More annual reports from Community Trust Bancorp Inc.:
2023 ReportPeers and competitors of Community Trust Bancorp Inc.:
Independent Bank Group2016 ANNUAL REPORT Photo Location: Pullman Square, Huntington, West Virginia Your Company “We are committed to increasing shareholder value by operating our community banking model with the core values of fairness, respect, and integrity.” -Mission Statement A Successful Business Model Community Trust Bancorp, Inc.'s business success is founded in our unwavering commitment to faithfully execute our business model of community banking with fairness, respect, and integrity toward all of our constituents. We continue to operate a conservative, efficient model of traditional community banking which has been the foundation of our customer service for more than 113 years and has driven our strong history of earnings. Our business model has allowed us to successfully meet the challenges of a highly competitive business environment and an ever- changing economy. Economic conditions in most of the communities we serve in Kentucky, West Virginia, and Tennessee have significantly improved, and we are optimistic that this trend will continue. However, some business sectors in our Eastern Region, particularly the energy industry, remain negatively impacted. We anticipate that most of our market areas will continue to experience moderately improving economic conditions. Our organizational structure and operating philosophy are our tools for fulfilling our mission. Our history of investment returns continues to demonstrate the viability of our stock as a long-term core value investment. Having a firm foundation for our operations, a strong capital position, a highly skilled and dedicated workforce, and a business model of community banking allows us to operate successfully. The directors, officers, and staff of Community Trust Bancorp, Inc. are committed to changing operational challenges into opportunities while remaining focused on our core banking business and increasing shareholder value. Comparison of 5-Year Cumulative Total Return $300 $200 $100 $0 2011 2012 2013 2014 2015 2016 Community Trust Bancorp, Inc. NASDAQ Stock Market (U.S.) NASDAQ Bank Stocks Index An investment in CTBI stock on December 31, 2011 would have outperformed the NASDAQ Stock Market (U.S.) but not the NASDAQ Bank Stocks Index at December 31, 2016. 1 Photo Location: Pikeville, Kentucky Main Street Photo Credit: Jordan M. Gibson To Our Shareholders Dear Shareholders nd Your Company's financial performance continues to demonstrate why an investment in CTBI stock is considered a long-term core value investment. Your Company achieved its 2 consecutive year of record earnings with net income of $47.3 million and earnings per share at $2.70. This performance represents a 1.21% return on average assets and a 9.58% return on average equity. Management believes cost control is a continuous action, not an event, and our ongoing focus on operational efficiencies has allowed us to consistently maintain an efficiency ratio less than 59.5% over the last five years. Our efficiency ratio at year-end 2016 was 58.5%. We were pleased to continue our commitment to shareholders by sharing earnings with them in the form of quarterly cash dividends. The quarterly cash dividend to shareholders was increased to $0.32 during 2016, representing the 36 consecutive year of increasing the cash dividend to shareholders. Our cash dividend yield at December 31, 2016 was 2.58%. th Economic Commentary During 2016, improvement was seen in the national and regional economies of most of our service area. With the advent of increased optimism in the business community, the economy should be stronger in 2017. The expectation of regulatory relief for the business community, including regulatory changes which can have a positive impact on specific business sectors, combined with the probability of changes in tax structure may have a positive impact on business and the economy. Community Trust Bancorp, Inc. addressed the need for economic diversity many years ago with the expansion of your Company in Kentucky, West Virginia, and Tennessee. We have met the challenges of operating in varying economic conditions and continued our long history of profitability. The economic diversity of the geographic regions we serve allows continued growth, although economic growth may not occur in all regions. Our financial strength allows us to seize the opportunities provided by an improving economy. For our national and regional economic conditions, 2017 is expected to be a year of change with significant changes proposed in health care and trade in addition to changes anticipated in the tax code and regulation. Traditional Community Banking Jean R. Hale Chairman, President and CEO Your Company is a traditional banking company which is dependent upon its net interest margin for most of our income. With the economy continuing to improve, there is an expectation of increasing interest rates which can have a positive impact on your Company's net interest margin. Your Company's interest rate gap is positioned to have our loans reprice quicker than our deposits during the first nine months of increasing rates. During 2016, we focused on growth of our largest earning asset, our loan portfolio. Loans grew $64.4 million from prior year 2015. We are also pleased to report that all asset quality matrices showed improvement during 2016. To fund our loan growth, we grew our deposit base $100.4 million year over year. Management has been focused for several years on increasing our noninterest revenue through growth and increasing the profitability of our trust company, Community Trust and Investment Company. Our trust company provides a full menu of products and services to meet the needs of clients in managing their assets and planning for their future, including wealth and trust management, brokerage service, and life insurance. We believe with the pressure placed on traditional noninterest revenue sources, our trust company provides a good opportunity for the growth of our noninterest revenue in the future. Investor Returns Your management is focused on providing a strong, consistent return to our investors. The total return to our investors for the year 2016 was 45.5%. Management 2 management team and their commitment to the execution of our strategic plan, and the hard work and dedication of our almost 1,000 employees. We believe challenges provide opportunities, and with our strong foundation and 113 years of experience, we have a long history of seizing opportunities for financial success. We are focused on the success of your Company. We appreciate the opportunity to serve our constituents...Our Shareholders, Our Customers, Our Employees, and Our Communities. Your loyalty and support are invaluable to the success of your Company! Jean R. Hale Chairman, President and CEO believes an investment in Community Trust Bancorp, Inc. is a long-term core value investment. We believe in returning to our shareholders in several ways, including cash dividends, stock dividends, stock splits, and price appreciation. Our goal is to return between 45% and 50% of earnings to our shareholders in the form of cash dividends. Our dividend payout ratio was 46.7% for 2016. The balance of our earnings is retained as capital, funding the continued growth of your Company to increase its earning capacity long-term. During 2016, the shareholders' equity of your Company grew 5.3% to $500.6 million. Prices of financial sector stocks increased significantly during the fourth quarter of 2016. CTBI experienced a 33.7% increase in the market price of our shares during the fourth quarter 2016 and a 41.9% increase year over year. The price of our stock to our tangible book value increased 34%, from 1.50x at year-end 2015 to 2.01x at year-end 2016. The increase experienced in the financial sector has been primarily driven by the expectation of interest rate increases and changes in the regulatory environment. Strong Financial Performance We believe that the consistently strong financial performance of your Company can be attributed to many things. Our decision to manage your Company using a community banking business model, the strength and dedicated service of our directors, a highly qualified Sales Price (quarterly) High Low Close Mar 31 $36.00 $30.89 $35.32 Jun 30 $36.95 $32.98 $34.66 Sep 30 $37.49 $33.71 $37.11 Dec 31 $51.35 $35.85 $49.60 3 Financial Highlights (in thousands except ratios, per share amounts, and employees) For the Year Net income Basic earnings per share Diluted earnings per share Cash dividends per share Average shares outstanding At Year End Assets Earning assets Deposits, incl. repurchase agreements Loans Allowance for loan and lease losses Shareholders' equity Book value per share Market price per common share Common shares outstanding Full time equivalent employees Significant Ratios For the year Return on average assets Return on average common equity Net interest margin Net charge-offs to average loans Efficiency ratio At year end Capital ratios: Equity to assets Tier 1 leverage Common equity Tier 1 Tier 1 risk based Total risk based Allowance to net loans Allowance to nonperforming loans 2016 2015 Percentage Change $ 47,346 2.70 2.70 1.26 17,548 $ 46,432 2.66 2.66 1.22 17,431 % 2.0 1.5 1.5 3.3 0.7 % 2016 2015 Percentage Change $ 3,932,169 3,667,626 3,332,373 2,938,371 35,933 500,615 28.40 49.60 $ 3,903,934 3,635,857 3,232,007 2,873,961 36,094 475,583 27.12 34.96 17,629 996 17,537 984 % 0.7 0.9 3.1 2.2 ) 0.4 5.3 4.7 41.9 ( % 0.5 1.2 2016 2015 Percentage Change % 1.21 9.58 3.70 0.28 58.54 % 12.73 12.75 15.18 17.25 18.50 1.22 130.81 % 1.23 9.97 3.81 0.25 58.20 % 12.18 12.40 14.58 16.70 17.95 1.26 126.16 % ) ( 1.6 ) ( 3.9 ) ( 2.9 12.0 0.6 % 4.5 2.8 4.1 3.3 3.1 ) 3.2 3.7 ( 4 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Net Income (in thousands) $44,862 $45,172 $43,251 $46,432 $47,346 $50,000 $40,000 $30,000 $20,000 $10,000 $0 2012 2013 2014 2015 2016 Earnings Per Share Dividends Per Share $2.64 $2.63 $2.50 $2.66 $2.70 $1.40 $1.20 $1.136 $1.154 $1.181 $1.220 $1.260 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Shareholders' Equity (in thousands) $475,583 $500,615 $447,877 $400,344 $412,492 $550,000 $500,000 $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 2012 2013 2014 2015 2016 5 Financial Highlights Consolidated Statements of Income Year Ended December 31 (in thousands except per share data) 2016 2015 Percentage Change Interest income Interest expense Net interest income Provision for loan losses Noninterest income Noninterest expense Income before income taxes Income tax expense Net Income Cash dividends per share Book value per share $ $ $ 146,576 13,555 133,021 7,872 48,441 107,126 66,464 19,118 47,346 1.26 28.40 $ $ $ 144,020 11,773 132,247 8,650 46,809 105,443 64,963 18,531 46,432 1.22 27.12 Average shares outstanding 17,548 17,431 % 1.8 15.1 0.6 ) ( 9.0 3.5 1.6 2.3 3.2 2.0 % 3.3 4.7 0.7 % Consolidated Balance Sheets At December 31 (in thousands) Assets 2016 2015 Percentage Change Cash and deposits in other banks Federal funds sold Securities Loans, net of allowance Other assets $ 145,169 527 606,260 2,902,438 277,775 $ 190,652 791 596,597 2,837,867 278,027 Total Assets $3,932,169 $3,903,934 Liabilities and Shareholders’ Equity Deposits Repurchase agreements Federal funds purchased Advances from Federal Home Loan Bank Long-term debt Other liabilities $ 3,081,308 251,065 4,816 944 61,341 32,080 $ 2,980,782 251,225 3,596 101,056 61,341 30,351 Total Liabilities 3,431,554 3,428,351 Shareholders' Equity 500,615 475,583 Total Liabilities and Shareholders' Equity $3,932,169 $3,903,934 % ( ( ) 23.9 ) 33.4 1.6 2.3 ) 0.1 ( 0.7 % 3.4 ) ( 0.1 33.9 ) 99.1 0.0 5.7 ( 0.1 5.3 0.7 6 Noninterest Income (in thousands) $49,304 $45,957 $45,081 $46,809 $48,441 $55,000 $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 2012 2013 2014 2015 2016 5-Year Cumulative Average Asset Growth Efficiency Ratio 4.56% 4.09% 3.84% 3.31% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 70.00% 60.00% 57.93% 59.33% 59.12% 58.20% 58.54% 2.26% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Nonperforming Assets to Loans and Foreclosed Properties 4 .0 0 % 3 .50 % 3 .0 0 % 2 .50 % 2 .0 0 % 1.50 % 1.0 0 % 0 .50 % 0 .0 0 % 3 .2 0 % 3 .12 % 2 .74 % 2 .3 8 % 2 .13 % 2 0 12 2 0 13 2 0 14 2 0 15 2 0 16 7 Photo Location: Danville, Kentucky Main Street Photo Credit: Rhonda Gilliam, Community Trust Bank Shareholders As a performance-driven team, our directors, officers, and staff focus on providing a stable and competitive return for our investors year after year. Our history of strong returns to investors continued during 2016, as we increased the cash dividend to our shareholders for the 36 consecutive year. th Community Trust achieved record earnings of $47.3 million. Our stock experienced a 41.9% increase in its price in 2016. By comparison, the NASDAQ Bank Index of 347 companies rose 35.0%. While increasing our cash dividend to our shareholders, we continued to grow our shareholders' equity to $500.6 million at December 31, 2016, a 5.3% increase from December 31, 2015. At December 31, 2016, our cash dividend yield was 2.58%, and the five-year compound growth rate of cash dividends per share was 2.4%. The five-year compound growth rate of earnings per share was 3.2% at December 31, 2016. CTBI continues to maintain a significantly higher level of capital than required by regulators. Our ratios as of December 31, 2016 all exceed the threshold for meeting the definition of “well-capitalized” as shown by the table below: Actual 12.75% 15.18% 17.25% For Capital Adequacy Purposes To Be Well- Capitalized 4.00% 4.50% 6.00% 5.00% 6.50% 8.00% Tier 1 capital (to average assets) Common equity Tier 1 capital (to risk weighted assets) Tier 1 capital (to risk weighted assets) Total capital (to risk weighted assets) 8 Our tangible common equity/tangible assets ratio also remained strong at 11.25% at December 31, 2016. Our stock is included in the Russell 2000 Index of small cap companies providing us with a good benchmark for comparing our stock's performance to other small cap investor opportunities. During the 10-year period ending December 31, 2016, CTBI produced an annualized return of 6.49%, while the Russell 2000 Index produced an annualized return of 6.99%. CTBI stock is traded on the prestigious NASDAQ Global Select Market (a founding stock selection) and is also one of 50 founding stocks of the NASDAQ's Dividend Achievers Index. An investment in CTBI stock on December 31, 2011 would have provided an annualized return of 16.72% as of December 31, 2016. Book Value Per Share $30.00 $25.00 $23.31 $23.70 $27.12 $28.40 $25.64 $20.00 $15.00 $10.00 $5.00 $0.00 18.50% 8.00% 10.00% 2012 2013 2014 2015 2016 Photo Location: Ashland, Kentucky Customers Our customers – individuals, businesses, and organizations – know that they can turn to us, with confidence, for their many financial product and service needs. In 2016, Community Trust served more than 245,000 customers. We offer our customers a wide variety of banking products and services. We are committed to serving our broad range of customers with products and services designed to fit each customer's needs. In 2016, for the eighth consecutive year, we were recognized by the Small Business Administration (SBA) as the top community bank SBA lender in the Commonwealth of Kentucky based on the total number of loans. We also offer USDA guaranteed loans and an entire suite of commercial loans and leases, mortgage loans, and consumer loans. Our deposit related products and services include certificates of deposits, savings accounts, online banking and online bill payment (at www.ctbi.com), mobile banking, remote deposit capture, and commercial cash management services. This year we introduced a new product, the Carefree CD, which allows customers to increase the interest rate of their certificate of deposit once during its term. This should prove to be a popular product in a rising interest rate environment. We offer our customers convenient access to their accounts through our network of 86 ATMs. The total number of ATMs to which our customers have free access is more than 160. Please visit our website at https://www.ctbi.com/ctbi/about- us/atm-location-listing for a complete listing of our ATM locations. With our continuing focus on customer service, we were pleased in 2016 to expand our menu of mobile and online banking services to include mobile banking Check Remote Deposit Capture. Our customers can now make a deposit into their account by taking a picture of a check with their smartphone. The People Pay and External Transfers products were added to our services, allowing our customers to directly pay another person or transfer funds to an external account electronically from their Community Trust Bank account. To enhance the product utilization experience, the features of Mobile Passcode and Touch ID were introduced. These are quick access methods that increase the speed of access to mobile banking by entering a short set of digits (Mobile Passcode) or a fingerprint (Touch ID) instead of a full user name and password. This increases convenience while still maintaining the security of financial information. We continued expanding our product offering by making Apple Pay™ available to our customers, allowing them to use their favorite Visa® debit card to pay the easy, secure, and private way at hundreds of thousands of stores and through participating apps. We offer customers a full line of wealth and trust management, estate planning, and retirement planning services, in addition to full service brokerage and life insurance products. Our trust and wealth management professionals are dedicated to helping individuals and businesses identify the right products and services to meet their unique needs. We are pleased to have served our customers for 113 years. Our employees are focused on providing a rewarding banking experience to our customers, whether it is in one of our 80 banking offices, five trust offices, or through our online and mobile banking systems. 9 and growth is in the level of service we provide to our customers. We recognize the hard work and dedication of our employees. In February 2017, we held our 18 annual “Pinnacle of Success” awards banquet and recognized 56 employees for their outstanding performance in business development and service during the prior year. We have included the names of those employees, as well as the offices, markets, and regions recognized, following the Branch Locations listing on page 16. th We know that the success of our employees means success for your Company. Our employees' commitment to the mission of your Company and our constituents is evidenced by their ownership of the Company's stock. Through their 401(k) and ESOP plans, our employees collectively own 1.3 million shares, or 7.2%, of Community Trust Bancorp, Inc. stock, making them our largest shareholder. In 2016, Community Trust Bancorp, Inc. contributed $2.5 million to these plans. Photo Location: Lexington, Kentucky Employees We know that Community Trust's most valuable asset is our employees. Recognizing this, we have recruited, hired, and retained the finest hard-working and talented employees. Our nearly 1,000 employee team works together to provide each customer the best service each and every day. Our continued success would not be possible without the dedication of our employees to meet the financial needs of our customers. We are committed to providing our employees with opportunities for personal and professional growth, whether it is by providing reimbursement of educational expenses, encouraging attendance at seminars and in-house training programs, or by sponsoring memberships in local civic organizations. Our employees participated in numerous coaching, training, and education programs throughout the year. Additionally, Community Trust makes online training available to employees; as a result, employees completed 33 different online courses through our Regulatory University program. We actively support our employees with a wellness program. Since beginning the program in 2004, participating employees have experienced improvements in preventing cardiovascular disease, cancer, and diabetes. Many of our in elevated employees have experienced decreases medical risk factors, including alcohol consumption, tobacco usage, physical inactivity, high stress, high cholesterol, and high blood pressure. We recognize that within our industry the products are basically the same from company to company; however, we believe that the difference we can make in our profitability 10 Photo Location: Photo Credit: Charles Hutson LaFollette, Tennessee Communities ® Our corporate motto is “building communities…built on trust .” We believe in living our motto as we work to help our friends and neighbors fulfill their financial dreams. We are actively involved in every community we serve. We dedicate our resources, both human and financial, to help make the places where we live and work better, not only for current generations, but also for generations yet to come. Our continuing support of our communities, both financially and through the volunteer service of our employees, has helped build great places to live and work for both our customers and our employees. During 2016, we donated more than $900,000 to community organizations involved in a wide variety of civic activities, including economic development, affordable housing, job creation, education, cultural enrichment, medical research, and health care. Community Trust employees provide leadership, monetary support, and countless volunteer hours to many exceptional local community organizations in all of the communities we serve. Our employees are active in a wide variety of community organizations, including Chambers of Commerce, United Way, One East Kentucky, YMCA, American Cancer Society's Relay For Life, Habitat for Humanity, Kentucky Blood Center, Diabetes Coalition, March of Dimes, little league sports programs, Boy and Girl Scouts of America, The Salvation Army, volunteer fire departments, home realtor and builder organizations, and independent and state supported colleges and universities. Our employees volunteer thousands of hours each year to these and other excellent local community organizations. In 2016, Community Trust continued to actively support SOAR (Shaping Our Appalachian Region), an organization created to expand job opportunities; enhance the economy of the region; encourage innovation, entrepreneurship, geographic cooperation, and a diversified workforce; improve the quality of life of our citizens; and support all those working to achieve these goals. Community Trust has partnered with SOAR since its inception with support, including service in leadership positions and providing office space for its Pikeville, Kentucky headquarters. Community Trust is dedicated to helping our communities grow and prosper now and in the future. We are proud to be a part of our hometowns across Kentucky, West Virginia, and Tennessee! CTBI Cash Contributions $1,000,000 $900,000 $800,000 $753,000 $811,000 $819,000 $904,000 $854,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 2012 2013 2014 2015 2016 11 Photo Location: Somerset, Kentucky Executive