discount cash flows, computer pricing model	Constant prepayment rate		7.0% - 28.0% (8.3%)
				Probability of default		0.0% - 100.0% (2.5%)
				Discount rate		10.0% - 11.5% (10.1%)

Impaired loans (collateral-dependent)	$	556	Market comparable properties	Marketability discount		10.0% - 100.0% (44.1%)

Other real estate owned	$	7,640	Market comparable properties	Comparability adjustments		6.0% - 32.0% (15.7%)

(in thousands)	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at December 31, 2017		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Mortgage servicing rights	$	3,484	Discount cash flows, computer pricing model	Constant prepayment rate		7.0% - 45.0% (10.0%)
				Probability of default		0.0% - 100.0% (3.0%)
				Discount rate		10.0% - 11.5% (10.1%)

Impaired loans (collateral-dependent)	$	2,709	Market comparable properties	Marketability discount		1.9% - 89.8% (38.5%)

Other real estate owned	$	18,951	Market comparable properties	Comparability adjustments		6.0% - 58.6% (15.0%)

Sensitivity of Significant Unobservable Inputs

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

Mortgage Servicing Rights

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

Fair Value of Financial Instruments

The following table presents estimated fair value of CTBI’s financial instruments as of September 30, 2018 and indicates the level within the fair value hierarchy of the valuation techniques. In accordance with the prospective adoption of ASU 2016-01, the fair values as of September 30, 2018 were measured using an exit price notion.

			Fair Value Measurements at September 30, 2018 Using
(in thousands)	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	171,333	$	171,333	$	0	$	0
Certificates of deposit in other banks		5,145		0		5,134		0
Securities available-for-sale		569,208		91,465		477,743		0
Securities held-to-maturity		659		0		660		0
Loans held for sale		1,029		1,050		0		0
Loans, net		3,142,097		0		0		3,137,941
Federal Home Loan Bank stock		14,713		0		14,713		0
Federal Reserve Bank stock		4,887		0		4,887		0
Accrued interest receivable		14,628		0		14,628		0
Mortgage servicing rights		3,815		0		0		3,815

Financial liabilities:
Deposits	$	3,273,646	$	826,804	$	2,460,736	$	0
Repurchase agreements		250,983		0		0		251,261
Federal funds purchased		1,305		0		1,305		0
Advances from Federal Home Loan Bank		787		0		845		0
Long-term debt		59,341		0		0		44,166
Accrued interest payable		4,381		0		4,381		0

Unrecognized financial instruments:
Letters of credit	$	0	$	0	$	0	$	0
Commitments to extend credit		0		0		0		0
Forward sale commitments		0		0		0		0

The following table presents estimated fair value of CTBI’s financial instruments as of December 31, 2017 and indicates the level within the fair value hierarchy of the valuation techniques.

(in thousands)			Fair Value Measurements at December 31, 2017 Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	175,274	$	175,274	$	0	$	0
Certificates of deposit in other banks		9,800		0		9,772		0
Securities available-for-sale		585,761		88,956		496,805		0
Securities held-to-maturity		659		0		660		0
Loans held for sale		1,033		1,060		0		0
Loans, net		3,086,789		0		0		3,092,437
Federal Home Loan Bank stock		17,927		0		17,927		0
Federal Reserve Bank stock		4,887		0		4,887		0
Accrued interest receivable		13,338		0		13,338		0
Mortgage servicing rights		3,484		0		0		3,484

Financial liabilities:
Deposits	$	3,263,863	$	790,930	$	2,319,278	$	0
Repurchase agreements		243,814		0		0		243,932
Federal funds purchased		7,312		0		7,312		0
Advances from Federal Home Loan Bank		845		0		841		0
Long-term debt		59,341		0		0		44,166
Accrued interest payable		2,228		0		2,228		0

Unrecognized financial instruments:
Letters of credit	$	0	$	0	$	0	$	0
Commitments to extend credit		0		0		0		0
Forward sale commitments		0		0		0		0

Note 9 – Earnings Per Share

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

	Three Months Ended				Nine Months Ended
	September 30				September 30
(in thousands except per share data)	2018		2017		2018		2017
Numerator:
Net income	$	16,106	$	13,763	$	43,519	$	36,581

