UNITED STATESSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) |
For the fiscal year ended December 31, 20192020
Or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) |
For the transition period from _____________ to _____________
Commission file number 001-31220
COMMUNITY TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
| Kentucky | | 61-0979818 |
| (State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
346 North Mayo Trail P.O. Box 2947 Pikeville, Kentucky (Address of principal executive offices) | | 41502 (Zip code) |
(606) 432-1414
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock (Title of class) |
| CTBI | The NASDAQ Global Select Market |
| (Trading symbol) | (Name of exchange on which registered) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☑☐ | Accelerated Filer☐☑ | Non-accelerated Filer ☐ |
| | | |
Smaller Reporting Company ☐ | Emerging Growth Company ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Based upon the closing price of the Common Shares of the Registrant on The NASDAQ Global Select Market, the aggregate market value of voting stock held by non-affiliates of the Registrant as of June 30, 20192020 was $714.7$552.8 million. For the purpose of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates. The number of shares outstanding of the Registrant’s Common Stock as of January 31, 20202021 was 17,819,938.17,826,076.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 28, 2020.27, 2021.
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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; the effects of the COVID-19 pandemic on our business operations and credit quality and on general economic and financial market conditions, as well as our ability to respond to the related challenges; our participation in the Paycheck Protection Program administered by the Small Business Administration; 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.
Community Trust Bancorp, Inc. (“CTBI”) is a bank holding company registered with the Board of Governors of the Federal Reserve System pursuant to Section 5(a) of the Bank Holding Company Act of 1956, as amended. CTBI was incorporated August 12, 1980, under the laws of the Commonwealth of Kentucky for the purpose of becoming a bank holding company. Currently, CTBI owns all the capital stock of one commercial bank and one trust company, serving small and mid-sized communities in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. The commercial bank is Community Trust Bank, Inc., Pikeville, Kentucky (“CTB”) and the trust company is Community Trust and Investment Company, Lexington, Kentucky.
At December 31, 2019,2020, CTBI had total consolidated assets of $4.4$5.1 billion and total consolidated deposits, including repurchase agreements, of $3.6$4.4 billion. Total shareholders’ equity at December 31, 20192020 was $614.9$654.9 million. Trust assets under management at December 31, 20192020 were $2.2$2.8 billion, including CTB’s investment portfolio totaling $0.6$1.0 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.
COMPETITION
CTBI’s subsidiaries face substantial competition for deposit, credit, trust, wealth management, and brokerage relationships in the communities we serve. Competing providers include state banks, national banks, thrifts, trust companies, insurance companies, mortgage banking operations, credit unions, finance companies, brokerage companies, and other financial and non-financial companies which may offer products functionally equivalent to those offered by our subsidiaries. As financial services become increasingly dependent on technology, permitting transactions to be conducted by telephone, mobile banking, and the internet, non-bank institutions are able to attract funds and provide lending and other financial services without offices located in our market areas. Many of our nonbank competitors have fewer regulatory constraints, broader geographic service areas, greater capital and, in some cases, lower cost structures. In addition, competition for quality customers has intensified as a result of changes in regulation, consolidation among financial service providers, and advances in technology and product delivery systems. Many of these providers offer services within and outside the market areas served by our subsidiaries. We strive to offer competitively priced products along with quality customer service to build customer relationships in the communities we serve.
The United States and global markets, as well as general economic conditions, have been volatile. Larger financial institutions could strengthen their competitive position as a result of ongoing consolidation within the financial services industry.
Banking legislation in Kentucky places no limits on the number of banks or bank holding companies that a bank holding company may acquire. Interstate acquisitions are allowed where reciprocity exists between the laws of Kentucky and the home state of the bank or bank holding company to be acquired. Bank holding companies continue to be limited to control of less than 15% of deposits held by federally insured depository institutions in Kentucky (exclusive of inter-bank and foreign deposits). Competition for deposits may be increasing as a consequence of FDIC assessments shifting from deposits to an asset based formula, as larger banks may move away from non-deposit funding sources.
No material portion of our business is seasonal. We are not dependent upon any one customer or a few customers, and the loss of any one or a few customers would not have a material adverse effect on us. See note 1918 to the consolidated financial statements for additional information regarding concentrations of credit.
We do not engage in any operations in foreign countries.
EMPLOYEESHUMAN CAPITAL
We recognize the long-term value of a highly skilled, dedicated workforce, with an average tenure of 10 years, and 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 sponsoring memberships in local civic organizations.
Our employees recognize the long-term benefit of working with our organization as evidenced by the 20% of our employees who have more than 20 years of service. Our employees participate in numerous coaching, training, and educational programs, including required periodic training on topics such as ethics, privacy regulations, anti-money laundering, and UDAAP (Unfair, Deceptive, or Abusive Acts or Practices). Additionally, CTBI makes online training available to employees. Employees also have the opportunity to utilize programs that provide skill development online with over 8,000 varied courses, including topics in banking, finance, computers, customer service, sales, management, and personal skills such as time management, project management, and communication skills.
In addition to classes provided by our training department, employees also have the opportunity to work on their skill development through attending secondary education courses. These are funded through our Educational Assistance Program.
As of December 31, 2019,2020, CTBI and subsidiaries had 1,000998 full-time equivalent employees. OurFemales comprise 75% of our workforce, and 58% of our managerial positions (supervisor or above) are held by females. This includes 67% of our branch managers, 31% of our market presidents, and 28% of our senior vice presidents.
CTBI offers its employees are provided withcompetitive compensation, as well as a variety of employee benefits.highly competitive benefits package. A retirement plan, an employee stock ownership plan, group life insurance, major medical insurance, a cafeteria plan, education reimbursement, and management and employee incentive compensation plans are available to all eligible personnel.
Employees are also offered the opportunity to complete periodic employee satisfaction surveys anonymously.
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 employees have experienced decreases in elevated medical risk factors, including alcohol consumption, tobacco usage, physical inactivity, high stress, high cholesterol, and high blood pressure.
During the recent COVID-19 pandemic, CTBI has taken many steps to protect the safety of our employees by adjusting branch operations and decreasing lobby usage as needed, encouraging drive-thru and ATM use along with internet banking, having employees work remotely or work split-shifts when possible, implementing social distancing guidelines, and consolidating operations. Management has also put a policy in place to continue to pay employees when they are required to be quarantined due to a positive COVID-19 test or exposure to COVID-19.
CTBI has been recognized by the organization 2020 Women on Boards as a Winning “W” company for 2019, for having at least 20% women on our board of directors. Our Board of Directors is currently 25% female.
SUPERVISION AND REGULATION
General
We, as a registered bank holding company, are restricted to those activities permissible under the Bank Holding Company Act of 1956, as amended, and are subject to actions of the Board of Governors of the Federal Reserve System thereunder. We are required to file an annual report with the Federal Reserve Board and are subject to an annual examination by the Board.
Community Trust Bank, Inc. is a state-chartered bank subject to state and federal banking laws and regulations and periodic examination by the Kentucky Department of Financial Institutions and the restrictions, including dividend restrictions, thereunder. CTB is also a member of the Federal Reserve System and is subject to certain restrictions imposed by and to examination and supervision under the Federal Reserve Act. Community Trust and Investment Company is also regulated by the Kentucky Department of Financial Institutions and the Federal Reserve.
Deposits of CTB are insured up to applicable limits by the Federal Deposit Insurance Corporation (FDIC), which subjects banks to regulation and examination under the provisions of the Federal Deposit Insurance Act.
The operations of CTBI and our subsidiaries are also affected by other banking legislation and policies and practices of various regulatory authorities. Such legislation and policies include statutory maximum rates on some loans, reserve requirements, domestic monetary and fiscal policy, and limitations on the kinds of services that may be offered.
CTBI’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on our website at
www.ctbi.com as soon as reasonably practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission. CTBI’s Code of Business Conduct and Ethics and other corporate governance documents are also available on our website. Copies of our annual report will be made available free of charge upon written request to:
Community Trust Bancorp, Inc.
Jean R. Hale
Chairman, President and CEO
P.O. Box 2947
Pikeville, KY 41502-2947
The SECSecurities and Exchange Commission (“SEC”) maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding CTBI and other issuers that file electronically with the SEC.
Capital Requirements; Basel IIIRequirements
On July 2, 2013, the Federal Reserve approved final rules that substantially amended the regulatory risk-based capital rules applicable to CTBI and CTB. The FDIC subsequently approved these rules. The final rules implemented the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.
The rules included new risk-based capital and leverage ratios, which were phased in from 2015 to January 2019, and refined the definition of what constitutes “capital” for purposes of calculating those ratios. The minimum capital level requirements applicable to CTBI and CTB under the final rules are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also established a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer began to be phased in on January 1, 2016 at 0.625% of risk-weighted assets increased by 0.625% annually until fully implemented in January 2019. An institution is subject to limitations on certain activities including payment of dividends, share repurchases, and discretionary bonuses to executive officers if its capital level is below the total capital plus capital conservation buffer amount.
The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including CTB, if their capital levels begin to show signs of weakness. These revisions took effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insuredInsured depository institutions are required to meet the followingcertain capital level requirements in order to qualify as “well capitalized:” (i) a common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8%; (iii) a total capital ratio of 10%; and (iv) a Tier 1 leverage ratio of 5%. We currently satisfy the well-capitalized and the capital conservation standards, and based on our current capital composition and levels, we anticipate that our capital ratios, on a Basel III basis, will continue to exceed the well-capitalized minimum capital requirements and capital conservation buffer standards.
requirements. On October 29, 2019, the Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currencyfederal banking regulators adopted a final rule to simplify the regulatory capital requirements for eligible community banks and holding companies that opt-in to the community bank leverage ratio framework (the “CBLR framework”), as required by Section 201 of the Economic Growth, Relief and Consumer Protection Act of 2018. Under the final rule, which became effective as of January 1, 2020, community banks and holding companies (which would includeincludes CTB and CTBI) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, would bewere eligible to opt-in to the CBLR framework. The community bank leverage ratio is the ratio of a banking organization’s Tier 1 capital to its average total consolidated assets, both as reported on the banking organization’s applicable regulatory filings. If this election is made,
In April 2020, as directed by Section 4012 of the CARES Act, the regulatory agencies introduced temporary changes to the CBLR. These changes, which subsequently were adopted as a final rule, temporarily reduced the CBLR requirement to 8% through the end of calendar year 2020. Beginning in calendar year 2021, the CBLR requirement will increase to 8.5% for the calendar year before returning to 9% in calendar year 2022. Management has elected to use the CBLR framework for CTBI and CTB would satisfy their regulatory capital standards by calculating and reporting the community bank leverage ratio instead of the risk-weighted capital ratios and minimum leverage ratio currently required and would be deemed “well-capitalized” under the Federal Reserve Board’s and FDIC’s prompt corrective action rules so long as they continue to satisfy the qualifying criteria of the CBLR framework. CTBI has not yet decided whether it will take advantage of the new CBLR framework or will continue with the existing layered ratio structure.CTB. Under either framework, CTBI and CTB would be considered well-capitalized under the applicable guidelines.
As CTBI’s CBLR ratio as of December 31, 2019, CTBI had a common equity Tier 1 capital2020 was 12.70%. CTB’s CBLR ratio as of 17.18%, a Tier 1 capital ratio of 18.94%, a total capital ratio of 20.05%, and a Tier 1 leverage ratio of 14.01%. Our capital conservation buffer at December 31, 20192020 was 12.05%12.13%.
In December 2017, the Basel Committee on Banking Supervision unveiled the latest round of its regulatory framework, commonly referred to as Basel IV. The framework makes changes to the capital framework of Basel III and is targeted for a timeframe of 2022-2027 for implementation. The new framework appears designed to limit the flexibility of financial institutions using advanced approaches to calculate credit and other risks and also makes significant amendments to the standardized approaches to credit risk, credit valuation adjustment risk, and operational risk. The manner and the form in which the Basel IV framework will be implemented in the U.S. are uncertain.
Item 1A. | Item 1A. Risk Factors |
An investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that management believes affect us are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference herein. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This report is qualified in its entirety by these risk factors. See also, “Cautionary Statement Regarding Forward-Looking Statements.” If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment.
Economic Environment Risks
Economic Risk
CTBI may continue to be adversely affected by economic and market conditions.
Beginning in 2008, the U.S. economy faced a severe economic crisis including a major recession from which recovery was slow and uneven. Commerce and business growth in certain regions in the U.S. remains reduced and local governments and many businesses continue to experience financial difficulty. In some areas of the U.S., including certain parts of our service area, unemployment levels remain elevated. There can be no assurance that these conditions will continue to improve and these conditions could worsen. In addition, the level of U.S. debt, the Federal Open Market Committee’s monetary policy, potential volatility in oil prices, U.S. tax law modifications, political events, and trade policies may have a destabilizing effect on financial markets or a negative effect on the economy.
Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent upon the business environment in the markets where we operate, in the states of Kentucky, West Virginia, and Tennessee and in the United States as a whole. While unemployment rates have improved in all of the markets in which we operate, unemployment rates in our markets remain high compared to the national average. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors. Currently, the pandemic known as the coronavirus disease (COVID-19)COVID-19 is causing worldwide concern and economic disruption. In his semiannual testimony before Congress in February, 2020, Federal Reserve Chairman Jerome Powell said the central bank is “closely monitoring the emergence of the coronavirus disease, which could lead to disruptions in China that spill over to the rest of the world.”
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 continued 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.
Economy of Our Markets
Our business may continue to be adversely affected by ongoing weaknesses in the local economies on which we depend.
Our loan portfolio is concentrated primarily in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. Our profits depend on providing products and services to clients in these local regions. While unemployment rates have improved in all of the markets in which we operate, unemploymentUnemployment rates in our markets remain high compared to the national average. Increases in unemployment, decreases in real estate values, or increases in interest rates could weaken the local economies in which we operate. These economic indicators typically affect certain industries, such as real estate and financial services, more significantly. High levels of unemployment and depressed real estate asset values in certain of the markets we serve would likely prolong the economic recovery period in our market area. Also, our growth within certain of our markets may be adversely affected by inconsistent access to high speed internet, and the lack of population and business growth in such markets in recent years. Weakness in our market area could depress our earnings and consequently our financial condition because:
Clients may not want, need, or qualify for our products and services; | ● | Clients may not want, need, or qualify for our products and services; |
Borrowers may not be able to repay their loans;The value of the collateral securing our loans to borrowers may decline; and | ● | Borrowers may not be able to repay their loans; |
| ● | The value of the collateral securing our loans to borrowers may decline; and |
| ● | The quality of our loan portfolio may decline. |
Many states and municipalities are experiencing financial stress. As a result, various levels of government have sought to increase their tax revenues through increased tax levies, which could have an adverse impact on our results of operations.
Climate Change Risk
Our business may be adversely impacted by climate change and related initiatives.
Climate change and other emissions-related laws, regulations, and agreements have been proposed and, in some cases adopted, on the international, federal, state, and local levels. These final and proposed initiatives take the form of restrictions, caps, taxes, or other controls on emissions. Our markets include areas where the coal industry was historically a significant part of the local economy. The importance of the coal industry to such areas has, however, continued to decline substantially and the economies of our markets have become more diversified. Nevertheless, to the extent that existing or new climate change laws, regulations, or agreements further impact production, purchase, or use of coal, the economies of certain areas within our markets, the demand for financing, the value of collateral securing our coal-related loans, and our financial condition and results of operations may be adversely affected.
We, like all businesses, as well as our market areas, borrowers, and customers, may be adversely impacted to the extent that weather-related events cause damage or disruption to properties or businesses.
Operational Risks
Interest Rate Risk
Changes in interest rates could adversely affect our earnings and financial condition.
Our earnings and financial condition are dependent to a large degree upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest-rate spreads, meaning the difference between the interest rates earned on loans and investments and the interest rates paid on deposits and borrowings, could adversely affect our earnings and financial condition. Interest rates are highly sensitive to many factors, including:
The rate of economic growth; | ● | The rate of economic growth; |
Monetary policies; and | ● | Instability in domestic and foreign financial markets. |
Changes in market interest rates will also affect the level of voluntary prepayments on our loans and the receipt of payments on our mortgage-backed securities resulting in the receipt of proceeds that may be reinvested at a lower rate than the loan or mortgage-backed security being prepaid.
We originate residential loans for sale and for our portfolio. The origination of loans for sale is designed to meet client financing needs and earn fee income. The origination of loans for sale is highly dependent upon the local real estate market and the level and trend of interest rates. Increasing interest rates may reduce the origination of loans for sale and consequently the fee income we earn. While our commercial banking, construction, and income property business lines remain a significant portion of our activities, high interest rates may reduce our mortgage-banking activities and thereby our income. In contrast, decreasing interest rates have the effect of causing clients to refinance mortgage loans faster than anticipated. This causes the value of assets related to the servicing rights on loans sold to be lower than originally anticipated. If this happens, we may need to write down our servicing assets faster, which would accelerate our expense and lower our earnings.
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 financial 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.
Financial institutions, including CTBI, must transition from LIBOR to an alternative reference rate.
LIBOR will cease to exist as a published rate after 2021. The Federal Reserve through the Alternative Reference Rate Committee has recommended a replacement benchmark rate, the Secured Overnight Financing Rate. All loans extending beyond 2021 will need to be managed to ensure appropriate benchmark rate replacements are provided for and adopted. Failure to identify and negotiate a replacement benchmark rate and/or update data processing systems could result in future interest rate risk not being mitigated as intended or interest being miscalculated, which could adversely impact CTBI’s business, financial condition and results of operations. As of December 31, 2019,2020, CTBI had approximately $28.3$27.8 million in variable rate loans and $46.4$113.6 million in available-for-sale securities with interest rates tied to LIBOR, substantially all of which have maturity dates beyond December 31, 2021. In addition, CTBI has debentures outstanding in the principal amount of $57.8 million which mature in 2037 and bear interest at a rate tied to LIBOR.
Moreover, financial institution contracts linked to LIBOR are widespread and intertwined with numerous financial products and services. The downstream effect of unwinding or transitioning such contracts could cause instability and negatively impact financial markets and individual institutions. The uncertainty surrounding the transition from LIBOR could adversely affect the U.S. financial system more broadly.