Committee JEAN R. HALE Chairman, President and CEO Community Trust Bancorp, Inc. Chairman Community Trust Bank, Inc. and Community Trust and Investment Company MARK A. GOOCH Executive Vice President and Secretary Community Trust Bancorp, Inc. Director, President and CEO Community Trust Bank, Inc. Director and Vice President Community Trust and Investment Company ANDY WATERS Executive Vice President Community Trust Bancorp, Inc. Director, President and CEO Community Trust and Investment Company JAMES B. DRAUGHN Executive Vice President Community Trust Bancorp, Inc. Executive Vice President/Operations Community Trust Bank, Inc. JAMES J. GARTNER Executive Vice President Community Trust Bancorp, Inc. Executive Vice President/ Chief Credit Officer Community Trust Bank, Inc. C. WAYNE HANCOCK II Executive Vice President Community Trust Bancorp, Inc. Executive Vice President/ Senior Staff Attorney Community Trust Bank, Inc. * STEVEN E. JAMESON Executive Vice President Community Trust Bancorp, Inc. Executive Vice President/Chief Internal Audit & Risk Officer Community Trust Bank, Inc. ANDREW JONES Executive Vice President Community Trust Bancorp, Inc. Executive Vice President/ Northeastern Region President Community Trust Bank, Inc. LARRY W. JONES Executive Vice President Community Trust Bancorp, Inc. Executive Vice President/ Central Kentucky Region President Community Trust Bank, Inc. RICHARD W. NEWSOM Executive Vice President Community Trust Bancorp, Inc. Executive Vice President/ Eastern Region President Community Trust Bank, Inc. RICKY D. SPARKMAN Executive Vice President Community Trust Bancorp, Inc. Executive Vice President/South Central Region President Community Trust Bank, Inc. KEVIN J. STUMBO Executive Vice President, CFO and Treasurer Community Trust Bancorp, Inc. Executive Vice President/CFO Community Trust Bank, Inc. Vice President Community Trust and Investment Company 12 * Non-voting Member Photo Location: Photo Credit: Harrodsburg/Mercer County Tourist Commission Harrodsburg, Kentucky Main Street Boards of Directors * ** *** ** *** JEAN R. HALE Chairman, President and CEO Community Trust Bancorp, Inc. Chairman Community Trust Bank, Inc. and Community Trust and Investment Company *** MARK A. GOOCH Executive Vice President and Secretary Community Trust Bancorp, Inc. Director, President and CEO Community Trust Bank, Inc. Director and Vice President Community Trust and Investment Company ANDY WATERS Executive Vice President Community Trust Bancorp, Inc. Director, President and CEO Community Trust and Investment Company * *** CHARLES J. BAIRD President Baird & Baird, P.S.C. Pikeville, Kentucky ** J. MARK CAMPBELL President Cambrian Coal, LLC Charleston, West Virginia * NICK CARTER Private Investor Lexington, Kentucky ** DAVID E. COLLINS Managing Partner Collins & Slone, LLP Pikeville, Kentucky *** E.B. LOWMAN II Chairman and CEO Cardinal Management Ltd. Ashland, Kentucky ** *** CRIT LUALLEN Former Lt. Governor Commonwealth of Kentucky Frankfort, Kentucky KRISHNA M. MALEMPATI Vice President OM Ventures Inc. Managing Partner Park Hills Shopping Center Tampa, Florida JAMES E. MCGHEE II President Three JC Investments, LLC Pikeville, Kentucky FRANKY MINNIFIELD President Minnifield Enterprize, Inc. Lexington, Kentucky M. LYNN PARRISH President Marwood Land Company, Inc. Pikeville, Kentucky Boards of Directors Community Trust Bancorp, Inc. Community Trust Bank, Inc. Community Trust and Investment Company * DR. JAMES R. RAMSEY Retired President and Professor of Economics University of Louisville Director Texas Roadhouse, Inc. and Aquila Municipal Trust Louisville, Kentucky * ANTHONY W. ST. CHARLES President and Chief Executive Officer The St. Charles Group, LLC Cincinnati, Ohio 13 Photo Location: Versailles Kentucky , Advisory Board Members Central Region Eastern Region Northeastern Region South Central Region Larry W. Jones Regional President Lexington Larry W. Jones Regional President James C. Baughman, Jr. Robert A. Branham Linda A. Carroll C. Glen Combs Jenny Dulworth-Albert James Keeton III Robert Kelly Todd Sallee Daryl Smith Danville/Harrodsburg David Maynard Market President Bob Allen Scott Burks James Walker Cox Bob Davis Bruce Harper James G. Ingram Alvis Johnson Myrna Miller Larry Scott, M.D. Walter “Skip” Stocker Mt. Sterling Bill McKenna Market President Byron Amburgey Marcus Shane Back Jeff Brother Reid Evans O. Keith Gannon Angela Patrick E. Dale Sorrell Richard Newsom Regional President Andrew Jones Regional President Ricky Sparkman Regional President Richmond Pikeville* Ashland Campbellsville Williamsburg Tim Houck Market President William Brett Keene Market President Andrew Jones Regional President Ricky Sparkman Regional President Michael Blount Interim Market President R. Don Adkins++ E. L. Ballou, D.M.D. Ray F. Bryant Joseph E. Early, Sr. Paul Estes Vernon B. Faulkner+++ Dallas B. Steely Mark S. Stephens Lonnie D. Walden Jeannette Crockett Alison Emmons David Fernandez James H. Howard Elizabeth McCarty David McFaddin Randall Stone Versailles Billie Dollins Market President Robert Cleveland Jack Givens Phil Huddleston Alice Kiviniemi Rodney Mitchell Billy Van Pelt Mark Wainwright, M.D. Winchester David Wills Market President Thomas R. Goebel Carl E. Jennings Robert M. Powe, Jr. David W. Underhill Gardner D. Wagers Floyd/Knott/Johnson* David Tackett Market President Hazard Paul Daniels, Sr. E. B. Lowman II E. B. Lowman III John McMeans Ann Perkins James C. Williams Janice Brafford-King Market President Advantage Valley William Bettinazzi Frances Feltner Meriwether W. Hall Charles Housley Syamala H. K. Reddy, M.D. Jeff Sandlin Tim Short Alan Dale Williams Tug Valley Duanne Thompson Market President William F. Blackburn III James H. Caines Harold Davis Timothy A. Hatfield Philip Haywood John Mark Hubbard Louie Jiunta Paul E. Pinson Whitesburg Reed Caudill Market President Herbert Caudill Bill Joe Collier Sam W. Quillen, Jr., D.M.D. Pauline C. Ritter-Combs Allen Burner Market President Randie Gail Lawson Christopher J. Plybon Julian Saad Steve Smith William Jack Stevens Flemingsburg Emery O. Clark Market President Michael A. Boyd, M.D. Steve Humphries Duane Lowe T. Scott Perkins, D.M.D. James Sauer J. E. Smith, Jr.+ Frank Vice, D.V.M. Summersville Paul Buechler Ellis S. Frame III David Michael Hughes Marshall Robinson Barry Bertram Salem M. George, M.D. Jerry Russell John Waldrop James Whitlock LaFollette Rhonda Longmire Market President George Ellison James C. Farris, M.D. Marvin Minton Peggy Payne Tom Robards Conrad Troutman Robert L. Woodson III Middlesboro Tim Helton Market President Marcum Brogan Meredith J. Evans, M.D. Keith A. Nagle Richard H. Tamer Mt. Vernon Michael Blount Market President Martha Cox Connie Hunt Gary W. Mink Tommy Mink 14 +Retired 12/31/2016 ++Deceased 2/13/2017 +++Deceased 12/28/2016 *These markets are served by the Community Trust Bank, Inc. Board of Directors. Photo Location: Prestonsburg, Kentucky Shareholder Information Dividend Reinvestment Community Trust Bancorp, Inc. offers its shareholders an automatic dividend reinvestment program. The program enables shareholders to reinvest their dividends in shares at the prevailing market price. For more information, contact us at: Community Trust Bancorp, Inc. c/o Broadridge Corporate Issuer Solutions, Inc. P.O. Box 1342 Brentwood, NY 11717-0718 866.232.3034 shareholder@broadridge.com Form 10-K CTBI's annual report on Form 10-K filed with the Securities and Exchange Commission is available without charge on our website at www.ctbi.com or by writing: Community Trust Bancorp, Inc. Jean R. Hale Chairman, President & CEO P.O. Box 2947 Pikeville, KY 41502-2947 Current Analyst Coverage J.J.B. Hilliard, W.L. Lyons, LLC Keefe, Bruyette & Woods, Inc. Raymond James and Associates, Inc. Sandler O'Neill & Partners, LP Stephens, Inc. Corporate Address Community Trust Bancorp, Inc. 346 North Mayo Trail P.O. Box 2947 Pikeville, KY 41502-2947 606.432.1414 www.ctbi.com Notice of Annual Meeting The annual meeting of the shareholders will be held at 10:00 a.m. on April 25, 2017 at: Community Trust Bancorp, Inc. 346 North Mayo Trail Pikeville, Kentucky Transfer Agent Inquiries relating to shareholder records, stock transfers, changes of ownership, changes of address, and dividend payments should be sent to the transfer agent at: Broadridge Corporate Issuer Solutions, Inc. P.O. Box 1342 Brentwood, NY 11717-0718 866.232.3034 720.358.3637 (International) shareholder@broadridge.com Inquiries may also be directed to Community Trust Bancorp, Inc.'s Stock Transfer Administrator, Marilyn Justice, at: Community Trust Bank, Inc. P.O. Box 2947 Pikeville, KY 41502-2947 606.437.3279 800.422.1090, ext. 3279 (Toll Free) justicma@ctbi.com 15 Branch Locations Central Region Danville Danville Main Street Danville Manor Harrodsburg 462 W. Main St. 1560 Hustonville Rd. 570 Chestnut St. 859-239-9200 859-239-9460 859-734-4354 Richmond Eastern ByPass Richmond Main Berea North 860 Eastern ByPass 128 W. Main St. 525 Walnut Meadow Rd. 859-624-4622 859-623-2747 859-985-0561 * Lexington Lexington Vine Beaumont Hamburg Leestown Pasadena Richmond Road Mt. Sterling Mt. Sterling Main Mt. Sterling North 100 E. Vine St. 901 Beaumont Centre Pkwy. 2417 Sir Barton Way 109 Louie Place 185 Pasadena Dr., Suite 100 3090 Richmond Rd. 859-389-5350 859-223-1111 859-264-1938 859-258-2659 859-313-5425 859-269-0164 110 N. Maysville St. 196 Evans Dr. 859-497-6900 859-497-6970 * Versailles Versailles Main Woodford Plaza Frankfort East Frankfort West Georgetown Wal-Mart 101 N. Main St. 470 Lexington Rd. 427 Versailles Rd. 1205 S. Hwy. 127 112 Osbourne Way 859-879-5400 859-879-5480 502-848-0913 502-696-0720 502-863-4693 Winchester Winchester Main Winchester Plaza 120 S. Main St. 125 Winchester Plaza 859-745-7200 859-745-7200 Eastern Region Floyd/Knott/Johnson Allen Floyd County Paintsville Knott County 6424 Ky Rt. 1428 161 S. Lake Dr. 470 N. Mayo Trl. 107 W. Main St. 1665 Combs Rd. 100 Citizens Ln. 101 Village Ln. Hazard Airport Gardens Black Gold Hazard Village Tug Valley Williamson Tug Valley 606-874-0408 606-886-2382 606-788-9934 606-785-5095 606-487-2160 606-436-2157 606-487-2152 101 E. 2nd Ave. 28160 US Hwy. 119 304-235-5454 606-237-6051 Northeastern Region Advantage Valley Alum Creek Hamlin Fort Gay Pullman Square 315 Midway Rd. 8049 Lynn Ave. 735 Court St. 952 3rd Ave. 304-756-3317 304-824-7223 304-648-7200 304-697-0272 Flemingsburg Ewing Flemingsburg Main South Ridge 1527 Ewing Rd. 36 Brookhaven Dr. 108 Clark St. 606-267-2061 606-845-3551 606-849-2304 South Central Region Campbellsville Campbellsville Main Campbellsville Bypass Columbia Greensburg Lebanon Somerset North Somerset South Jamestown Williamsburg Williamsburg Main Convenience Center Corbin London South London North 1218 E. Broadway 402 Campbellsville Bypass 1005 Jamestown St. 205 S. Main St. 521 W. Main St. 239 N. Hwy. 27 3809 S. Hwy. 27 752 N. Main St. 201 N. 3rd St. 895 S. Hwy. 25 W. 678 US Hwy. 25 W. 1706 Hwy. 192 W. 38 Shiloh Dr. 270-789-5900 270-789-5900 270-384-4771 270-932-7464 270-692-0064 606-679-8826 606-679-8446 270-343-2556 606-549-5000 606-539-2251 606-526-8777 606-877-2644 606-864-2439 Pikeville Elkhorn City Marrowbone Mouthcard Phelps Pikeville Main Pikeville Main Street Pikeville Wal-Mart Town Mountain Virgie Weddington Plaza * Whitesburg Whitesburg Main West Whitesburg Jenkins Isom Neon 211 W. Russell St. 10579 Regina Belcher Hwy. 32 N. Levisa Rd. 38720 State Hwy. 194 E. 346 N. Mayo Trl. 137 Main St. # 4 254 Cassidy Blvd. 105 Northgate Dr. 1056 KY Hwy. 610 W. 4205 North Mayo Trl. 155 Main St. 24 Pkwy. Plaza Loop 9505 Hwy. 805, Suite A 56 Isom Plaza 1001 Hwy. 317 606-754-5589 606-754-4462 606-835-4907 606-456-8701 606-432-1414 606-437-3326 606-437-0048 606-437-3323 606-639-4451 606-432-4529 606-633-0161 606-633-4532 606-832-2477 606-633-5995 606-855-4435 * Ashland Ashland Main South Ashland Summit Westwood Russell Summersville Summersville 1544 Winchester Ave. 2101 29th St. 7100 US Route 60 721 Wheatley Rd. 970 Diederich Blvd. 606-329-6000 606-329-6600 606-928-9555 606-329-6610 606-329-6680 507 Main St. 304-872-2711 Middlesboro Middlesboro Main Middlesboro East Pineville Mt. Vernon Mt. Vernon Main Mt. Vernon Downtown * LaFollette LaFollette Main LaFollette Mall Jacksboro Clinton 1918 Cumberland Ave. 1206 E. Cumberland Ave. 11792 US Hwy. 25 E. 606-248-9600 606-248-9642 606-337-6122 2134 Lake Cumberland Rd. 120 Main St. 606-256-5141 606-256-5142 106 S. Tennessee Ave. 2205 Jacksboro Pike 2603 Jacksboro Pike 2106 Charles G. Seivers Blvd. 423-562-3364 423-562-9918 423-566-7800 865-457-8684 16 *Community Trust and Investment Company has offices in these locations. 2017 for their 2016 Sales & Service Individual Success David Akers Donna Angel Steve Belcher Cindy Blanton Michael Blount Mike Bonfield Steven Booth Allen Burner John R. Caldwell Ryan Charles Gerrie Clark Kellan Clark Delena Clevinger Kim Copley Wendy Corder Tina M. Davis Sherry Dotson Dorothy Franklin Melissa Hatfield Tim Houck Stephanie Hudson Andrew Jarvis Brett Keene Robert Kelly Bill Klier Savi Kumar Brent Lee Jenny Maggard Elizabeth Maynard-Johnson Bobby Terrell Medley Charlene Miller Gaylon D. Neat Tracy Osborne Tina Parsons Barry Pennington Shellie Phipps Donna Ray Ty Reynolds Melissa Rhodes Jeremy Rigney Charlene Ritz Amy Selvage Erin Serrate Mike Shepherd Daryl Slone Roger Smith Willie T. Swatzell Helena Syck Charles Tackett David Tackett Bob Watson Kevin Way Tammy Wheeler David Wills Jimmy Workman Trina Yack Team Success Ashland Main Office Ashland Market Berea North Office Central Region Eastern Region Floyd/Knott Market Knott County Office LaFollette Market Northeastern Region Pikeville Main Office Pikeville Market Richmond Main Office Versailles Market Williamsburg Market Financial Information Community Trust Bancorp, Inc. 2016 Annual Report Financial Statements and Supplementary Data Community Trust Bancorp, Inc. Consolidated Balance Sheets (dollars in thousands) December 31 Assets: Cash and due from banks Interest bearing deposits Federal funds sold Cash and cash equivalents Certificates of deposit in other banks Securities available-for-sale at fair value (amortized cost of $608,939 and $593,381, respectively) Securities held-to-maturity at amortized cost (fair value of $867 and $1,651, respectively) Loans held for sale Loans Allowance for loan and lease losses Net loans Premises and equipment, net Federal Home Loan Bank stock Federal Reserve Bank stock Goodwill Core deposit intangible (net of accumulated amortization of $8,483 and $8,324, respectively) Bank owned life insurance Mortgage servicing rights Other real estate owned Other assets Total assets Liabilities and shareholders’ equity: Deposits: Noninterest bearing Interest bearing Total deposits Repurchase agreements Federal funds purchased Advances from Federal Home Loan Bank Long-term debt Deferred taxes Other liabilities Total liabilities Commitments and contingencies (notes 18 and 20) Shareholders’ equity: Preferred stock, 300,000 shares authorized and unissued Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2016 – 17,628,695; 2015 – 17,536,914 Capital surplus Retained earnings Accumulated other comprehensive income (loss), net of tax Total shareholders’ equity Total liabilities and shareholders’ equity See notes to consolidated financial statements. $ $ $ 2016 2015 $ $ $ 48,603 95,586 527 144,716 980 605,394 866 1,244 2,938,371 (35,933) 2,902,438 47,940 17,927 4,887 65,490 133 63,881 3,433 35,856 36,984 3,932,169 767,918 2,313,390 3,081,308 251,065 4,816 944 61,341 7,836 24,244 3,431,554 - 88,144 219,697 195,078 (2,304) 500,615 51,974 134,846 791 187,611 3,832 594,936 1,661 1,172 2,873,961 (36,094) 2,837,867 48,188 17,927 4,887 65,490 291 62,335 3,236 40,674 33,827 3,903,934 749,975 2,230,807 2,980,782 251,225 3,596 101,056 61,341 8,920 21,431 3,428,351 - 87,685 217,032 169,855 1,011 475,583 $ 3,932,169 $ 3,903,934 18Consolidated Statements of Income and Comprehensive Income (in thousands except per share data) Year Ended December 31 Interest income: Interest and fees on loans, including loans held for sale Interest and dividends on securities: Taxable Tax exempt Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock Other, including interest on federal funds sold Total interest income Interest expense: Interest on deposits Interest on repurchase agreements Interest on advances from Federal Home Loan Bank Interest on long-term debt Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income: Service charges on deposit accounts Gains on sales of loans, net Trust and wealth management income Loan related fees Bank owned life insurance Brokerage revenue Securities gains (losses) Other noninterest income Total noninterest income Noninterest expense: Officer salaries and employee benefits Other salaries and employee benefits Occupancy, net Equipment Data processing Bank franchise tax Legal fees Professional fees Advertising and marketing FDIC insurance Other real estate owned provision and expense Repossession expense Amortization of limited partnership investments Other noninterest expense Total noninterest expense Income before income taxes Income taxes Net income Other comprehensive income (loss): Unrealized holding gains (losses) on securities available-for-sale: Unrealized holding gains (losses) arising during the period Less: Reclassification adjustments for realized gains (losses) included in net income Tax expense (benefit) Other comprehensive income (loss), net of tax Comprehensive income Basic earnings per share Diluted earnings per share Weighted average shares outstanding-basic Weighted average shares outstanding-diluted Dividends declared per share See notes to consolidated financial statements. 2016 2015 2014 $ 133,965 $ 130,829 $ 128,457 8,265 2,718 1,011 617 146,576 10,921 1,155 62 1,417 13,555 133,021 7,872 125,149 24,966 1,831 9,585 4,107 2,199 1,314 522 3,917 48,441 12,198 44,877 7,999 2,950 6,497 5,671 1,906 1,890 2,614 1,789 2,879 1,156 2,623 12,077 107,126 66,464 19,118 47,346 (4,578) 522 (1,785) (3,315) 44,031 2.70 2.70 17,548 17,566 $ $ $ $ 9,153 2,705 1,010 323 144,020 9,616 938 49 1,170 11,773 132,247 8,650 123,597 24,282 1,978 9,286 3,821 2,158 1,426 (106) 3,964 46,809 11,652 42,911 7,826 3,049 6,743 5,174 2,236 1,884 2,428 2,382 3,533 1,265 2,580 11,780 105,443 64,963 18,531 46,432 (342) (106) (83) (153) 46,279 2.66 2.66 17,431 17,483 $ $ $ $ 1.260 $ 1.220 $ 11,314 2,576 1,136 384 143,867 9,798 841 27 1,131 11,797 132,070 8,755 123,315 23,892 1,468 9,011 3,531 1,996 2,454 (211) 2,940 45,081 11,076 43,417 8,017 3,414 7,877 4,857 2,444 1,832 2,421 2,400 3,897 1,508 859 11,980 105,999 62,397 19,146 43,251 13,928 (211) 4,949 9,190 52,441 2.50 2.49 17,326 17,397 1.181 $ $ $ $ $ 19Consolidated Statements of Changes in Shareholders’ Equity (in thousands except per share and share amounts) Balance, January 1, 2014 Net income Other comprehensive income, net of tax of $4,949 Cash dividends declared ($1.181 per share) Issuance of 10% stock dividend Issuance of common stock Vesting of restricted stock Issuance of restricted stock Forfeiture of restricted stock Stock-based compensation and related excess tax benefits Balance, December 31, 2014 Net income Other comprehensive loss, net of tax of $(83) Cash dividends declared ($1.22 per share) Issuance of common stock Repurchase of common stock Vesting of restricted stock Issuance of restricted stock Forfeiture of restricted stock Stock-based compensation and related excess tax benefits Balance, December 31, 2015 Net income Other comprehensive loss, net of tax of $(1,785) Cash dividends declared ($1.26 per share) Issuance of common stock Repurchase of common stock Vesting of restricted stock Issuance of restricted stock Forfeiture of restricted stock Stock-based compensation and related excess tax benefits Balance, December 31, 2016 See notes to consolidated financial statements. Accumulated Other Comprehensive Income (Loss), Net of Tax $ (8,026) $ 9,190 Retained Earnings 174,289 $ 43,251 (20,539) (52,304) 144,697 46,432 (21,274) 169,855 47,346 (22,123) 1,164 (153) 1,011 (3,315) Common Shares Common Stock Capital Surplus 17,403,441 $ 79,107 $ 167,122 69,138 (8,945) 4,576 (1,835) 7,910 346 (45) 23 (9) 17,466,375 87,332 112,837 (5,724) (46,482) 10,582 (674) 564 (29) (232) 53 (3) 17,536,914 87,685 138,605 (11,574) (52,963) 18,069 (356) 693 (57) (265) 90 (2) 44,394 1,646 45 (23) 9 1,491 214,684 1,518 (160) 232 (53) 3 808 217,032 2,292 (325) 265 (90) 2 521 17,628,695 $ 88,144 $ 219,697 $ 195,078 $ (2,304) $ Total 412,492 43,251 9,190 (20,539) 0 1,992 0 0 0 1,491 447,877 46,432 (153) (21,274) 2,082 (189) 0 0 0 808 475,583 47,346 (3,315) (22,123) 2,985 (382) 0 0 0 521 500,615 20Consolidated Statements of Cash Flows (in thousands) Year Ended December 31 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Deferred taxes Stock-based compensation Excess tax benefits of stock-based compensation Provision for loan losses Write-downs of other real estate owned and other repossessed assets Gains on sale of mortgage loans held for sale Securities (gains) losses Gains on sale of assets, net Proceeds from sale of mortgage loans held for sale Funding of mortgage loans held for sale Amortization of securities premiums and discounts, net Change in cash surrender value of bank owned life insurance Mortgage servicing rights: Fair value adjustments New servicing assets created Changes in: Other assets Other liabilities Net cash provided by operating activities Cash flows from investing activities: Certificates of deposit in other banks: Purchase of certificates of deposit Maturity of certificates of deposit Securities available-for-sale (AFS): Purchase of AFS securities Proceeds from sales of AFS securities Proceeds from prepayments, calls, and maturities of AFS securities Securities held-to-maturity (HTM): Proceeds from prepayments and maturities of HTM securities Change in loans, net Purchase of premises and equipment Proceeds from sale of premises and equipment Redemption of stock by FHLB Additional investment in Federal Reserve Bank stock Cancellation of Federal Reserve Bank stock Proceeds from sale of other real estate owned and repossessed assets Additional investment in other real estate owned and repossessed assets Additional investment in bank owned life insurance Net cash used in investing activities Cash flows from financing activities: Change in deposits, net Change in repurchase agreements and federal funds purchased, net Advances from Federal Home Loan Bank Payments on advances from Federal Home Loan Bank Issuance of common stock Repurchase of common stock Excess tax benefits of stock-based compensation Dividends paid Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosures: Income taxes paid Interest paid Non-cash activities: Loans to facilitate the sale of other real estate owned and repossessed assets Common stock dividends accrued, paid in subsequent quarter Real estate acquired in settlement of loans See notes to consolidated financial statements. 