Denominator:
Basic earnings per share:
Weighted average shares		17,691		17,633		17,683		17,625
Diluted earnings per share:
Effect of dilutive stock options and restricted stock grants		19		20		17		20
Adjusted weighted average shares		17,710		17,653		17,700		17,645

Earnings per share:
Basic earnings per share	$	0.91	$	0.78	$	2.46	$	2.08
Diluted earnings per share		0.91		0.78		2.46		2.07

There were no options to purchase common shares that were excluded from the diluted calculations above for the three and nine months ended September 30, 2018 and 2017. In addition to in-the-money stock options, unvested restricted stock grants were also used in the calculation of diluted earnings per share based on the treasury method.

Note 10 – Accumulated Other Comprehensive Income

Unrealized gains on AFS securities

Amounts reclassified from accumulated other comprehensive income (AOCI) and the affected line items in the statements of income during the three and nine months ended September 30, 2018 and 2017 were:

	Amounts Reclassified from AOCI
(in thousands)	Three Months Ended September 30					Nine Months Ended September 30
(in thousands)	2018			2017		2018		2017
Affected line item in the statements of income
Securities gains	$	(2	)	$	48	$	149	$	58
Tax expense		0			17		32		20
Total reclassifications out of AOCI	$	(2	)	$	31	$	117	$	38

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

Results of Operations

Overview

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

v Our Business

v Results of Operations and Financial Condition

v Dividends

v Liquidity and Market Risk

v Interest Rate Risk

v Capital Resources

v Impact of Inflation, Changing Prices, and Economic Conditions

v Stock Repurchase Program

v Critical Accounting Policies and Estimates

Our Business

Community Trust Bancorp, Inc. (“CTBI”) is a bank holding company headquartered in Pikeville, Kentucky. Currently, we own one commercial bank, Community Trust Bank, Inc. (“CTB”) and one trust company, Community Trust and Investment Company, Inc. Through our subsidiaries, we have eighty banking locations in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee, four trust offices across Kentucky, and one trust office in northeastern Tennessee. At September 30, 2018, we had total consolidated assets of $4.2 billion and total consolidated deposits, including repurchase agreements, of $3.5 billion. Total shareholders’ equity at September 30, 2018 was $550.3 million. Trust assets under management, which are excluded from CTBI’s total consolidated assets, at September 30, 2018, were $2.2 billion. Trust assets under management include CTB’s investment portfolio totaling $0.6 billion.

Through its subsidiaries, CTBI engages in a wide range of commercial and personal banking and trust and wealth management activities, which include accepting time and demand deposits; making secured and unsecured loans to corporations, individuals and others; providing cash management services to corporate and individual customers; issuing letters of credit; renting safe deposit boxes; and providing funds transfer services. The lending activities of CTB include making commercial, construction, mortgage, and personal loans. Lease-financing, lines of credit, revolving lines of credit, term loans, and other specialized loans, including asset-based financing, are also available. Our corporate subsidiaries act as trustees of personal trusts, as executors of estates, as trustees for employee benefit trusts, as paying agents for bond and stock issues, as investment agent, as depositories for securities, and as providers of full service brokerage and insurance services. For further information, see Item 1 of our annual report on Form 10-K for the year ended December 31, 2017.

Results of Operations and Financial Condition

We reported record earnings for the third quarter 2018 of $16.1 million, or $0.91 per basic share, compared to $11.6 million, or $0.66 per basic share, earned during the second quarter 2018 and $13.8 million, or $0.78 per basic share, earned during the third quarter 2017. Earnings for the nine months ended September 30, 2018 were $43.5 million, or $2.46 per basic share, compared to $36.6 million or $2.08 per basic share earned during the nine months ended September 30, 2017.