Credit Risk
Our earnings and reputation may be adversely affected if we fail to effectively manage our credit risk.
Originating and underwriting loans are integral to the success of our business. This business requires us to take “credit risk,” which is the risk of losing principal and interest income because borrowers fail to repay loans. Collateral values and the ability of borrowers to repay their loans may be affected at any time by factors such as:
The length and severity of downturns in the local economies in which we operate or the national economy;
The length and severity of downturns in one or more of the business sectors in which our customers operate, particularly the automobile, hotel/motel, coal, and residential development industries; or
A rapid increase in interest rates.
Our loan portfolio includes loans with a higher risk of loss.
We originate commercial real estate residential loans, commercial real estate nonresidential loans, hotel/motel loans, other commercial loans, consumer loans, and residential mortgage loans, primarily within our market area. Commercial real estate residential, commercial real estate nonresidential, hotel/motel, and other commercial loans tend to involve larger loan balances to a single borrower or groups of related borrowers and are most susceptible to a risk of loss during a downturn in the business cycle. These loans also have historically had a greater credit risk than other loans for the following reasons:
| • | Commercial Real Estate Residential. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. As of December 31, 2020, commercial real estate residential loans comprised approximately 8% of our total loan portfolio. |
| • | Commercial Real Estate Nonresidential.Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. As of December 31, 2020, commercial real estate nonresidential loans comprised approximately 21% of our total loan portfolio. |
| • | Hotel/Motel. The hotel and motel industry is highly susceptible to changes in the domestic and global economic environments, which has caused the industry to experience substantial volatility due to the recent global pandemic. As of December 31, 2020, hotel/motel loans comprised approximately 7% of our total loan portfolio. |
| • | Other Commercial Loans. Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid, or fluctuate in value based on the success of the business. As of December 31, 2020, other commercial loans comprised approximately 17% of our total loan portfolio. SBA Paycheck Protection Program loans, as discussed below in the COVID-19 Risks section, comprise approximately 42% of the other commercial loan portfolio and 7% of the total loan portfolio. |
Consumer loans may carry a higher degree of repayment risk than residential mortgage loans, particularly when the consumer loan is unsecured. Repayment of a consumer loan typically depends on the borrower’s financial stability, and it is more likely to be affected adversely by job loss, illness, or personal bankruptcy. In addition, federal and state bankruptcy, insolvency, and other laws may limit the amount we can recover when a consumer client defaults. As of December 31, 2020, consumer loans comprised approximately 22% of our total loan portfolio. As of December 31, 2020, approximately 80% of our consumer loans and 17% of our total loan portfolio were consumer indirect loans. Consumer indirect loans are fixed rate loans secured by new and used automobiles, trucks, vans, and recreational vehicles originated at selling dealerships which are purchased by us following our review and approval of such loans. These loans generally have a greater risk of loss in the event of default than, for example, one-to-four family residential mortgage loans due to the rapid depreciation of vehicles securing the loans. We face the risk that the collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. We also assume the risk that the dealership administering the lending process complies with applicable consumer protection law and regulations.
A significant part of our lending business is focused on small to medium-sized business which may be impacted more severely during periods of economic weakness.
A significant portion of our commercial loan portfolio is tied to small to medium-sized businesses in our markets. During periods of economic weakness, small to medium-sized businesses may be impacted more severely than larger businesses. As a result, the ability of smaller businesses to repay their loans may deteriorate, particularly if economic challenges persist over a period of time, and such deterioration would adversely impact our results of operations and financial condition.
A large percentage of our loan portfolio is secured by real estate, in particular commercial real estate. Weakness in the real estate market or other segments of our loan portfolio would lead to additional losses, which could have a material adverse effect on our business, financial condition, and results of operations.
As of December 31, 2020, approximately 54% of our loan portfolio was secured by real estate, 29% of which is commercial real estate. High levels of commercial and consumer delinquencies or declines in real estate market values could require increased net charge-offs and increases in the allowance for credit losses, which could have a material adverse effect on our business, financial condition, and results of operations and prospects.
Competition
Strong competition within our market area may reduce our ability to attract and retain deposits and originate loans.
We face competition both in originating loans and in attracting deposits. Competition in the financial services industry is intense. We compete for clients by offering excellent service and competitive rates on our loans and deposit products. The type of institutions we compete with include commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms. Competition arises from institutions located within and outside our market areas. As financial services become increasingly dependent on technology, permitting transactions to be conducted by telephone, mobile banking, and the internet, non-bank institutions are able to attract funds and provide lending and other financial services without offices located in our market areas. As a result of their size and ability to achieve economies of scale, certain of our competitors offer a broader range of products and services than we offer. With the increased consolidation in the financial industry, larger financial institutions may strengthen their competitive positions. In addition, to stay competitive in our markets we may need to adjust the interest rates on our products to match the rates offered by our competitors, which could adversely affect our net interest margin. As a result, our profitability depends upon our continued ability to successfully compete in our market areas while achieving our investment objectives.
Technology and other changes are allowing consumers to complete financial transactions through alternative methods to those which historically involved banks. For example, consumers can now hold funds that would have been held as bank deposits in mutual funds, brokerage accounts, general purpose reloadable prepaid cards, or cyber currency. In addition, consumers can complete transactions, such as paying bills or transferring funds, directly without utilizing the services of a bank. The process of eliminating banks as intermediaries (known as disintermediation), could result in the loss of fee income, as well as the loss of deposits and the income that might be generated from those deposits. The related revenue reduction could adversely affect our financial condition, cash flows, and results of operations.
Operational Risk
An extended disruption of vital infrastructure or a security breach could negatively impact our business, results of operations, and financial condition.
Our operations depend upon, among other things, our infrastructure, including equipment and facilities. Extended disruption of vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking or viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of our control could have a material adverse impact on the financial services industry as a whole and on our business, results of operations, cash flows, and financial condition in particular. Our business recovery plan may not work as intended or may not prevent significant interruption of our operations. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in the loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have an adverse effect on our financial condition and results of operation.
Our information technology systems and networks may experience interruptions, delays, or cessations of service or produce errors due to regular maintenance efforts, such as systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time-consuming, disruptive, and resource intensive. Such disruptions could damage our reputation and otherwise adversely impact our business and results of operations.
Third party vendors provide key components of our business infrastructure, such as processing, internet connections, and network access. While CTBI has selected these third party vendors carefully through its vendor management process, it does not control their actions and generally is not able to obtain satisfactory indemnification provisions in its third party vendor written contracts. Any problems caused by third parties or arising from their services, such as disruption in service, negligence in the performance of services or a breach of customer data security with regard to the third parties’ systems, could adversely affect our ability to deliver services, negatively impact our business reputation, cause a loss of customers, or result in increased expenses, regulatory fines and sanctions, or litigation.
Claims and litigation may arise pertaining to fiduciary responsibility.
Customers may, from time to time, make a claim and take legal action pertaining to our performance of fiduciary responsibilities. Whether customer claims and legal action related to our performance of fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant financial liability, adversely affect the market perception of us and our products and services, and impact customer demand for those products and services. Any such financial liability or reputational damage could have an adverse effect on our business, financial condition, and results of operations.
Significant legal actions could subject us to uninsured liabilities.
From time to time, we may be subject to claims related to our operations. These claims and legal actions, including supervisory actions by our regulators, could involve significant amounts. We maintain insurance coverage in amounts and with deductibles we believe are appropriate for our operations. However, our insurance coverage may not cover all claims against us and related costs, and further insurance coverage may not continue to be available at a reasonable cost. As a result, CTBI could be exposed to uninsured liabilities, which could adversely affect CTBI’s business, financial condition, or results of operations.
Technology Risk
CTBI continually encounters technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
Cyber Risk
A breach in the security of our systems could disrupt our business, result in the disclosure of confidential information, damage our reputation, and create significant financial and legal exposure for us.
Our businesses are dependent on our ability and the ability of our third party service providers to process, record, and monitor a large number of transactions. If the financial, accounting, data processing, or other operating systems and facilities fail to operate properly, become disabled, experience security breaches, or have other significant shortcomings, our results of operations could be materially adversely affected.
Although we and our third party service providers devote significant resources to maintain and upgrade our systems and processes that are designed to protect the security of computer systems, software, networks, and other technology assets and the confidentiality, integrity, and availability of information belonging to us and our customers, there is no assurance that our security systems and those of our third party service providers will provide absolute security. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks, and other means. Despite our efforts and those of our third party service providers to ensure the integrity of these systems, it is possible that we or our third party service providers may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, especially because techniques used change frequently or are not recognized until launched, and because security attacks can originate from a wide variety of sources.
A successful breach of the security of our systems or those of our third party service providers could cause serious negative consequences to us, including significant disruption of our operations, misappropriation of our confidential information or the confidential information of our customers, or damage to our computers or operating systems, and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss in confidence in our security measures, customer dissatisfaction, litigation exposure, and harm to our reputation, all of which could have a material adverse effect on us. While we maintain insurance coverage that should, subject to policy terms and conditions, cover certain aspects of our cyber risks, this insurance coverage may be insufficient to cover all losses we could experience resulting from a cyber-security breach. Moreover, the cost of insurance sufficient to cover substantially all, or a reasonable portion, of losses related to cyber security breaches is expected to increase and such increases are likely to be material.
Banking customers and employees have been, and will likely continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, account information, or other personal information, or to introduce viruses or other malware to bank information systems or customers’ computers. Though we endeavor to lessen the success of such threats through the use of authentication technology and employee education, such cyber-attacks remain a serious issue. Publicity concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications as a means of conducting banking and other commercial transactions.
We could incur increased costs or reductions in revenue or suffer reputational damage in the event of misuse of information.
Our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks regarding our customers and their accounts. To provide these products and services, we use information systems and infrastructure that we and third party service providers operate. As a financial institution, we also are subject to and examined for compliance with an array of data protection laws, regulations, and guidance, as well as to our own internal privacy and information security policies and programs.
Information security risks for financial institutions like us have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, and other external parties. Our technologies and systems may become the target of cyber-attacks or other attacks that could result in the misuse or destruction of our or our customers’ confidential, proprietary, or other information or that could result in disruptions to the business operations of us or our customers or other third parties. Also, our customers, in order to access some of our products and services, may use personal computers, smart mobile phones, tablet PCs, and other devices that are beyond our controls and security systems. Further, a breach or attack affecting one of our third-party service providers or partners could impact us through no fault of our own. In addition, because the methods and techniques employed by perpetrators of fraud and others to attack systems and applications change frequently and often are not fully recognized or understood until after they have been launched, we and our third-party service providers and partners may be unable to anticipate certain attack methods in order to implement effective preventative measures.
While we have policies and procedures designed to prevent or limit the effect of the possible security breach of our information systems, if unauthorized persons were somehow to get access to confidential or proprietary information in our possession or to our proprietary information, it could result in litigation and regulatory investigations, significant legal and financial exposure, damage to our reputation, or a loss of confidence in the security of our systems that could materially adversely affect our results of operation.
Counterparty Risk
The soundness of other financial institutions could adversely affect CTBI.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional counterparties. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan due us. There is no assurance that any such losses would not materially and adversely affect our businesses, financial condition, or results of operations.
Acquisition Risks
Acquisition Risk
We may have difficulty in the future continuing to grow through acquisitions.
We may experience difficulty in making acquisitions on acceptable terms due to the decreasing number of suitable acquisition targets, competition for attractive acquisitions, regulatory impediments, and certain limitations on interstate acquisitions.
Any future acquisitions or mergers by CTBI or its banking subsidiary are subject to approval by the appropriate federal and state banking regulators. The banking regulators evaluate a number of criteria in making their approval decisions, such as:
Safety and soundness guidelines;
Compliance with all laws including the USA Patriot Act, the International Money Laundering Abatement and Anti-Terrorist Financing Act, the Sarbanes-Oxley Act and the related rules and regulations promulgated under such Act or the Exchange Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, and all other applicable fair lending and consumer protection laws and other laws relating to discriminatory business practices; and
Anti-competitive concerns with the proposed transaction.
If the banking regulators or a commenter on our regulatory application raise concerns about any of these criteria at the time a regulatory application is filed, the banking regulators may deny, delay, or condition their approval of a proposed transaction. We have grown, and, subject to regulatory approval, intend to continue to grow, through acquisitions of banks and other financial institutions. After these acquisitions, we may experience adverse changes in results of operations of acquired entities, unforeseen liabilities, asset quality problems of acquired entities, loss of key personnel, loss of clients because of change of identity, difficulties in integrating data processing and operational procedures, and deterioration in local economic conditions. These various acquisition risks can be heightened in larger transactions.
Integration Risk
We may not be able to achieve the expected integration and cost savings from our bank acquisition activities.
We have a long history of acquiring financial institutions and, subject to regulatory approval, we expect this acquisition activity to resume in the future. Difficulties may arise in the integration of the business and operations of the financial institutions that agree to merge with and into CTBI and, as a result, we may not be able to achieve the cost savings and synergies that we expect will result from the merger activities. Achieving cost savings is dependent on consolidating certain operational and functional areas, eliminating duplicative positions and terminating certain agreements for outside services. Additional operational savings are dependent upon the integration of the banking businesses of the acquired financial institution with that of CTBI, including the conversion of the acquired entity’s core operating systems, data systems and products to those of CTBI and the standardization of business practices. Complications or difficulties in the conversion of the core operating systems, data systems, and products of these other banks to those of CTBI may result in the loss of clients, damage to our reputation within the financial services industry, operational problems, one-time costs currently not anticipated by us, and/or reduced cost savings resulting from the merger activities.
Market and Liquidity Risks
Market Risk
Community Trust Bancorp, Inc.’s stock price is volatile.
Our stock price has been volatile in the past, and several factors could cause the price to fluctuate substantially in the future. These factors include:
Actual or anticipated variations in earnings;
Changes in analysts’ recommendations or projections;
CTBI’s announcements of developments related to our businesses;
Operating and stock performance of other companies deemed to be peers;
New technology used or services offered by traditional and non-traditional competitors;
News reports of trends, concerns, and other issues related to the financial services industry; and
Additional governmental policies and enforcement of current laws.
Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to CTBI’s performance. Although investor confidence in financial institutions has strengthened, the financial crisis adversely impacted investor confidence in the financial institutions sector. General market price declines or market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.
LiquidityCredit Risk
CTBI is subjectOur earnings and reputation may be adversely affected if we fail to liquidityeffectively manage our credit risk.
CTBIOriginating and underwriting loans are integral to the success of our business. This business requires liquidityus to meet its deposittake “credit risk,” which is the risk of losing principal and debt obligations as they come dueinterest income because borrowers fail to repay loans. Collateral values and the ability of borrowers to fund loan demands. CTBI’s access to funding sources in amounts adequate to finance its activities or on terms that are acceptable to it couldrepay their loans may be impairedaffected at any time by factors such as:
The length and severity of downturns in the local economies in which we operate or the national economy;
The length and severity of downturns in one or more of the business sectors in which our customers operate, particularly the automobile, hotel/motel, coal, and residential development industries; or
A rapid increase in interest rates.
Our loan portfolio includes loans with a higher risk of loss.
We originate commercial real estate residential loans, commercial real estate nonresidential loans, hotel/motel loans, other commercial loans, consumer loans, and residential mortgage loans, primarily within our market area. Commercial real estate residential, commercial real estate nonresidential, hotel/motel, and other commercial loans tend to involve larger loan balances to a single borrower or groups of related borrowers and are most susceptible to a risk of loss during a downturn in the business cycle. These loans also have historically had a greater credit risk than other loans for the following reasons:
| • | Commercial Real Estate Residential. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. As of December 31, 2020, commercial real estate residential loans comprised approximately 8% of our total loan portfolio. |
| • | Commercial Real Estate Nonresidential.Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. As of December 31, 2020, commercial real estate nonresidential loans comprised approximately 21% of our total loan portfolio. |
| • | Hotel/Motel. The hotel and motel industry is highly susceptible to changes in the domestic and global economic environments, which has caused the industry to experience substantial volatility due to the recent global pandemic. As of December 31, 2020, hotel/motel loans comprised approximately 7% of our total loan portfolio. |
| • | Other Commercial Loans. Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid, or fluctuate in value based on the success of the business. As of December 31, 2020, other commercial loans comprised approximately 17% of our total loan portfolio. SBA Paycheck Protection Program loans, as discussed below in the COVID-19 Risks section, comprise approximately 42% of the other commercial loan portfolio and 7% of the total loan portfolio. |
Consumer loans may carry a higher degree of repayment risk than residential mortgage loans, particularly when the consumer loan is unsecured. Repayment of a consumer loan typically depends on the borrower’s financial stability, and it is more likely to be affected adversely by job loss, illness, or personal bankruptcy. In addition, federal and state bankruptcy, insolvency, and other laws may limit the amount we can recover when a consumer client defaults. As of December 31, 2020, consumer loans comprised approximately 22% of our total loan portfolio. As of December 31, 2020, approximately 80% of our consumer loans and 17% of our total loan portfolio were consumer indirect loans. Consumer indirect loans are fixed rate loans secured by new and used automobiles, trucks, vans, and recreational vehicles originated at selling dealerships which are purchased by us following our review and approval of such loans. These loans generally have a greater risk of loss in the event of default than, for example, one-to-four family residential mortgage loans due to the rapid depreciation of vehicles securing the loans. We face the risk that affect it specificallythe collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. We also assume the risk that the dealership administering the lending process complies with applicable consumer protection law and regulations.
A significant part of our lending business is focused on small to medium-sized business which may be impacted more severely during periods of economic weakness.
A significant portion of our commercial loan portfolio is tied to small to medium-sized businesses in our markets. During periods of economic weakness, small to medium-sized businesses may be impacted more severely than larger businesses. As a result, the ability of smaller businesses to repay their loans may deteriorate, particularly if economic challenges persist over a period of time, and such deterioration would adversely impact our results of operations and financial condition.
A large percentage of our loan portfolio is secured by real estate, in particular commercial real estate. Weakness in the real estate market or other segments of our loan portfolio would lead to additional losses, which could have a material adverse effect on our business, financial condition, and results of operations.