2016 2015 2014 $ 47,346 $ 46,432 $ 43,251 3,904 701 458 100 7,872 1,214 (1,831) (522) 46 81,441 (79,682) 2,452 (1,546) 324 (521) (3,205) 2,874 61,425 0 2,852 (176,236) 54,446 104,302 795 (74,379) (3,498) 10 0 0 0 5,601 0 0 (86,107) 100,526 1,060 50,000 (150,112) 2,985 (382) (100) (22,190) (18,213) (42,895) 187,611 144,716 19,244 13,426 3,964 209 5,900 $ $ 3,932 115 783 104 8,650 1,656 (1,978) 106 (321) 80,571 (77,501) 3,098 (1,638) 289 (557) (6,274) (2,488) 54,979 0 4,365 (81,456) 44,198 79,068 1 (161,702) (2,246) 239 0 (18) 0 9,287 (85) 0 (108,349) 106,525 8,594 170,000 (130,114) 2,082 (189) (104) (21,330) 135,464 82,094 105,517 187,611 20,527 11,609 4,343 239 18,557 $ $ 4,314 (1,048) 852 760 8,755 1,730 (1,468) 211 (73) 51,181 (51,149) 2,661 (1,506) 830 (374) (60) (1,339) 57,528 (245) 1,616 (217,949) 135,411 63,023 0 (132,906) (2,081) 82 7,746 (1) 18 6,714 0 (5,504) (144,076) 19,183 25,695 60,000 (116) 1,992 0 (760) (20,570) 85,424 (1,124) 106,641 105,517 15,818 11,922 6,168 216 12,199 $ $ 21Notes to Consolidated Financial Statements 1. Accounting Policies Basis of Presentation – The consolidated financial statements include Community Trust Bancorp, Inc. (“CTBI”) and its subsidiaries, including its principal subsidiary, Community Trust Bank, Inc. (“CTB”). Intercompany transactions and accounts have been eliminated in consolidation. Nature of Operations – Substantially all assets, liabilities, revenues, and expenses are related to banking operations, including lending, investing of funds, obtaining of deposits, trust and wealth management operations, full service brokerage operations, and other financing activities. All of our business offices and the majority of our business are located in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. Use of Estimates – In preparing the consolidated financial statements, management must make certain estimates and assumptions. These estimates and assumptions affect the amounts reported for assets, liabilities, revenues, and expenses, as well as affecting the disclosures provided. Future results could differ from the current estimates. Such estimates include, but are not limited to, the allowance for loan and lease losses, valuation of other real estate owned, fair value of securities and mortgage servicing rights, goodwill, and valuation of deferred tax assets. The accompanying financial statements have been prepared using values and information currently available to CTBI. Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan and lease losses, and capital. Cash and Cash Equivalents – CTBI considers all liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents include cash on hand, amounts due from banks, interest bearing deposits in other financial institutions, and federal funds sold. Generally, federal funds are sold for one-day periods. Certificates of Deposit in Other Banks – Certificates of deposit in other banks generally mature within 18 months and are carried at cost. 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 (FASB) 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. 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 the 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. 22We 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, a charge off is taken, if necessary, in order that the remaining balance reflects the fair value estimated less costs to sell of the collateral then transferred to other real estate owned or other repossessed assets. 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. Loans Held for Sale – Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses, if any, are recognized by charges to income. Gains and losses on loan sales are recorded in noninterest income. Premises and Equipment – Premises and equipment are stated at cost less accumulated depreciation and amortization. Capital leases are included in premises and equipment at the capitalized amount less accumulated amortization. Premises and equipment are evaluated for impairment on a quarterly basis. Depreciation and amortization are computed primarily using the straight-line method. Estimated useful lives range up to 40 years for buildings, 2 to 10 years for furniture, fixtures, and equipment, and up to the lease term for leasehold improvements. Capitalized leased assets are amortized on a straight-line basis over the lives of the respective leases. Federal Home Loan Bank and Federal Reserve Stock – CTB is a member of the Federal Home Loan Bank (“FHLB”) system. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery par value. Both cash and stock dividends are reported as income. CTB is also a member of its regional Federal Reserve Bank. Federal Reserve Bank stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery par value. Both cash and stock dividends are reported as income. Other Real Estate Owned – 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 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. 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. Goodwill and Core Deposit Intangible – We evaluate total goodwill and core deposit intangible for impairment, based upon ASC 350, Intangibles- Goodwill and Other, using fair value techniques including multiples of price/equity. Goodwill and core deposit intangible are evaluated for impairment on an annual basis or as other events may warrant. The balance of goodwill, at $65.5 million, has not changed since January 1, 2014. The activity to core deposit intangible for the years ended December 31, 2016, 2015, and 2014 is shown below. 23Core Deposit Intangible: (in thousands) Beginning balance, January 1 Amortization Ending balance, December 31 2016 2015 2014 $ $ 291 $ (158) 133 $ 477 $ (186) 291 $ 690 (213) 477 Amortization of core deposit intangible is estimated at approximately $0.1 million for year one, at which time core deposit intangible will be fully amortized. Transfers of Financial Assets – Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from CTBI—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) CTBI does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. 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 years ended December 31, 2016, 2015, and 2014, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes. Earnings Per Share (“EPS”) – Basic EPS is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding, excluding restricted shares. Diluted EPS adjusts the number of weighted average shares of common stock outstanding by the dilutive effect of stock options, including restricted shares, as prescribed in ASC 718, Share-Based Payment. Segments – Management analyzes the operation of CTBI assuming one operating segment, community banking services. CTBI, through its operating subsidiaries, offers a wide range of consumer and commercial community banking services. These services include: (i) residential and commercial real estate loans; (ii) checking accounts; (iii) regular and term savings accounts and savings certificates; (iv) full service securities brokerage services; (v) consumer loans; (vi) debit cards; (vii) annuity and life insurance products; (viii) Individual Retirement Accounts and Keogh plans; (ix) commercial loans; (x) trust and wealth management services; (xi) commercial demand deposit accounts; and (xii) repurchase agreements. Bank Owned Life Insurance – CTBI’s bank owned life insurance policies are carried at their cash surrender value. We recognize tax-free income from the periodic increases in cash surrender value of these policies and from death benefits. Mortgage Servicing Rights – Mortgage servicing rights (“MSRs”) are carried at fair market value following the accounting guidance in ASC 860-50, Servicing Assets and Liabilities. MSRs are valued using Level 3 inputs as defined in ASC 820, Fair Value Measurements. The fair value is determined quarterly based on an independent third-party valuation using a discounted cash flow analysis and calculated using a computer pricing model. The system used in this evaluation, Compass Point, attempts to quantify loan level idiosyncratic risk by calculating a risk derived value. As a result, each loan’s unique characteristics determine the valuation assumptions ascribed to that loan. Additionally, the computer valuation is based on key economic assumptions including the 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, as applicable. Along with the gains received from the sale of loans, fees are received for servicing loans. These fees include late fees, which are recorded in interest income, and ancillary fees and monthly servicing fees, which are recorded in noninterest income. Costs of servicing loans are charged to expense as incurred. Changes in fair market value of the MSRs are reported as an increase or decrease to mortgage banking income. Share-Based Compensation – CTBI has a share-based employee compensation plan, which is described more fully in note 15 to the consolidated financial statements. CTBI accounts for this plan under the recognition and measurement principles of ASC 718, Share-Based Payment. Comprehensive Income – Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income includes unrealized appreciation (depreciation) on available-for-sale securities and unrealized appreciation (depreciation) on available-for-sale securities for which a portion of an other than temporary impairment has been recognized in income. Transfers between Fair Value Hierarchy Levels – Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs), and Level 3 (significant unobservable inputs) are recognized on the period ending date. Reclassifications – Certain reclassifications considered to be immaterial have been made in the prior year consolidated financial statements to conform to current year classifications. These reclassifications had no effect on net income. New Accounting Standards – ò Elimination of Extraordinary Reporting – In January 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU No. 2015-01 eliminated from U.S. GAAP the concept of an extraordinary item. The FASB issued this ASU as part of its initiative to reduce complexity in accounting standards. The objective of the simplification initiative was to identify, evaluate, and improve areas of U.S. GAAP for which cost and complexity could be reduced while maintaining or improving the usefulness of the information provided to the users of financial statements. The amendments in this ASU were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this ASU did not have an impact on CTBI’s consolidated financial statements as no extraordinary items have been presented. 24ò Intangibles – Goodwill and Other – Internal-Use Software – In April 2015, the FASB issued ASU No. 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). The amendments in this update provided guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance did not change GAAP for a customer’s accounting for service contracts. In addition, the guidance in this update supersedes paragraph 350-40-25-16. Consequently, all software licenses within the scope of Subtopic 350-40 are accounted for consistent with other licenses of intangible assets. For public business entities, the amendments were effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. The adoption of this ASU did not have a material effect on CTBI’s consolidated financial statements. ò Income Taxes – In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740). Topic 740 requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. Deferred tax liabilities and assets that are not related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. To simplify the presentation of deferred income taxes, the amendments in this Update require that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. The previous requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount was not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. This ASU has been implemented with no material impact on CTBI’s consolidated financial statements. ò Financial Instruments – Overall – In January 2016, the FASB issued 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. Management does not expect an impact on CTBI’s accounting for equity investments as a result of this ASU. At this time, we cannot quantify the change in the fair value disclosures since we are currently evaluating the full impact of this ASU and are in the planning stages of developing appropriate procedures and processes to comply with the disclosure requirements of such amendments. ò 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. While we expect the impact of this ASU to be significant, we have not finalized our calculation of the estimated amounts as we are currently evaluating certain significant variables within the calculation including the impact of individual renewal options and applicable discount rates for each individual lease. ò Investments—Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting – In March 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. The amendments became effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 and will not have a material impact on CTBI’s consolidated financial statements. 25ò Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting – In April 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. CTBI adopted this ASU effective January 1, 2017, and it will not have a material impact on our consolidated financial statements. ò 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. Management is currently evaluating the effects of these ASUs on its financial statements and disclosures but does not expect a material impact on CTBI’s consolidated financial statements, as we have determined the majority of the revenues earned by CTBI are not within the scope of ASU 2014-09. ò 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. ò 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 (COLIs) (including bank-owned life insurance policies (BOLIs)); 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. Management intends to adopt this ASU effective January 1, 2018, and we do not expect a material impact on CTBI’s consolidated financial statements. ò 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. 26ò Accounting Changes and Error Correction and Investments – Equity Method and Joint Ventures – In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments -Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. ASU 2017-03 provides amendments that add paragraph 250-10-S99-6 which includes the text of "SEC Staff Announcement: Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards Are Adopted in a Future Period (in accordance with Staff Accounting Bulletin (SAB) Topic 11.M). This announcement applies to ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606); ASU No. 2016-02, Leases (Topic 842); and ASU 2016-03, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent amendments. CTBI has enhanced its disclosures regarding the impact of recently issued accounting standards adopted in a future period will have on its accounting and disclosures in this footnote. 2. Cash and Due from Banks and Interest Bearing Deposits Included in cash and due from banks and interest bearing deposits are amounts required to be held at the Federal Reserve or maintained in vault cash in accordance with regulatory reserve requirements. The balance requirements were $74.1 million and $69.4 million at December 31, 2016 and 2015, respectively. At December 31, 2016, CTBI had cash accounts which exceeded federally insured limits, and therefore are not subject to FDIC insurance, with $93.4 million in deposits with the Federal Reserve, $23.3 million in deposits with Fifth Third Bank, and $2.2 million in deposits with the Federal Home Loan Bank. 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 December 31, 2016 are summarized as follows: Available-for-Sale (in thousands) U.S. Treasury and government agencies State and political subdivisions U.S. government sponsored agency mortgage-backed securities Total debt securities CRA investment funds Total available-for-sale securities Held-to-Maturity (in thousands) U.S. Treasury and government agencies State and political subdivisions Total held-to-maturity securities Available-for-Sale (in thousands) U.S. Treasury and government agencies State and political subdivisions U.S. government sponsored agency mortgage-backed securities Total debt securities CRA investment funds Total available-for-sale securities Held-to-Maturity (in thousands) U.S. Treasury and government agencies State and political subdivisions Total held-to-maturity securities Amortized Cost $ 223,014 $ 133,351 227,574 583,939 25,000 608,939 $ Gross Unrealized Gains Gross Unrealized Losses Fair Value 193 $ 1,957 1,008 3,158 76 3,234 $ (743) $ (1,792) (3,526) (6,061) (718) (6,779) $ 222,464 133,516 225,056 581,036 24,358 605,394 Amortized Cost $ 0 $ 866 866 $ Gross Unrealized Gains Gross Unrealized Losses Fair Value 0 $ 1 1 $ 0 $ 0 0 $ 0 867 867 Amortized Cost $ 240,434 $ 125,665 202,282 568,381 25,000 593,381 $ Gross Unrealized Gains Gross Unrealized Losses Fair Value 311 $ 3,707 1,564 5,582 132 5,714 $ (1,351) $ (157) (2,270) (3,778) (381) (4,159) $ 239,394 129,215 201,576 570,185 24,751 594,936 Amortized Cost $ 480 $ 1,181 1,661 $ Gross Unrealized Gains Gross Unrealized Losses Fair Value 0 $ 2 2 $ (12) $ 0 (12) $ 468 1,183 1,651 $ $ $ $ The amortized cost and fair value of securities at December 31, 2015 are summarized as follows: 27 The amortized cost and fair value of securities at December 31, 2016 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) Due in one year or less Due after one through five years Due after five through ten years Due after ten years U.S. government sponsored agency mortgage-backed securities Total debt securities CRA investment funds Total securities Amortized Cost $ 104,396 $ 101,799 60,047 90,123 227,574 583,939 25,000 608,939 $ Fair Value Amortized Cost Fair Value 104,383 $ 102,135 60,358 89,104 225,056 581,036 24,358 605,394 $ 0 $ 866 0 0 0 866 0 866 $ 0 867 0 0 0 867 0 867 $ In 2016, there was a net gain of $522 thousand realized on sales and calls of AFS securities, consisting of a pre-tax gain of $529 thousand and a pre-tax loss of $7 thousand. There was a net loss of $106 thousand realized in 2015 and a net loss of $211 thousand realized in 2014. The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $221.2 million at December 31, 2016 and $228.2 million at December 31, 2015. The amortized cost of securities sold under agreements to repurchase amounted to $303.5 million at December 31, 2016 and $285.5 million at December 31, 2015. CTBI evaluates its investment portfolio on a quarterly basis for impairment. The analysis performed as of December 31, 2016 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 December 31, 2016 was 65.6% compared to 61.1% as of December 31, 2015. 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, 2016 that are not deemed to be other-than-temporarily impaired. Available-for-Sale (in thousands) Less Than 12 Months U.S. Treasury and government agencies State and political subdivisions U.S. government sponsored agency mortgage-backed securities Total debt securities CRA investment funds Total <12 months temporarily impaired AFS securities 12 Months or More U.S. Treasury and government agencies State and political subdivisions U.S. government sponsored agency mortgage-backed securities Total debt securities CRA investment funds Total ≥12 months temporarily impaired AFS securities Total U.S. Treasury and government agencies State and political subdivisions U.S. government sponsored agency mortgage-backed securities Total debt securities CRA investment funds Total temporarily impaired AFS securities Held-to-Maturity (in thousands) 12 Months or More U.S. Treasury and government agencies Total temporarily impaired HTM securities U.S. Treasury and Government Agencies Amortized Cost Gross Unrealized Losses Fair Value $ $ 158,732 $ 53,491 135,939 348,162 17,500 365,662 1,880 751 31,132 33,763 5,000 38,763 160,612 54,242 167,071 381,925 22,500 404,425 $ (716) $ (1,780) (2,646) (5,142) (444) (5,586) (27) (12) (880) (919) (274) (1,193) (743) (1,792) (3,526) (6,061) (718) (6,779) $ 158,016 51,711 133,293 343,020 17,056 360,076 1,853 739 30,252 32,844 4,726 37,570 159,869 52,450 163,545 375,864 21,782 397,646 Amortized Cost Gross Unrealized Losses Fair Value $ $ 0 $ 0 $ 0 $ 0 $ 0 0 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 December 31, 2016, 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. 28 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 December 31, 2016, 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 December 31, 2016, 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. CRA Investment Funds CTBI’s CRA investment funds consist of investments in fixed income mutual funds ($24.4 million of the total fair value and $718 thousand of the total unrealized losses in common stock investments). The severity of the impairment (fair value is approximately 2.9% less than cost) and the duration of the impairment correlates with the decline in long-term interest rates in 2016. CTBI evaluated the near-term prospects of these funds in relation to the severity and duration of the impairment. Based on that evaluation, CTBI does not consider those investments to be other-than-temporarily impaired at December 31, 2016. The analysis performed as of December 31, 2015 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, 2015 that are not deemed to be other-than-temporarily impaired. Available-for-Sale (in thousands) Less Than 12 Months U.S. Treasury and government agencies State and political subdivisions U.S. government sponsored agency mortgage-backed securities Total debt securities CRA investment funds Total <12 months temporarily impaired AFS securities 12 Months or More U.S. Treasury and government agencies State and political subdivisions U.S. government sponsored agency mortgage-backed securities Total debt securities CRA investment funds Total ≥12 months temporarily impaired AFS securities Total U.S. Treasury and government agencies State and political subdivisions U.S. government sponsored agency mortgage-backed securities Total debt securities CRA investment funds Total temporarily impaired AFS securities Held-to-Maturity (in thousands) 12 Months or More U.S. Treasury and government agencies Total temporarily impaired HTM securities Amortized Cost Gross Unrealized Losses Fair Value $ $ 142,147 $ 11,190 92,009 245,346 10,000 255,346 54,773 3,187 49,908 107,868 5,000 112,868 196,920 14,377 141,917 353,214 15,000 368,214 $ (487) $ (106) (899) (1,492) (183) (1,675) (864) (51) (1,371) (2,286) (198) (2,484) (1,351) (157) (2,270) (3,778) (381) (4,159) $ 141,660 11,084 91,110 243,854 9,817 253,671 53,909 3,136 48,537 105,582 4,802 110,384 195,569 14,220 139,647 349,436 14,619 364,055 Amortized Cost Gross Unrealized Losses Fair Value $ $ 480 $ 480 $ (12) $ (12) $ 468 468 29 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) 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 loans December 31 2016 December 31 2015 $ $ 66,998 $ 1,085,428 5,512 350,159 57,966 702,969 91,511 133,093 444,735 2,938,371 $ 78,020 1,052,919 8,514 358,898 61,750 707,874 89,450 126,406 390,130 2,873,961 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, variable, and tax exempt 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 fixed rate products comprised of unsecured loans, consumer revolving credit lines, deposit secured loans, and all other consumer purpose loans. Consumer indirect loans are fixed rate loans secured by automobiles, trucks, vans, and recreational vehicles originated at the selling dealership underwritten and purchased by CTBI’s indirect lending department. Both new and used products are financed. Only dealers who have executed dealer agreements with CTBI participate in the indirect lending program. Not included in the loan balances above were loans held for sale in the amount of $1.2 million at December 31, 2016 and 2015. 