Quarterly Highlights

v	Net interest income for the quarter of $36.1 million was an increase of $1.0 million, or 2.8%, from second quarter 2018 and $1.2 million, or 3.3%, from prior year third quarter.

v	Provision for loan losses for the quarter ended September 30, 2018 decreased $0.4 million from prior quarter but increased $0.9 million from prior year same quarter.

v	Our loan portfolio increased $8.8 million, an annualized 1.1%, during the quarter and $54.9 million, or an annualized 2.4%, from December 31, 2017.

v	Net loan charge-offs for the quarter ended September 30, 2018 were $1.5 million, or 0.19% of average loans annualized, compared to $1.3 million, or 0.17%, experienced for the second quarter 2018 and $1.4 million, or 0.18%, for the third quarter 2017.

v	Nonperforming loans at $21.0 million decreased $1.0 million from June 30, 2018 and $7.3 million from December 31, 2017. Nonperforming assets at $50.8 million decreased $1.6 million from June 30, 2018 and $9.7 million from December 31, 2017.

v	Deposits, including repurchase agreements, decreased $33.6 million during the quarter but increased $17.0 million from December 31, 2017.

Noninterest income for the quarter ended September 30, 2018 of $12.7 million was a decrease of $1.1 million, or 7.8%, from prior quarter but increased $0.5 million, or 3.8%, from prior year same quarter. The decrease in noninterest income from prior quarter was primarily due to a gain in the second quarter on the sale of a partnership interest resulting from a low income housing tax credit recapture .

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

Income Statement Review

(dollars in thousands)							Change 2018 vs. 2017
Nine Months Ended September 30	2018			2017			Amount			Percent
Net interest income	$	105,875		$	102,300		$	3,575			3.5	%
Provision for loan losses		4,418			4,659			(241	)		(5.2	)
Noninterest income		39,713			36,092			3,621			10.0
Noninterest expense		89,226			82,142			7,084			8.6
Income taxes		8,425			15,010			(6,585	)		(43.9	)
Net income	$	43,519		$	36,581		$	6,938			19.0	%

Average earning assets	$	3,905,673		$	3,775,572		$	130,101			3.4	%

Yield on average earnings assets, tax equivalent*		4.34	%		4.13	%		0.21	%		5.3	%
Cost of interest bearing funds		0.97	%		0.63	%		0.34	%		55.4	%
Net interest margin, tax equivalent*		3.65	%		3.68	%		(0.03	)%		(0.8	)%

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

Net Interest Income

Net interest income for the quarter of $36.1 million was an increase of $1.0 million, or 2.8%, from second quarter 2018 and $1.2 million, or 3.3%, from prior year third quarter. Net interest income for the nine months ended September 30, 2018 increased $3.6 million from September 30, 2017 with a 3 basis point decrease in our net interest margin and a $130.1 million increase in average earning assets. Our yield on average earning assets for the nine months ended September 30, 2018 increased 21 basis points from prior year, and our cost of funds increased 34 basis points from prior year. Our ratio of average loans to deposits, including repurchase agreements, was 88.7% for the nine months ended September 30, 2018 compared to 89.7% for the nine months ended September 30, 2017.

Provision for Loan Losses

The provision for loan losses that was added to the allowance for the third quarter 2018 was $1.5 million compared to $1.9 million for the quarter ended June 30, 2018 and $0.7 million for the quarter ended September 30, 2017. Year-to-date allocations to the reserve were $4.4 million at September 30, 2018 compared to $4.7 million at September 30, 2017. This provision represented a charge against current earnings in order to maintain the allowance at an appropriate level determined using the accounting estimates described in the Critical Accounting Policies and Estimates section. Our reserve coverage (allowance for loan and lease loss reserve to nonperforming loans) at September 30, 2018 was 170.1% compared to 162.6% at June 30, 2018 and 121.2% at September 30, 2017. Our loan loss reserve as a percentage of total loans outstanding remained at 1.13% from June 30, 2018 to September 30, 2018, down from the 1.17% at September 30, 2017. The decline in the loan loss reserve from prior year is primarily attributable to a reduction in our soft factor allocation for long-term trends in delinquencies.