As of December 31, 2020, approximately 54% of our loan portfolio was secured by real estate, 29% of which is commercial real estate. High levels of commercial and consumer delinquencies or declines in real estate market values could require increased net charge-offs and increases in the allowance for credit losses, which could have a material adverse effect on our business, financial condition, and results of operations and prospects.
Competition
Strong competition within our market area may reduce our ability to attract and retain deposits and originate loans.
We face competition both in originating loans and in attracting deposits. Competition in the financial services industry or economyis intense. We compete for clients by offering excellent service and competitive rates on our loans and deposit products. The type of institutions we compete with include commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms. Competition arises from institutions located within and outside our market areas. As financial services become increasingly dependent on technology, permitting transactions to be conducted by telephone, mobile banking, and the internet, non-bank institutions are able to attract funds and provide lending and other financial services without offices located in general. Factors that could reduce its accessour market areas. As a result of their size and ability to liquidity sources includeachieve economies of scale, certain of our competitors offer a downturnbroader range of products and services than we offer. With the increased consolidation in the financial industry, larger financial institutions may strengthen their competitive positions. In addition, to stay competitive in our markets we may need to adjust the interest rates on our products to match the rates offered by our competitors, which could adversely affect our net interest margin. As a result, our profitability depends upon our continued ability to successfully compete in our market difficult credit markets,areas while achieving our investment objectives.
Technology and other changes are allowing consumers to complete financial transactions through alternative methods to those which historically involved banks. For example, consumers can now hold funds that would have been held as bank deposits in mutual funds, brokerage accounts, general purpose reloadable prepaid cards, or adverse regulatory actions against CTBI. CTBI’s access to deposits may also be affected bycyber currency. In addition, consumers can complete transactions, such as paying bills or transferring funds, directly without utilizing the liquidity needsservices of its depositors. In particular, a substantial majoritybank. The process of CTBI’s liabilities are demand, savings, interest checking, and money market deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of its assets are loans, which cannot be called or soldeliminating banks as intermediaries (known as disintermediation), could result in the same time frame. To the extent that consumer confidence in other investment vehicles, suchloss of fee income, as well as the stock market, increases, customers may move funds from bankloss of deposits and products intothe income that might be generated from those deposits. The related revenue reduction could adversely affect our financial condition, cash flows, and results of operations.
Operational Risk
An extended disruption of vital infrastructure or a security breach could negatively impact our business, results of operations, and financial condition.
Our operations depend upon, among other things, our infrastructure, including equipment and facilities. Extended disruption of vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking or viruses, terrorist activity or the domestic and foreign response to such activity, or other investment vehicles. Although CTBI historically has been able to replace maturing deposits and advances as necessary, it might not be able to replace such funds in the future, especially if a large numberevents outside of its depositors sought to withdraw their accounts, regardless of the reason. As of December 31, 2019, we had wholesale brokered deposits outstanding of $37.1 million (1% of total deposits) with a weighted average maturity of 0.71 years. If CTBI ceases to be categorized as “well-capitalized” under banking regulations, it would be prohibited from accepting, renewing, or rolling over brokered deposits without a regulatory waiver. The cost of funds associated with brokered deposits is generally higher than locally generated deposits and may be a less stable funding source. A failure to maintain adequate liquidityour control could have a material adverse impact on the financial services industry as a whole and on our business, results of operations, cash flows, and financial condition in particular. Our business recovery plan may not work as intended or may not prevent significant interruption of our operations. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in the loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have an adverse effect on our financial condition and results of operations.operation.
Risks RelatedOur information technology systems and networks may experience interruptions, delays, or cessations of service or produce errors due to Regulatory Policiesregular maintenance efforts, such as systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and Oversight
The banking industry is heavily regulated,transitioning data, which could cause business disruptions and be more expensive, time-consuming, disruptive, and resource intensive. Such disruptions could damage our reputation and otherwise adversely impact our business may be adversely affected by legislation or changes in regulatory policies and oversight.results of operations.
The earningsThird party vendors provide key components of banks and bank holding companiesour business infrastructure, such as ours are affectedprocessing, internet connections, and network access. While CTBI has selected these third party vendors carefully through its vendor management process, it does not control their actions and generally is not able to obtain satisfactory indemnification provisions in its third party vendor written contracts. Any problems caused by the policies of regulatory authorities, including the Federal Reserve Board, which regulates the money supply. Among the methods employed by the Federal Reserve Board are open market operationsthird parties or arising from their services, such as disruption in U.S. Government securities, changesservice, negligence in the discount rate on member bank borrowings,performance of services or a breach of customer data security with regard to the third parties’ systems, could adversely affect our ability to deliver services, negatively impact our business reputation, cause a loss of customers, or result in increased expenses, regulatory fines and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect interest rates charged on loanssanctions, or paid on deposits. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial and savings banks in the past and are expected to continue to do so in the future.litigation.
In recent years, federal banking regulators have increased regulatory scrutiny,Claims and additional limitations (including those containedlitigation may arise pertaining to fiduciary responsibility.
Customers may, from time to time, make a claim and take legal action pertaining to our performance of fiduciary responsibilities. Whether customer claims and legal action related to our performance of fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in the Dodd-Frank Act) ona manner favorable to us, they may result in significant financial institutions have been proposed or adopted by regulators and by Congress. Moreover, banking regulatory agencies have increasingly over the last few years used authority under Section 5 of the Federal Trade Commission Act to take supervisory or enforcement action with respect to alleged unfair or deceptive acts or practices by banks to address practices that may not necessarily fall within the scope of a specific banking or consumer finance law. The banking industry is highly regulated and changes in federal and state banking regulations as well as policies and administration guidelines may affect our practices, growth prospects, and earnings. In particular, there is no assurance that governmental actions designed to stabilize the economy and banking system will notliability, adversely affect the market perception of us and our products and services, and impact customer demand for those products and services. Any such financial positionliability or reputational damage could have an adverse effect on our business, financial condition, and results of operations of CTBI.operations.
Significant legal actions could subject us to uninsured liabilities.
From time to time, CTBI and/or its subsidiarieswe may be involvedsubject to claims related to our operations. These claims and legal actions, including supervisory actions by our regulators, could involve significant amounts. We maintain insurance coverage in information requests, reviews, investigations,amounts and proceedings (both formalwith deductibles we believe are appropriate for our operations. However, our insurance coverage may not cover all claims against us and informal) by various governmental agenciesrelated costs, and law enforcement authorities regarding our respective businesses. Any of these mattersfurther insurance coverage may not continue to be available at a reasonable cost. As a result, in material adverse consequencesCTBI could be exposed to CTBI and its subsidiaries, including adverse judgements, findings, limitations on merger and acquisition activity, settlements, fines, penalties, orders, injunctions, and other actions. Such adverse consequences may be material to theuninsured liabilities, which could adversely affect CTBI’s business, financial position of CTBIcondition, or its results of operations.
In particular, consumer products and services are subject to increasing regulatory oversight and scrutiny with respect to compliance with consumer laws and regulations. We may face a greater number or wider scope of investigations, enforcement actions, and litigation in the future related to consumer practices. In addition, any required changes to our business operations resulting from these developments could result in a significant loss of revenue, require remuneration to customers, trigger fines or penalties, limit the products or services we offer, require us to increase certain prices and therefore reduce demand for our products, impose additional compliance costs on us, cause harm to our reputation, or otherwise adversely affect our consumer business. As previously disclosed in a Form 8-K dated July 25, 2018, CTB entered into a consent order regarding two deposit add-on products.Technology Risk
CTBI continually encounters technological change.
The financial services industry has experienced leadership changes at federal banking agencies, whichis continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may impact regulationsnot be able to effectively implement new technology-driven products and government policy applicableservices or be successful in marketing these products and services to us. For example, in 2017 and early 2018, Congress confirmed a new Chairman ofour customers. Failure to successfully keep pace with technological change affecting the Federal Reserve and a new Vice Chairman for Supervision at the Federal Reserve. New appointments to the Board of Governors of the Federal Reserve could affect monetary policy and interest rates. The President, certain members of Congress, and others in the President’s leadership group have advocated for significant reduction of financial services regulation. Any regulatory relief is uncertainindustry could have a material adverse impact on our business and, even if adopted, may not result in a meaningful reductionturn, our financial condition and results of our regulatory requirements and related costs.operations.
WeCyber Risk
A breach in the security of our systems could disrupt our business, result in the disclosure of confidential information, damage our reputation, and create significant financial and legal exposure for us.
Our businesses are requireddependent on our ability and the ability of our third party service providers to process, record, and monitor a large number of transactions. If the financial, accounting, data processing, or other operating systems and facilities fail to operate properly, become disabled, experience security breaches, or have other significant shortcomings, our results of operations could be materially adversely affected.
Although we and our third party service providers devote significant resources to maintain and upgrade our systems and processes that are designed to protect the security of computer systems, software, networks, and other technology assets and the confidentiality, integrity, and availability of information belonging to us and our customers, there is no assurance that our security systems and those of our third party service providers will provide absolute security. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks, and other means. Despite our efforts and those of our third party service providers to ensure the integrity of these systems, it is possible that we or our third party service providers may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, especially because techniques used change frequently or are not recognized until launched, and because security attacks can originate from a wide variety of sources.
A successful breach of the security of our systems or those of our third party service providers could cause serious negative consequences to us, including significant disruption of our operations, misappropriation of our confidential information or the confidential information of our customers, or damage to our computers or operating systems, and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss in confidence in our security measures, customer dissatisfaction, litigation exposure, and harm to our reputation, all of which could have a material adverse effect on us. While we maintain insurance coverage that should, subject to policy terms and conditions, cover certain minimum amounts and typesaspects of capital andour cyber risks, this insurance coverage may be insufficient to cover all losses we could experience resulting from a cyber-security breach. Moreover, the cost of insurance sufficient to cover substantially all, or a reasonable portion, of losses related to cyber security breaches is expected to increase and such increases are likely to be material.
Banking customers and employees have been, and will likely continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, account information, or other personal information, or to introduce viruses or other malware to bank information systems or customers’ computers. Though we endeavor to lessen the success of such threats through the use of authentication technology and employee education, such cyber-attacks remain a serious issue. Publicity concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications as a means of conducting banking and other commercial transactions.
We could incur increased costs or reductions in revenue or suffer reputational damage in the event of misuse of information.
Our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks regarding our customers and their accounts. To provide these products and services, we use information systems and infrastructure that we and third party service providers operate. As a financial institution, we also are subject to more stringent capital requirementsand examined for compliance with an array of data protection laws, regulations, and guidance, as well as to our own internal privacy and information security policies and programs.
Information security risks for financial institutions like us have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, and other external parties. Our technologies and systems may become the target of cyber-attacks or other attacks that could result in the future. A failuremisuse or destruction of our or our customers’ confidential, proprietary, or other information or that could result in disruptions to meet applicable capital requirementsthe business operations of us or our customers or other third parties. Also, our customers, in order to access some of our products and services, may use personal computers, smart mobile phones, tablet PCs, and other devices that are beyond our controls and security systems. Further, a breach or attack affecting one of our third-party service providers or partners could impact us through no fault of our own. In addition, because the methods and techniques employed by perpetrators of fraud and others to attack systems and applications change frequently and often are not fully recognized or understood until after they have an adverse materialbeen launched, we and our third-party service providers and partners may be unable to anticipate certain attack methods in order to implement effective preventative measures.
While we have policies and procedures designed to prevent or limit the effect onof the possible security breach of our information systems, if unauthorized persons were somehow to get access to confidential or proprietary information in our possession or to our proprietary information, it could result in litigation and regulatory investigations, significant legal and financial exposure, damage to our reputation, or a loss of confidence in the security of our systems that could materially adversely affect our results of operation.
Counterparty Risk
The soundness of other financial institutions could adversely affect CTBI.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional counterparties. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan due us. There is no assurance that any such losses would not materially and adversely affect our businesses, financial condition, andor results of operations.
Acquisition Risks
Acquisition Risk
We may have difficulty in the future continuing to grow through acquisitions.
We may experience difficulty in making acquisitions on acceptable terms due to the decreasing number of suitable acquisition targets, competition for attractive acquisitions, regulatory impediments, and certain limitations on interstate acquisitions.
Any future acquisitions or mergers by CTBI or its banking subsidiary are subject to regulatory requirements specifying minimum amountsapproval by the appropriate federal and types of capital that we must maintain. From time to time,state banking regulators. The banking regulators evaluate a number of criteria in making their approval decisions, such as:
Safety and soundness guidelines;
Compliance with all laws including the USA Patriot Act, the International Money Laundering Abatement and Anti-Terrorist Financing Act, the Sarbanes-Oxley Act and the related rules and regulations promulgated under such Act or the Exchange Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, and all other applicable fair lending and consumer protection laws and other laws relating to discriminatory business practices; and
Anti-competitive concerns with the proposed transaction.
If the banking regulators or a commenter on our regulatory application raise concerns about any of these criteria at the time a regulatory application is filed, the banking regulators may deny, delay, or condition their approval of a proposed transaction. We have grown, and, subject to regulatory approval, intend to continue to grow, through acquisitions of banks and other financial institutions. After these acquisitions, we may experience adverse changes in results of operations of acquired entities, unforeseen liabilities, asset quality problems of acquired entities, loss of key personnel, loss of clients because of change theseof identity, difficulties in integrating data processing and operational procedures, and deterioration in local economic conditions. These various acquisition risks can be heightened in larger transactions.
Integration Risk
We may not be able to achieve the expected integration and cost savings from our bank acquisition activities.
We have a long history of acquiring financial institutions and, subject to regulatory capital adequacy guidelines. For example,approval, we expect this acquisition activity to resume in the future. Difficulties may arise in the integration of the business and operations of the financial institutions that agree to merge with and into CTBI and, as a result, we may not be able to achieve the cost savings and synergies that we expect will result from the merger activities. Achieving cost savings is dependent on consolidating certain operational and functional areas, eliminating duplicative positions and terminating certain agreements for outside services. Additional operational savings are dependent upon the integration of the recently implemented “Basel III” capital reforms required bybanking businesses of the Dodd-Frank Act, we are now requiredacquired financial institution with that of CTBI, including the conversion of the acquired entity’s core operating systems, data systems and products to satisfy additional, more stringent capital adequacy standards than we hadthose of CTBI and the standardization of business practices. Complications or difficulties in the past. See Item 1 above for additional information. We currently satisfyconversion of the well capitalizedcore operating systems, data systems, and capital conservation standards set forth in Basel III, and based on our current capital composition and levels, we anticipate that our capital ratios, on a Basel III basis, will continueproducts of these other banks to exceed the well-capitalized minimum capital requirements and capital conservation buffer standards. However, a failure to meet minimum capital requirements couldthose of CTBI may result in certain mandatory and possible additional discretionary actionsthe loss of clients, damage to our reputation within the financial services industry, operational problems, one-time costs currently not anticipated by regulators that, if undertaken, could have an adverse material effect on our financial condition and results of operations.us, and/or reduced cost savings resulting from the merger activities.
Climate Change Risk
Our business may be adversely impacted by climate change initiativesMarket and issues.Liquidity Risks
Climate changeMarket Risk
Community Trust Bancorp, Inc.’s stock price is volatile.
Our stock price has been volatile in the past, and several factors could cause the price to fluctuate substantially in the future. These factors include:
Actual or anticipated variations in earnings;
Changes in analysts’ recommendations or projections;
CTBI’s announcements of developments related to our businesses;
Operating and stock performance of other companies deemed to be peers;
New technology used or services offered by traditional and non-traditional competitors;
News reports of trends, concerns, and other emissions-related laws, regulations,issues related to the financial services industry; and agreements have been proposed
Additional governmental policies and enforcement of current laws.
Our stock price may fluctuate significantly in some cases adopted, on the international, federal, state,future, and local levels. These final and proposed initiatives takethese fluctuations may be unrelated to CTBI’s performance. Although investor confidence in financial institutions has strengthened, the formfinancial crisis adversely impacted investor confidence in the financial institutions sector. General market price declines or market volatility in the future could adversely affect the price of restrictions, caps, taxes, or other controls on emissions. Our markets include areas where the coal industry was historically a significant part of the local economy. The importance of the coal industry to such areas has, however, continued to decline substantiallyour common stock, and the economiescurrent market price may not be indicative of our markets have become more diversified. Nevertheless, to the extent that existing or new climate change laws, regulations, or agreements further impact production, purchase, or use of coal, the economies of certain areas within our markets, the demand for financing, the value of collateral securing our coal-related loans, and our financial condition and results of operations may be adversely affected.future market prices.
We, like all businesses, as well as our market areas, borrowers, and customers, may be adversely impacted to the extent that weather-related events cause damage or disruption to properties or businesses.
Credit Risk
Our earnings and reputation may be adversely affected if we fail to effectively manage our credit risk.
Originating and underwriting loans are integral to the success of our business. This business requires us to take “credit risk,” which is the risk of losing principal and interest income because borrowers fail to repay loans. Collateral values and the ability of borrowers to repay their loans may be affected at any time by factors such as:
The length and severity of downturns in the local economies in which we operate or the national economy; | ● | The length and severity of downturns in the local economies in which weThe length and severity of downturns in one or more of the business sectors in which our customers operate, particularly the automobile, hotel/motel, coal, and residential development industries; or the national economy; |
| ● | The length and severity of downturns in one or more of the business sectors in which our customers operate, particularly the automobile, hotel/motel, coal, and residential development industries; or |
| ● | A rapid increase in interest rates. |
Our loan portfolio includes loans with a higher risk of loss.