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) Commercial: Commercial construction Commercial secured by real estate Commercial other Residential: Real estate construction Real estate mortgage Home equity Consumer: Consumer direct Total nonaccrual loans December 31 2016 December 31 2015 $ $ 1,912 $ 6,326 1,559 11 6,260 555 0 16,623 $ 3,402 5,928 1,485 249 5,206 183 110 16,563 30 The following tables present CTBI’s loan portfolio aging analysis, segregated by class, as of December 31, 2016 and 2015: (in thousands) Commercial: 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due Total Past Due Current Total Loans 90+ and Accruing* December 31, 2016 $ Commercial construction Commercial secured by real estate Equipment lease financing Commercial other Residential: Real estate construction Real estate mortgage Home equity Consumer: Consumer direct Consumer indirect Total $ 22 $ 0 $ 1,940 $ 1,962 $ 65,036 $ 66,998 $ 2,033 0 997 707 1,493 829 873 3,288 10,242 $ 478 0 122 42 5,278 288 265 851 7,324 $ 8,847 0 1,235 152 10,695 905 68 681 24,523 $ 11,358 0 2,354 901 17,466 2,022 1,206 4,820 42,089 $ 1,074,070 5,512 347,805 57,065 685,503 89,489 131,887 439,915 2,896,282 $ 1,085,428 5,512 350,159 57,966 702,969 91,511 133,093 444,735 2,938,371 $ 28 3,015 0 141 152 6,295 467 68 681 10,847 (in thousands) Commercial: 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due Total Past Due Current Total Loans 90+ and Accruing* December 31, 2015 $ Commercial construction Commercial secured by real estate Equipment lease financing Commercial other Residential: Real estate construction Real estate mortgage Home equity Consumer: Consumer direct Consumer indirect Total $ 36 $ 6 $ 3,431 $ 3,473 $ 74,547 $ 78,020 $ 2,947 199 762 443 1,128 527 835 2,133 9,010 $ 622 0 121 62 3,888 148 479 814 6,140 $ 7,923 0 1,476 291 10,907 580 126 395 25,129 $ 11,492 199 2,359 796 15,923 1,255 1,440 3,342 40,279 $ 1,041,427 8,315 356,539 60,954 691,951 88,195 124,966 386,788 2,833,682 $ 1,052,919 8,514 358,898 61,750 707,874 89,450 126,406 390,130 2,873,961 $ 30 3,757 0 310 55 6,925 448 126 395 12,046 *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. 31 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 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: ò=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. ò=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. ò=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. ò=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. ò=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 December 31, 2016 and 2015: (in thousands) December 31, 2016 Pass Watch OAEM Substandard Doubtful Total December 31, 2015 Pass Watch OAEM Substandard Doubtful Total Commercial Construction Commercial Secured by Real Estate Equipment Leases Commercial Other Total $ $ $ $ 55,315 $ 3,366 2,535 5,592 190 66,998 $ 62,978 $ 4,931 2,206 6,780 1,125 78,020 $ 975,383 $ 51,932 25,772 31,945 396 1,085,428 $ 937,196 $ 71,830 13,765 29,232 896 1,052,919 $ 5,206 $ 137 169 0 0 5,512 $ 8,514 $ 0 0 0 0 8,514 $ 299,301 $ 32,780 7,913 9,599 566 350,159 $ 312,100 $ 37,670 963 7,072 1,093 358,898 $ 1,335,205 88,215 36,389 47,136 1,152 1,508,097 1,320,788 114,431 16,934 43,084 3,114 1,498,351 32 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 December 31, 2016 and 2015: (in thousands) December 31, 2016 Performing Nonperforming (1) Total December 31, 2015 Performing Nonperforming (1) Total Real Estate Construction Real Estate Mortgage Home Equity Consumer Direct Consumer Indirect Total $ $ $ $ 57,803 $ 163 57,966 $ 61,446 $ 304 61,750 $ 690,414 $ 12,555 702,969 $ 695,743 $ 12,131 707,874 $ 90,489 $ 1,022 91,511 $ 88,819 $ 631 89,450 $ 133,025 $ 68 133,093 $ 444,054 $ 681 444,735 $ 126,170 $ 236 126,406 $ 389,735 $ 395 390,130 $ 1,415,785 14,489 1,430,274 1,361,913 13,697 1,375,610 (1) A loan is considered nonperforming if it is 90 days or more past due or on nonaccrual. The total of consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings are in process totaled $3.5 million at December 31, 2016 compared to $4.4 million at December 31, 2015. 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 years ended December 31, 2016, 2015, and 2014: (in thousands) Loans without a specific valuation allowance: Commercial construction Commercial secured by real estate Commercial other Real estate mortgage Loans with a specific valuation allowance: Commercial construction Commercial secured by real estate Commercial other Totals: Commercial construction Commercial secured by real estate Commercial other Real estate mortgage Total December 31, 2016 Recorded Balance Unpaid Contractual Principal Balance Specific Allowance Average Investment in Impaired Loans *Interest Income Recognized $ $ 4,102 $ 29,025 11,215 1,483 1,507 4,731 139 5,609 33,756 11,354 1,483 52,202 $ 4,123 $ 29,594 13,155 1,483 1,509 5,885 139 5,632 35,479 13,294 1,483 55,888 $ 0 $ 0 0 0 213 1,035 65 213 1,035 65 0 1,313 $ 4,367 $ 31,136 11,561 1,691 2,290 4,151 483 6,657 35,287 12,044 1,691 55,679 $ 218 1,609 632 52 0 19 0 218 1,628 632 52 2,530 33 December 31, 2015 Recorded Balance Unpaid Contractual Principal Balance Specific Allowance Average Investment in Impaired Loans *Interest Income Recognized $ 2,861 30,761 7,500 1,744 $ 2,862 32,166 9,148 1,744 $ 0 0 0 0 $ 4,574 30,605 8,802 1,179 (in thousands) Loans without a specific valuation allowance: Commercial construction Commercial secured by real estate Commercial other Real estate mortgage Loans with a specific valuation allowance: Commercial construction Commercial secured by real estate Commercial other Totals: Commercial construction Commercial secured by real estate Commercial other Real estate mortgage Total (in thousands) Loans without a specific valuation allowance: Commercial construction Commercial secured by real estate Commercial other Real estate mortgage Loans with a specific valuation allowance: Commercial construction Commercial secured by real estate Commercial other Totals: Commercial construction Commercial secured by real estate Commercial other Real estate mortgage Total $ $ $ $ 3,402 2,660 960 6,263 33,421 8,460 1,744 49,888 Recorded Balance 5,653 31,639 13,069 1,277 3,974 2,718 738 9,627 34,357 13,807 1,277 59,068 $ $ $ 200 1,378 316 50 0 7 1 200 1,385 317 50 1,952 3,402 2,768 1,153 6,264 34,934 10,301 1,744 53,243 $ 831 1,227 403 831 1,227 403 0 2,461 $ 3,631 2,349 836 8,205 32,954 9,638 1,179 51,976 $ December 31, 2014 Unpaid Contractual Principal Balance Specific Allowance Average Investment in Impaired Loans *Interest Income Recognized $ 5,654 33,268 14,597 1,277 3,974 2,876 862 9,628 36,144 15,459 1,277 62,508 $ $ 0 0 0 0 734 827 181 734 827 181 0 1,742 $ $ 5,415 34,650 15,663 1,507 4,216 4,376 531 9,631 39,026 16,194 1,507 66,358 $ 205 1,180 783 53 0 11 1 205 1,191 784 53 2,233 *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 with 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. 34During 2016, 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 years ended December 31, 2016 and 2015: (in thousands) Commercial: Commercial construction Commercial secured by real estate Commercial other Residential: Real estate mortgage Total troubled debt restructurings (in thousands) Commercial: Commercial construction Commercial secured by real estate Commercial other Residential: Real estate mortgage Total troubled debt restructurings Number of Loans Term Modification Rate Modification Combination Post-Modification Outstanding Balance Year Ended December 31, 2016 1 $ 27 14 1 43 $ 1,288 $ 8,827 5,088 0 15,203 $ 0 $ 0 0 0 0 $ 0 $ 581 87 281 949 $ 1,288 9,408 5,175 281 16,152 Number of Loans Term Modification Rate Modification Combination Post-Modification Outstanding Balance Year Ended December 31, 2015 3 $ 21 7 3 34 $ 428 $ 4,244 3,847 0 8,519 $ 0 $ 0 0 0 0 $ 0 $ 1,760 0 848 2,608 $ 428 6,004 3,847 848 11,127 No charge-offs have resulted from modifications for any of the presented periods. We have commitments to extend additional credit in the amount of $0.1 million on loans that are considered troubled debt restructurings. Loans retain their accrual status at the time of their modification. As a result, if a loan is on nonaccrual at the time it is modified, it stays as nonaccrual, and if a loan is on accrual at the time of the modification, it generally stays on accrual. Commercial and consumer loans modified in a troubled debt restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a troubled debt restructuring subsequently default, CTBI evaluates the loan for possible further impairment. The allowance for loan and lease 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) Commercial: Commercial secured by real estate Commercial other Total defaulted restructured loans (in thousands) Commercial: Commercial secured by real estate Total defaulted restructured loans Year Ended December 31, 2016 Number of Loans Recorded Balance 1 $ 1 2 $ 67 12 79 Year Ended December 31, 2015 Number of Loans Recorded Balance 3 $ 3 $ 114 114 5. Mortgage Banking and Servicing Rights Mortgage banking activities primarily include residential mortgage originations and servicing. As discussed in note 1 above, mortgage servicing rights (“MSRs”) are carried at fair market value. The fair value is determined quarterly based on an independent third-party valuation using a discounted cash flow analysis and calculated using a computer pricing model. The system used in this evaluation, Compass Point, attempts to quantify loan level idiosyncratic risk by calculating a risk derived value. As a result, each loan’s unique characteristics determine the valuation assumptions ascribed to that loan. Additionally, the computer valuation is based on key economic assumptions including the 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, as applicable. Along with the gains received from the sale of loans, fees are received for servicing loans. These fees include late fees, which are recorded in interest income, and ancillary fees and monthly servicing fees, which are recorded in noninterest income. Costs of servicing loans are charged to expense as incurred. Changes in fair market value of the MSRs are reported as an increase or decrease to mortgage banking income. 35 The following table presents the components of mortgage banking income: (in thousands) Year Ended December 31 Net gain on sale of loans held for sale Net loan servicing income (expense) Servicing fees Late fees Ancillary fees Fair value adjustments Net loan servicing income Mortgage banking income 2016 2015 2014 $ 1,831 $ 1,978 $ 1,239 78 322 (324) 1,315 3,146 $ 1,197 88 212 (289) 1,208 3,186 $ $ 1,468 1,129 112 149 (830) 560 2,028 Mortgage loans serviced for others are not included in the accompanying balance sheets. Loans serviced for the benefit of others (primarily FHLMC) totaled $466 million, $458 million, and $441 million at December 31, 2016, 2015 and 2014, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and processing foreclosures. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $1.0 million, $1.0 million, and $0.9 million at December 31, 2016, 2015, and 2014, respectively. Activity for capitalized mortgage servicing rights using the fair value method is as follows: (in thousands) Fair value of MSRs, beginning of period New servicing assets created Change in fair value during the period due to: Time decay (1) Payoffs (2) Changes in valuation inputs or assumptions (3) Fair value of MSRs, end of period 2016 2015 2014 3,236 $ 521 (175) (313) 164 3,433 $ 2,968 $ 557 (168) (247) 126 3,236 $ 3,424 374 (162) (202) (466) 2,968 $ $ (1) Represents decrease in value due to regularly scheduled loan principal payments and partial loan paydowns. (2) Represents decrease in value due to loans that paid off during the period. (3) Represents change in value resulting from market-driven changes in interest rates. The fair values of capitalized mortgage servicing rights were $3.4 million, $3.2 million, and $3.0 million at December 31, 2016, 2015, and 2014, respectively. Fair values for the years ended December 31, 2016, 2015, and 2014 were determined by third-party valuations with a resulting 10.1% average discount rate over the last three years, respectively, and weighted average default rates of 3.02%, 2.64%, and 3.61%, respectively. Prepayment speeds generated using the Andrew Davidson Prepayment Model averaged 9.5%, 10.0%, and 11.3% at December 31, 2016, 2015, and 2014, respectively. MSR values are very sensitive to movement in interest rates as expected future net servicing income depends on the projected balance of the underlying loans, which can be greatly impacted by the level of prepayments. CTBI does not currently hedge against changes in the fair value of its MSR portfolio. 6. Related Party Transactions In the ordinary course of business, CTB has made extensions of credit and had transactions with certain directors and executive officers of CTBI or our subsidiaries, including their associates (as defined by the Securities and Exchange Commission). We believe such extensions of credit and transactions were made on substantially the same terms, including interest rate and collateral, as those prevailing at the same time for comparable transactions with other persons. Activity for related party extensions of credit during 2016 and 2015 is as follows: (in thousands) Related party extensions of credit, beginning of period New loans and advances on lines of credit Repayments Related party extensions of credit, end of period 2016 2015 $ $ 29,224 $ 2,456 (4,599) 27,081 $ 37,473 867 (9,116) 29,224 The aggregate balances of related party deposits at December 31, 2016 and 2015 were $15.5 million and $12.5 million, respectively. A director of CTBI is a shareholder in a law firm that provided services to CTBI and its subsidiaries during the years 2016, 2015, and 2014. Approximately $1.0 million in legal fees and $0.1 million in expenses paid on behalf of CTBI, $1.1 million total, were paid to this law firm during 2016. Approximately $1.2 million in legal fees and $0.1 million in expenses, $1.3 million total, were paid during 2015, and approximately $1.0 million in legal fees and $0.1 million in expenses, $1.1 million in total, were paid during 2014. 36 7. 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 December 31, 2016, 2015, and 2014: 2016 (in thousands) ALLL Balance, beginning of year Provision charged to expense Losses charged off Recoveries Balance, end of year 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 $ $ 2,199 $ (1,035) (316) 36 884 $ 14,434 $ 1,220 (1,641) 178 14,191 $ 79 $ (37) 0 0 42 $ 4,225 $ 2,128 (2,136) 439 4,656 $ 550 $ 264 (192) 7 629 $ 6,678 $ 291 (1,043) 101 6,027 $ 839 $ (20) (54) 9 774 $ 1,594 $ 912 (1,236) 615 1,885 $ 5,496 $ 4,149 (5,050) 2,250 6,845 $ 36,094 7,872 (11,668) 3,635 35,933 Ending balance: Individually evaluated for impairment $ Collectively evaluated for impairment $ Loans Ending balance: Individually evaluated for impairment $ Collectively evaluated for impairment $ 213 $ 671 $ 1,035 $ 13,156 $ 0 $ 42 $ 65 $ 4,591 $ 0 $ 629 $ 0 $ 6,027 $ 0 $ 774 $ 0 $ 1,885 $ 0 $ 6,845 $ 1,313 34,620 5,609 $ 33,756 $ 61,389 $ 1,051,672 $ 0 $ 5,512 $ 11,354 $ 338,805 $ 0 $ 1,483 $ 57,966 $ 701,486 $ 0 $ 52,202 91,511 $ 133,093 $ 444,735 $ 2,886,169 0 $ 0 $ 2015 (in thousands) ALLL Balance, beginning of year Provision charged to expense Losses charged off Recoveries Balance, end of year 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 $ $ 2,896 $ (707) (3) 13 2,199 $ 13,618 $ 2,135 (1,379) 60 14,434 $ 119 $ (40) 0 0 79 $ 4,263 $ 1,338 (1,961) 585 4,225 $ 534 $ 147 (135) 4 550 $ 6,094 $ 1,888 (1,421) 117 6,678 $ 756 $ 158 (129) 54 839 $ 1,574 $ 891 (1,306) 435 1,594 $ 4,593 $ 2,840 (3,536) 1,599 5,496 $ 34,447 8,650 (9,870) 2,867 36,094 Ending balance: Individually evaluated for impairment $ Collectively evaluated for impairment $ Loans Ending balance: Individually evaluated for impairment $ Collectively evaluated for impairment $ 831 $ 1,368 $ 1,227 $ 13,207 $ 0 $ 79 $ 403 $ 3,822 $ 0 $ 550 $ 0 $ 6,678 $ 0 $ 839 $ 0 $ 1,594 $ 0 $ 5,496 $ 2,461 33,633 6,263 $ 33,421 $ 71,757 $ 1,019,498 $ 0 $ 8,514 $ 8,460 $ 350,438 $ 0 $ 1,744 $ 61,750 $ 706,130 $ 0 $ 49,888 89,450 $ 126,406 $ 390,130 $ 2,824,073 0 $ 0 $ 2014 (in thousands) ALLL Balance, beginning of year Provision charged to expense Losses charged off Recoveries Balance, end of year 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 $ $ 3,396 $ (513) (15) 28 2,896 $ 14,535 $ 941 (2,163) 305 13,618 $ 121 $ (2) 0 0 119 $ 5,238 $ 1,545 (3,141) 621 4,263 $ 397 $ 258 (123) 2 534 $ 4,939 $ 2,173 (1,058) 40 6,094 $ 601 $ 265 (115) 5 756 $ 1,127 $ 1,207 (1,326) 566 1,574 $ 3,654 $ 2,881 (3,495) 1,553 4,593 $ 34,008 8,755 (11,436) 3,120 34,447 Ending balance: Individually evaluated for impairment $ Collectively evaluated for impairment $ Loans Ending balance: Individually evaluated for impairment $ Collectively evaluated for impairment $ 734 $ 2,162 $ 827 $ 12,791 $ 0 $ 119 $ 181 $ 4,082 $ 0 $ 534 $ 0 $ 6,094 $ 0 $ 756 $ 0 $ 1,574 $ 0 $ 4,593 $ 1,742 32,705 9,627 $ 112,315 $ 34,357 $ 914,269 $ 0 $ 10,344 $ 13,807 $ 338,241 $ 0 $ 1,277 $ 62,412 $ 711,188 $ 0 $ 59,068 88,335 $ 122,136 $ 315,516 $ 2,674,756 0 $ 0 $ 37 8. Premises and Equipment Premises and equipment are summarized as follows: (in thousands) December 31 Land and buildings Leasehold improvements Furniture, fixtures, and equipment Construction in progress Total premises and equipment Less accumulated depreciation and amortization Premises and equipment, net 2016 2015 $ $ 78,086 $ 4,886 36,831 769 120,572 (72,632) 47,940 $ 76,709 4,793 35,382 196 117,080 (68,892) 48,188 Depreciation and amortization of premises and equipment for 2016, 2015, and 2014 was $3.7 million, $3.7 million, and $4.1 million, respectively. 9. Other Real Estate Owned Activity for other real estate owned was as follows: (in thousands) Beginning balance of other real estate owned New assets acquired Capitalized costs Fair value adjustments Sale of assets Ending balance of other real estate owned 2016 2015 40,674 $ 5,900 0 (1,214) (9,504) 35,856 $ 36,776 18,850 85 (1,656) (13,381) 40,674 $ $ Carrying costs and fair value adjustments associated with foreclosed properties were $2.9 million, $3.5 million, and $3.9 million for 2016, 2015, and 2014, 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) December 31 1-4 family Agricultural/farmland Construction/land development/other Multifamily Non-farm/non-residential Total foreclosed properties 10. Deposits Major classifications of deposits are categorized as follows: (in thousands) December 31 Noninterest bearing deposits NOW accounts Money market deposits Savings Certificates of deposit and other time deposits of $100,000 or more Certificates of deposit and other time deposits less than $100,000 Total deposits 2016 2015 6,210 $ 93 20,778 270 8,505 35,856 $ 7,493 116 22,570 833 9,662 40,674 2016 2015 767,918 $ 45,872 649,917 404,558 651,882 561,161 3,081,308 $ 749,975 44,567 614,911 382,131 606,859 582,339 2,980,782 $ $ $ $ Certificates of deposit and other time deposits of $250,000 or more at December 31, 2016 and 2015 were $228.6 million and $190.6 million, respectively. Maturities of certificates of deposits and other time deposits are presented below: (in thousands) Certificates of deposit and other time deposits of $100,000 or more Certificates of deposit and other time deposits less than $100,000 Total maturities Total Within 1 Year Maturities by Period at December 31, 2016 3 Years 4 Years 2 Years 5 Years After 5 Years $ 651,882 $ 516,384 $ 56,494 $ 23,180 $ 24,074 $ 31,750 $ $ 561,161 1,213,043 $ 471,912 988,296 $ 38,109 94,603 $ 17,628 40,808 $ 13,354 37,428 $ 19,830 51,580 $ 0 328 328 38 11. Borrowings Short-term debt is categorized as follows: (in thousands) December 31 Repurchase agreements Federal funds purchased Total short-term debt 2016 2015 $ $ 251,065 $ 4,816 255,881 $ 251,225 3,596 254,821 All federal funds purchased mature and reprice daily. See note 12 for information regarding the maturities of our repurchase agreements. The average rates paid for federal funds purchased and repurchase agreements on December 31, 2016 were 0.54% and 0.51%, respectively. The maximum balance for repurchase agreements at any month-end during 2016 occurred at October 31, 2016, with a month-end balance of $264.5 million. The average balance of repurchase agreements for the year was $256.6 million. On October 5, 2016, Community Trust Bancorp, Inc. entered into a revolving credit promissory note for a line of credit in the amount of $12 million at a floating interest rate of 2.00% in excess of the one-month LIBOR Rate, with an unused commitment fee of 0.15%. Currently, all $12 million remain available for general corporate purposes. The agreement, which was effective October 5, 2016, replaced the agreement dated November 2, 2015, and will mature on October 31, 2017. Long-term debt is categorized as follows: (in thousands) December 31 Junior subordinated debentures, 2.52%, due 6/1/37 2016 2015 $ 61,341 $ 61,341 On March 31, 2007, CTBI issued $61.3 million in junior subordinated debentures to a newly formed unconsolidated Delaware statutory trust subsidiary which in turn issued $59.5 million of capital securities in a private placement to institutional investors. The debentures, which mature in 30 years but are redeemable at par at CTBI’s option after five years, were issued at a rate of 6.52% until June 1, 2012, and thereafter at a floating rate based on the three-month LIBOR plus 1.59%. The underlying capital securities were issued at the equivalent rates and terms. The proceeds of the debentures were used to fund the redemption on April 2, 2007 of all CTBI’s outstanding 9.0% and 8.25% junior subordinated debentures in the total amount of $61.3 million. On November 29, 2016, the coupon rate was set at 2.52% for the March 1, 2017 distribution date, which was based on the three-month LIBOR rate as of November 29, 2016 of 0.93% plus 1.59%. 12. 