Noninterest Income

Noninterest income for the quarter ended September 30, 2018 of $12.7 million was a decrease of $1.1 million, or 7.8%, from prior quarter but a $0.5 million, or 3.8%, increase from prior year same quarter. The decrease in noninterest income from prior quarter was primarily due to a $1.0 million gain in the second quarter on the sale of a partnership interest resulting from a low income housing tax credit recapture. The increase from prior year same quarter was a result of increases in deposit service charges ($0.2 million), trust revenue ($0.3 million), and loan related fees ($0.2 million), partially offset by a $0.2 million decrease in insurance commissions. The increase in loan related fees was a result of fluctuations in the fair value adjustments of our mortgage servicing rights . Noninterest income for the nine months ended September 30, 2018 was a $3.6 million, or 10.0%, increase from prior year. Year over year noninterest income has been positively impacted by increases in deposit service charges ($0.7 million), trust revenue ($0.9 million), loan related fees ($0.5 million), and bank owned life insurance income ($1.5 million).

Noninterest Expense

Noninterest expense for the quarter ended September 30, 2018 of $28.1 million decreased $4.3 million, or 13.4%, from prior quarter, but increased $1.2 million, or 4.4%, from prior year same quarter. The variance in noninterest expense from prior quarter was primarily due to the $3.6 million increase in a customer reimbursement accrual in June 2018, which is more fully disclosed in our Form 8-K dated July 25, 2018. The increase from prior year same quarter was primarily a result of a $1.2 million increase in personnel expense with increases in salaries ($0.2 million) , bonuses ($0.5 million), and the cost of group medical and life insurance ($0.3 million). Noninterest expense for the nine months ended September 30, 2018 was $89.2 million, a $7.1 million, or 8.6%, increase over the first nine months of 2017, with a $3.3 million increase in personnel expense in addition to the $3.6 million increased customer reimbursement accrual discussed above.

Balance Sheet Review

CTBI’s total assets at $4.2 billion decreased $31.3 million, or 3.0% annualized, from June 30, 2018 but increased $37.6 million, or 1.2% annualized, from December 31, 2017. Loans outstanding at September 30, 2018 were $3.2 billion, an increase of $8.8 million, or an annualized 1.1%, from June 30, 2018 and an increase of $54.9 million, or an annualized 2.4%, from December 31, 2017. We experienced an increase during the nine months ended September 30, 2018 of $40.9 million in the indirect loan portfolio, $11.3 million in the residential loan portfolio, and $8.2 million in the consumer direct loan portfolio, partially offset by a decrease of $5.5 million in the commercial loan portfolio. CTBI’s investment portfolio decreased $16.6 million, or an annualized 11.2%, from June 30, 2018 and $16.6 million, or an annualized 3.8%, from December 31, 2017. Deposits in other banks decreased $33.8 million from prior quarter as a result of a $40 million paydown in brokered deposits. Deposits, including repurchase agreements, at $3.5 billion decreased $33.6 million, or an annualized 3.7%, from June 30, 2018 but increased $17.0 million, or an annualized 0.6%, from December 31, 2017.

Shareholders’ equity at September 30, 2018 was $550.3 million, a 5.9% annualized increase from the $542.2 million at June 30, 2018 and a 4.9% annualized increase from the $530.7 million at December 31, 2017. Our tangible common equity/tangible assets ratio at September 30, 2018 was 11.80%.

Loans

(in thousands)	September 30, 2018
Loan Category	Balance		Variance from Prior Year-End			YTD Net Charge-Offs			Nonperforming		ALLL
Commercial:
Construction	$	81,472		6.5	%	$	40		$	666	$	817
Secured by real estate		1,183,632		(0.4	)		(766	)		7,514		14,638
Equipment lease financing		1,986		(34.7	)		0			0		15
Commercial other		346,645		(1.3	)		(532	)		533		4,605
Total commercial		1,613,735		(0.3	)		(1,258	)		8,713		20,075

Residential:
Real estate construction		61,782		(8.3	)		(28	)		33		574
Real estate mortgage		722,022		1.8			(524	)		10,814		4,539
Home equity		103,805		4.5			(33	)		796		842
Total residential		887,609		1.3			(585	)		11,643		5,955