We originate commercial real estate residential loans, construction and developmentcommercial real estate nonresidential loans, hotel/motel loans, other commercial loans, consumer loans, and residential mortgage loans, primarily within our market area. Commercial real estate residential, commercial real estate nonresidential, hotel/motel, and construction and developmentother commercial loans tend to involve larger loan balances to a single borrower or groups of related borrowers and are most susceptible to a risk of loss during a downturn in the business cycle. These loans also have historically had a greater credit risk than other loans for the following reasons:
| ●• | Commercial Real Estate Loans.Residential. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. As of December 31, 2019,2020, commercial real estate loans, including multi-familyresidential loans comprised approximately 39%8% of our total loan portfolio. |
| ●• | Commercial Real Estate Nonresidential.Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. As of December 31, 2020, commercial real estate nonresidential loans comprised approximately 21% of our total loan portfolio. |
| • | Hotel/Motel. The hotel and motel industry is highly susceptible to changes in the domestic and global economic environments, which has caused the industry to experience substantial volatility due to the recent global pandemic. As of December 31, 2020, hotel/motel loans comprised approximately 7% of our total loan portfolio. |
| • | Other Commercial Loans.Loans. Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid, or fluctuate in value based on the success of the business. As of December 31, 2019,2020, other commercial loans comprised approximately 12%17% of our total loan portfolio. |
| ● | Construction and Development Loans. The risk of loss is largely dependent on our initial estimate of whetherSBA Paycheck Protection Program loans, as discussed below in the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If our estimate is inaccurate or if actual construction costs exceed estimates, the valueCOVID-19 Risks section, comprise approximately 42% of the property securing ourother commercial loan may be insufficient to ensure full repayment when completed through a permanent loan, saleportfolio and 7% of the property, or by seizure of collateral. As of December 31, 2019, construction and development loans comprised approximately 5% of our total loan portfolio.
|
Consumer loans may carry a higher degree of repayment risk than residential mortgage loans, particularly when the consumer loan is unsecured. Repayment of a consumer loan typically depends on the borrower’s financial stability, and it is more likely to be affected adversely by job loss, illness, or personal bankruptcy. In addition, federal and state bankruptcy, insolvency, and other laws may limit the amount we can recover when a consumer client defaults. As of December 31, 2019,2020, consumer loans comprised approximately 21%22% of our total loan portfolio.
As of December 31, 2019,2020, approximately 78%80% of our consumer loans and 16%17% of our total loan portfolio were consumer indirect loans. Consumer indirect loans are fixed rate loans secured by new and used automobiles, trucks, vans, and recreational vehicles originated at selling dealerships which are purchased by us following our review and approval of such loans. These loans generally have a greater risk of loss in the event of default than, for example, one-to-four family residential mortgage loans due to the rapid depreciation of vehicles securing the loans. We face the risk that the collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. We also assume the risk that the dealership administering the lending process complies with applicable consumer protection law and regulations.
A significant part of our lending business is focused on small to medium-sized business which may be impacted more severely during periods of economic weakness.
A significant portion of our commercial loan portfolio is tied to small to medium-sized businesses in our markets. During periods of economic weakness, small to medium-sized businesses may be impacted more severely than larger businesses. As a result, the ability of smaller businesses to repay their loans may deteriorate, particularly if economic challenges persist over a period of time, and such deterioration would adversely impact our results of operations and financial condition.
A large percentage of our loan portfolio is secured by real estate, in particular commercial real estate. Weakness in the real estate market or other segments of our loan portfolio would lead to additional losses, which could have a material adverse effect on our business, financial condition, and results of operations.
As of December 31, 2019,2020, approximately 67%54% of our loan portfolio was secured by real estate, 39%29% of which is commercial real estate. High levels of commercial and consumer delinquencies or declines in real estate market values could require increased net charge-offs and increases in the allowance for loan and leasecredit losses, which could have a material adverse effect on our business, financial condition, and results of operations and prospects.
Competition
Strong competition within our market area may reduce our ability to attract and retain deposits and originate loans.
We face competition both in originating loans and in attracting deposits. Competition in the financial services industry is intense. We compete for clients by offering excellent service and competitive rates on our loans and deposit products. The type of institutions we compete with include commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms. Competition arises from institutions located within and outside our market areas. As financial services become increasingly dependent on technology, permitting transactions to be conducted by telephone, mobile banking, and the internet, non-bank institutions are able to attract funds and provide lending and other financial services without offices located in our market areas. As a result of their size and ability to achieve economies of scale, certain of our competitors offer a broader range of products and services than we offer. With the increased consolidation in the financial industry, larger financial institutions may strengthen their competitive positions. In addition, to stay competitive in our markets we may need to adjust the interest rates on our products to match the rates offered by our competitors, which could adversely affect our net interest margin. As a result, our profitability depends upon our continued ability to successfully compete in our market areas while achieving our investment objectives.
Technology and other changes are allowing consumers to complete financial transactions through alternative methods to those which historically involved banks. For example, consumers can now hold funds that would have been held as bank deposits in mutual funds, brokerage accounts, general purpose reloadable prepaid cards, or cyber currency. In addition, consumers can complete transactions, such as paying bills or transferring funds, directly without utilizing the services of a bank. The process of eliminating banks as intermediaries (known as disintermediation), could result in the loss of fee income, as well as the loss of deposits and the income that might be generated from those deposits. The related revenue reduction could adversely affect our financial condition, cash flows, and results of operations.
Operational Risk
An extended disruption of vital infrastructure or a security breach could negatively impact our business, results of operations, and financial condition.
Our operations depend upon, among other things, our infrastructure, including equipment and facilities. Extended disruption of vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking or viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of our control could have a material adverse impact on the financial services industry as a whole and on our business, results of operations, cash flows, and financial condition in particular. Our business recovery plan may not work as intended or may not prevent significant interruption of our operations. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in the loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have an adverse effect on our financial condition and results of operation.
Our information technology systems and networks may experience interruptions, delays, or cessations of service or produce errors due to regular maintenance efforts, such as systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time-consuming, disruptive, and resource intensive. Such disruptions could damage our reputation and otherwise adversely impact our business and results of operations.
Third party vendors provide key components of our business infrastructure, such as processing, internet connections, and network access. While CTBI has selected these third party vendors carefully through its vendor management process, it does not control their actions and generally is not able to obtain satisfactory indemnification provisions in its third party vendor written contracts. Any problems caused by third parties or arising from their services, such as disruption in service, negligence in the performance of services or a breach of customer data security with regard to the third parties’ systems, could adversely affect our ability to deliver services, negatively impact our business reputation, cause a loss of customers, or result in increased expenses, regulatory fines and sanctions, or litigation.
Claims and litigation may arise pertaining to fiduciary responsibility.
Customers may, from time to time, make a claim and take legal action pertaining to our performance of fiduciary responsibilities. Whether customer claims and legal action related to our performance of fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant financial liability, adversely affect the market perception of us and our products and services, and impact customer demand for those products and services. Any such financial liability or reputational damage could have an adverse effect on our business, financial condition, and results of operations.
Significant legal actions could subject us to uninsured liabilities.
From time to time, we may be subject to claims related to our operations. These claims and legal actions, including supervisory actions by our regulators, could involve significant amounts. We maintain insurance coverage in amounts and with deductibles we believe are appropriate for our operations. However, our insurance coverage may not cover all claims against us and related costs, and further insurance coverage may not continue to be available at a reasonable cost. As a result, CTBI could be exposed to uninsured liabilities, which could adversely affect CTBI’s business, financial condition, or results of operations.
Technology Risk
CTBI continually encounters technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
Cyber Risk
A breach in the security of our systems could disrupt our business, result in the disclosure of confidential information, damage our reputation, and create significant financial and legal exposure for us.
Our businesses are dependent on our ability and the ability of our third party service providers to process, record, and monitor a large number of transactions. If the financial, accounting, data processing, or other operating systems and facilities fail to operate properly, become disabled, experience security breaches, or have other significant shortcomings, our results of operations could be materially adversely affected.
Although we and our third party service providers devote significant resources to maintain and upgrade our systems and processes that are designed to protect the security of computer systems, software, networks, and other technology assets and the confidentiality, integrity, and availability of information belonging to us and our customers, there is no assurance that our security systems and those of our third party service providers will provide absolute security. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks, and other means. Despite our efforts and those of our third party service providers to ensure the integrity of these systems, it is possible that we or our third party service providers may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, especially because techniques used change frequently or are not recognized until launched, and because security attacks can originate from a wide variety of sources.
A successful breach of the security of our systems or those of our third party service providers could cause serious negative consequences to us, including significant disruption of our operations, misappropriation of our confidential information or the confidential information of our customers, or damage to our computers or operating systems, and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss in confidence in our security measures, customer dissatisfaction, litigation exposure, and harm to our reputation, all of which could have a material adverse effect on us. While we maintain insurance coverage that should, subject to policy terms and conditions, cover certain aspects of our cyber risks, this insurance coverage may be insufficient to cover all losses we could experience resulting from a cyber-security breach. Moreover, the cost of insurance sufficient to cover substantially all, or a reasonable portion, of losses related to cyber security breaches is expected to increase and such increases are likely to be material.
Banking customers and employees have been, and will likely continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, account information, or other personal information, or to introduce viruses or other malware to bank information systems or customers’ computers. Though we endeavor to lessen the success of such threats through the use of authentication technology and employee education, such cyber-attacks remain a serious issue. Publicity concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications as a means of conducting banking and other commercial transactions.
We could incur increased costs or reductions in revenue or suffer reputational damage in the event of misuse of information.
Our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks regarding our customers and their accounts. To provide these products and services, we use information systems and infrastructure that we and third party service providers operate. As a financial institution, we also are subject to and examined for compliance with an array of data protection laws, regulations, and guidance, as well as to our own internal privacy and information security policies and programs.
Information security risks for financial institutions like us have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, and other external parties. Our technologies and systems may become the target of cyber-attacks or other attacks that could result in the misuse or destruction of our or our customers’ confidential, proprietary, or other information or that could result in disruptions to the business operations of us or our customers or other third parties. Also, our customers, in order to access some of our products and services, may use personal computers, smart mobile phones, tablet PCs, and other devices that are beyond our controls and security systems. Further, a breach or attack affecting one of our third-party service providers or partners could impact us through no fault of our own. In addition, because the methods and techniques employed by perpetrators of fraud and others to attack systems and applications change frequently and often are not fully recognized or understood until after they have been launched, we and our third-party service providers and partners may be unable to anticipate certain attack methods in order to implement effective preventative measures.
While we have policies and procedures designed to prevent or limit the effect of the possible security breach of our information systems, if unauthorized persons were somehow to get access to confidential or proprietary information in our possession or to our proprietary information, it could result in litigation and regulatory investigations, significant legal and financial exposure, damage to our reputation, or a loss of confidence in the security of our systems that could materially adversely affect our results of operation.
Counterparty Risk
The soundness of other financial institutions could adversely affect CTBI.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional counterparties. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan due us. There is no assurance that any such losses would not materially and adversely affect our businesses, financial condition, or results of operations.
Acquisition Risks
Acquisition Risk
We may have difficulty in the future continuing to grow through acquisitions.
We may experience difficulty in making acquisitions on acceptable terms due to the decreasing number of suitable acquisition targets, competition for attractive acquisitions, regulatory impediments, and certain limitations on interstate acquisitions.
Any future acquisitions or mergers by CTBI or its banking subsidiary are subject to approval by the appropriate federal and state banking regulators. The banking regulators evaluate a number of criteria in making their approval decisions, such as:
Safety and soundness guidelines;
Compliance with all laws including the USA Patriot Act, the International Money Laundering Abatement and Anti-Terrorist Financing Act, the Sarbanes-Oxley Act and the related rules and regulations promulgated under such Act or the Exchange Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, and all other applicable fair lending and consumer protection laws and other laws relating to discriminatory business practices; and
Anti-competitive concerns with the proposed transaction.
If the banking regulators or a commenter on our regulatory application raise concerns about any of these criteria at the time a regulatory application is filed, the banking regulators may deny, delay, or condition their approval of a proposed transaction. We have grown, and, subject to regulatory approval, intend to continue to grow, through acquisitions of banks and other financial institutions. After these acquisitions, we may experience adverse changes in results of operations of acquired entities, unforeseen liabilities, asset quality problems of acquired entities, loss of key personnel, loss of clients because of change of identity, difficulties in integrating data processing and operational procedures, and deterioration in local economic conditions. These various acquisition risks can be heightened in larger transactions.
Integration Risk
We may not be able to achieve the expected integration and cost savings from our bank acquisition activities.
Our levelWe have a long history of other real estate owned remains above our historical norm, primarilyacquiring financial institutions and, subject to regulatory approval, we expect this acquisition activity to resume in the future. Difficulties may arise in the integration of the business and operations of the financial institutions that agree to merge with and into CTBI and, as a result, we may not be able to achieve the cost savings and synergies that we expect will result from the merger activities. Achieving cost savings is dependent on consolidating certain operational and functional areas, eliminating duplicative positions and terminating certain agreements for outside services. Additional operational savings are dependent upon the integration of foreclosures.the banking businesses of the acquired financial institution with that of CTBI, including the conversion of the acquired entity’s core operating systems, data systems and products to those of CTBI and the standardization of business practices. Complications or difficulties in the conversion of the core operating systems, data systems, and products of these other banks to those of CTBI may result in the loss of clients, damage to our reputation within the financial services industry, operational problems, one-time costs currently not anticipated by us, and/or reduced cost savings resulting from the merger activities.
Market and Liquidity Risks
Market Risk
Community Trust Bancorp, Inc.’s stock price is volatile.
Our stock price has been volatile in the past, and several factors could cause the price to fluctuate substantially in the future. These factors include:
Actual or anticipated variations in earnings;
Changes in analysts’ recommendations or projections;
CTBI’s announcements of developments related to our businesses;
Operating and stock performance of other companies deemed to be peers;
New technology used or services offered by traditional and non-traditional competitors;
News reports of trends, concerns, and other issues related to the financial services industry; and
Additional governmental policies and enforcement of current laws.
Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to CTBI’s performance. Although investor confidence in financial institutions has strengthened, the financial crisis adversely impacted investor confidence in the financial institutions sector. General market price declines or market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.
Liquidity Risk
CTBI is subject to liquidity risk.
CTBI requires liquidity to meet its deposit and debt obligations as they come due and to fund loan demands. CTBI’s access to funding sources in amounts adequate to finance its activities or on terms that are acceptable to it could be impaired by factors that affect it specifically or the financial services industry or economy in general. Factors that could reduce its access to liquidity sources include a downturn in the market, difficult credit markets, or adverse regulatory actions against CTBI. CTBI’s access to deposits may also be affected by the liquidity needs of its depositors. In particular, a substantial majority of CTBI’s liabilities are demand, savings, interest checking, and money market deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of its assets are loans, which cannot be called or sold in the same time frame. To the extent that we continueconsumer confidence in other investment vehicles, such as the stock market, increases, customers may move funds from bank deposits and products into such other investment vehicles. Although CTBI historically has been able to holdreplace maturing deposits and advances as necessary, it might not be able to replace such funds in the future, especially if a higher levellarge number of other real estate owned, related real estate expense will likely remain high. In addition, our abilityits depositors sought to hold foreclosed property is subject to time limitations under applicable regulations.
During the economic downturn which began in 2008, we experienced an increase in nonperforming real estate loans. As a result, we have experienced, and we continue to experience, an increased level of foreclosed properties. Foreclosed real estate expense consists of maintenance costs, taxes, valuation adjustments to appraisal values, and gains or losses on disposition. The amount that we may realize after a default is dependent upon factors outside of our control, including but not limited to: (i) general and local economic conditions; (ii) neighborhood values; (iii) interest rates; (iv) real estate tax rates; (v) operating expenseswithdraw their accounts, regardless of the properties; (vi) environmental remediation liabilities; (vii) abilityreason. A failure to obtainmaintain adequate liquidity could have a material adverse effect on our financial condition and maintain occupancy of the properties; (viii) zoning laws; (ix) governmental rules, regulations, and fiscal policies; (x) potential vandalism; and (xi) acts of God. Expenditures associated with the ownership of real estate, such as real estate taxes, insurance, and maintenance costs, may adversely affect income from the real estate. The cost of operating real property may exceed the income earned from the property, and we may need to advance funds in order to protect our investment in the property, or we may be required to dispose of the property at a loss. If our levels of other real estate owned increase or are sustained and local real estate values decline, our foreclosed real estate expense will increase, which would adversely impact our results of operations.
Legal, Legislation, and Regulation Risks
Risks Related to Regulatory Policies and Oversight
The banking industry is heavily regulated, and our foreclosed properties had been held by us for over five years. Regulatory approval is required and has been obtained to hold these properties beyond the initial period of five years. Additional approvalbusiness may be requiredadversely affected by legislation or changes in regulatory policies and oversight.
The earnings of banks and bank holding companies such as ours are affected by the policies of regulatory authorities, including the Federal Reserve Board, which regulates the money supply. Among the methods employed by the Federal Reserve Board are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial and savings banks in the past and are expected to continue to holddo so in the future.
In recent years, federal banking regulators have increased regulatory scrutiny, and additional limitations on financial institutions have been proposed or adopted by regulators and by Congress. Moreover, banking regulatory agencies have increasingly over the last few years used authority under Section 5 of the Federal Trade Commission Act to take supervisory or enforcement action with respect to alleged unfair or deceptive acts or practices by banks to address practices that may not necessarily fall within the scope of a specific banking or consumer finance law. The banking industry is highly regulated and changes in federal and state banking regulations as well as policies and administration guidelines may affect our practices, growth prospects, and earnings. In particular, there is no assurance that governmental actions designed to stabilize the economy and banking system will not adversely affect the financial position or results of operations of CTBI.
From time to time, CTBI and/or its subsidiaries may be involved in information requests, reviews, investigations, and proceedings (both formal and informal) by various governmental agencies and law enforcement authorities regarding our respective businesses. Any of these properties should they notmatters may result in material adverse consequences to CTBI and its subsidiaries, including adverse judgements, findings, limitations on merger and acquisition activity, settlements, fines, penalties, orders, injunctions, and other actions. Such adverse consequences may be liquidated during the extension period, which is typically one year. While we have previously received regulatory approval to continue to hold foreclosed properties for over five years,material to the extent such approval is not obtainedfinancial position of CTBI or its results of operations.