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 $302.3 million and $288.1 million at December 31, 2016 and December 31, 2015, 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 December 31, 2016 and December 31, 2015 is presented in the following tables: (in thousands) Repurchase agreements and repurchase-to-maturity transactions: December 31, 2016 Remaining Contractual Maturity of the Agreements Overnight and Continuous Up to 30 days 30-90 days Greater Than 90 days Total U.S. Treasury and government agencies State and political subdivisions U.S. government sponsored agency mortgage-backed securities Total $ $ 17,249 $ 55,354 23,386 95,989 $ 0 $ 0 0 0 $ 14,349 $ 1,998 8,003 24,350 $ 73,076 $ 10,272 47,378 130,726 $ 104,674 67,624 78,767 251,065 39 (in thousands) Repurchase agreements and repurchase-to-maturity transactions: December 31, 2015 Remaining Contractual Maturity of the Agreements Overnight and Continuous Up to 30 days 30-90 days Greater Than 90 days Total U.S. Treasury and government agencies State and political subdivisions U.S. government sponsored agency mortgage-backed securities Total $ $ 19,184 58,676 27,810 105,670 $ $ 0 494 6 500 $ $ 10,401 1,656 12,278 24,335 $ $ 48,695 9,159 62,866 120,720 $ $ 78,280 69,985 102,960 251,225 13. Advances from Federal Home Loan Bank Federal Home Loan Bank advances consisted of the following monthly amortizing and term borrowings at December 31: (in thousands) Monthly amortizing Term Total FHLB advances The advances from the FHLB that require monthly principal payments were due for repayment as follows: Total Within 1 Year Principal Payments Due by Period at December 31, 2016 3 Years 4 Years 2 Years 2016 2015 944 0 944 $ $ 1,056 100,000 101,056 $ $ 5 Years After 5 Years (in thousands) Outstanding advances, weighted average interest rate – 1.33% $ 944 $ 106 $ 404 $ 20 $ 20 $ 20 $ 374 At December 31, 2015, CTBI had monthly amortizing FHLB advances totaling $1.1 million at a weighted average interest rate of 1.53%. CTBI utilizes the FHLB cash management advance to facilitate any short-term funding needs. These short-term advances typically have a two-week maturity and require the total payment to be made at maturity. At December 31, 2016, there were no short-term advances. At December 31, 2015, CTBI had a $100.0 million term advance with a fixed interest rate of 0.34% and a maturity date of January 6, 2016. Advances totaling $0.9 million at December 31, 2016 were collateralized by FHLB stock of $17.9 million and a blanket lien on qualifying 1-4 family first mortgage loans. As of December 31, 2016, CTBI had a $522.8 million FHLB borrowing capacity with $0.9 million in advances and $226.1 million in letters of credit used for public fund pledging leaving $295.8 million available for additional advances. The advances had fixed interest rates ranging from 0.00% to 6.03% with a weighted average rate of 1.33%. The advances are subject to restrictions or penalties in the event of prepayment. 14. Income Taxes The components of the provision for income taxes, exclusive of tax effect of unrealized securities gains and losses, are as follows: (in thousands) Current income tax expense Deferred income tax expense (benefit) Total income tax expense 2016 2015 2014 $ $ 18,417 701 19,118 $ $ 18,416 115 18,531 $ $ 20,194 (1,048) 19,146 A reconciliation of income tax expense at the statutory rate to our actual income tax expense is shown below: (in thousands) Computed at the statutory rate Adjustments resulting from: Tax-exempt interest Housing and new markets credits Dividends received deduction Bank owned life insurance ESOP dividend deduction Other, net Total 2016 2015 2014 $ 23,262 35.00% $ 22,737 35.00% $ 21,839 (1,289) (2,680) (136) (518) (313) 792 19,118 $ (1.94) (4.03) (0.20) (0.78) (0.47) 1.18 28.76% $ (1,275) (2,692) (128) (549) (298) 736 18,531 (1.96) (4.14) (0.20) (0.84) (0.46) 1.13 28.53% $ (1,204) (1,076) (178) (503) (284) 552 19,146 35.00% (1.93) (1.72) (0.29) (0.81) (0.46) 0.89 30.68% 40The components of the net deferred tax liability as of December 31 are as follows: (in thousands) Deferred tax assets: Allowance for loan and lease losses Interest on nonperforming loans Accrued expenses Allowance for other real estate owned Unrealized losses on available-for-sale securities Other Total deferred tax assets Deferred tax liabilities: Depreciation and amortization FHLB stock dividends Loan fee income Mortgage servicing rights Capitalized lease obligations Unrealized gains on AFS securities Limited partnership investments Other Total deferred tax liabilities Net deferred tax liability $ 2016 2015 12,577 $ 806 1,883 1,898 1,241 282 18,687 (20,287) (3,460) (536) (1,202) (65) 0 (411) (562) (26,523) 12,633 806 2,087 2,185 0 665 18,376 (20,150) (3,460) (552) (1,133) (211) (544) (650) (596) (27,296) $ (7,836) $ (8,920) CTBI accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. CTBI determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. With a few exceptions, CTBI is no longer subject to U.S. federal tax examinations by tax authorities for years before 2013, and state and local income tax examinations by tax authorities for years before 2012. For federal tax purposes, CTBI recognizes interest and penalties on income taxes as a component of income tax expense. CTBI files consolidated income tax returns with its subsidiaries. 15. Employee Benefits CTBI maintains two separate retirement savings plans, a 401(k) Plan and an Employee Stock Ownership Plan ("ESOP"). The 401(k) Plan is available to all employees (age 21 and over) with one year of service and who work at least 1,000 hours per year. Participants in the plan have the option to contribute from 1% to 20% of their annual compensation. CTBI matches 50% of participant contributions up to 4% of gross pay. CTBI may at its discretion, contribute an additional percentage of covered employees' compensation. CTBI's matching contributions were $1.0 million for the years ended December 31, 2016, 2015, and 2014. The 401(k) Plan owned 482,426, 515,062, and 503,082 shares of CTBI's common stock at December 31, 2016, 2015, and 2014, respectively. Substantially all shares owned by the 401(k) were allocated to employee accounts on those dates. The market price of the shares at the date of allocation is essentially the same as the market price at the date of purchase. The ESOP Plan has the same entrance requirements as the 401(k) Plan above. CTBI currently contributes 4% of covered employees' gross compensation to the ESOP. The ESOP uses the contributions to acquire shares of CTBI's common stock. CTBI's contributions to the ESOP were $1.5 million for the years ended December 31, 2016, 2015, and 2014. The ESOP owned 788,308, 765,630, and 752,710 shares of CTBI's common stock at December 31, 2016, 2015, and 2014, respectively. Substantially all shares owned by the ESOP were allocated to employee accounts on those dates. The market price of the shares at the date of allocation is essentially the same as the market price at the date of purchase. 41 Stock-Based Compensation: As of December 31, 2016, CTBI maintained one active and two inactive incentive stock ownership plans covering key employees. The 2015 Stock Ownership Incentive Plan (“2015 Plan”) was approved by the Board of Directors and the Shareholders in 2015. The 2006 Stock Ownership Incentive Plan (“2006 Plan”) was approved by the Board of Directors and the Shareholders in 2006. The 2006 Plan was rendered inactive as of April 28, 2015. The 1998 Stock Option Plan (“1998 Plan”) was approved by the Board of Directors and the Shareholders in 1998. The 1998 Plan was rendered inactive as of April 26, 2006. The 2015 Plan has 550,000 shares authorized, 540,131 of which were available at December 31, 2016. Shares issuable pursuant to awards which were granted under the prior plans on or before their respective expiration or termination dates will be issued from the remaining shares reserved for issuance under the prior plans. The shares of common stock reserved for issuance under the prior plans in excess of the number of shares as to which options or other benefits are awarded thereunder, and any shares as to which options or other benefits granted under the prior plans may lapse, expire, terminate or be canceled, will not be reserved and available for issuance or reissuance under the 2015 Plan. In January 2016, 18,069 shares were issued under the terms of the 2015 Plan pursuant to awards granted and earned under the 2006 Plan. Accordingly, this issuance did not reduce the shares available under the 2015 Plan. Additional shares will not be issued under the 2015 Plan pursuant to awards granted under the 2006 Plan. The following table provides detail of the number of shares to be issued upon exercise of outstanding stock-based awards and remaining shares available for future issuance under all of CTBI's equity compensation plans as of December 31, 2016: Plan Category (shares in thousands) Equity compensation plans approved by shareholders: Stock options Restricted stock Performance units Stock appreciation rights (“SARs”) Total Number of Shares to Be Issued Upon Exercise Weighted Average Price Shares Available for Future Issuance 71 $ (c) (d) (e) 30.36 (b) (b) (b) 540(a) (a) (a) (a) 540 (a) (b) (c) (d) Under the 2015 Plan, 550,000 shares are authorized for issuance; 10,000 have been issued as of December 31, 2016. In January of 2016, 18,069 restricted stock shares were issued under the terms of the 2015 Plan pursuant to awards granted under the 2006 Plan. Additional shares will not be issued pursuant to awards granted from prior plans. Not applicable The maximum number of shares of restricted stock that may be granted is 550,000 shares, and the maximum that may be granted to a participant during any calendar year is 75,000 shares. No performance units payable in stock had been issued as of December 31, 2016. The maximum payment that can be made pursuant to performance units granted to any one participant in any calendar year shall be $1,000,000. (e) No SARS have been issued. The maximum number of shares with respect to which SARs may be granted to a participant during any calendar year shall be 100,000 shares. The following table details the shares available for future issuance under the 2015 Plan at December 31, 2016. Plan Category Shares available at January 1, 2016 Stock option issuances Restricted stock issuances Forfeitures Shares available for future issuance Shares Available for Future Issuance 550,000 (10,000) 0 131 540,131 CTBI uses a Black-Scholes option pricing model with the following weighted average assumptions, which are evaluated and revised as necessary, in estimating the grant-date fair value of each option grant for the year end: Expected option life (in years) Expected volatility Expected dividend yield Risk-free interest rate 2016 7.5 34.34% 3.70% 1.45% 2015 7.5 43.11% 3.72% 1.54% 2014 7.5 43.32% 3.40% 2.01% The expected option life is derived from the “safe-harbor” rules for estimating option life in ASC 718, Share-Based Payment. The expected volatility is based on historical volatility of the stock using a historical look back that approximates the expected life of the option grant. The interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. CTBI's stock-based compensation expense for the years 2016, 2015, and 2014 was $0.5 million, $0.8 million, and $0.9 million, respectively. Included in stock-based compensation expense were dividends paid on restricted stock shares in the amount of $37 thousand, $80 thousand, and $121 thousand, respectively, for the same periods. 42 The 2015 Plan: CTBI’s stock option activity for the 2015 Plan for the year ended December 31, 2016 is summarized as follows: December 31 Outstanding at beginning of year Granted Exercised Forfeited/expired Outstanding at end of year Exercisable at end of year 2016 Weighted Average Exercise Price Options 0 10,000 0 0 10,000 0 $ $ $ -- 33.55 -- -- 33.55 -- A summary of the status of CTBI’s 2015 Plan for nonvested options as of December 31, 2016, and changes during the year ended December 31, 2016, is presented as follows: Nonvested Options Nonvested at January 1, 2016 Granted Vested Forfeited Nonvested at December 31, 2016 Weighted Average Grant Date Fair Value -- $ 6.82 -- -- 6.82 $ Options 0 10,000 0 0 10,000 The weighted average remaining contractual term in years of the options outstanding at December 31, 2016 was 9.1 years. The weighted-average fair value of options granted from the 2015 Plan during the year 2016 was $0.07 million, or $6.82 per share. The following table shows the intrinsic values of options exercised, exercisable, and outstanding for the 2015 Plan for the years ended December 31, 2016: (in thousands) Options exercised Options exercisable Outstanding options The following table shows restricted stock activity for the 2015 Plan for the year ended December 31, 2016: December 31 Outstanding at beginning of year Granted* Vested Forfeited Outstanding at end of year 2016 $ -- -- 161 2016 Weighted Average Fair Value at Grant Grants 0 18,069 (442) (131) 17,496 $ $ -- 33.55 33.55 33.55 33.55 * Issued under the terms of the 2015 Plan pursuant to awards granted and earned under the 2006 Plan. The 2006 Plan: CTBI’s stock option activity for the 2006 Plan for the years ended December 31, 2016, 2015, and 2014 is summarized as follows: December 31 2016 2015 2014 Outstanding at beginning of year Granted Exercised Forfeited/expired Outstanding at end of year Exercisable at end of year Options Weighted Average Exercise Price Options Weighted Average Exercise Price Options Weighted Average Exercise Price 118,574 0 (57,423) (110) 61,041 30,629 $ $ $ 32.36 -- 35.02 35.41 29.84 26.64 $ 98,821 20,000 (247) 0 $ 118,574 87,749 $ 32.35 32.27 24.12 -- 32.36 32.12 97,047 10,000 (5,757) (2,469) 98,821 86,264 $ $ $ 32.29 34.75 34.62 34.29 32.35 32.25 43A summary of the status of CTBI’s 2006 Plan for nonvested options as of December 31, 2016, and changes during the year ended December 31, 2016, is presented as follows: Nonvested Options Nonvested at January 1, 2016 Granted Vested Forfeited Nonvested at December 31, 2016 Options Weighted Average Grant Date Fair Value 7.02 -- 8.23 -- 7.00 30,825 $ 0 (413) 0 30,412 $ The weighted average remaining contractual term in years of the options outstanding at December 31, 2016 was 4.6 years. There were no options granted from the 2006 Plan for the year 2016. The weighted-average fair value of options granted from the 2006 Plan during the years 2015 and 2014 were $0.13 million or $6.60 per share and $0.08 million or $7.76 per share; respectively. The following table shows the intrinsic values of options exercised, exercisable, and outstanding for the 2006 Plan for the years ended December 31, 2016, 2015, and 2014: (in thousands) Options exercised Options exercisable Outstanding options 2016 2015 2014 $ 139 $ 703 1,206 3 $ 275 334 11 376 421 The following table shows restricted stock activity for the years ended December 31, 2016, 2015, and 2014: December 31 2016 2015 2014 Grants Weighted Average Fair Value at Grant Grants Weighted Average Fair Value at Grant Grants Outstanding at beginning of year Granted Vested Forfeited Outstanding at end of year The 1998 Plan: 64,735 $ 0 (52,521) (225) 11,989 $ 28.92 -- 28.01 32.52 32.85 101,309 $ 10,582 (46,482) (674) 64,735 $ 26.19 32.27 23.66 33.31 28.92 Weighted Average Fair Value at Grant 25.91 37.85 28.35 28.38 26.19 107,511 $ 4,561 (8,949) (1,814) 101,309 $ CTBI’s stock option activity for the 1998 Plan for the years ended December 31, 2016, 2015, and 2014 is summarized as follows: December 31 2016 2015 2014 Options Weighted Average Exercise Price Options Weighted Average Exercise Price Options Weighted Average Exercise Price Outstanding at beginning of year Granted Exercised Forfeited/expired Outstanding at end of year 2,980 $ 0 (2,980) 0 0 $ 29.49 -- 29.49 -- -- 43,960 $ 0 (40,980) 0 2,980 $ 29.43 -- 29.42 -- 29.49 78,066 $ 0 (34,106) 0 43,960 $ Exercisable at end of year 0 $ -- 2,980 $ 29.49 43,960 $ 28.91 -- 28.25 -- 29.43 29.43 There were no options outstanding in the 1998 Plan at December 31, 2016. The following table shows the intrinsic values of options exercised, exercisable, and outstanding for the 1998 Plan for the years ended December 31, 2016, 2015, and 2014: (in thousands) Options exercised Options exercisable Outstanding options $ 2016 2015 2014 13 $ 0 0 241 $ 16 16 270 316 316 There were no nonvested options in the 1998 Plan for the years December 31, 2016, 2015, and 2014. 44 The following table shows the unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans at December 31, 2016, 2015, and 2014 and the total grant-date fair value of shares vested, cash received from option exercises under all share-based payment arrangements, and the actual tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements for the years ended December 31, 2016, 2015, and 2014. (in thousands) Unrecognized compensation cost of unvested share-based compensation arrangements granted under the plan at year-end Grant date fair value of shares vested for the year Cash received from option exercises under all share-based payment arrangements for the year Tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements for the year $ 2016 2015 2014 835 $ 1,490 2,099 3 495 $ 1,111 1,212 82 861 343 1,163 93 The unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans at December 31, 2016 is expected to be recognized over a weighted-average period of 2.9 years. 16. Operating Leases Certain premises and equipment are leased under operating leases. Additionally, certain premises are leased or subleased to third parties. These leases generally contain renewal options and require CTBI to pay all executory costs, such as taxes, maintenance fees, and insurance. Minimum non-cancellable rental payments and rental receipts are as follows: (in thousands) 2017 2018 2019 2020 2021 Thereafter Total Payments Receipts $ $ 2,010 $ 1,501 943 725 610 3,089 8,878 $ 561 350 261 227 147 81 1,627 Rental expense net of rental income under operating leases was $1.3 million for 2016, $1.3 million for 2015, and $1.3 million for 2014. 17. 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 assumptions market participants would use 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 pricing 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 December 31, 2016 and December 31, 2015 and indicate the level within the fair value hierarchy of the valuation techniques. (in thousands) Assets measured – recurring basis Available-for-sale securities: U.S. Treasury and government agencies State and political subdivisions U.S. government sponsored agency mortgage-backed securities CRA investment funds Mortgage servicing rights Fair Value Measurements at December 31, 2016 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value $ 222,464 $ 133,516 225,056 24,358 3,433 44,934 $ 0 0 24,358 0 177,530 $ 133,516 225,056 0 0 0 0 0 0 3,433 45 (in thousands) Assets measured – recurring basis Available-for-sale securities: U.S. Treasury and government agencies State and political subdivisions U.S. government sponsored agency mortgage-backed securities CRA investment funds Mortgage servicing rights Fair Value Measurements at December 31, 2015 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value $ 239,394 $ 129,215 201,576 24,751 3,236 44,702 $ 0 0 24,751 0 194,692 $ 129,215 201,576 0 0 0 0 0 0 3,236 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 December 31, 2016 and December 31, 2015. There have been no significant changes in the valuation techniques during the year ended December 31, 2016. 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 and CTBI’s CRA investment funds 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, and U.S. government sponsored agency mortgage-backed 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 December 31, 2016, 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 December 31, 2016. 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: Mortgage Servicing Rights (in thousands) Beginning balance Total recognized gains (losses) Included in net income Issues Settlements Ending balance 2016 2015 $ 3,236 $ 164 521 (488) 3,433 $ $ 2,968 126 557 (415) 3,236 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 $ 164 $ 126 46 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 (in thousands) Total losses Nonrecurring Measurements 2016 2015 $ (324) $ (289) 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 December 31, 2016 and December 31, 2015 and indicate the level within the fair value hierarchy of the valuation techniques. (in thousands) Assets measured – nonrecurring basis Impaired loans (collateral dependent) Other real estate/assets owned (in thousands) Assets measured – nonrecurring basis Impaired loans (collateral dependent) Other real estate/assets owned Fair Value Measurements at December 31, 2016 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value $ 5,506 $ 4,388 0 $ 0 0 $ 0 5,506 4,388 Fair Value Measurements at December 31, 2015 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value $ 3,192 $ 6,798 0 $ 0 0 $ 0 3,192 6,798 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. Fair value adjustments on impaired loans disclosed above were $0.6 million and $1.8 million for the years ended December 31, 2016 and December 31, 2015, respectively. 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. Fair value adjustments on other real estate/assets owned were $1.2 million and $1.7 million for the years ended December 31, 2016 and December 31, 2015, respectively. 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. 47 Unobservable (Level 3) Inputs The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at December 31, 2016 and December 31, 2015. (in thousands) Quantitative Information about Level 3 Fair Value Measurements Fair Value at December 31, 2016 Valuation Technique(s) Unobservable Input 3,433 Discount cash flows, computer pricing model Constant prepayment rate Mortgage servicing rights Impaired loans (collateral-dependent) Other real estate owned (in thousands) Mortgage servicing rights Impaired loans (collateral-dependent) Other real estate owned $ $ $ $ $ $ 5,506 4,388 Fair Value at December 31, 2015 Probability of default Discount rate Market comparable properties Marketability discount Market comparable properties Comparability adjustments 10.0% - 100.0% (14.9%) Quantitative Information about Level 3 Fair Value Measurements Valuation Technique(s) Unobservable Input 3,236 Discount cash flows, computer pricing model Constant prepayment rate Probability of default Discount rate 3,192 6,798 Market comparable properties Marketability discount Market comparable properties Comparability adjustments Range (Weighted Average) 7.0% - 27.0% (9.5%) 0.0% - 100.0% (3.0%) 10.0% - 11.5% (10.1%) 0.0% - 100.0% (33.7%) Range (Weighted Average) 6.1% - 22.4% (10.0%) 0.0% - 100.0% (2.6%) 10.0% - 11.5% (10.1%) 0.0% - 76.7% (26.8%) 5.0% - 51.8% (11.7%) 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 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. 