Consumer:
Consumer direct		146,002		6.0			(359	)		36		1,906
Consumer indirect		530,542		8.3			(2,576	)		645		7,855
Total consumer		676,544		7.8			(2,935	)		681		9,761

Total loans	$	3,177,888		1.8	%	$	(4,778	)	$	21,037	$	35,791

Asset Quality

CTBI’s total nonperforming loans, not including performing troubled debt restructurings, were $21.0 million, or 0.66% of total loans, at September 30, 2018 compared to $22.0 million, or 0.69% of total loans, at June 30, 2018 and $28.3 million, or 0.91% of total loans, at December 31, 2017. Accruing loans 90+ days past due increased $0.8 million from prior quarter but decreased $2.2 million from December 31, 2017. Nonaccrual loans decreased $1.8 million during the quarter and $5.1 million from December 31, 2017. Accruing loans 30-89 days past due at $28.2 million was an increase of $4.7 million from June 30, 2018 and $8.8 million from December 31, 2017. Our loan portfolio management processes focus on the immediate identification, management, and resolution of problem loans to maximize recovery and minimize loss. Our loan risk management processes include weekly delinquent loan review meetings at the market levels and monthly delinquent loan review meetings involving senior corporate management to review all nonaccrual loans and loans 30 days or more past due. Any activity regarding a criticized/classified loan (i.e. problem loan) must be approved by CTB’s Watch List Asset Committee (i.e. Problem Loan Committee). CTB’s Watch List Asset Committee also meets on a quarterly basis and reviews every criticized/classified loan of $100,000 or greater. We also have a Loan Review Department that reviews every market within CTB annually and performs extensive testing of the loan portfolio to assure the accuracy of loan grades and classifications for delinquency, troubled debt restructuring, impaired status, impairment, nonaccrual status, and adequate loan loss reserves.

Impaired loans, loans not expected to meet contractual principal and interest payments other than insignificant delays, at September 30, 2018 totaled $46.9 million, a $0.2 million increase from the $46.7 million at June 30, 2018 but a $0.5 million decrease from the $47.4 million at December 31, 2017. Management evaluates all impaired loans for the amount of impairment, if any, and records a direct charge-off or provides specific reserves when necessary.

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

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

Our level of foreclosed properties at $29.7 million at September 30, 2018 was a $0.6 million decrease from the $30.3 million at June 30, 2018 and a $2.3 million decrease from the $32.0 million at December 31, 2017. Sales of foreclosed properties for the nine months ended September 30, 2018 totaled $4.0 million while new foreclosed properties totaled $3.7 million. At September 30, 2018, the book value of properties under contracts to sell was $2.8 million; however, the closings had not occurred at quarter-end.

When foreclosed properties are acquired, appraisals are obtained and the properties are booked at the current market value less expected sales costs. Additionally, periodic updated appraisals are obtained on unsold foreclosed properties. When an updated appraisal reflects a fair market value below the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected sales costs. Charges to earnings in the third quarter 2018 to reflect the decrease in current market values of foreclosed properties totaled $0.7 million. There were twenty-four properties reappraised during the third quarter 2018. Of these, fifteen properties were written down by a total of $0.4 million. Charges were $0.9 million during the quarters ended June 30, 2018 and September 30, 2017. Charges to earnings for the nine months ended September 30, 2018 were $2.0 million compared to $2.9 million for the nine months ended September 30, 2017. Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months. Approximately ninety-nine percent of our OREO properties have appraisals dated within the past 18 months. Management anticipates that our foreclosed properties will remain elevated as we work through current market conditions.

The appraisal aging analysis of foreclosed properties, as well as the holding period, at September 30, 2018 is shown below:

(in thousands)
Appraisal Aging Analysis			Holding Period Analysis
Days Since Last Appraisal	Current Book Value		Holding Period	Current Book Value
Up to 3 months	$	2,110	Less than one year	$	3,151
3 to 6 months		5,778	1 year		2,698
6 to 9 months		3,377	2 years		7,480
9 to 12 months		1,769	3 years		2,387
12 to 18 months		16,329	4 years		1,626
18 to 24 months		171	5 years		72
Over 24 months		132	6 years*		1,124
Total	$	29,666	7 years*		8,603
			8 years*		122
			9 years*		2,403
			Total	$	29,666

*Regulatory approval is required and has been obtained to hold these properties beyond the initial period of 5 years. Additional approval may be required to continue to hold these properties should they not be liquidated during the extension period, which is typically one year. To the extent we are not able to sell a foreclosed property in 10 years, we will be required to relinquish ownership of that property.