In particular, consumer products and services are subject to increasing regulatory oversight and scrutiny with respect to compliance with consumer laws and regulations. We may face a greater number or wider scope of investigations, enforcement actions, and litigation in the future with respectrelated to consumer practices. In addition, any required changes to our business operations resulting from these developments could result in a foreclosed property,significant loss of revenue, require remuneration to customers, trigger fines or penalties, limit the products or services we might be forcedoffer, require us to liquidate such propertyincrease certain prices and therefore reduce demand for our products, impose additional compliance costs on us, cause harm to our reputation, or otherwise adversely affect our consumer business.
The financial services industry has experienced leadership changes at a price less than its appraised value. Tofederal banking agencies, which may impact regulations and government policy applicable to us. New appointments to the extent weBoard of Governors of the Federal Reserve could affect monetary policy and interest rates.
We are not able to sell a foreclosed property in 10 years, we will be required to relinquish ownershipmaintain certain minimum amounts and types of that property.capital and may be subject to more stringent capital requirements in the future. A failure to meet applicable capital requirements could have an adverse material effect on our financial condition and results of operations.
AsWe are subject to regulatory requirements specifying minimum amounts and types of December 31, 2019,capital that we had no foreclosed property that had been held by us for nine years or more. However, if certain properties go unsold, we will have properties reach the nine year holding period in the year 2020.must maintain. From time to time, banking regulators change these regulatory capital adequacy guidelines. See Item 7 of this report1 above for more detailedadditional information regarding the holding periodscurrent capital requirements. A failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our financial condition and results of other real estate loans.operations.
Environmental LiabilityIntegration Risk
We are subject to environmental liability risk associated with lending activity.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficientable to detect all potential environmental hazards. The remediationachieve the expected integration and cost savings from our bank acquisition activities.
We have a long history of acquiring financial institutions and, subject to regulatory approval, we expect this acquisition activity to resume in the future. Difficulties may arise in the integration of the business and operations of the financial institutions that agree to merge with and into CTBI and, as a result, we may not be able to achieve the cost savings and synergies that we expect will result from the merger activities. Achieving cost savings is dependent on consolidating certain operational and functional areas, eliminating duplicative positions and terminating certain agreements for outside services. Additional operational savings are dependent upon the integration of the banking businesses of the acquired financial institution with that of CTBI, including the conversion of the acquired entity’s core operating systems, data systems and products to those of CTBI and the standardization of business practices. Complications or difficulties in the conversion of the core operating systems, data systems, and products of these other banks to those of CTBI may result in the loss of clients, damage to our reputation within the financial services industry, operational problems, one-time costs currently not anticipated by us, and/or reduced cost savings resulting from the merger activities.
Market and anyLiquidity Risks
Market Risk
Community Trust Bancorp, Inc.’s stock price is volatile.
Our stock price has been volatile in the past, and several factors could cause the price to fluctuate substantially in the future. These factors include:
Actual or anticipated variations in earnings;
Changes in analysts’ recommendations or projections;
CTBI’s announcements of developments related to our businesses;
Operating and stock performance of other companies deemed to be peers;
New technology used or services offered by traditional and non-traditional competitors;
News reports of trends, concerns, and other issues related to the financial services industry; and
Additional governmental policies and enforcement of current laws.
Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to CTBI’s performance. Although investor confidence in financial institutions has strengthened, the financial crisis adversely impacted investor confidence in the financial institutions sector. General market price declines or market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.
Liquidity Risk
CTBI is subject to liquidity risk.
CTBI requires liquidity to meet its deposit and debt obligations as they come due and to fund loan demands. CTBI’s access to funding sources in amounts adequate to finance its activities or on terms that are acceptable to it could be impaired by factors that affect it specifically or the financial services industry or economy in general. Factors that could reduce its access to liquidity sources include a downturn in the market, difficult credit markets, or adverse regulatory actions against CTBI. CTBI’s access to deposits may also be affected by the liquidity needs of its depositors. In particular, a substantial majority of CTBI’s liabilities associated with an environmental hazardare demand, savings, interest checking, and money market deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of its assets are loans, which cannot be called or sold in the same time frame. To the extent that consumer confidence in other investment vehicles, such as the stock market, increases, customers may move funds from bank deposits and products into such other investment vehicles. Although CTBI historically has been able to replace maturing deposits and advances as necessary, it might not be able to replace such funds in the future, especially if a large number of its depositors sought to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on our financial condition and results of operations.
Credit Loss Allowance Risk
New accounting standards may require us to increase our allowance for loan and lease losses.
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU is commonly referred to as CECL (Current Expected Credit Loss). 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. The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current generally accepted accounting principles (“GAAP”) and reflect an entity’s current estimate of all expected credit losses. Specifically, 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. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. For all other assets within the scope of ASU 2016-13, a cumulative-effect adjustment will be recognized in retained earnings as of the beginning of the first reporting period in which the guidance is effective.
ASU 2016-13Legal, Legislation, and Regulation Risks
Risks Related to Regulatory Policies and Oversight
The banking industry is effective for fiscal years,heavily regulated, and interim periods within those fiscal years, beginning after December 15, 2019. As previously disclosed, CTBI formed an implementation teamour business may be adversely affected by legislation or changes in regulatory policies and oversight.
The earnings of banks and bank holding companies such as ours are affected by the policies of regulatory authorities, including the Federal Reserve Board, which regulates the money supply. Among the methods employed by the Federal Reserve Board are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to oversee the adoptioninfluence overall growth and distribution of bank loans, investments and deposits, and their use may also affect interest rates charged on loans or paid on deposits. The monetary policies of the ASU including assessingFederal Reserve Board have had a significant effect on the impact on its accountingoperating results of commercial and disclosures. The implementation team was a cross-functional working group comprised of individuals from areas including credit, finance, and operations. The team has established the historical data available and has identified the loan segments to be analyzed. Credit losses for loans that no longer share similar risk characteristics are estimated on an individual basis. The team has determined the portfolio methodologies and relevant economic factors to be utilized and began running parallel with its current model as part of the monthly fourth quarter 2019 loan portfolio analysis.The team has developed a CECL allowance model which calculates reserves over the life of the loan and is largely driven by historical losses, portfolio characteristics, risk-grading, economic outlook, and other qualitative factors. The methodologies will utilize a single economic forecast over a two-year reasonable and supportable forecast period with immediate reversion to historical losses. While the models are operationally complete as of January 1, 2020, other required processes are being finalized.
It is estimated that the allowance for credit losses at the time of adoption will increase by approximately $2.1 to $3.9 million, or 6% to 11%, with the increasesavings banks in the allowance being offset by a charge to retained earnings, net of deferred taxes. Adoption of the standard is notpast and are expected to have a material impact on our available-for-sale or held-to-maturity investment portfolio’s or our off-balance sheet reserve. The ultimate impact of adoptingcontinue to do so in the ASU, and at each subsequent reporting period, is highly dependent on credit quality, economic forecasts and conditions and composition of our loans, along with other management judgements. The transition adjustment to record the allowance for credit losses may fall outside of management’s estimated increase based on material changes in these items, specifically the economic forecast and conditions and loan composition, used in calculating the allowance for credit losses upon the adoption of CECL.future.
In December 2018,recent years, federal banking regulators have increased regulatory scrutiny, and additional limitations on financial institutions have been proposed or adopted by regulators and by Congress. Moreover, banking regulatory agencies have increasingly over the Officelast few years used authority under Section 5 of the ComptrollerFederal Trade Commission Act to take supervisory or enforcement action with respect to alleged unfair or deceptive acts or practices by banks to address practices that may not necessarily fall within the scope of a specific banking or consumer finance law. The banking industry is highly regulated and changes in federal and state banking regulations as well as policies and administration guidelines may affect our practices, growth prospects, and earnings. In particular, there is no assurance that governmental actions designed to stabilize the Currency,economy and banking system will not adversely affect the financial position or results of operations of CTBI.
From time to time, CTBI and/or its subsidiaries may be involved in information requests, reviews, investigations, and proceedings (both formal and informal) by various governmental agencies and law enforcement authorities regarding our respective businesses. Any of these matters may result in material adverse consequences to CTBI and its subsidiaries, including adverse judgements, findings, limitations on merger and acquisition activity, settlements, fines, penalties, orders, injunctions, and other actions. Such adverse consequences may be material to the financial position of CTBI or its results of operations.
In particular, consumer products and services are subject to increasing regulatory oversight and scrutiny with respect to compliance with consumer laws and regulations. We may face a greater number or wider scope of investigations, enforcement actions, and litigation in the future related to consumer practices. In addition, any required changes to our business operations resulting from these developments could result in a significant loss of revenue, require remuneration to customers, trigger fines or penalties, limit the products or services we offer, require us to increase certain prices and therefore reduce demand for our products, impose additional compliance costs on us, cause harm to our reputation, or otherwise adversely affect our consumer business.
The financial services industry has experienced leadership changes at federal banking agencies, which may impact regulations and government policy applicable to us. New appointments to the Board of Governors of the Federal Reserve System,could affect monetary policy and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. CTBI is planning on adopting the capital transition relief over the permissible three-year period.
Competition
Strong competition within our market area may reduce our ability to attract and retain deposits and originate loans.interest rates.
We face competition both in originating loansare required to maintain certain minimum amounts and in attracting deposits. Competitiontypes of capital and may be subject to more stringent capital requirements in the financial services industry is intense. We compete for clients by offering excellent service and competitive ratesfuture. A failure to meet applicable capital requirements could have an adverse material effect on our loansfinancial condition and deposit products. The typeresults of institutionsoperations.
We are subject to regulatory requirements specifying minimum amounts and types of capital that we compete with include commercial banks, savings institutions, mortgagemust maintain. From time to time, banking firms, credit unions, finance companies, mutual funds, insurance companiesregulators change these regulatory capital adequacy guidelines. See Item 1 above for additional information regarding current capital requirements. A failure to meet minimum capital requirements could result in certain mandatory and brokerage and investment banking firms. Competition arises from institutions located within and outside our market areas. As financial services become increasingly dependent on technology, permitting transactions to be conductedpossible additional discretionary actions by telephone, mobile banking, and the internet, non-bank institutions are able to attract funds and provide lending and other financial services without offices located in our market areas. As a result of their size and ability to achieve economies of scale, certain of our competitors offer a broader range of products and services than we offer. With the increased consolidation in the financial industry, larger financial institutions may strengthen their competitive positions. In addition, to stay competitive in our markets we may need to adjust the interest ratesregulators that, if undertaken, could have an adverse material effect on our products to match the rates offered by our competitors, which could adversely affect our net interest margin. As a result, our profitability depends upon our continued ability to successfully compete in our market areas while achieving our investment objectives.financial condition and results of operations.
Technology and other changes are allowing consumers to complete financial transactions through alternative methods to those which historically involved banks. For example, consumers can now hold funds that would have been held as bank deposits in mutual funds, brokerage accounts, general purpose reloadable prepaid cards, or cyber currency. In addition, consumers can complete transactions, such as paying bills or transferring funds, directly without utilizing the services of a bank. The process of eliminating banks as intermediaries (known as disintermediation), could result in the loss of fee income, as well as the loss of deposits and the income that might be generated from those deposits. The related revenue reduction could adversely affect our financial condition, cash flows, and results of operations.
Acquisition Risk
We may have difficulty in the future continuing to grow through acquisitions.
We may experience difficulty in making acquisitions on acceptable terms due to the decreasing number of suitable acquisition targets, competition for attractive acquisitions, regulatory impediments, and certain limitations on interstate acquisitions.
Any future acquisitions or mergers by CTBI or its banking subsidiary are subject to approval by the appropriate federal and state banking regulators. The banking regulators evaluate a number of criteria in making their approval decisions, such as:
| ● | Safety and soundness guidelines; |
| ● | Compliance with all laws including the USA Patriot Act, the International Money Laundering Abatement and Anti-Terrorist Financing Act, the Sarbanes-Oxley Act and the related rules and regulations promulgated under such Act or the Exchange Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, and all other applicable fair lending and consumer protection laws and other laws relating to discriminatory business practices; and |
| ● | Anti-competitive concerns with the proposed transaction. |
If the banking regulators or a commenter on our regulatory application raise concerns about any of these criteria at the time a regulatory application is filed, the banking regulators may deny, delay, or condition their approval of a proposed transaction. A Federal Reserve investigation begun in 2014 resulted in a 2018 consent order related to two deposit add-on products, which created impediments to CTBI’s merger and acquisition activity for an unspecified period of time.
We have grown, and, subject to regulatory approval, intend to continue to grow, through acquisitions of banks and other financial institutions. After these acquisitions, we may experience adverse changes in results of operations of acquired entities, unforeseen liabilities, asset quality problems of acquired entities, loss of key personnel, loss of clients because of change of identity, difficulties in integrating data processing and operational procedures, and deterioration in local economic conditions. These various acquisition risks can be heightened in larger transactions.
IntegrationCyber Risk
WeA breach in the security of our systems could disrupt our business, result in the disclosure of confidential information, damage our reputation, and create significant financial and legal exposure for us.
Our businesses are dependent on our ability and the ability of our third party service providers to process, record, and monitor a large number of transactions. If the financial, accounting, data processing, or other operating systems and facilities fail to operate properly, become disabled, experience security breaches, or have other significant shortcomings, our results of operations could be materially adversely affected.
Although we and our third party service providers devote significant resources to maintain and upgrade our systems and processes that are designed to protect the security of computer systems, software, networks, and other technology assets and the confidentiality, integrity, and availability of information belonging to us and our customers, there is no assurance that our security systems and those of our third party service providers will provide absolute security. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks, and other means. Despite our efforts and those of our third party service providers to ensure the integrity of these systems, it is possible that we or our third party service providers may not be able to achieveanticipate or to implement effective preventive measures against all security breaches of these types, especially because techniques used change frequently or are not recognized until launched, and because security attacks can originate from a wide variety of sources.
A successful breach of the security of our systems or those of our third party service providers could cause serious negative consequences to us, including significant disruption of our operations, misappropriation of our confidential information or the confidential information of our customers, or damage to our computers or operating systems, and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss in confidence in our security measures, customer dissatisfaction, litigation exposure, and harm to our reputation, all of which could have a material adverse effect on us. While we maintain insurance coverage that should, subject to policy terms and conditions, cover certain aspects of our cyber risks, this insurance coverage may be insufficient to cover all losses we could experience resulting from a cyber-security breach. Moreover, the cost of insurance sufficient to cover substantially all, or a reasonable portion, of losses related to cyber security breaches is expected integrationto increase and cost savings from oursuch increases are likely to be material.
Banking customers and employees have been, and will likely continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, account information, or other personal information, or to introduce viruses or other malware to bank acquisition activities.information systems or customers’ computers. Though we endeavor to lessen the success of such threats through the use of authentication technology and employee education, such cyber-attacks remain a serious issue. Publicity concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications as a means of conducting banking and other commercial transactions.
We havecould incur increased costs or reductions in revenue or suffer reputational damage in the event of misuse of information.
Our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks regarding our customers and their accounts. To provide these products and services, we use information systems and infrastructure that we and third party service providers operate. As a long history of acquiring financial institutions and,institution, we also are subject to regulatory approval, we expect this acquisition activity to resume in the future. Difficulties may arise in the integrationand examined for compliance with an array of the businessdata protection laws, regulations, and operations of the financial institutions that agree to merge with and into CTBI and,guidance, as a result, we may not be able to achieve the cost savings and synergies that we expect will result from the merger activities. Achieving cost savings is dependent on consolidating certain operational and functional areas, eliminating duplicative positions and terminating certain agreements for outside services. Additional operational savings are dependent upon the integration of the banking businesses of the acquired financial institution with that of CTBI, including the conversion of the acquired entity’s core operating systems, data systems and products to those of CTBI and the standardization of business practices. Complications or difficulties in the conversion of the core operating systems, data systems, and products of these other banks to those of CTBI may result in the loss of clients, damagewell as to our reputation within the financial services industry, operational problems, one-time costs currently not anticipated by us, and/or reduced cost savings resulting from the merger activities.own internal privacy and information security policies and programs.
Operational Risk
An extended disruptionInformation security risks for financial institutions like us have generally increased in recent years in part because of vital infrastructurethe proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, and other external parties. Our technologies and systems may become the target of cyber-attacks or other attacks that could result in the misuse or destruction of our or our customers’ confidential, proprietary, or other information or that could result in disruptions to the business operations of us or our customers or other third parties. Also, our customers, in order to access some of our products and services, may use personal computers, smart mobile phones, tablet PCs, and other devices that are beyond our controls and security systems. Further, a security breach or attack affecting one of our third-party service providers or partners could negatively impact us through no fault of our business, resultsown. In addition, because the methods and techniques employed by perpetrators of operations,fraud and financial condition.others to attack systems and applications change frequently and often are not fully recognized or understood until after they have been launched, we and our third-party service providers and partners may be unable to anticipate certain attack methods in order to implement effective preventative measures.
Our operations depend upon, among other things, our infrastructure, including equipmentWhile we have policies and facilities. Extended disruptionprocedures designed to prevent or limit the effect of vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking or viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of our control could have a material adverse impact on the financial services industry as a whole and on our business, results of operations, cash flows, and financial condition in particular. Our business recovery plan may not work as intended or may not prevent significant interruption of our operations. The occurrence of any failures, interruptions, orpossible security breachesbreach of our information systems, if unauthorized persons were somehow to get access to confidential or proprietary information in our possession or to our proprietary information, it could result in litigation and regulatory investigations, significant legal and financial exposure, damage to our reputation, resultor a loss of confidence in the losssecurity of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of whichour systems that could have an adverse effect onmaterially adversely affect our financial condition and results of operation.
Our information technology systems and networks may experience interruptions, delays, or cessationsCounterparty Risk
The soundness of service or produce errors due to regular maintenance efforts, such as systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time-consuming, disruptive, and resource intensive. Such disruptions could damage our reputation and otherwise adversely impact our business and results of operations.
Third party vendors provide key components of our business infrastructure, such as processing, internet connections, and network access. While CTBI has selected these third party vendors carefully through its vendor management process, it does not control their actions and generally is not able to obtain satisfactory indemnification provisions in its third party vendor written contracts. Any problems caused by third parties or arising from their services, such as disruption in service, negligence in the performance of services or a breach of customer data security with regard to the third parties’ systems,other financial institutions could adversely affect ourCTBI.