48Fair Value of Financial Instruments The following table presents estimated fair value of CTBI’s financial instruments as of December 31, 2016 and indicates the level within the fair value hierarchy of the valuation techniques. (in thousands) Financial assets: Cash and cash equivalents Certificates of deposit in other banks Securities available-for-sale Securities held-to-maturity Loans held for sale Loans, net Federal Home Loan Bank stock Federal Reserve Bank stock Accrued interest receivable Mortgage servicing rights Financial liabilities: Deposits Repurchase agreements Federal funds purchased Advances from Federal Home Loan Bank Long-term debt Accrued interest payable Unrecognized financial instruments: Letters of credit Commitments to extend credit Forward sale commitments Fair Value Measurements at December 31, 2016 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Carrying Amount $ $ $ 144,716 $ 980 605,394 866 1,244 2,902,438 17,927 4,887 11,922 3,433 3,081,308 $ 251,065 4,816 944 61,341 1,200 0 $ 0 0 144,716 $ 0 69,292 0 1,260 0 0 0 0 0 767,918 $ 0 0 0 0 0 0 $ 0 0 0 $ 982 536,102 867 0 0 17,927 4,887 11,922 0 2,321,690 $ 0 4,816 1,009 0 1,200 0 $ 0 0 0 0 0 0 0 2,882,348 0 0 0 3,433 0 250,820 0 0 49,073 0 0 0 0 The following table presents estimated fair value of CTBI’s financial instruments as of December 31, 2015 and indicates the level within the fair value hierarchy of the valuation techniques. (in thousands) Financial assets: Cash and cash equivalents Certificates of deposit in other banks Securities available-for-sale Securities held-to-maturity Loans held for sale Loans, net Federal Home Loan Bank stock Federal Reserve Bank stock Accrued interest receivable Mortgage servicing rights Financial liabilities: Deposits Repurchase agreements Federal funds purchased Advances from Federal Home Loan Bank Long-term debt Accrued interest payable Unrecognized financial instruments: Letters of credit Commitments to extend credit Forward sale commitments Fair Value Measurements at December 31, 2015 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Carrying Amount $ $ $ 187,611 $ 3,832 594,936 1,661 1,172 2,837,867 17,927 4,887 12,194 3,236 2,980,782 $ 251,225 3,596 101,056 61,341 1,071 0 $ 0 0 187,611 $ 0 69,453 0 1,196 0 0 0 0 0 749,975 $ 0 0 0 0 0 0 $ 0 0 0 $ 3,836 525,483 1,651 0 0 17,927 4,887 12,194 0 2,208,120 $ 0 3,596 100,905 0 1,071 0 $ 0 0 0 0 0 0 0 2,833,267 0 0 0 3,236 0 250,873 0 0 49,073 0 0 0 0 49 The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents – The carrying amount approximates fair value. Certificates of deposit in other banks – Fair values are based on quoted market prices or dealer quotes for similar instruments. Securities held-to-maturity – Fair values are based on quoted market prices, if available. If a quoted price is not available, fair value is estimated using quoted prices for similar securities. The fair value estimate is provided to management from a third party using modeling assumptions specific to each type of security that are reviewed and approved by management. Quarterly sampling of fair values provided by additional third parties supplement the fair value review process. Loans held for sale – The fair value is predetermined at origination based on sale price. Loans (net of the allowance for loan and lease losses) – The fair value of fixed rate loans and variable rate mortgage loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. For other variable rate loans, the carrying amount approximates fair value. Federal Home Loan Bank stock – The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank. Federal Reserve Bank stock – The carrying value of Federal Reserve Bank stock approximates fair value based on the redemption provisions of the Federal Reserve Bank. Accrued interest receivable – The carrying amount approximates fair value. Deposits – The fair value of fixed maturity time deposits is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. For deposits including demand deposits, savings accounts, NOW accounts, and certain money market accounts, the carrying value approximates fair value. Repurchase agreements – The fair value is estimated by discounting future cash flows using current rates. Federal funds purchased – The carrying amount approximates fair value. Advances from Federal Home Loan Bank – The fair value of these fixed-maturity advances is estimated by discounting future cash flows using rates currently offered for advances of similar remaining maturities. Long-term debt – The fair value is estimated by discounting future cash flows using current rates. Accrued interest payable – The carrying amount approximates fair value. Commitments to originate loans, forward sale commitments, letters of credit, and lines of credit – The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of forward sale commitments is estimated based on current market prices for loans of similar terms and credit quality. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair values of these commitments are not material. 18. Off-Balance Sheet Transactions and Guarantees CTBI is a party to transactions with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include standby letters of credit and commitments to extend credit in the form of unused lines of credit. CTBI uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. At December 31, CTBI had the following off-balance sheet financial instruments, whose approximate contract amounts represent additional credit risk to CTBI: (in thousands) Standby letters of credit Commitments to extend credit Total off-balance sheet financial instruments 2016 2015 $ $ 29,917 $ 570,467 600,384 $ 28,143 455,273 483,416 Standby letters of credit represent conditional commitments to guarantee the performance of a third party. The credit risk involved is essentially the same as the risk involved in making loans. At December 31, 2016, we maintained a credit loss reserve recorded in other liabilities of approximately $5 thousand relating to these financial standby letters of credit. The reserve coverage calculation was determined using essentially the same methodology as used for the allowance for loan and lease losses. Approximately 74% of the total standby letters of credit are secured, with $18.6 million of the total $29.9 million secured by cash. Collateral for the remaining secured standby letters of credit varies but is comprised primarily of accounts receivable, inventory, property, equipment, and income-producing properties. 50 Commitments to extend credit are agreements to originate loans to customers as long as there is no violation of any condition of the contract. At December 31, 2016, a credit loss reserve recorded in other liabilities of $275 thousand was maintained relating to these commitments. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate, and residential real estate. A portion of the commitments is to extend credit at fixed rates. Fixed rate loan commitments at December 31, 2016 of $62.8 million had interest rates ranging predominantly from 3.00% to 5.00%, respectively, and terms predominantly two years or less. These credit commitments were based on prevailing rates, terms, and conditions applicable to other loans being made at December 31, 2016. Included in our commitments to extend credit are mortgage loans in the process of origination which are intended for sale to investors in the secondary market. These forward sale commitments are on an individual loan basis that CTBI originates as part of its mortgage banking activities. CTBI commits to sell the loans at specified prices in a future period, typically within 60 days. These commitments are acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale since CTBI is exposed to interest rate risk during the period between issuing a loan commitment and the sale of the loan into the secondary market. Total mortgage loans in the process of origination amounted to $2.9 million and $3.2 million at December 31, 2016 and 2015, respectively, and mortgage loans held for sale amounted to $1.2 million for the years ended December 31, 2016 and 2015, respectively. 19. Concentrations of Credit Risk CTBI’s banking activities include granting commercial, residential, and consumer loans to customers primarily located in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. CTBI is continuing to manage all components of its portfolio mix in a manner to reduce risk from changes in economic conditions. Concentrations of credit, as defined for regulatory purposes, are reviewed quarterly by management to ensure that internally established limits based on Tier 1 Capital plus the allowance for loan and lease losses are not exceeded. At December 31, 2016 and 2015, our concentrations of lessors of non-residential buildings credits were 45% and 44% of Tier 1 Capital plus the allowance for loan and lease losses, respectively. Lessors of residential buildings and dwellings were 37% and 36%, respectively. Hotel/motel industry credits were 41% and 34%, respectively. These percentages are within our internally established limits regarding concentrations of credit. 20. Commitments and Contingencies CTBI and our subsidiaries, and from time to time, our officers, are named defendants in legal actions arising from ordinary business activities. Management, after consultation with legal counsel, believes any pending actions at December 31, 2016 are without merit or that the ultimate liability, if any, will not materially affect our consolidated financial position or results of operations. Based on a recent discussion with a regulatory agency representative concerning the status of an ongoing review of two CTB deposit add-on products, CTBI believes it is likely that it will be cited for two violations based on alleged unfair and deceptive practices with respect to such products. CTBI has evaluated the possible violations and their potential financial impact. Based upon this analysis, management established an accrual in 2014, which was not considered material, for possible customer reimbursements. We have not received a final written notice citing such violations and have not been informed as to the amount of, or relevant time period for, related reimbursement. The actual amount of reimbursement may materially vary from the amount management has evaluated as most likely at December 31, 2016, but it is not currently expected to be material to the financial statements. 21. Regulatory Matters CTBI’s principal source of funds is dividends received from our banking subsidiary, CTB. Regulations limit the amount of dividends that may be paid by CTB without prior approval. During 2017, approximately $55.4 million plus any 2017 net profits can be paid by CTB without prior regulatory approval. The Federal Reserve Bank adopted quantitative measures which assign risk weightings to assets and off-balance sheet items and also define and set minimum regulatory capital requirements (risk based capital ratios). All banks are required to have a minimum Tier 1 (core capital) leverage ratio of 4% of adjusted quarterly average assets, common equity Tier 1 capital ratio of at least 4.5% of risk-weighted assets, Tier 1 capital of at least 6% of risk-weighted assets, and total capital of at least 8% of risk-weighted assets. Tier 1 capital consists principally of shareholders’ equity including capital-qualifying subordinated debt but excluding unrealized gains and losses on securities available-for-sale, less goodwill and certain other intangibles. Total capital consists of Tier 1 capital plus certain debt instruments and the reserve for credit losses, subject to limitation. Failure to meet certain capital requirements can initiate certain actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. The regulations also define well-capitalized levels of Tier 1 leverage, common equity Tier 1 capital, Tier 1, and total capital as 5%, 6.5%, 8%, and 10%, respectively. We had Tier 1 leverage, common equity Tier 1 capital, Tier 1, and total capital ratios above the well- capitalized levels at December 31, 2016 and 2015. We believe, as of December 31, 2016, CTBI meets all capital adequacy requirements for which it is subject to be defined as well-capitalized under the regulatory framework for prompt corrective action. Under the current Federal Reserve Board’s regulatory framework, certain capital securities offered by wholly owned unconsolidated trust preferred entities of CTBI are included as Tier 1 regulatory capital. On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the continued limited inclusion of trust preferred securities in the Tier 1 capital of bank holding companies (“BHCs”). Under the final rule, trust preferred securities and other restricted core capital elements are subject to stricter quantitative limits. The Board’s final rule limits restricted core capital elements to 25 percent of all core capital elements, net of goodwill less any associated deferred tax liability. Amounts of restricted core capital elements in excess of these limits generally may be included in Tier 2 capital. The final rule provided a five-year transition period, which ended March 31, 2009, for application of the quantitative limits. The requirement for trust preferred securities to include a call option has been eliminated, and standards for the junior subordinated debt underlying trust preferred securities eligible for Tier 1 capital treatment have been clarified. The final rule addresses supervisory concerns, competitive equity considerations, and the accounting for trust preferred securities. The final rule also strengthens the definition of regulatory capital by incorporating longstanding Board policies regarding the acceptable terms of capital instruments included in banking organizations’ Tier 1 or Tier 2 capital. The final rule did not have a material impact on our regulatory ratios. 51 Consolidated Capital Ratios (in thousands) As of December 31, 2016: Tier 1 capital (to average assets) Common equity Tier 1 capital (to risk weighted assets) Tier 1 capital (to risk weighted assets) Total capital (to risk weighted assets) As of December 31, 2015: Tier 1 capital (to average assets) Common equity Tier 1 capital (to risk weighted assets) Tier 1 capital (to risk weighted assets) Total capital (to risk weighted assets) Community Trust Bank, Inc.’s Capital Ratios Actual Amount Ratio For Capital Adequacy Purposes Amount Ratio $ $ 496,432 436,932 496,432 532,332 468,304 408,804 468,304 503,296 12.75% $ 15.18 17.25 18.50 12.40% $ 14.58 16.70 17.95 155,743 129,525 172,672 230,198 151,066 126,194 168,253 224,310 4.00% 4.50 6.00 8.00 4.00% 4.50 6.00 8.00 (in thousands) As of December 31, 2016: Tier 1 capital (to average assets) Common equity Tier 1 capital (to risk weighted assets) Tier 1 capital (to risk weighted assets) Total capital (to risk weighted assets) As of December 31, 2015: Tier 1 capital (to average assets) Common equity Tier 1 capital (to risk weighted assets) Tier 1 capital (to risk weighted assets) Total capital (to risk weighted assets) Actual Amount Ratio For Capital Adequacy Purposes Amount Ratio To Be Well-Capitalized Under Prompt Corrective Action Provision Ratio Amount $ $ 472,615 472,615 472,615 508,515 445,107 445,107 445,107 480,099 12.19% $ 16.46 16.46 17.71 11.84% $ 15.91 15.91 17.16 155,083 129,208 172,278 229,708 150,374 125,895 167,859 223,822 4.00% $ 4.50 6.00 8.00 4.00% $ 4.50 6.00 8.00 193,854 186,634 229,704 287,134 187,967 181,848 223,812 279,778 5.00% 6.50 8.00 10.00 5.00% 6.50 8.00 10.00 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 current 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 capital conservation buffer amount. The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes CTBI) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature. The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, 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 new 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). The final rules set forth certain changes for the calculation of risk-weighted assets, which we were required to utilize beginning January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets. We currently satisfy the well-capitalized and capital conservation buffer 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. 5222. Parent Company Financial Statements Condensed Balance Sheets (in thousands) December 31 Assets: Cash on deposit Investment in and advances to subsidiaries Goodwill Premises and equipment, net Other assets Total assets Liabilities and shareholders’ equity: Long-term debt Other liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity Condensed Statements of Income and Comprehensive Income (in thousands) Year Ended December 31 Income: Dividends from subsidiary banks Other income Total income Expenses: Interest expense Depreciation expense Other expenses Total expenses Income before income taxes and equity in undistributed income of subsidiaries Income tax benefit Income before equity in undistributed income of subsidiaries Equity in undistributed income of subsidiaries $ $ $ 2016 2015 1,525 $ 556,975 4,973 142 391 564,006 $ 61,341 $ 2,050 63,391 1,462 531,702 4,973 145 911 539,193 61,341 2,269 63,610 500,615 475,583 $ 564,006 $ 539,193 2016 2015 2014 $ 20,708 $ 459 21,167 19,808 $ 414 20,222 1,417 107 2,256 3,780 17,387 (1,373) 18,760 28,586 1,170 130 2,465 3,765 16,457 (1,371) 17,828 28,604 19,534 196 19,730 1,131 153 2,550 3,834 15,896 (1,548) 17,444 25,807 Net income $ 47,346 $ 46,432 $ 43,251 Other comprehensive income (loss): Unrealized holding gains (losses) on securities available-for-sale: Unrealized holding gains (losses) arising during the period Less: Reclassification adjustments for realized gains (losses) included in net income Tax expense (benefit) Other comprehensive income (loss), net of tax Comprehensive income (4,578) 522 (1,785) (3,315) 44,031 $ (342) (106) (83) (153) 46,279 $ 13,928 (211) 4,949 9,190 52,441 $ 53 Condensed Statements of Cash Flows (in thousands) Year Ended December 31 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Equity in undistributed earnings of subsidiaries Stock-based compensation Excess tax benefits of stock-based compensation Changes in: Other assets Other liabilities Net cash provided by operating activities Cash flows from investing activities: Purchase of premises and equipment Repayment of investments in and advances to subsidiaries Net cash used in investing activities Cash flows from financing activities: Issuance of common stock Repurchase of common stock Excess tax benefits of stock-based compensation Dividends paid Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 23. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: Year Ended December 31 (in thousands except per share data) Numerator: Net income Denominator: Basic earnings per share: Weighted average shares Diluted earnings per share: Dilutive effect of equity grants Adjusted weighted average shares Earnings per share: Basic earnings per share Diluted earnings per share 2016 2015 2014 $ 47,346 $ 46,432 $ 43,251 107 (28,586) 458 100 519 (90) 19,854 (104) 0 (104) 2,985 (382) (100) (22,190) (19,687) 63 1,462 1,525 $ 130 (28,604) 783 104 240 968 20,053 (45) 0 (45) 2,082 (189) (104) (21,330) (19,541) 467 995 1,462 $ 153 (25,807) 838 760 (558) 563 19,200 (125) (14) (139) 1,992 0 (760) (20,570) (19,338) (277) 1,272 995 $ 2016 2015 2014 $ 47,346 $ 46,432 $ 43,251 17,548 17,431 18 17,566 52 17,483 $ 2.70 $ 2.70 2.66 $ 2.66 17,326 71 17,397 2.50 2.49 There were no options to purchase common shares that were excluded from the diluted calculations above for the year ended December 31, 2016. 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. Options to purchase 58,063 common shares were excluded from the diluted calculations above for the year ended December 31, 2015, because the exercise prices on the options were greater than the average market price for the period. There were no options to purchase common shares that were excluded from the diluted calculations above for the year ended December 31, 2014. 24. Accumulated Other Comprehensive Income Unrealized gains (losses) on AFS securities Amounts reclassified from accumulated other comprehensive income (AOCI) and the affected line items in the statements of income during the years ended December 31, 2016, 2015, and 2014 were: Year Ended December 31 (in thousands) Affected line item in the statements of income Securities gains (losses) Tax expense (benefit) Total reclassifications out of AOCI Amounts Reclassified from AOCI 2016 2015 2014 $ $ 522 $ 183 339 $ (106) $ (37) (69) $ (211) (74) (137) 54 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Audit Committee, Board of Directors and Stockholders Community Trust Bancorp, Inc. Pikeville, Kentucky We have audited the accompanying consolidated balance sheets of Community Trust Bancorp, Inc. (Company) as of December 31, 2016 and 2015, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2016. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. BKD, LLP Louisville, Kentucky March 15, 2017 55REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Audit Committee, Board of Directors and Stockholders Community Trust Bancorp, Inc. Pikeville, Kentucky We have audited Community Trust Bancorp, Inc.’s (Company) internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company, maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company and our report dated March 15, 2017, expressed an unqualified opinion thereon. BKD, LLP Louisville, Kentucky March 15, 2017 56 MANAGEMENT REPORT ON INTERNAL CONTROL We, as management of Community Trust Bancorp, Inc. and its subsidiaries (“CTBI”), are responsible for establishing and maintaining adequate internal control over financial reporting. Pursuant to the rules and regulations of the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: ö= Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; ö= Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and ö= Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time. Because of the inherent limitations, any system of internal control over financial reporting, no matter how well designed, may not prevent or detect misstatements due to the possibility that a control can be circumvented or overridden or that misstatements due to error or fraud may occur that are not detected. Also, projections of the effectiveness to future periods are subject to the risk that the internal controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures included in such controls may deteriorate. Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2016 based on the control criteria in the 2013 COSO Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, we have concluded that CTBI’s internal control over financial reporting is effective as of December 31, 2016. The effectiveness of CTBI’s internal control over financial reporting as of December 31, 2016 has been audited by BKD, LLP, an independent registered public accounting firm that audited the CTBI’s consolidated financial statements included in this annual report. March 15, 2017 Jean R. Hale Chairman, President, and Chief Executive Officer Kevin J. Stumbo Executive Vice President, Chief Financial Officer, and Treasurer 57 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. 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 consolidated financial statements and the accompanying notes thereto contained in this annual report. The MD&A includes the following sections: Our Business Financial Goals and Performance Results of Operations and Financial Condition Contractual Obligations and Commitments Liquidity and Market Risk Interest Rate Risk Capital Resources Impact of Inflation, Changing Prices, and Economic Conditions Stock Repurchase Program Critical Accounting Policies and Estimates = = = = = = = = = = Our Business Community Trust Bancorp, Inc. (“CTBI”) is a bank holding company headquartered in Pikeville, Kentucky. Currently, we own one commercial bank, Community Trust Bank, Inc. (“CTB”) and one trust company, Community Trust and Investment Company. 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 December 31, 2016, we had total consolidated assets of $3.9 billion and total consolidated deposits, including repurchase agreements, of $3.3 billion. Total shareholders’ equity at December 31, 2016 was $500.6 million. Trust assets under management, which are excluded from CTBI’s total consolidated assets, at December 31, 2016, were $2.1 billion. Trust assets under management include CTB’s investment portfolio totaling $0.6 billion. Through its subsidiaries, CTBI engages in a wide range of commercial and personal banking and trust and wealth management activities, which include accepting time and demand deposits; making secured and unsecured loans to corporations, individuals and others; providing cash management services to corporate and individual customers; issuing letters of credit; renting safe deposit boxes; and providing funds transfer services. The lending activities of CTB include making commercial, construction, mortgage, and personal loans. Lease-financing, lines of credit, revolving lines of credit, term loans, and other specialized loans, including asset-based financing, are also available. Our corporate subsidiaries act as trustees of personal trusts, as executors of estates, as trustees for employee benefit trusts, as paying agents for bond and stock issues, as investment agent, as depositories for securities, and as providers of full service brokerage and insurance services. For further information, see Item 1 of our annual report on Form 10-K for the year ended December 31, 2016. 