Net loan charge-offs for the quarter ended September 30, 2018 were $1.5 million, or 0.19% of average loans annualized, compared to $1.3 million, or 0.17%, experienced for the second quarter 2018 and $1.4 million, or 0.18%, for the third quarter 2017. Net loan charge-offs for the nine months ended September 30, 2018 were $4.8 million, or 0.20% of average loans, compared to $4.2 million, or 0.19% of average loans, experienced for the nine months ended September 30, 2017. Of the net charge-offs for the nine months, $1.3 million were in commercial loans, $2.6 million were in indirect auto loans, $0.6 million were in residential loans, and $0.3 million were in consumer direct loans.

Dividends

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

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

Liquidity and Market Risk

The objective of CTBI’s Asset/Liability management function is to maintain consistent growth in net interest income within our policy limits. This objective is accomplished through management of our consolidated balance sheet composition, liquidity, and interest rate risk exposures arising from changing economic conditions, interest rates, and customer preferences. The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand or deposit withdrawals. This is accomplished by maintaining liquid assets in the form of cash and cash equivalents and investment securities, sufficient unused borrowing capacity, and growth in core deposits and wholesale funding (including the use of wholesale brokered deposits). As of September 30, 2018, we had approximately $171.3 million in cash and cash equivalents and approximately $569.2 million in securities valued at estimated fair value designated as available-for-sale and available to meet liquidity needs on a continuing basis compared to $175.3 million and $585.8 million at December 31, 2017. Additional asset-driven liquidity is provided by the remainder of the securities portfolio and the repayment of loans. In addition to core deposit funding, we also have a variety of other short-term and long-term funding sources available. As of September 30, 2018, we had wholesale brokered deposits outstanding of $42.3 million with a weighted average maturity of 1.83 years compared to $82.3 million with a weighted average maturity of 1.67 years at December 31, 2017. We also rely on Federal Home Loan Bank advances for both liquidity and management of our asset/liability position. Federal Home Loan Bank advances were $0.8 million at September 30, 2018 and December 31, 2017. As of September 30, 2018, we had a $352.3 million available borrowing position with the Federal Home Loan Bank compared to $295.5 million at December 31, 2017. We generally rely upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash for our investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, use of short-term borrowing facilities such as repurchase agreements and federal funds purchased, use of wholesale brokered deposits, and issuance of long-term debt. At September 30, 2018 and December 31, 2017, we had $57 million in lines of credit with various correspondent banks available to meet any future cash needs. Included in such $57 million is a $12 million line of credit which CTBI does not intend to renew when it expires on November 30, 2018. Our primary investing activities include purchases of securities and loan originations. We do not rely on any one source of liquidity and manage availability in response to changing consolidated balance sheet needs. Included in our cash and cash equivalents at September 30, 2018 were deposits with the Federal Reserve of $108.5 million compared to $124.3 million at December 31, 2017. Additionally, we project cash flows from our investment portfolio to generate additional liquidity over the next 90 days.

The investment portfolio consists of investment grade short-term issues suitable for bank investments. The majority of the investment portfolio is in U.S. government and government sponsored agency issuances. At September 30, 2018, available-for-sale (“AFS”) securities comprised substantially all of the total investment portfolio, and the AFS portfolio was approximately 103% of equity capital. Ninety-four percent of the pledge eligible portfolio was pledged.

Interest Rate Risk

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

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

Capital Resources

Shareholders’ equity was $550.3 million at September 30, 2018 and $530.7 million at December 31, 2017. CTBI’s annualized dividend yield to shareholders as of September 30, 2018 was 3.11%. Our primary source of capital growth is the retention of earnings. Cash dividends were $1.02 per share and $0.97 per share for the nine months ended September 30, 2018 and 2017, respectively. We retained 58.5% of our earnings for the first nine months of 2018 compared to 53.4% for the first nine months of 2017.