Our ability to deliverengage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services negatively impact our business reputation, causecompanies are interrelated as a lossresult of customers,trading, clearing, counterparty, or resultother relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in increased expenses, regulatory finesthe financial services industry, including brokers and sanctions, or litigation.
Claimsdealers, commercial banks, investment banks, mutual and litigation may arise pertaining to fiduciary responsibility.
Customers may, from time to time, make a claimhedge funds, and take legal action pertaining to our performance of fiduciary responsibilities. Whether customer claims and legal action related to our performance of fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant financial liability, adversely affect the market perception of us and our products and services, and impact customer demand for those products and services. Any such financial liability or reputational damage could have an adverse effect on our business, financial condition, and results of operations.
Significant legal actions could subject us to uninsured liabilities.
From time to time, we may be subject to claims related to our operations. These claims and legal actions, including supervisory actions by our regulators, could involve significant amounts. We maintain insurance coverage in amounts and with deductibles we believe are appropriate for our operations. However, our insurance coverage may not cover all claims against us and related costs, and further insurance coverage may not continue to be available at a reasonable cost.other institutional counterparties. As a result, CTBIdefaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exposedexacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to uninsured liabilities, which couldrecover the full amount of the loan due us. There is no assurance that any such losses would not materially and adversely affect CTBI’s business,our businesses, financial condition, or results of operations.
Market Risk
Community Trust Bancorp, Inc.’s stock price is volatile.Acquisition Risks
Our stock price has been volatileAcquisition Risk
We may have difficulty in the past,future continuing to grow through acquisitions.
We may experience difficulty in making acquisitions on acceptable terms due to the decreasing number of suitable acquisition targets, competition for attractive acquisitions, regulatory impediments, and several factors could causecertain limitations on interstate acquisitions.
Any future acquisitions or mergers by CTBI or its banking subsidiary are subject to approval by the priceappropriate federal and state banking regulators. The banking regulators evaluate a number of criteria in making their approval decisions, such as:
Safety and soundness guidelines;
Compliance with all laws including the USA Patriot Act, the International Money Laundering Abatement and Anti-Terrorist Financing Act, the Sarbanes-Oxley Act and the related rules and regulations promulgated under such Act or the Exchange Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, and all other applicable fair lending and consumer protection laws and other laws relating to fluctuate substantiallydiscriminatory business practices; and
Anti-competitive concerns with the proposed transaction.
If the banking regulators or a commenter on our regulatory application raise concerns about any of these criteria at the time a regulatory application is filed, the banking regulators may deny, delay, or condition their approval of a proposed transaction. We have grown, and, subject to regulatory approval, intend to continue to grow, through acquisitions of banks and other financial institutions. After these acquisitions, we may experience adverse changes in the future.results of operations of acquired entities, unforeseen liabilities, asset quality problems of acquired entities, loss of key personnel, loss of clients because of change of identity, difficulties in integrating data processing and operational procedures, and deterioration in local economic conditions. These factors include:
| ● | Actual or anticipated variations in earnings; |
| ● | Changes in analysts’ recommendations or projections; |
| ● | CTBI’s announcements of developments related to our businesses; |
various acquisition risks can be heightened in larger transactions.
| ● | Operating and stock performance of other companies deemed to be peers; |
| ● | New technology used or services offered by traditional and non-traditional competitors; |
| ● | News reports of trends, concerns, and other issues related to the financial services industry; and |
| ● | Additional governmental policies and enforcement of current laws. |
Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to CTBI’s performance. Although investor confidence in financial institutions has strengthened, the financial crisis adversely impacted investor confidence in the financial institutions sector. General market price declines or market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.
Technology Risk
CTBI continually encounters technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
Cyber Risk
A breach in the security of our systems could disrupt our business, result in the disclosure of confidential information, damage our reputation, and create significant financial and legal exposure for us.
Our businesses are dependent on our ability and the ability of our third party service providers to process, record, and monitor a large number of transactions. If the financial, accounting, data processing, or other operating systems and facilities fail to operate properly, become disabled, experience security breaches, or have other significant shortcomings, our results of operations could be materially adversely affected.
Although we and our third party service providers devote significant resources to maintain and upgrade our systems and processes that are designed to protect the security of computer systems, software, networks, and other technology assets and the confidentiality, integrity, and availability of information belonging to us and our customers, there is no assurance that our security systems and those of our third party service providers will provide absolute security. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks, and other means. Despite our efforts and those of our third party service providers to ensure the integrity of these systems, it is possible that we or our third party service providers may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, especially because techniques used change frequently or are not recognized until launched, and because security attacks can originate from a wide variety of sources.
A successful breach of the security of our systems or those of our third party service providers could cause serious negative consequences to us, including significant disruption of our operations, misappropriation of our confidential information or the confidential information of our customers, or damage to our computers or operating systems, and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss in confidence in our security measures, customer dissatisfaction, litigation exposure, and harm to our reputation, all of which could have a material adverse effect on us. While we maintain insurance coverage that should, subject to policy terms and conditions, cover certain aspects of our cyber risks, this insurance coverage may be insufficient to cover all losses we could experience resulting from a cyber securitycyber-security breach. Moreover, the cost of insurance sufficient to cover substantially all, or a reasonable portion, of losses related to cyber security breaches is expected to increase and such increases are likely to be material.
Banking customers and employees have been, and will likely continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, account information, or other personal information, or to introduce viruses or other malware to bank information systems or customers’ computers. Though we endeavor to lessen the success of such threats through the use of authentication technology and employee education, such cyber-attacks remain a serious issue. Publicity concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications as a means of conducting banking and other commercial transactions.
We could incur increased costs or reductions in revenue or suffer reputational damage in the event of misuse of information.
Our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks regarding our customers and their accounts. To provide these products and services, we use information systems and infrastructure that we and third party service providers operate. As a financial institution, we also are subject to and examined for compliance with an array of data protection laws, regulations, and guidance, as well as to our own internal privacy and information security policies and programs.
Information security risks for financial institutions like us have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, and other external parties. Our technologies and systems may become the target of cyber-attacks or other attacks that could result in the misuse or destruction of our or our customers’ confidential, proprietary, or other information or that could result in disruptions to the business operations of us or our customers or other third parties. Also, our customers, in order to access some of our products and services, may use personal computers, smart mobile phones, tablet PCs, and other devices that are beyond our controls and security systems. Further, a breach or attack affecting one of our third-party service providers or partners could impact us through no fault of our own. In addition, because the methods and techniques employed by perpetrators of fraud and others to attack systems and applications change frequently and often are not fully recognized or understood until after they have been launched, we and our third-party service providers and partners may be unable to anticipate certain attack methods in order to implement effective preventative measures.
While we have policies and procedures designed to prevent or limit the effect of the possible security breach of our information systems, if unauthorized persons were somehow to get access to confidential or proprietary information in our possession or to our proprietary information, it could result in litigation and regulatory investigations, significant legal and financial exposure, damage to our reputation, or a loss of confidence in the security of our systems that could materially adversely affect our results of operation.
Counterparty Risk
The soundness of other financial institutions could adversely affect CTBI.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional counterparties. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan due us. There is no assurance that any such losses would not materially and adversely affect our businesses, financial condition, or results of operations.
Acquisition Risks
Acquisition Risk
We may have difficulty in the future continuing to grow through acquisitions.
We may experience difficulty in making acquisitions on acceptable terms due to the decreasing number of suitable acquisition targets, competition for attractive acquisitions, regulatory impediments, and certain limitations on interstate acquisitions.
Any future acquisitions or mergers by CTBI or its banking subsidiary are subject to approval by the appropriate federal and state banking regulators. The banking regulators evaluate a number of criteria in making their approval decisions, such as:
Safety and soundness guidelines;
Compliance with all laws including the USA Patriot Act, the International Money Laundering Abatement and Anti-Terrorist Financing Act, the Sarbanes-Oxley Act and the related rules and regulations promulgated under such Act or the Exchange Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, and all other applicable fair lending and consumer protection laws and other laws relating to discriminatory business practices; and
Anti-competitive concerns with the proposed transaction.
If the banking regulators or a commenter on our regulatory application raise concerns about any of these criteria at the time a regulatory application is filed, the banking regulators may deny, delay, or condition their approval of a proposed transaction. We have grown, and, subject to regulatory approval, intend to continue to grow, through acquisitions of banks and other financial institutions. After these acquisitions, we may experience adverse changes in results of operations of acquired entities, unforeseen liabilities, asset quality problems of acquired entities, loss of key personnel, loss of clients because of change of identity, difficulties in integrating data processing and operational procedures, and deterioration in local economic conditions. These various acquisition risks can be heightened in larger transactions.
Integration Risk
We may not be able to achieve the expected integration and cost savings from our bank acquisition activities.
We have a long history of acquiring financial institutions and, subject to regulatory approval, we expect this acquisition activity to resume in the future. Difficulties may arise in the integration of the business and operations of the financial institutions that agree to merge with and into CTBI and, as a result, we may not be able to achieve the cost savings and synergies that we expect will result from the merger activities. Achieving cost savings is dependent on consolidating certain operational and functional areas, eliminating duplicative positions and terminating certain agreements for outside services. Additional operational savings are dependent upon the integration of the banking businesses of the acquired financial institution with that of CTBI, including the conversion of the acquired entity’s core operating systems, data systems and products to those of CTBI and the standardization of business practices. Complications or difficulties in the conversion of the core operating systems, data systems, and products of these other banks to those of CTBI may result in the loss of clients, damage to our reputation within the financial services industry, operational problems, one-time costs currently not anticipated by us, and/or reduced cost savings resulting from the merger activities.
Market and Liquidity Risks
Market Risk
Community Trust Bancorp, Inc.’s stock price is volatile.
Our stock price has been volatile in the past, and several factors could cause the price to fluctuate substantially in the future. These factors include:
Actual or anticipated variations in earnings;
Changes in analysts’ recommendations or projections;
CTBI’s announcements of developments related to our businesses;
Operating and stock performance of other companies deemed to be peers;
New technology used or services offered by traditional and non-traditional competitors;
News reports of trends, concerns, and other issues related to the financial services industry; and
Additional governmental policies and enforcement of current laws.
Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to CTBI’s performance. Although investor confidence in financial institutions has strengthened, the financial crisis adversely impacted investor confidence in the financial institutions sector. General market price declines or market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.
Liquidity Risk
CTBI is subject to liquidity risk.
CTBI requires liquidity to meet its deposit and debt obligations as they come due and to fund loan demands. CTBI’s access to funding sources in amounts adequate to finance its activities or on terms that are acceptable to it could be impaired by factors that affect it specifically or the financial services industry or economy in general. Factors that could reduce its access to liquidity sources include a downturn in the market, difficult credit markets, or adverse regulatory actions against CTBI. CTBI’s access to deposits may also be affected by the liquidity needs of its depositors. In particular, a substantial majority of CTBI’s liabilities are demand, savings, interest checking, and money market deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of its assets are loans, which cannot be called or sold in the same time frame. To the extent that consumer confidence in other investment vehicles, such as the stock market, increases, customers may move funds from bank deposits and products into such other investment vehicles. Although CTBI historically has been able to replace maturing deposits and advances as necessary, it might not be able to replace such funds in the future, especially if a large number of its depositors sought to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on our financial condition and results of operations.
Legal, Legislation, and Regulation Risks
Risks Related to Regulatory Policies and Oversight
The banking industry is heavily regulated, and our business may be adversely affected by legislation or changes in regulatory policies and oversight.
The earnings of banks and bank holding companies such as ours are affected by the policies of regulatory authorities, including the Federal Reserve Board, which regulates the money supply. Among the methods employed by the Federal Reserve Board are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial and savings banks in the past and are expected to continue to do so in the future.
In recent years, federal banking regulators have increased regulatory scrutiny, and additional limitations on financial institutions have been proposed or adopted by regulators and by Congress. Moreover, banking regulatory agencies have increasingly over the last few years used authority under Section 5 of the Federal Trade Commission Act to take supervisory or enforcement action with respect to alleged unfair or deceptive acts or practices by banks to address practices that may not necessarily fall within the scope of a specific banking or consumer finance law. The banking industry is highly regulated and changes in federal and state banking regulations as well as policies and administration guidelines may affect our practices, growth prospects, and earnings. In particular, there is no assurance that governmental actions designed to stabilize the economy and banking system will not adversely affect the financial position or results of operations of CTBI.
From time to time, CTBI and/or its subsidiaries may be involved in information requests, reviews, investigations, and proceedings (both formal and informal) by various governmental agencies and law enforcement authorities regarding our respective businesses. Any of these matters may result in material adverse consequences to CTBI and its subsidiaries, including adverse judgements, findings, limitations on merger and acquisition activity, settlements, fines, penalties, orders, injunctions, and other actions. Such adverse consequences may be material to the financial position of CTBI or its results of operations.
In particular, consumer products and services are subject to increasing regulatory oversight and scrutiny with respect to compliance with consumer laws and regulations. We may face a greater number or wider scope of investigations, enforcement actions, and litigation in the future related to consumer practices. In addition, any required changes to our business operations resulting from these developments could result in a significant loss of revenue, require remuneration to customers, trigger fines or penalties, limit the products or services we offer, require us to increase certain prices and therefore reduce demand for our products, impose additional compliance costs on us, cause harm to our reputation, or otherwise adversely affect our consumer business.
The financial services industry has experienced leadership changes at federal banking agencies, which may impact regulations and government policy applicable to us. New appointments to the Board of Governors of the Federal Reserve could affect monetary policy and interest rates.
We are required to maintain certain minimum amounts and types of capital and may be subject to more stringent capital requirements in the future. A failure to meet applicable capital requirements could have an adverse material effect on our financial condition and results of operations.
We are subject to regulatory requirements specifying minimum amounts and types of capital that we must maintain. From time to time, banking regulators change these regulatory capital adequacy guidelines. See Item 1 above for additional information regarding current capital requirements. A failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our financial condition and results of operations.
Environmental Liability Risk
We are subject to environmental liability risk associated with lending activity.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.
COVID-19-Related Risks
COVID-19 Risk
Since March 13, 2020, the United States has been operating under a state of emergency in response to the spread of COVID-19. COVID-19 and related governmental responses have affected economic and financial market conditions as well as the operations, results, and prospects of companies across many industries.
The coronavirus pandemic has caused increased volatility in financial markets and the possibility of prolonged adverse economic conditions. These changes in economic and financial market conditions could result in decreases in demand for products, decreases in market value of loans and securities, impairments of intangible assets (such as goodwill), decreases in income due to interest rate declines, and increases in customer delinquencies and defaults.There is uncertainty around the duration and breadth of the COVID-19 pandemic, and as a result the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated at this time. While we expect the impacts of COVID-19 to have an adverse effect on our business, financial condition, and results of operations, we are unable to predict the extent or nature of these impacts at this time.
Loan and Credit Losses. To combat the spread of COVID-19, and, in some cases, in response to governmental mandates to close non-essential businesses, many businesses have ceased or substantially reduced operations for an indeterminate period. In addition, individuals may have been laid off, furloughed, or be unable to work as a result of reduced business operations. These situations could lead to a material change in the credit quality of our loan portfolio.
Industry Concentration. Certain industries have been or are likely to be more impacted by COVID-19 than others. The impact to the agriculture industry, bank holding companies, the hotel/motel industry, lessors of non-residential buildings, and lessors of residential buildings/dwellings could lead to significant deterioration in our asset quality.
Small and Mid-Size Business Concentration. It is expected that small and mid-size businesses, many of which rely on continuing cash flow to fund day-to-day operations, may be particularly hard hit by forced closures and other preventative measures taken by federal, state, or local governments. Although government programs have sought, and may further seek, to provide relief to these types of entities, there can be no assurance that these programs will succeed. Also, governments may continue to adopt regulations or promulgate executive orders that restrict or limit banks’ ability to take certain actions with these customers that they would otherwise take in the ordinary course—such as following standard collection and foreclosure procedures. At the same time, it may be the case that more customers are expected to draw on existing lines of credit or seek additional loans to help finance their business operations.
Capital and Liquidity. Market volatility and prolonged periods of economic stress may affect our capital and liquidity. In addition, these factors may limit access to capital markets. Risks to credit portfolios and/or increased draws on outstanding lines of credit could affect capital and liquidity at, and/or result in decreased income or increased losses for, our bank subsidiary. Changes to our capital and liquidity could lead to the need to cease or reduce dividend payments and any formal or informal actions regulators may take to address capital and liquidity concerns.
Suspension of Mortgage and Other Loan Payments and Foreclosures. The federal government signed into law on March 27, 2020 Title IV of the CARES Act, which provides that individuals with single-family, federally backed mortgages may request a 180-day mortgage forbearance (which can be extended another 180 days) due to COVID-19-related difficulties. It is possible that other states or federal regulators take similar measures. The bank implemented relief actions for our customers including suspension of residential foreclosure actions initially through May 18, 2020 and extended through March 31, 2021 as well as several loan assistance programs designed to assist those customers who are experiencing, or, are likely to experience, financial difficulties directly related to COVID-19 causing loss of individual income and/or household income. Through December 31, 2020, we have processed 3,844 COVID-19 loan deferrals totaling $992 million.
Real Estate Market and Real Estate Lending. In addition to the actions described above, there is risk that COVID-19 significantly affects the U.S. commercial and residential real estate markets and, accordingly, our real estate lending business in other ways, including through low U.S. mortgage rates (which reached an all-time low during the first quarter), decreasing property values (which, among other effects, may both increase the risk of defaults and reduce the value of real estate collateral, thereby diminishing recovery in the event of default), and reduced demand for commercial and multifamily real estate and increased vacancies if businesses fail or close locations.
Catastrophes, including Pandemics and Contagious Illnesses. The length of the COVID-19 outbreak is unknown and unpredictable and there is a potential for additional waves of COVID-19 or new strains of coronavirus even after COVID-19 appears contained in an area.