58 Financial Goals and Performance The following table shows the primary measurements used by management to assess annual performance. The goals in the table below should not be viewed as a forecast of our performance for 2017. Rather, the goals represent a range of target performance for 2017. There is no assurance that any or all of these goals will be achieved. See “Cautionary Statement Regarding Forward Looking Statements.” Earnings per share Net income ROAA ROAE Revenues 2016 Goals $2.72 - $2.82 $48.0 - $49.2 million 1.22% - 1.28% 9.4% - 10.4% 2016 Performance $2.70 $47.3 million 1.21% 9.58% 2017 Goals $2.76 - $2.86 $49.0 - $50.2 million 1.19% - 1.25% 9.10% - 10.10% $183.0 - $189.6 million $181.5 million $187.8 - $193.8 million Noninterest revenue as of % of total revenue 26.0% - 26.5% Assets Loans $3.8 - $4.2 billion $2.9 - $3.1 billion Deposits, including repurchase agreements $3.2 - $3.4 billion 26.48% $3.93 billion $2.94 billion $3.33 billion 25.00% - 25.80% $3.90 - $4.40 billion $3.00 - $3.20 billion $3.30 - $3.50 billion Shareholders’ equity $485.0 - $520.0 million $500.6 million $510.0 - $550.0 million Results of Operations and Financial Condition We reported earnings of $47.3 million, or $2.70 per basic share, for the year ended December 31, 2016 compared to $46.4 million, or $2.66 per basic share, for the year ended December 31, 2015 and $43.3 million, or $2.50 per basic share, for the year ended December 31, 2014. 2016 Highlights =Our loan portfolio increased $64.4 million from December 31, 2015. =Our investment portfolio increased $9.7 million from December 31, 2015. =Deposits, including repurchase agreements, increased $100.4 million from December 31, 2015. =Nonperforming loans at $27.5 million decreased $1.1 million from December 31, 2015. Nonperforming assets at $63.4 million decreased $6.0 million from December 31, 2015. =Net loan charge-offs for the year 2016 were $8.0 million, or 0.28% of average loans, compared to $7.0 million, or 0.25%, for the year 2015. Income Statement Review (dollars in thousands) Year Ended December 31 Net interest income Provision for loan losses Noninterest income Noninterest expense Income taxes Net income Average earning assets Yield on average earnings assets Cost of interest bearing funds Net interest margin Net Interest Income 2016 2015 2014 Amount Percent Change 2016 vs. 2015 $ $ $ 133,021 $ 7,872 48,441 107,126 19,118 47,346 $ 132,247 $ 8,650 46,809 105,443 18,531 46,432 $ 132,070 $ 8,755 45,081 105,999 19,146 43,251 $ 774 (778) 1,632 1,683 587 914 3,652,714 $ 3,524,506 $ 3,422,450 $ 128,208 4.07% 0.52% 3.70% 4.14% 0.46% 3.81% 4.26% 0.46% 3.92% (0.07)% 0.06 % (0.11)% 0.6 % (9.0) 3.5 1.6 3.2 2.0 % 3.6 % (1.8)% 12.5 % (2.9)% Net interest income for the year ended December 31, 2016 of $133.0 million increased $0.8 million, or 0.6%, from prior year. Average earning assets increased $128.2 million over prior year. Our yield on average earning assets decreased 7 basis points from prior year, while our cost of interest bearing funds increased 6 basis points. Average loans to deposits, including repurchase agreements, for the year ended December 31, 2016 were 88.2% compared to 87.2% for the year ended December 31, 2015. 59 Net interest income for the year ended December 31, 2015 increased $0.2 million, or 0.1%, from 2014. Our yield on average earning assets decreased 12 basis points from 2014 to 2015, while our cost of interest bearing funds remained flat. Average loans to deposits, including repurchase agreements, for the year ended December 31, 2015 were 87.2% compared to 84.4% for the year ended December 31, 2014. Provision for Loan Losses The provision for loan losses added to the allowance for 2016 of $7.9 million was a $0.8 million decrease from prior year. 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. The provision for loan losses added to the allowance for 2015 of $8.7 million was a $0.1 million decrease from 2014. Noninterest Income Noninterest income for the year ended December 31, 2016 of $48.4 million was an increase of $1.6 million, or 3.5%, from 2015. The increase in noninterest income year over year was primarily due to a $0.7 million increase in deposit services charges, a $0.3 million increase in trust revenue, a $0.3 million increase in loan related fees, and a $0.6 million positive variance in securities gains (losses). Noninterest income for the year ended December 31, 2015 increased $1.7 million, or 3.8%, from 2014 as a result of increases in gains on sales of loans ($0.5 million), deposit service charges ($0.4 million), trust revenue ($0.3 million), and loan related fees ($0.3 million) and decreased securities losses ($0.1 million). Loan related fees were affected by a $0.5 million fluctuation in the fair value adjustments of our mortgage servicing rights from 2014 to 2015. Noninterest Expense Noninterest expense for the year ended December 31, 2016 of $107.1 million increased $1.7 million, or 1.6%, from prior year. The increase in noninterest expense was primarily due to an increase in personnel expense, partially offset by decreased FDIC insurance expense. The increase in our personnel expense is a result of changes in our group medical insurance expense caused by differences in our claims paid experience as a self-insured employer. Noninterest expense for the year ended December 31, 2015 decreased $0.6 million, or 0.5%, from 2014, as a result of decreases in occupancy and equipment expense ($0.6 million), data processing expense ($1.1 million), and repossession expense ($0.2 million), partially offset by a $1.7 million increase in amortization expense related to tax credits. Balance Sheet Review CTBI’s total assets at $3.9 billion increased $28.2 million, or 0.7%, from December 31, 2015. Loans outstanding at December 31, 2016 were $2.9 billion, increasing $64.4 million, or 2.2%, year over year. We experienced growth during the year of $9.7 million in the commercial loan portfolio, $54.6 million in the indirect loan portfolio, and $6.7 million in the consumer direct loan portfolio, partially offset by a $6.6 million decrease in the residential loan portfolio. CTBI’s investment portfolio increased $9.7 million, or 1.6%, from December 31, 2015. Deposits in other banks decreased $42.1 million from December 31, 2015. Deposits, including repurchase agreements, at $3.3 billion increased $100.4 million, or 3.1%, from December 31, 2015. Shareholders’ equity at December 31, 2016 was $500.6 million compared to $475.6 million at December 31, 2015. CTBI’s annualized dividend yield to shareholders as of December 31, 2016 was 2.58%. Loans (in thousands) Loan Category Commercial: Construction Secured by real estate Equipment lease financing Other commercial Total commercial Residential: Real estate construction Real estate mortgage Home equity Total residential Consumer: Consumer direct Consumer indirect Total consumer Total loans Balance Variance from Prior Year Net Charge-Offs Nonperforming ALLL December 31, 2016 $ 66,998 1,085,428 5,512 350,159 1,508,097 57,966 702,969 91,511 852,446 133,093 444,735 577,828 (14.1)% $ 3.1 (35.3) (2.4) 0.7 (6.1) (0.7) 2.3 (0.8) 5.3 14.0 11.9 280 $ 1,463 0 1,697 3,440 185 942 45 1,172 621 2,800 3,421 1,940 $ 9,341 0 1,700 12,981 163 12,555 1,022 13,740 68 681 749 884 14,191 42 4,656 19,773 629 6,027 774 7,430 1,885 6,845 8,730 $ 2,938,371 2.2% $ 8,033 $ 27,470 $ 35,933 60 Asset Quality CTBI’s total nonperforming loans were $27.5 million at December 31, 2016, a 4.0% decrease from the $28.6 million at December 31, 2015. The decrease for the year included a $1.2 million decrease in loans 90+ days past due partially offset by a $0.1 million increase in nonaccrual loans. Loans 30-89 days past due and accruing interest at $16.4 million was an increase of $2.0 million from December 31, 2015. Our loan portfolio management processes focus on the immediate identification, management, and resolution of problem loans to maximize recovery and minimize loss. Our loan portfolio 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. The Loan Review Department has annually reviewed on average 95% of the outstanding commercial loan portfolio for the past three years. The average annual review percentage of the consumer and residential loan portfolio for the past three years was 85% based on the loan production during the number of months included in the review scope. The review scope is generally four to six months of production. Impaired loans, loans not expected to meet contractual principal and interest payments, at December 31, 2016 totaled $52.2 million compared to $49.9 million at December 31, 2015. Included in certain loan categories of impaired loans are troubled debt restructurings that were classified as impaired. At December 31, 2016, CTBI had $28.8 million in commercial loans secured by real estate, $5.3 million in commercial real estate construction loans, $10.8 million in commercial other loans, and $1.5 million in real estate mortgage loans that were modified in troubled debt restructurings and impaired. Management evaluates all impaired loans for impairment 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 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 $35.9 million at December 31, 2016 was a $4.8 million decrease from $40.7 million at December 31, 2015. Sales of foreclosed properties for the year ended December 31, 2016 totaled $9.5 million while new foreclosed properties totaled $5.9 million. At December 31, 2016, the book value of properties under contracts to sell was $1.9 million; however, the closings had not occurred at year-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 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 2016 to reflect the decrease in current market values of foreclosed properties totaled $1.2 million. There were 72 properties reappraised during 2016. Of these, 45 were written down by a total of $0.9 million. Charges during the year ended December 31, 2015 were $1.7 million. 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 eighty-eight 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 December 31, 2016 is shown below: (in thousands) Up to 3 months 3 to 6 months 6 to 9 months 9 to 12 months 12 to 18 months 18 to 24 months Over 24 months Total Appraisal Aging Analysis Holding Period Analysis Days Since Last Appraisal Current Book Value Holding Period Current Book Value $ $ 2,783 Less than one year 3,739 1 to 2 years 1,317 2 to 3 years 3,493 3 to 4 years 20,289 4 to 5 years 4,195 Over 5 years* 40 35,856 Total $ $ 5,095 9,145 3,330 976 2,203 15,107 35,856 * 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. Net loan charge-offs for the year were $8.0 million, or 0.28% of average loans annualized, an increase from prior year’s $7.0 million, or 0.25% of average loans annualized. Of the total net charge-offs, $3.4 million were in commercial loans, $2.8 million were in indirect auto loans, $1.2 million were in residential real estate mortgage loans, and $0.6 million were in direct consumer loans. Our loan loss reserve as a percentage of total loans outstanding at December 31, 2016 decreased to 1.22% from the 1.26% at December 31, 2015. Our reserve coverage (allowance for loan and lease loss reserve to nonperforming loans) improved to 130.8% at December 31, 2016 compared to 126.2% at December 31, 2015. 61 Contractual Obligations and Commitments As disclosed in the notes to the consolidated financial statements, we have certain obligations and commitments to make future payments under contracts. At December 31, 2016, the aggregate contractual obligations and commitments are: Contractual Obligations: (in thousands) Deposits without stated maturity Certificates of deposit and other time deposits Repurchase agreements and federal funds purchased Advances from Federal Home Loan Bank Interest on advances from Federal Home Loan Bank* Long-term debt Interest on long-term debt* Annual rental commitments under leases Total contractual obligations Payments Due by Period Total 1 Year 1,868,265 $ 1,213,043 255,881 944 21 61,341 57,842 8,878 3,466,215 $ 1,868,265 $ 988,296 255,881 106 12 0 1,842 2,010 3,116,412 $ $ $ 2-5 Years After 5 Years 0 $ 224,419 0 464 9 0 10,280 3,779 238,951 $ 0 328 0 374 0 61,341 45,720 3,089 110,852 *The amounts provided as interest on advances from Federal Home Loan Bank and interest on long-term debt assume the liabilities will not be prepaid and interest is calculated to their individual maturities. The interest on $61.3 million in long-term debt is calculated based on the three-month LIBOR plus 1.59% until its maturity of June 1, 2037. The three-month LIBOR rate is projected using the most likely rate forecast from assumptions incorporated in the interest rate risk model and is determined two business days prior to the interest payment date. These assumptions are uncertain, and as a result, the actual payments will differ from the projection due to changes in economic conditions. Other Commitments: (in thousands) Standby letters of credit Commitments to extend credit Total other commitments Amount of Commitment - Expiration by Period Total 1 Year 2-5 Years After 5 Years $ $ 29,917 $ 570,467 600,384 $ 19,829 $ 436,984 456,813 $ 10,088 $ 121,080 131,168 $ 0 12,403 12,403 Commitments to extend credit and standby letters of credit do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon. Refer to note 18 to the consolidated financial statements for additional information regarding other commitments. 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. As of December 31, 2016, we had approximately $144.7 million in cash and cash equivalents and approximately $605.4 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 $187.6 million and $594.9 million at December 31, 2015. 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. 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 $0.9 million at December 31, 2016 compared to $101.1 million at December 31, 2015. As of December 31, 2016, we had a $295.8 million available borrowing position with the Federal Home Loan Bank compared to $218.3 million at December 31, 2015. 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, and issuance of long-term debt. At December 31, 2016, we had $57 million in lines of credit with various correspondent banks available to meet any future cash needs compared to $44 million at December 31, 2015. 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 December 31, 2016 were federal funds sold of $0.5 million compared to $0.8 million at December 31, 2015, and deposits with the Federal Reserve were $93.4 million at December 31, 2016 compared to $130.6 million at December 31, 2015. Additionally, we project cash flows from our investment portfolio to generate additional liquidity over the next 90 days. The investment portfolio consists primarily 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 the end of 2016, available-for-sale (“AFS”) securities comprised approximately 99.9% of the total investment portfolio, and the AFS portfolio was approximately 120.9% of equity capital. Ninety-two 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. 62 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. The following table shows our estimated earnings sensitivity profile as of December 31, 2016: Change in Interest Rates (basis points) +400 +300 +200 +100 -25 Percentage Change in Net Interest Income (12 Months) 7.05% 5.10% 3.15% 1.30% (0.21)% The following table shows our estimated earnings sensitivity profile as of December 31, 2015: Change in Interest Rates (basis points) +400 +300 +200 +100 -25 Percentage Change in Net Interest Income (12 Months) 7.54% 5.46% 3.33% 1.35% (0.30)% The simulation model used the yield curve spread evenly over a twelve-month period. The measurement at December 31, 2016 estimates that our net interest income in an up-rate environment would increase by 7.05% at a 400 basis point change, 5.10% increase at a 300 basis point change, 3.15% increase at a 200 basis point change, and a 1.30% increase at a 100 basis point change. In a down-rate environment, a 25 basis point decrease in interest rates would decrease net interest income by 0.21% over one year. In order to reduce the exposure to interest rate fluctuations and to manage liquidity, we have developed sale procedures for several types of interest-sensitive assets. Primarily all long-term, fixed rate single family residential mortgage loans underwritten according to Federal Home Loan Mortgage Corporation guidelines are sold for cash upon origination or originated under terms where they could be sold. Periodically, additional assets such as commercial loans are also sold. In 2016 and 2015, $81.4 million and $80.6 million, respectively, were realized on the sale of fixed rate residential mortgages. We focus our efforts on consistent net interest revenue and net interest margin growth through each of the retail and wholesale business lines. We do not currently engage in trading activities. The preceding analysis was prepared using a rate ramp analysis which attempts to spread changes evenly over a specified time period as opposed to a rate shock which measures the impact of an immediate change. Had these measurements been prepared using the rate shock method, the results would vary. Our Static Repricing GAP as of December 31, 2016 is presented below. In the 12 month repricing GAP, rate sensitive liabilities (“RSL”) exceeded rate sensitive assets (“RSA”) by $158.7 million. (dollars in thousands) 1-3 Months 4-6 Months 7-9 Months 10-12 Months 2-3 Years 4-5 Years > 5 Years Assets $ 1,435,324 $ 227,194 $ 193,639 $ 215,660 $ 756,883 $ 469,905 $ 633,565 Liabilities and Equity 871,530 341,950 421,541 595,465 1,075,805 Repricing difference 563,794 (114,756) (227,902) (379,805) (318,921) 92,109 377,795 Cumulative GAP 563,794 449,038 221,136 (158,669) (477,590) (99,795) RSA/RSL 1.65x 0.66x 0.46x 0.36x 0.70x 5.10x 533,769 99,795 0 1.19x Cumulative GAP to total assets Capital Resources 14.34% 11.42% 5.62% (4.04)% (12.15)% (2.54)% 0.00% We continue to grow our shareholders’ equity while also providing an annual dividend yield for the year 2016 of 2.54% to shareholders. Shareholders’ equity increased 5.3% from December 31, 2015 to $500.6 million at December 31, 2016. Our primary source of capital growth is the retention of earnings. Cash dividends were $1.260 per share for 2016 and $1.220 per share for 2015. We retained 53.3% of our earnings in 2016 compared to 54.1% in 2015. Regulatory guidelines require bank holding companies, commercial banks, and savings banks to maintain certain minimum capital ratios and define companies as “well-capitalized” that sufficiently exceed the minimum ratios. The banking regulators may alter minimum capital requirements as a result of revising their internal policies and their ratings of individual institutions. To be “well-capitalized” banks and bank holding companies must maintain a Tier 1 leverage ratio of no less than 5%, a common equity Tier 1 capital ratio of no less than 6.5%, a Tier 1 risk based ratio of no less than 8%, and a total risk based ratio of no less than 10%. Our ratios as of December 31, 2016 were 12.75%, 15.18%, 17.25%, and 18.50%, respectively, all exceeding the threshold for meeting the definition of “well-capitalized.” See note 21 to the consolidated financial statements for further information. As of December 31, 2016, 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. However, based on a recent discussion with a regulatory agency representative concerning the status of an ongoing review of two CTB deposit add-on products, CTBI believes it is likely that it will be cited for two violations based on alleged unfair and deceptive practices with respect to such products. CTBI has evaluated the possible violations and their potential financial impact. Based upon this analysis, management established an accrual in 2014 for possible customer reimbursements. We have not received a final written notice citing such violations and have not been informed as to the amount of, or relevant time period for, related reimbursement. The actual amount of reimbursement may materially vary from the amount management has evaluated as most likely at December 31, 2016. 63 Basel III 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 current 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 capital conservation buffer amount. The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes CTBI) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature. The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, 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 new 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). The final rules set forth certain changes for the calculation of risk-weighted assets, which we were required to utilize beginning January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets. 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. 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 plan for economic stabilization, potential volatility in oil prices, potential U.S. tax law modifications, and the repeal of the Patient Protection and Affordable Care Act and the implementation of replacement healthcare legislation 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 many areas of the United States, unemployment rates remain elevated in certain markets in which we operate. 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. Overall, during recent years, the business environment has been adverse for many households and businesses in the United States and worldwide. 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. 64 Stock Repurchase Program CTBI’s stock repurchase program began in December 1998 with the authorization to acquire up to 500,000 shares and was increased by an additional 1,000,000 shares in July 2000 and in May 2003. We have not repurchased any shares of our common stock since February 2008. There are currently 67,371 shares remaining under CTBI’s current repurchase authorization. As of December 31, 2016, a total of 2,432,629 shares have been repurchased through this program. The following table shows Board authorizations and repurchases made through the stock repurchase program for the years 1998 through 2016: Repurchases* 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Board Authorizations 500,000 0 1,000,000 0 0 1,000,000 0 0 0 0 0 0 0 0 0 0 0 0 0 2,500,000 Average Price ($) - 14.45 10.25 13.35 17.71 19.62 23.14 - - 28.56 25.53 - - - - - - - - 15.93 # of Shares 0 144,669 763,470 489,440 396,316 259,235 60,500 0 0 216,150 102,850 0 0 0 0 0 0 0 0 2,432,629 Shares Available for Repurchase 67,371 *Repurchased shares and average prices have been restated to reflect stock dividends that have occurred; however, board authorized shares have not been adjusted. 