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

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

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

As of September 30, 2018, CTBI had a common equity Tier 1 capital ratio of 16.08%, a Tier 1 capital ratio of 17.94%, a total capital ratio of 19.11%, and a Tier 1 leverage ratio of 13.37. Our capital conservation buffer at September 30, 2018 was 11.11%.

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

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

Impact of Inflation, Changing Prices, and Economic Conditions

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

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

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

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

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

Stock Repurchase Program

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

Critical Accounting Policies and Estimates

We have identified the following critical accounting policies:

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.

When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair market value is below amortized cost, additional analysis is performed to determine whether an other than temporary impairment condition exists. Available-for-sale and held-to-maturity securities are analyzed quarterly for possible other than temporary impairment. The analysis considers (i) whether we have the intent to sell our securities prior to recovery and/or maturity and (ii) whether it is more likely than not that we will not have to sell our securities prior to recovery and/or maturity. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on the CTBI’s results of operations and financial condition.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. CTBI uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. Given a 200 basis point increase to the yield curve used in the simulation model, it is estimated net interest income for CTBI would increase by 5.96 percent over one year and 10.95 percent over two years. A 200 basis point decrease in the yield curve would decrease net interest income by an estimated 4.86 percent over one year and 8.49 percent over two years. For further discussion of CTBI’s market risk, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Market Risk included in the annual report on Form 10-K for the year ended December 31, 2017.

Item 4. Controls and Procedures

E VALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

CTBI’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. As of the end of the period covered by this report, an evaluation was carried out by CTBI’s management, with the participation of our Chief Executive Officer and the Executive Vice President, Chief Financial Officer, and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, management concluded that disclosure controls and procedures as of September 30, 2018 were effective in ensuring material information required to be disclosed in this quarterly report on Form 10-Q was recorded, processed, summarized, and reported on a timely basis.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in CTBI’s internal control over financial reporting that occurred during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, CTBI’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	None

Item 1A.	Risk Factors	None

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	None

Item 3.	Defaults Upon Senior Securities	None

Item 4.	Mine Safety Disclosure	Not applicable

Item 5.	Other Information:
	CTBI ’ s Principal Executive Officer and Principal Financial Officer have furnished to the SEC the certifications with respect to this Form 10-Q that are required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002

Item 6.	Exhibits:
	(1) Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Exhibit 31.1 Exhibit 31.2
	(2) Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Exhibit 32.1 Exhibit 32.2
	(3) XBRL Instance Document	Exhibit 101.INS
	(4) XBRL Taxonomy Extension Schema	Exhibit 101.SCH
	(5) XBRL Taxonomy Extension Calculation Linkbase	Exhibit 101.CAL
	(6) XBRL Taxonomy Extension Definition Linkbase	Exhibit 101.DEF
	(7) XBRL Taxonomy Extension Label Linkbase	Exhibit 101.LAB
	(8) XBRL Taxonomy Extension Presentation Linkbase	Exhibit 101.PRE

SIGNATURES

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

	COMMUNITY TRUST BANCORP, INC.

Date: November 8, 2018	By:	/s/ Jean R. Hale
		Jean R. Hale
		Chairman, President, and Chief Executive Officer

		/s/ Kevin J. Stumbo
		Kevin J. Stumbo
		Executive Vice President, Chief Financial Officer, and Treasurer

TABLE OF CONTENTS

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 Other Real Estate Owned Note 7 Repurchase Agreements Note 8 Fair Market Value Of Financial Assets and Liabilities Note 9 Earnings Per Share Note 10 Accumulated Other Comprehensive Income 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 Item 1. Legal Proceedings None Item 1A. Risk Factors None Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Mine Safety Disclosure Not Applicable Item 5. Other Information:Item 6. Exhibits:

Exhibits

(1) Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.1Exhibit 31.2 (2) Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1Exhibit 32.2

CTBI 10-Q Quarter ended Sept. 30, 2018

Exhibits