Cybersecurity. We face increased cybersecurity risks due to employees working remotely. Increased levels of remote access create additional opportunities for cybercriminals to exploit vulnerabilities, and employees may be more susceptible to phishing and social engineering attempts due to increased stress caused by the crisis and from balancing family and work responsibilities at home. Cybercriminals may also prey on fears about COVID-19, and take advantage of the current environment in which legitimate information regarding COVID-19 is being frequently and widely disseminated, such as by including malware in emails that appear to include documents providing legitimate information for protecting oneself from COVID-19. In addition, technological resources may be strained due to the number of remote users.
Changes in Consumer Behavior. Consumers affected by COVID-19 may continue to demonstrate changed behavior even after the crisis is over. For example, consumers may decrease discretionary spending on a permanent or long-term basis, certain industries may take longer to recover (particularly those that rely on travel or large gatherings) as consumers may be hesitant to return to full social interaction, and temporary closures of bank branches could result in consumers becoming more comfortable with technology and devaluing face-to-face interaction.
Reliance on Vendors and Other Companies. We rely on vendors and other third parties to provide critical systems and services. COVID-19 presents heightened or novel risks with respect to continuity of critical services. These risks include the possibility of closure or business interruption. In addition, although in most regions subject to a stay-at-home order the definition of essential services generally includes businesses that provide essential services to banks, the definitions vary by state and may result in some vendors not being able to work from their offices.
Changes to Interest Rates. In response to COVID-19, the Federal Reserve reduced the Federal Funds Rate to zero percent in March 2020. The outlook for 2021 is uncertain, and there is a possibility that the Federal Reserve keeps interest rates low or even uses negative interest rates if economic conditions warrant. The possibility of an extended period of operations in a zero- or negative-rate environment has the potential for significantly decreased profitability.
Other Impacts on Financial Condition. A prolonged pandemic event may have a number of effects on our financial condition. Decreases in our stock price and cash flow projections as a result of COVID-19 could result in goodwill impairment. In addition, a period of prolonged losses or decreased earnings could result in the expiration of deferred tax assets (“DTA”) before we have the opportunity to use some or all of the benefit of the DTA. Changes in our assessment of whether the full benefit of DTAs may be realized could impact our regulatory capital. We may also be at risk of being required to recognize other-than-temporary impairments and/or reduce other comprehensive income.
Impact to Investment Management Business Lines. Volatile market conditions caused by COVID-19 could reduce the value of assets under management and/or cause clients to withdraw funds.
LIBOR Transition Planning. Banking institutions have been planning for the transition away from LIBOR in advance of December 31, 2021, the date that LIBOR is generally expected to cease to exist, although the U.K. Financial Conduct Authority has expressed that it and the Bank of England are assessing the impacts of COVID-19 on progress to meet the expected deadline. It remains unclear, however, whether the cessation of LIBOR will be delayed due to COVID-19 or what form any delay may take, and there are no assurances that there will be a delay. It is also unclear what the duration and severity of COVID-19 will be, and whether this will impact LIBOR transition planning. COVID-19 may also slow regulators’ and others’ efforts to develop and implement alternative reference rates, which could make LIBOR transition planning more difficult, particularly if the cessation of LIBOR is not delayed but alternatives do not develop.
PPP Loan Participation. As a participating lender in the SBA Paycheck Protection Program (“PPP”), CTBI and CTB are subject to additional risks of litigation from CTB’s clients or other parties in connection with the CTB’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
On March 27, 2020, the CARES Act was enacted, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses, eligible nonprofits and certain others can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. Under the terms of the PPP, loans are to be fully guaranteed by the SBA. CTB is participating as a lender in the PPP. Because of the short timeframe between the passing of the CARES Act and the April 3, 2020 opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes CTBI to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress approved additional funding for the PPP (increasing the total to $670 billion) and the related new legislation was enacted on April 24, 2020. Since the opening of the PPP, several larger banks have been subject to litigation relating to the policies and procedures that they used in processing applications for the PPP. CTBI and CTB may be exposed to the risk of litigation, from both customers and non-customers that have approached CTB in connection with PPP loans and its policies and procedures used in processing applications for the PPP. If any such litigation is filed against CTBI or CTB and is not resolved in a manner favorable to CTBI or CTB, it may result in significant financial liability or adversely affect CTBI’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.
CTB also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by CTB, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by CTBI, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from CTB.
| Item 1B. | Unresolved Staff Comments |
None.
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
| | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | |
| (in thousands) | | Average Balances | | | Interest | | | Average Rate | | | Average Balances | | | Interest | | | Average Rate | | | Average Balances | | | Interest | | | Average Rate | | | Average Balances | | | Interest | | | Average Rate | | | Average Balances | | | Interest | | | Average Rate | | | Average Balances | | | Interest | | | Average Rate | |
| Earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans (1)(2)(3) | | $ | 3,195,662 | | | $ | 165,016 | | | | 5.16 | % | | $ | 3,150,878 | | | $ | 154,613 | | | | 4.91 | % | | $ | 3,048,879 | | | $ | 141,821 | | | | 4.65 | % | | $ | 3,453,529 | | | $ | 160,348 | | | | 4.64 | % | | $ | 3,195,662 | | | $ | 165,016 | | | | 5.16 | % | | $ | 3,150,878 | | | $ | 154,613 | | | | 4.91 | % |
| Loans held for sale | | | 1,362 | | | | 120 | | | | 8.81 | | | | 684 | | | | 98 | | | | 14.33 | | | | 709 | | | | 81 | | | | 11.42 | | | | 15,426 | | | | 573 | | | | 3.71 | | | | 1,362 | | | | 120 | | | | 8.81 | | | | 684 | | | | 98 | | | | 14.33 | |
| Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and agencies | | | 492,909 | | | | 11,297 | | | | 2.29 | | | | 459,204 | | | | 9,019 | | | | 1.96 | | | | 449,339 | | | | 7,263 | | | | 1.62 | | | | 651,911 | | | | 10,021 | | | | 1.54 | | | | 492,909 | | | | 11,297 | | | | 2.29 | | | | 459,204 | | | | 9,019 | | | | 1.96 | |
| Tax exempt state and political subdivisions (3) | | | 86,811 | | | | 2,980 | | | | 3.43 | | | | 102,396 | | | | 3,539 | | | | 3.46 | | | | 110,393 | | | | 4,632 | | | | 4.20 | | | | 93,368 | | | | 3,012 | | | | 3.23 | | | | 86,811 | | | | 2,980 | | | | 3.43 | | | | 102,396 | | | | 3,539 | | | | 3.46 | |
| Other securities | | | 35,871 | | | | 1,219 | | | | 3.40 | | | | 29,299 | | | | 996 | | | | 3.40 | | | | 49,981 | | | | 1,452 | | | | 2.91 | | | | 81,884 | | | | 1,918 | | | | 2.34 | | | | 35,871 | | | | 1,219 | | | | 3.40 | | | | 29,299 | | | | 996 | | | | 3.40 | |
| Federal Reserve Bank and Federal Home Loan Bank stock | | | 16,695 | | | | 947 | | | | 5.67 | | | | 21,264 | | | | 1,303 | | | | 6.13 | | | | 22,814 | | | | 1,189 | | | | 5.21 | | | | 15,349 | | | | 532 | | | | 3.47 | | | | 16,695 | | | | 947 | | | | 5.67 | | | | 21,264 | | | | 1,303 | | | | 6.13 | |
| Federal funds sold | | | 800 | | | | 21 | | | | 2.63 | | | | 2,795 | | | | 59 | | | | 2.11 | | | | 3,139 | | | | 41 | | | | 1.31 | | | | 14 | | | | 0 | | | | 0.00 | | | | 800 | | | | 21 | | | | 2.63 | | | | 2,795 | | | | 59 | | | | 2.11 | |
| Interest bearing deposits | | | 211,078 | | | | 4,480 | | | | 2.12 | | | | 138,794 | | | | 2,567 | | | | 1.85 | | | | 103,066 | | | | 1,084 | | | | 1.05 | | | | 248,599 | | | | 715 | | | | 0.29 | | | | 211,078 | | | | 4,480 | | | | 2.12 | | | | 138,794 | | | | 2,567 | | | | 1.85 | |
| Other investments | | | 936 | | | | 14 | | | | 1.50 | | | | 6,432 | | | | 88 | | | | 1.37 | | | | 8,961 | | | | 107 | | | | 1.19 | | | | 245 | | | | 3 | | | | 1.22 | | | | 936 | | | | 14 | | | | 1.50 | | | | 6,432 | | | | 88 | | | | 1.37 | |
| Investment in unconsolidated subsidiaries | | | 1,851 | | | | 75 | | | | 4.05 | | | | 1,850 | | | | 70 | | | | 3.78 | | | | 1,847 | | | | 52 | | | | 2.82 | | | | 1,847 | | | | 46 | | | | 2.49 | | | | 1,851 | | | | 75 | | | | 4.05 | | | | 1,850 | | | | 70 | | | | 3.78 | |
| Total earning assets | | | 4,043,975 | | | $ | 186,169 | | | | 4.60 | % | | | 3,913,596 | | | $ | 172,352 | | | | 4.40 | % | | | 3,799,128 | | | $ | 157,722 | | | | 4.15 | % | | | 4,562,172 | | | $ | 177,168 | | | | 3.88 | % | | | 4,043,975 | | | $ | 186,169 | | | | 4.60 | % | | | 3,913,596 | | | $ | 172,352 | | | | 4.40 | % |
| Allowance for loan and lease losses | | | (35,122 | ) | | | | | | | | | | | (35,711 | ) | | | | | | | | | | | (36,507 | ) | | | | | | | | | |
| Allowance for credit losses* | | | | (45,040 | ) | | | | | | | | | | | (35,122 | ) | | | | | | | | | | | (35,711 | ) | | | | | | | | |
| | | | 4,008,853 | | | | | | | | | | | | 3,877,885 | | | | | | | | | | | | 3,762,621 | | | | | | | | | | | | 4,517,132 | | | | | | | | | | | | 4,008,853 | | | | | | | | | | | | 3,877,885 | | | | | | | | | |
| Nonearning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | | 52,122 | | | | | | | | | | | | 52,286 | | | | | | | | | | | | 52,321 | | | | | | | | | | | | 55,550 | | | | | | | | | | | | 52,122 | | | | | | | | | | | | 52,286 | | | | | | | | | |
| Premises and equipment, net | | | 59,326 | | | | | | | | | | | | 45,970 | | | | | | | | | | | | 47,129 | | | | | | | | | | | | 56,835 | | | | | | | | | | | | 59,326 | | | | | | | | | | | | 45,970 | | | | | | | | | |
| Other assets | | | 207,723 | | | | | | | | | | | | 211,256 | | | | | | | | | | | | 206,899 | | | | | | | | | | | | 208,643 | | | | | | | | | | | | 207,723 | | | | | | | | | | | | 211,256 | | | | | | | | | |
| Total assets | | $ | 4,328,024 | | | | | | | | | | | $ | 4,187,397 | | | | | | | | | | | $ | 4,068,970 | | | | | | | | | | | $ | 4,838,160 | | | | | | | | | | | $ | 4,328,024 | | | | | | | | | | | $ | 4,187,397 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Savings and demand deposits | | $ | 1,442,083 | | | $ | 14,875 | | | | 1.03 | % | | $ | 1,234,562 | | | $ | 8,443 | | | | 0.68 | % | | $ | 1,134,147 | | | $ | 3,863 | | | | 0.34 | % | | $ | 1,682,773 | | | $ | 5,732 | | | | 0.34 | % | | $ | 1,442,083 | | | $ | 14,875 | | | | 1.03 | % | | $ | 1,234,562 | | | $ | 8,443 | | | | 0.68 | % |
| Time deposits | | | 1,111,713 | | | | 18,496 | | | | 1.66 | | | | 1,256,030 | | | | 15,271 | | | | 1.22 | | | | 1,243,181 | | | | 10,487 | | | | 0.84 | | | | 1,075,672 | | | | 15,445 | | | | 1.44 | | | | 1,111,713 | | | | 18,496 | | | | 1.66 | | | | 1,256,030 | | | | 15,271 | | | | 1.22 | |
| Repurchase agreements and federal funds purchased | | | 233,484 | | | | 4,631 | | | | 1.98 | | | | 244,647 | | | | 3,312 | | | | 1.35 | | | | 258,419 | | | | 1,832 | | | | 0.71 | | | | 293,158 | | | | 2,788 | | | | 0.95 | | | | 233,484 | | | | 4,631 | | | | 1.98 | | | | 244,647 | | | | 3,312 | | | | 1.35 | |
| Advances from Federal Home Loan Bank | | | 1,959 | | | | 39 | | | | 1.99 | | | | 1,512 | | | | 27 | | | | 1.79 | | | | 38,287 | | | | 427 | | | | 1.12 | | | | 473 | | | | 0 | | | | 0.00 | | | | 1,959 | | | | 39 | | | | 1.99 | | | | 1,512 | | | | 27 | | | | 1.79 | |
| Long-term debt | | | 58,815 | | | | 2,418 | | | | 4.11 | | | | 59,341 | | | | 2,242 | | | | 3.78 | | | | 60,042 | | | | 1,685 | | | | 2.81 | | | | 57,841 | | | | 1,431 | | | | 2.47 | | | | 58,815 | | | | 2,418 | | | | 4.11 | | | | 59,341 | | | | 2,242 | | | | 3.78 | |
| Finance lease liability | | | 616 | | | | 54 | | | | 8.77 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 1,450 | | | | 54 | | | | 3.72 | | | | 616 | | | | 54 | | | | 8.77 | | | | 0 | | | | 0 | | | | 0 | |
| Total interest bearing liabilities | | | 2,848,670 | | | $ | 40,513 | | | | 1.42 | % | | | 2,796,092 | | | $ | 29,295 | | | | 1.05 | % | | | 2,734,076 | | | $ | 18,294 | | | | 0.67 | % | | | 3,111,367 | | | $ | 25,450 | | | | 0.82 | % | | | 2,848,670 | | | $ | 40,513 | | | | 1.42 | % | | | 2,796,092 | | | $ | 29,295 | | | | 1.05 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | | 828,281 | | | | | | | | | | | | 810,270 | | | | | | | | | | | | 778,304 | | | | | | | | | | | | 1,030,911 | | | | | | | | | | | | 828,281 | | | | | | | | | | | | 810,270 | | | | | | | | | |
| Other liabilities | | | 55,736 | | | | | | | | | | | | 34,394 | | | | | | | | | | | | 37,823 | | | | | | | | | | | | 59,904 | | | | | | | | | | | | 55,736 | | | | | | | | | | | | 34,394 | | | | | | | | | |
| Total liabilities | | | 3,732,687 | | | | | | | | | | | | 3,640,756 | | | | | | | | | | | | 3,550,203 | | | | | | | | | | | | 4,202,182 | | | | | | | | | | | | 3,732,687 | | | | | | | | | | | | 3,640,756 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shareholders’ equity | | | 595,337 | | | | | | | | | | | | 546,641 | | | | | | | | | | | | 518,767 | | | | | | | | | | | | 635,978 | | | | | | | | | | | | 595,337 | | | | | | | | | | | | 546,641 | | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 4,328,024 | | | | | | | | | | | $ | 4,187,397 | | | | | | | | | | | $ | 4,068,970 | | | | | | | | | | | $ | 4,838,160 | | | | | | | | | | | $ | 4,328,024 | | | | | | | | | | | $ | 4,187,397 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income, tax equivalent | | | | | | $ | 145,656 | | | | | | | | | | | $ | 143,057 | | | | | | | | | | | $ | 139,428 | | | | | | | | | | | $ | 151,718 | | | | | | | | | | | $ | 145,656 | | | | | | | | | | | $ | 143,057 | | | | | |
| Less tax equivalent interest income | | | | | | | 771 | | | | | | | | | | | | 902 | | | | | | | | | | | | 2,026 | | | | | | | | | | | | 727 | | | | | | | | | | | | 771 | | | | | | | | | | | | 902 | | | | | |
| Net interest income | | | | | | $ | 144,885 | | | | | | | | | | | $ | 142,155 | | | | | | | | | | | $ | 137,402 | | | | | | | | | | | $ | 150,991 | | | | | | | | | | | $ | 144,885 | | | | | | | | | | | $ | 142,155 | | | | | |
| Net interest spread | | | | | | | | | | | 3.18 | % | | | | | | | | | | | 3.35 | % | | | | | | | | | | | 3.48 | % | | | | | | | | | | | 3.06 | % | | | | | | | | | | | 3.18 | % | | | | | | | | | | | 3.35 | % |
| Benefit of interest free funding | | | | | | | | | | | 0.42 | | | | | | | | | | | | 0.31 | | | | | | | | | | | | 0.19 | | | | | | | | | | | | 0.27 | | | | | | | | | | | | 0.42 | | | | | | | | | | | | 0.31 | |
| Net interest margin | | | | | | | | | | | 3.60 | % | | | | | | | | | | | 3.66 | % | | | | | | | | | | | 3.67 | % | | | | | | | | | | | 3.33 | % | | | | | | | | | | | 3.60 | % | | | | | | | | | | | 3.66 | % |
*Effective January 1, 2020, the allowance for loan and lease losses became the allowance for credit losses with the implementation of ASU 2016-13, commonly referred to as CECL.
(1) Interest includes fees on loans of $1,725, $1,932, and $1,762 in 2020, 2019, and $1,808 in 2019, 2018, and 2017, 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 21% rate in 2019 and 2018, and a 35% rate in 2017.rate.