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. Our accounting policies are described in note 1 to the consolidated financial statements. 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 (FASB) 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. 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 the CTBI’s results of operations and financial condition. 65 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, a charge off is taken, if necessary, in order that the remaining balance reflects the fair value estimated less costs to sell of the collateral then transferred to other real estate owned or other repossessed assets. Any unsecured commercial loan is charged off when it is considered uncollectable or 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 market value less expected sales costs. Additionally, periodic updated appraisals are obtained on unsold foreclosed properties. When an updated appraisal reflects a 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. 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 years ended December 31, 2016, 2015, and 2014, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes. 66 SELECTED STATISTICAL INFORMATION The following tables set forth certain statistical information relating to CTBI and subsidiaries on a consolidated basis and should be read together with our consolidated financial statements. Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates (in thousands) Average Balances 2016 Interest Average Rate Average Balances 2015 Interest Average Rate Average Balances 2014 Interest Average Rate $ Earning assets: Loans (1)(2)(3) Loans held for sale Securities: U.S. Treasury and agencies Tax exempt state and political subdivisions (3) Other securities Federal Reserve Bank and Federal Home Loan Bank stock Federal funds sold Interest bearing deposits Other investments Investment in unconsolidated subsidiaries Total earning assets Allowance for loan and lease losses Nonearning assets: Cash and due from banks Premises and equipment, net Other assets Total assets $ 2,916,031 $ 134,455 4.61% $ 2,791,871 $ 131,304 4.70% $ 2,642,231 $ 128,929 728 101 13.87 1,075 95 8.84 943 74 4.88% 7.85 445,500 6,669 1.50 446,081 7,425 1.66 474,062 9,302 1.96 99,086 53,492 4,182 1,596 4.22 2.98 101,382 59,705 4,162 1,728 4.11 2.89 95,460 66,793 3,963 2,012 22,814 1,011 3,121 108,546 1,550 19 538 17 4.43 0.61 0.50 1.10 22,812 1,010 3,344 90,106 6,285 13 219 56 4.43 0.39 4,007 0.24 103,823 0.89 9,307 15 248 87 23,978 1,136 1,846 43 2.33 1,845 35 1.90 1,846 34 3,652,714 $ 148,631 4.07% 3,524,506 $ 146,047 4.14% 3,422,450 $ 145,800 (36,681) 3,616,033 50,946 48,138 205,140 3,920,257 (35,735) 3,488,771 53,641 49,103 198,767 3,790,282 $ (34,544) 3,387,906 55,658 50,923 185,044 3,679,531 $ 4.15 3.01 4.74 0.37 0.24 0.93 1.84 4.26% 67 Average Balances 2016 Interest Average Rate Average Balances 2015 Interest Average Rate Average Balances 2014 Interest Average Rate $ 1,088,291 $ 1,203,081 2,566 8,355 0.24% $ 0.69 1,018,866 $ 1,217,225 2,299 7,317 0.23% $ 0.60 956,389 $ 1,291,896 2,141 7,657 262,361 1,155 0.44 256,091 938 0.37 233,431 841 14,410 61,341 62 1,417 0.43 2.31 15,821 61,341 49 1,170 0.31 1.91 4,210 61,341 27 1,131 0.22% 0.59 0.36 0.64 1.84 2,629,484 $ 13,555 0.52% 2,569,344 $ 11,773 0.46% 2,547,267 $ 11,797 0.46% 758,555 37,820 3,425,859 494,398 720,508 34,748 3,324,600 465,682 660,833 36,141 3,244,241 435,290 $ 3,920,257 $ 3,790,282 $ 3,679,531 $ 135,076 $ 134,274 $ 134,003 2,055 2,027 1,933 $ 133,021 $ 132,247 $ 132,070 3.55% 0.15 3.70% 3.68% 0.13 3.81% 3.80% 0.12 3.92% (in thousands) Interest bearing liabilities: Deposits: Savings and demand deposits Time deposits Repurchase agreements and federal funds purchased Advances from Federal Home Loan Bank Long-term debt Total interest bearing liabilities Noninterest bearing liabilities: Demand deposits Other liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity Net interest income, tax equivalent Less tax equivalent interest income Net interest income Net interest spread Benefit of interest free funding Net interest margin (1) Interest includes fees on loans of $1,717, $1,782, and $1,848 in 2016, 2015, and 2014, respectively. (2) Loan balances include deferred loan origination costs and principal balances on nonaccrual loans. (3) Tax exempt income on securities and loans is reported on a fully taxable equivalent basis using a 35% rate. 68 Net Interest Differential The following table illustrates the approximate effect of volume and rate changes on net interest differentials between 2016 and 2015 and also between 2015 $ and 2014. (in thousands) Interest income: Loans Loans held for sale U.S. Treasury and agencies Tax exempt state and political subdivisions Other securities Federal Reserve Bank and Federal Home Loan Bank stock Federal funds sold Interest bearing deposits Other investments Investment in unconsolidated subsidiaries Total interest income Interest expense: Savings and demand deposits Time deposits Repurchase agreements and federal funds purchased Advances from Federal Home Loan Bank Long-term debt Total interest expense Total Change 2016/2015 Change Due to Volume Rate Total Change 2015/2014 Change Due to Volume Rate 3,151 $ 6 (756) 20 (132) 1 6 319 (39) 8 2,584 267 1,038 217 13 247 1,782 5,760 $ (24) (10) (93) (176) 0 (1) 52 (35) 0 5,473 161 (84) 23 (4) 0 96 (2,609) $ 30 (746) 113 44 1 7 267 (4) 8 (2,889) 106 1,122 194 17 247 1,686 2,375 $ 21 (1,877) 199 (284) (126) (2) (29) (31) 1 247 158 (340) 97 22 39 (24) 7,141 $ 11 (572) 244 (220) (57) (2) (32) (29) 0 6,484 141 (438) 83 42 0 (172) (4,766) 10 (1,305) (45) (64) (69) 0 3 (2) 1 (6,237) 17 98 14 (20) 39 148 Net interest income $ 802 $ 5,377 $ (4,575) $ 271 $ 6,656 $ (6,385) For purposes of the above table, changes which are due to both rate and volume are allocated based on a percentage basis, using the absolute values of rate and volume variance as a basis for percentages. Income is stated at a fully taxable equivalent basis, assuming a 35% tax rate. Investment Portfolio The maturity distribution and weighted average interest rates of securities at December 31, 2016 are as follows: Available-for-sale (in thousands) U.S. Treasury, government agencies, and government sponsored agency mortgage-backed securities State and political subdivisions Other securities Total Within 1 Year 1-5 Years 5-10 Years After 10 Years Total Fair Value Amortized Cost Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Estimated Maturity at December 31, 2016 $ 101,616 0.79% $ 95,908 1.66% $ 85,877 1.71% $ 164,119 1.93% $ 447,520 1.57% $ 450,588 2,800 0 $ 104,416 44,225 2.99 0.00 0 0.85% $ 140,133 46,283 3.66 0.00 0 2.29% $ 132,160 40,208 4.33 0.00 24,358 2.63% $ 228,685 133,516 4.36 2.28 24,358 2.40% $ 605,394 133,351 4.09 2.28 25,000 2.15% $ 608,939 69 Held-to-maturity (in thousands) U.S. Treasury, government agencies, and government sponsored agency mortgage-backed securities State and political subdivisions Total Total Securities Within 1 Year 1-5 Years 5-10 Years After 10 Years Total Amortized Cost Fair Value Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Estimated Maturity at December 31, 2016 $ $ 0 0 0 0.00% $ 0.00 0.00% $ 0 0.00% $ 866 866 4.30 4.30% $ 0 0 0 0.00% $ 0.00 0.00% $ 0 0 0 0.00% $ 0.00 0.00% $ 0 0.00% $ 866 866 4.30 4.30% $ 0 867 867 Within 1 Year 1-5 Years 5-10 Years After 10 Years Total Book Value Fair Value (in thousands) Total Amount $ 104,416 Yield Amount 0.85% $ 140,999 Yield Amount 2.30% $ 132,160 Yield Amount 2.63% $ 228,685 Yield Amount 2.40% $ 606,260 Yield Amount 2.16% $ 606,261 Estimated Maturity at December 31, 2016 The calculations of the weighted average interest rates for each maturity category are based upon yield weighted by the respective costs of the securities. The weighted average rates on state and political subdivisions are computed on a taxable equivalent basis using a 35% tax rate. Excluding those holdings of the investment portfolio in U.S. Treasury securities, government agencies, and government sponsored agency mortgage-backed securities, there were no securities of any one issuer that exceeded 10% of our shareholders’ equity at December 31, 2016. The book values of securities available-for-sale and securities held-to-maturity as of December 31, 2016 and 2015 are presented in note 3 to the consolidated financial statements. The book value of securities at December 31, 2014 is presented below: (in thousands) U.S. Treasury and government agencies State and political subdivisions U.S. government sponsored agency mortgage-backed securities Total debt securities CRA investment funds Total securities Available-for- Sale Held-to- Maturity $ $ 190,563 $ 133,951 288,881 613,395 25,000 638,395 $ 480 1,182 0 1,662 0 1,662 70 Loan Portfolio (in thousands) Commercial: Construction Secured by real estate Equipment lease financing Commercial other Total commercial Residential: Real estate construction Real estate mortgage Home equity Total residential Consumer: Consumer direct Consumer indirect Total consumer Total loans Percent of total year-end loans Commercial: Construction Secured by real estate Equipment lease financing Commercial other Total commercial Residential: Real estate construction Real estate mortgage Home equity Total residential Consumer: Consumer direct Consumer indirect Total consumer Total loans 2016 2015 2014 2013 2012 $ 66,998 $ 1,085,428 5,512 350,159 1,508,097 78,020 $ 1,052,919 8,514 358,898 1,498,351 121,942 $ 948,626 10,344 352,048 1,432,960 110,779 $ 872,542 8,840 374,881 1,367,042 57,966 702,969 91,511 852,446 133,093 444,735 577,828 61,750 707,874 89,450 859,074 126,406 390,130 516,536 62,412 712,465 88,335 863,212 122,136 315,516 437,652 56,075 697,601 84,880 838,556 122,215 287,541 409,756 119,447 807,213 9,246 376,348 1,312,254 55,041 696,928 82,292 834,261 122,581 281,477 404,058 $ 2,938,371 $ 2,873,961 $ 2,733,824 $ 2,615,354 $ 2,550,573 2.28% 36.94 0.18 11.92 51.32 1.97 23.93 3.11 29.01 4.53 15.14 19.67 2.71% 36.64 0.30 12.49 52.14 2.15 24.63 3.11 29.89 4.40 13.57 17.97 4.46% 34.70 0.38 12.88 52.42 2.28 26.06 3.23 31.57 4.47 11.54 16.01 4.24% 33.36 0.34 14.33 52.27 2.15 26.67 3.25 32.07 4.67 10.99 15.66 4.68% 31.65 0.36 14.76 51.45 2.16 27.32 3.23 32.71 4.80 11.04 15.84 100.00% 100.00% 100.00% 100.00% 100.00% The total loans above are net of deferred loan fees and costs. The following table shows the amounts of loans (excluding residential mortgages of 1-4 family residences, consumer loans and lease financing) which, based on the remaining scheduled repayments of principal are due in the periods indicated. Also, the amounts are classified according to sensitivity to changes in interest rates (fixed, variable). (in thousands) Commercial secured by real estate and commercial other Commercial and real estate construction Rate sensitivity: Fixed rate Adjustable rate Within One Year $ 203,129 $ 78,507 281,636 $ Maturity at December 31, 2016 After One but Within Five Years After Five Years Total 211,021 $ 18,358 229,379 $ 1,021,437 $ 28,099 1,049,536 $ $ $ $ 70,554 $ 211,082 281,636 $ 72,075 $ 157,304 229,379 $ 25,355 $ 1,024,181 1,049,536 $ 1,435,587 124,964 1,560,551 167,984 1,392,567 1,560,551 71 Nonperforming Assets (in thousands) Nonaccrual loans 90 days or more past due and still accruing interest Total nonperforming loans Other repossessed assets Foreclosed properties Total nonperforming assets Nonperforming assets to total loans and foreclosed properties Allowance to nonperforming loans Nonaccrual and Past Due Loans (in thousands) December 31, 2016 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 December 31, 2015 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 Discussion of the Nonaccrual Policy $ $ 2016 2015 2014 2013 2012 16,623 $ 10,847 27,470 103 35,856 63,429 $ 2.13% 130.81% 16,563 $ 12,046 28,609 183 40,674 69,466 $ 2.38% 126.16% 20,971 $ 17,985 38,956 90 36,776 75,822 $ 2.74% 88.43% 19,958 $ 23,599 43,557 0 39,188 82,745 $ 3.12% 78.08% 16,791 19,215 36,006 5 46,986 82,997 3.20% 92.33% Nonaccrual loans As a % of Loan Balances by Category Accruing Loans Past Due 90 Days or More As a % of Loan Balances by Category Balances $ $ $ $ 1,912 6,326 0 1,559 11 6,260 555 0 0 16,623 3,402 5,928 0 1,485 249 5,206 183 110 0 16,563 2.85% $ 0.58 0.00 0.45 0.02 0.89 0.61 0.00 0.00 0.57% $ 4.36% $ 0.56 0.00 0.41 0.40 0.74 0.20 0.09 0.00 0.58% $ 28 3,015 0 141 152 6,295 467 68 681 10,847 30 3,757 0 310 55 6,925 448 126 395 12,046 0.04% $ 0.28 0.00 0.04 0.26 0.90 0.51 0.05 0.15 0.37% $ 0.04% $ 0.36 0.00 0.09 0.09 0.98 0.50 0.10 0.10 0.42% $ 66,998 1,085,428 5,512 350,159 57,966 702,969 91,511 133,093 444,735 2,938,371 78,020 1,052,919 8,514 358,898 61,750 707,874 89,450 126,406 390,130 2,873,961 The accrual of interest income on loans 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 the collection of interest is doubtful. Cash payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured. Any loans greater than 90 days past due must be well secured and in the process of collection to continue accruing interest. See note 1 for further discussion on our nonaccrual policy. Potential Problem Loans Interest accrual is discontinued when we believe, 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. Foreign Outstandings None Loan Concentrations We had no concentration of loans exceeding 10% of total loans at December 31, 2016. See note 19 to the consolidated financial statements for further information. 72 Analysis of the Allowance for Loan and Lease Losses (in thousands) Allowance for loan and lease losses, beginning of year Loans charged off: Commercial construction Commercial secured by real estate Commercial other Real estate construction Real estate mortgage Home equity Consumer direct Consumer indirect Total charge-offs Recoveries of loans previously charged off: Commercial construction Commercial secured by real estate Commercial other Real estate construction Real estate mortgage Home equity Consumer direct Consumer indirect Total recoveries Net charge-offs: Commercial construction Commercial secured by real estate Commercial other Real estate construction Real estate mortgage Home equity Consumer direct Consumer indirect Total net charge-offs Provisions charged against operations Balance, end of year Allocation of allowance, end of year: Commercial construction Commercial secured by real estate Equipment lease financing Commercial other Real estate construction Real estate mortgage Home equity Consumer direct Consumer indirect Balance, end of year Average loans outstanding, net of deferred loan costs and fees Loans outstanding at end of year, net of deferred loan costs and fees Net charge-offs to average loan type: Commercial construction Commercial secured by real estate Commercial other Real estate construction Real estate mortgage Home equity Consumer direct Consumer indirect Total Other ratios: Allowance to net loans, end of year Provision for loan losses to average loans 2016 2015 2014 2013 2012 $ 36,094 $ 34,447 $ 34,008 $ 33,245 $ 33,171 (316) (1,641) (2,136) (192) (1,043) (54) (1,236) (5,050) (11,668) 36 178 439 7 101 9 615 2,250 3,635 (280) (1,463) (1,697) (185) (942) (45) (621) (2,800) (8,033) 7,872 (3) (1,379) (1,961) (135) (1,421) (129) (1,306) (3,536) (9,870) 13 60 585 4 117 54 435 1,599 2,867 10 (1,319) (1,376) (131) (1,304) (75) (871) (1,937) (7,003) 8,650 (15) (2,163) (3,141) (123) (1,058) (115) (1,326) (3,495) (11,436) 28 305 621 2 40 5 566 1,553 3,120 13 (1,858) (2,520) (121) (1,018) (110) (760) (1,942) (8,316) 8,755 (1,135) (1,607) (2,265) (89) (744) (241) (1,166) (3,802) (11,049) 309 163 557 4 56 11 495 1,649 3,244 (826) (1,444) (1,708) (85) (688) (230) (671) (2,153) (7,805) 8,568 (1,034) (2,035) (3,233) (189) (1,123) (248) (1,245) (3,483) (12,590) 35 303 764 28 151 11 538 1,384 3,214 (999) (1,732) (2,469) (161) (972) (237) (707) (2,099) (9,376) 9,450 $ $ $ $ $ 35,933 $ 36,094 $ 34,447 $ 34,008 $ 33,245 884 $ 14,191 42 4,656 629 6,027 774 1,885 6,845 35,933 $ 2,199 14,434 79 4,225 550 6,678 839 1,594 5,496 36,094 $ $ 2,896 13,618 119 4,263 534 6,094 756 1,574 4,593 34,447 $ $ 3,396 $ 14,535 121 5,238 397 4,939 601 1,127 3,654 34,008 $ 4,033 13,541 126 5,469 376 4,767 563 1,102 3,268 33,245 2,916,031 $ 2,938,371 $ 2,791,871 2,873,961 $ $ 2,642,231 2,733,824 $ $ 2,579,805 $ 2,615,354 $ 2,549,459 2,550,573 0.40% 0.14 0.47 0.32 0.13 0.05 0.48 0.67 0.28% 1.22% 0.27% (0.01)% 0.13 0.39 0.21 0.18 0.08 0.71 0.55 0.25% 1.26% 0.31% (0.01)% 0.21 0.70 0.20 0.15 0.13 0.63 0.67 0.31% 1.26% 0.33% 0.77% 0.17 0.46 0.16 0.10 0.28 0.55 0.75 0.30% 1.30% 0.33% 0.86% 0.21 0.64 0.30 0.15 0.28 0.57 0.67 0.37% 1.30% 0.37% 73 The allowance for loan and lease losses balance is maintained at a level considered adequate to cover anticipated probable losses based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time. This analysis is completed quarterly and forms the basis for allocation of the loan loss reserve and what charges to the provision may be required. See notes 1, 4, and 7 to the consolidated financial statements for further information. Average Deposits and Other Borrowed Funds (in thousands) Deposits: Noninterest bearing deposits NOW accounts Money market accounts Savings accounts Certificates of deposit of $100,000 or more Certificates of deposit < $100,000 and other time deposits Total deposits Other borrowed funds: Repurchase agreements and federal funds purchased Advances from Federal Home Loan Bank Long-term debt Total other borrowed funds Total deposits and other borrowed funds 2016 2015 2014 $ $ 758,555 $ 49,037 640,297 398,957 578,669 624,412 3,049,927 262,361 14,410 61,341 338,112 3,388,039 $ 720,508 $ 36,227 613,804 368,835 571,660 645,565 2,956,599 256,091 15,821 61,341 333,253 3,289,852 $ 660,833 31,208 585,467 339,714 598,684 693,212 2,909,118 233,431 4,210 61,341 298,982 3,208,100 The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2016 occurred at October 31, 2016, with a month-end balance of $269.3 million. The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2015 occurred at September 30, 2015, with a month-end balance of $265.4 million. The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2014 occurred at November 30, 2014, with a month-end balance of $252.3 million. Maturities and/or repricing of time deposits of $100,000 or more outstanding at December 31, 2016 are summarized as follows: (in thousands) Three months or less Over three through six months Over six through twelve months Over twelve through sixty months Over sixty months Certificates of Deposit Other Time Deposits Total $ $ 119,653 $ 118,173 244,562 116,444 0 598,832 $ 7,982 $ 10,105 15,909 19,054 0 53,050 $ 127,635 128,278 260,471 135,498 0 651,882 74 Selected Financial Data 2012-2016 (in thousands except ratios, per share amounts and # of employees) Year Ended December 31 Interest income Interest expense Net interest income Provision for loan losses Noninterest income Noninterest expense Income before income taxes Income taxes Net income Per common share: Basic earnings per share Diluted earnings per share Cash dividends declared- as a % of net income Book value, end of year Market price, end of year Market to book value, end of year Price/earnings ratio, end of year Cash dividend yield, for the year At year-end: Total assets Long-term debt Shareholders’ equity Averages: Assets Deposits, including repurchase agreements Earning assets Loans Shareholders’ equity Profitability ratios: Return on average assets Return on average equity Capital ratios: Equity to assets, end of year Average equity to average assets Risk based capital ratios: Tier 1 leverage Common equity Tier 1 capital Tier 1 capital Total capital Other significant ratios: Allowance to net loans, end of year Allowance to nonperforming loans, end of year Nonperforming assets to loans and foreclosed properties, end of year Net interest margin Efficiency ratio Other statistics: Average common shares outstanding Number of full-time equivalent employees, end of year $ $ $ $ $ $ $ $ $ 2016 2015 2014 2013 2012 146,576 $ 13,555 133,021 7,872 48,441 107,126 66,464 19,118 47,346 $ 2.70 $ 2.70 $ 1.260 $ 46.67% 28.40 $ 49.60 $ 1.75x 18.37x 2.54% 144,020 $ 11,773 132,247 8,650 46,809 105,443 64,963 18,531 46,432 $ 2.66 $ 2.66 $ 1.220 $ 45.86% 27.12 $ 34.96 $ 1.29x 13.14x 3.49% 143,867 $ 11,797 132,070 8,755 45,081 105,999 62,397 19,146 43,251 $ 2.50 $ 2.49 $ 1.181 $ 47.24% 25.64 $ 36.61 $ 1.43x 14.64x 3.23% 148,127 $ 13,440 134,687 8,568 49,304 110,251 65,172 20,000 45,172 $ 2.63 $ 2.62 $ 1.154 $ 43.79% 23.70 $ 41.05 $ 1.73x 15.57x 2.81% 3,932,169 $ 61,341 500,615 3,903,934 $ 61,341 475,583 3,723,765 $ 61,341 447,877 3,581,716 $ 61,341 412,492 3,920,257 $ 3,306,550 3,652,714 2,916,031 494,398 3,790,282 $ 3,201,545 3,524,506 2,791,871 465,682 3,679,531 $ 3,130,338 3,422,450 2,642,231 435,290 3,651,541 $ 3,127,709 3,384,211 2,579,805 408,782 1.21% 9.58 12.73% 12.61 12.75% 15.18 17.25 18.50 1.22% 130.81 2.13 3.70 58.54 1.23% 9.97 12.18% 12.29 12.40% 14.58 16.70 17.95 1.26% 126.16 2.38 3.81 58.20 1.18% 9.94 12.03% 11.83 12.04% -- 16.51 17.76 1.26% 88.43 2.74 3.92 59.12 1.24% 11.05 11.52% 11.19 11.51% -- 16.15 17.40 1.30% 78.08 3.12 4.03 59.33 153,722 21,588 132,134 9,450 45,957 103,554 65,087 20,225 44,862 2.64 2.63 1.136 43.10% 23.31 29.80 1.28x 11.30x 3.81% 3,635,664 61,341 400,344 3,641,660 3,139,229 3,357,134 2,549,459 389,377 1.23% 11.52 11.01% 10.69 10.65% -- 15.23 16.49 1.30% 92.33 3.20 3.99 57.93 17,548 996 17,431 984 17,326 1,012 17,158 1,022 17,013 1,035 75 Quarterly Financial Data (Unaudited) (in thousands except ratios and per share amounts) Three Months Ended 2016 Net interest income Net interest income, taxable equivalent basis Provision for loan losses Noninterest income Noninterest expense Net income Per common share: Basic earnings per share Diluted earnings per share Dividends declared Common stock price: High Low Last trade Selected ratios: Return on average assets, annualized Return on average common equity, annualized Net interest margin, annualized Three Months Ended 2015 Net interest income Net interest income, taxable equivalent basis Provision for loan losses Noninterest income Noninterest expense Net income Per common share: Basic earnings per share Diluted earnings per share Dividends declared Common stock price: High Low Last trade Selected ratios: Return on average assets, annualized Return on average common equity, annualized Net interest margin, annualized December 31 September 30 June 30 March 31 $ $ $ 33,411 $ 33,930 2,043 12,515 27,005 11,866 0.67 $ 0.67 0.32 51.35 $ 35.85 49.60 1.19% 9.41 3.66 33,227 $ 33,726 2,191 13,186 26,687 12,312 0.70 $ 0.70 0.32 37.49 $ 33.71 37.11 1.25% 9.81 3.66 33,059 $ 33,565 1,873 11,769 27,192 11,566 0.66 $ 0.66 0.31 36.95 $ 32.98 34.66 1.19% 9.46 3.71 33,324 33,855 1,765 10,971 26,242 11,602 0.66 0.66 0.31 36.00 30.89 35.32 1.20% 9.63 3.76 December 31 September 30 June 30 March 31 $ $ $ 33,195 $ 33,692 1,910 11,810 25,778 11,870 0.68 $ 0.68 0.31 37.15 $ 33.68 34.96 1.22% 9.91 3.74 32,965 $ 33,467 2,520 12,035 27,534 11,222 0.64 $ 0.64 0.31 37.63 $ 33.62 35.51 1.18% 9.50 3.77 33,182 $ 33,697 2,319 12,228 26,313 12,402 0.71 $ 0.71 0.30 35.49 $ 31.54 34.87 1.32% 10.78 3.85 32,905 33,418 1,901 10,736 25,818 10,938 0.63 0.63 0.30 36.47 31.53 33.16 1.18% 9.70 3.89 76
Continue reading text version or see original annual report in PDF format above