Net Interest Differential
The following table illustrates the approximate effect of volume and rate changes on net interest differentials between 20192020 and 20182019 and also between 20182019 and 2017.2018.
| | Total Change | | Change Due to | | Total Change | | Change Due to | | | Total Change | | | Change Due to | | | Total Change | | | Change Due to | |
| (in thousands) | | 2019/2018 | | Volume | | Rate | | 2018/2017 | | Volume | | Rate | | | _2020/2019 | | | Volume | | | Rate | | | _2019/2018 | | | Volume | | | Rate | |
| Interest income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans | | $ | 10,403 | | $ | 2,222 | | $ | 8,181 | | $ | 12,792 | | $ | 4,843 | | $ | 7,949 | | | $ | (4,668 | ) | | $ | 12,718 | | | $ | (17,386 | ) | | $ | 10,403 | | | $ | 2,222 | | | $ | 8,181 | |
| Loans held for sale | | 22 | | 70 | | (48 | ) | | 17 | | (3 | ) | | 20 | | | | 453 | | | | 560 | | | | (107 | ) | | | 22 | | | | 70 | | | | (48 | ) |
| U.S. Treasury and agencies | | 2,278 | | 696 | | 1,582 | | 1,756 | | 163 | | 1,593 | | | | (1,276 | ) | | | 3,050 | | | | (4,326 | ) | | | 2,278 | | | | 696 | | | | 1,582 | |
| Tax exempt state and political subdivisions | | (559 | ) | | (542 | ) | | (17 | ) | | (1,093 | ) | | (353 | ) | | (740 | ) | | | 32 | | | | 218 | | | | (186 | ) | | | (559 | ) | | | (542 | ) | | | (17 | ) |
| Other securities | | 223 | | 223 | | 0 | | (456 | ) | | (528 | ) | | 72 | | | | 699 | | | | 1,173 | | | | (474 | ) | | | 223 | | | | 223 | | | | 0 | |
| Federal Reserve Bank and Federal Home Loan Bank stock | | (356 | ) | | (295 | ) | | (61 | ) | | 114 | | (77 | ) | | 191 | | | | (415 | ) | | | (81 | ) | | | (334 | ) | | | (356 | ) | | | (295 | ) | | | (61 | ) |
| Federal funds sold | | (38 | ) | | (34 | ) | | (4 | ) | | 18 | | (4 | ) | | 22 | | | | (21 | ) | | | 0 | | | | (21 | ) | | | (38 | ) | | | (34 | ) | | | (4 | ) |
| Interest bearing deposits | | 1,913 | | 1,491 | | 422 | | 1,483 | | 465 | | 1,018 | | | | (3,765 | ) | | | 680 | | | | (4,445 | ) | | | 1,913 | | | | 1,491 | | | | 422 | |
| Other investments | | (74 | ) | | (69 | ) | | (5 | ) | | (19 | ) | | (27 | ) | | 8 | | | | (11 | ) | | | (12 | ) | | | 1 | | | | (74 | ) | | | (69 | ) | | | (5 | ) |
| Investment in unconsolidated subsidiaries | | 5 | | 0 | | 5 | | 18 | | 0 | | 18 | | | | (29 | ) | | | 0 | | | | (29 | ) | | | 5 | | | | 0 | | | | 5 | |
| Total interest income | | 13,817 | | 3,762 | | 10,055 | | 14,630 | | 4,479 | | 10,151 | | | | (9,001 | ) | | | 18,306 | | | | (27,307 | ) | | | 13,817 | | | | 3,762 | | | | 10,055 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Savings and demand deposits | | 6,432 | | 1,598 | | 4,834 | | 4,580 | | 370 | | 4,210 | | | | (9,143 | ) | | | 2,151 | | | | (11,294 | ) | | | 6,432 | | | | 1,598 | | | | 4,834 | |
| Time deposits | | 3,225 | | (1,601 | ) | | 4,826 | | 4,784 | | 109 | | 4,675 | | | | (3,051 | ) | | | (615 | ) | | | (2,436 | ) | | | 3,225 | | | | (1,601 | ) | | | 4,826 | |
| Repurchase agreements and federal funds purchased | | 1,319 | | (145 | ) | | 1,464 | | 1,480 | | (93 | ) | | 1,573 | | | | (1,843 | ) | | | 981 | | | | (2,824 | ) | | | 1,319 | | | | (145 | ) | | | 1,464 | |
| Advances from Federal Home Loan Bank | | 12 | | 9 | | 3 | | (400 | ) | | (258 | ) | | (142 | ) | | | (39 | ) | | | 0 | | | | (39 | ) | | | 12 | | | | 9 | | | | 3 | |
| Long-term debt | | 176 | | (20 | ) | | 196 | | 557 | | (19 | ) | | 576 | | | | (987 | ) | | | (41 | ) | | | (946 | ) | | | 176 | | | | (20 | ) | | | 196 | |
| Finance lease liability | | 54 | | 54 | | 0 | | 0 | | 0 | | 0 | | | | 0 | | | | 44 | | | | (44 | ) | | | 54 | | | | 54 | | | | 0 | |
| Total interest expense | | 11,218 | | (105 | ) | | 11,323 | | 11,001 | | 109 | | 10,892 | | | | (15,063 | ) | | | 2,520 | | | | (17,583 | ) | | | 11,218 | | | | (105 | ) | | | 11,323 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | $ | 2,599 | | $ | 3,867 | | $ | (1,268 | ) | | $ | 3,629 | | $ | 4,370 | | $ | (741 | ) | | $ | 6,062 | | | $ | 15,786 | | | $ | (9,724 | ) | | $ | 2,599 | | | $ | 3,867 | | | $ | (1,268 | ) |
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, using a 21% tax rate in 2019 and 2018, and a 35% tax rate in 2017.rate.
Investment Portfolio
The maturity distribution and weighted average interest ratesyields of debt securities at December 31, 20192020 are as follows:
Available-for-sale
| | Estimated Maturity at December 31, 2019 | |
| | | Within 1 Year | | | 1-5 Years | | | 5-10 Years | | | After 10 Years | | | Total Fair Value | | | Amortized Cost | |
| (in thousands) | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | |
| U.S. Treasury, government agencies, and government sponsored agency mortgage-backed securities | | $ | 93,952 | | | | 2.03 | % | | $ | 48,057 | | | | 1.77 | % | | $ | 95,499 | | | | 3.42 | % | | $ | 228,887 | | | | 2.56 | % | | $ | 466,395 | | | | 2.55 | % | | $ | 463,124 | |
| State and political subdivisions | | | 6,520 | | | | 3.14 | | | | 19,922 | | | | 3.22 | | | | 24,910 | | | | 3.18 | | | | 50,955 | | | | 3.87 | | | | 102,307 | | | | 3.53 | | | | 99,403 | |
| Other securities | | | 0 | | | | 0.00 | | | | 0 | | | | 0.00 | | | | 0 | | | | 0.00 | | | | 31,142 | | | | 3.39 | | | | 31,142 | | | | 3.39 | | | | 31,418 | |
| Total | | $ | 100,472 | | | | 2.11 | % | | $ | 67,979 | | | | 2.19 | % | | $ | 120,409 | | | | 3.37 | % | | $ | 310,984 | | | | 2.85 | % | | $ | 599,844 | | | | 2.76 | % | | $ | 593,945 | |
Held-to-maturity
| | Estimated Maturity at December 31, 2019 | |
| | | Within 1 Year | | | 1-5 Years | | | 5-10 Years | | | After 10 Years | | | Total Amortized Cost | | | Fair Value | |
| (in thousands) | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | |
| State and political subdivisions | | $ | 517 | | | | 3.64 | % | | $ | 0 | | | | 0.00 | % | | $ | 0 | | | | 0.00 | % | | $ | 0 | | | | 0.00 | % | | $ | 517 | | | | 3.64 | % | | $ | 517 | |
| Total | | $ | 517 | | | | 3.64 | % | | $ | 0 | | | | 0.00 | % | | $ | 0 | | | | 0.00 | % | | $ | 0 | | | | 0.00 | % | | $ | 517 | | | | 3.64 | % | | $ | 517 | |
Total Debt Securities
| | Estimated Maturity at December 31, 2019 | | | Estimated Maturity at December 31, 2020 | |
| | | Within 1 Year | | | 1-5 Years | | | 5-10 Years | | | After 10 Years | | | Total Book Value | | | Fair Value | | | Within 1 Year | | | 1-5 Years | | | 5-10 Years | | | After 10 Years | | | Total Fair Value | | | Amortized Cost | |
| (in thousands) | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | |
| U.S. Treasury, government agencies, and government sponsored agency mortgage-backed securities | | | $ | 81,054 | | | | 0.18 | % | | $ | 38,146 | | | | 1.83 | % | | $ | 124,664 | | | | 1.86 | % | | $ | 556,736 | | | | 1.31 | % | | $ | 800,600 | | | | 1.31 | % | | $ | 789,044 | |
| State and political subdivisions | | | | 2,433 | | | | 3.64 | | | | 16,130 | | | | 3.37 | | | | 35,153 | | | | 3.39 | | | | 86,700 | | | | 3.04 | | | | 140,416 | | | | 3.18 | | | | 133,287 | |
| Other securities | | | | 0 | | | | 0.00 | | | | 0 | | | | 0.00 | | | | 17,310 | | | | 1.67 | | | | 38,935 | | | | 1.16 | | | | 56,245 | | | | 1.32 | | | | 56,443 | |
| Total | | $ | 100,989 | | | | 2.11 | % | | $ | 67,979 | | | | 2.19 | % | | $ | 120,409 | | | | 3.37 | % | | $ | 310,984 | | | | 2.85 | % | | $ | 600,361 | | | | 2.76 | % | | $ | 600,361 | | | $ | 83,487 | | | | 0.28 | % | | $ | 54,276 | | | | 2.29 | % | | $ | 177,127 | | | | 2.15 | % | | $ | 682,371 | | | | 1.52 | % | | $ | 997,261 | | | | 1.57 | % | | $ | 978,774 | |
The calculations of the weighted average interest ratesyields 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 21% 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, 2019.2020.
The book values of securities available-for-sale and securities held-to-maturity as of December 31, 20192020 and 20182019 are presented in note 3 to the consolidated financial statements.
The book value of debt securities at December 31, 20172018 is presented below:
| (in thousands) | | Available- for-Sale | | | Held-to- Maturity | | | Available- for-Sale | | | Held-to- Maturity | |
| U.S. Treasury and government agencies | | $ | 211,574 | | | $ | 0 | | | $ | 219,358 | | | $ | 0 | |
| State and political subdivisions | | | 144,159 | | | | 659 | | | | 126,280 | | | | 649 | |
| U.S. government sponsored agency mortgage-backed securities | | | 208,959 | | | | 0 | | | | 255,969 | | | | 0 | |
| Other debt securities | | | 507 | | | | 0 | | | | 507 | | | | 0 | |
| Total debt securities | | | 565,199 | | | | 659 | | | $ | 602,114 | | | $ | 649 | |
| CRA investment funds | | | 25,000 | | | | 0 | | |
| Total securities | | $ | 590,199 | | | $ | 659 | | |
Loan Portfolio
| (in thousands) | | 2020 | |
| Commercial: | | | |
| Hotel/motel | | $ | 260,699 | |
| Commercial real estate residential | | | 287,928 | |
| Commercial real estate nonresidential | | | 743,238 | |
| Dealer floorplans | | | 69,087 | |
| Commercial other | | | 279,908 | |
| Commercial unsecured SBA PPP | | | 252,667 | |
| Total commercial | | | 1,893,527 | |
| | | | | |
| Residential: | | | | |
| Real estate mortgage | | | 784,559 | |
| Home equity | | | 103,770 | |
| Total residential | | | 888,329 | |
| | | | | |
| Consumer: | | | | |
| Consumer direct | | | 152,304 | |
| Consumer indirect | | | 620,051 | |
| Total consumer | | | 772,355 | |
| | | | | |
| Total loans | | $ | 3,554,211 | |
| | | | | |
| Percent of total year-end loans | | | | |
| Commercial: | | | | |
| Hotel/motel | | | 7.33 | % |
| Commercial real estate residential | | | 8.10 | |
| Commercial real estate nonresidential | | | 20.91 | |
| Dealer floorplans | | | 1.94 | |
| Commercial other | | | 7.88 | |
| Commercial unsecured SBA PPP | | | 7.11 | |
| Total commercial | | | 53.27 | |
| | | | | |
| Residential: | | | | |
| Real estate mortgage | | | 22.07 | |
| Home equity | | | 2.92 | |
| Total residential | | | 24.99 | |
| | | | | |
| Consumer: | | | | |
| Consumer direct | | | 4.29 | |
| Consumer indirect | | | 17.45 | |
| Total consumer | | | 21.74 | |
| | | | | |
| Total loans | | | 100.00 | % |
Loan Portfolio
| (in thousands) | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | |
| Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Construction | | $ | 104,809 | | | $ | 82,715 | | | $ | 76,479 | | | $ | 66,998 | | | $ | 78,020 | | | $ | 104,809 | | | $ | 82,715 | | | $ | 76,479 | | | $ | 66,998 | |
| Secured by real estate | | | 1,169,975 | | | | 1,183,093 | | | | 1,188,680 | | | | 1,085,428 | | | | 1,052,919 | | | | 1,169,975 | | | | 1,183,093 | | | | 1,188,680 | | | | 1,085,428 | |
| Equipment lease financing | | | 481 | | | | 1,740 | | | | 3,042 | | | | 5,512 | | | | 8,514 | | | | 481 | | | | 1,740 | | | | 3,042 | | | | 5,512 | |
| Commercial other | | | 389,683 | | | | 377,198 | | | | 351,034 | | | | 350,159 | | | | 358,898 | | | | 389,683 | | | | 377,198 | | | | 351,034 | | | | 350,159 | |
| Total commercial | | | 1,664,948 | | | | 1,644,746 | | | | 1,619,235 | | | | 1,508,097 | | | | 1,498,351 | | | | 1,664,948 | | | | 1,644,746 | | | | 1,619,235 | | | | 1,508,097 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real estate construction | | | 63,350 | | | | 57,160 | | | | 67,358 | | | | 57,966 | | | | 61,750 | | | | 63,350 | | | | 57,160 | | | | 67,358 | | | | 57,966 | |
| Real estate mortgage | | | 733,003 | | | | 722,417 | | | | 709,570 | | | | 702,969 | | | | 707,874 | | | | 733,003 | | | | 722,417 | | | | 709,570 | | | | 702,969 | |
| Home equity | | | 111,894 | | | | 106,299 | | | | 99,356 | | | | 91,511 | | | | 89,450 | | | | 111,894 | | | | 106,299 | | | | 99,356 | | | | 91,511 | |
| Total residential | | | 908,247 | | | | 885,876 | | | | 876,284 | | | | 852,446 | | | | 859,074 | | | | 908,247 | | | | 885,876 | | | | 876,284 | | | | 852,446 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer direct | | | 148,051 | | | | 144,289 | | | | 137,754 | | | | 133,093 | | | | 126,406 | | | | 148,051 | | | | 144,289 | | | | 137,754 | | | | 133,093 | |
| Consumer indirect | | | 527,418 | | | | 533,727 | | | | 489,667 | | | | 444,735 | | | | 390,130 | | | | 527,418 | | | | 533,727 | | | | 489,667 | | | | 444,735 | |
| Total consumer | | | 675,469 | | | | 678,016 | | | | 627,421 | | | | 577,828 | | | | 516,536 | | | | 675,469 | | | | 678,016 | | | | 627,421 | | | | 577,828 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total loans | | $ | 3,248,664 | | | $ | 3,208,638 | | | $ | 3,122,940 | | | $ | 2,938,371 | | | $ | 2,873,961 | | | $ | 3,248,664 | | | $ | 3,208,638 | | | $ | 3,122,940 | | | $ | 2,938,371 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Percent of total year-end loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Construction | | | 3.23 | % | | | 2.58 | % | | | 2.45 | % | | | 2.28 | % | | | 2.71 | % | | | 3.23 | % | | | 2.58 | % | | | 2.45 | % | | | 2.28 | % |
| Secured by real estate | | | 36.01 | | | | 36.87 | | | | 38.06 | | | | 36.94 | | | | 36.64 | | | | 36.01 | | | | 36.87 | | | | 38.06 | | | | 36.94 | |
| Equipment lease financing | | | 0.01 | | | | 0.05 | | | | 0.10 | | | | 0.18 | | | | 0.30 | | | | 0.01 | | | | 0.05 | | | | 0.10 | | | | 0.18 | |
| Commercial other | | | 12.00 | | | | 11.76 | | | | 11.24 | | | | 11.92 | | | | 12.49 | | | | 12.00 | | | | 11.76 | | | | 11.24 | | | | 11.92 | |
| Total commercial | | | 51.25 | | | | 51.26 | | | | 51.85 | | | | 51.32 | | | | 52.14 | | | | 51.25 | | | | 51.26 | | | | 51.85 | | | | 51.32 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real estate construction | | | 1.95 | | | | 1.78 | | | | 2.16 | | | | 1.97 | | | | 2.15 | | | | 1.95 | | | | 1.78 | | | | 2.16 | | | | 1.97 | |
| Real estate mortgage | | | 22.57 | | | | 22.52 | | | | 22.72 | | | | 23.93 | | | | 24.63 | | | | 22.57 | | | | 22.52 | | | | 22.72 | | | | 23.93 | |
| Home equity | | | 3.44 | | | | 3.31 | | | | 3.18 | | | | 3.11 | | | | 3.11 | | | | 3.44 | | | | 3.31 | | | | 3.18 | | | | 3.11 | |
| Total residential | | | 27.96 | | | | 27.61 | | | | 28.06 | | | | 29.01 | | | | 29.89 | | | | 27.96 | | | | 27.61 | | | | 28.06 | | | | 29.01 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer direct | | | 4.56 | | | | 4.50 | | | | 4.41 | | | | 4.53 | | | | 4.40 | | | | 4.56 | | | | 4.50 | | | | 4.41 | | | | 4.53 | |
| Consumer indirect | | | 16.23 | | | | 16.63 | | | | 15.68 | | | | 15.14 | | | | 13.57 | | | | 16.23 | | | | 16.63 | | | | 15.68 | | | | 15.14 | |
| Total consumer | | | 20.79 | | | | 21.13 | | | | 20.09 | | | | 19.67 | | | | 17.97 | | | | 20.79 | | | | 21.13 | | | | 20.09 | | | | 19.67 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total loans | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % |
The total loans above are net of deferred loan fees and costs.costs and unamortized premiums.
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).
CTB has changed the origination process on commercial and residential construction loans to be primarily construction to permanent financing with only one note. This change is resulting in a greater number of loans showing in the after five year maturity for construction loans, even though those loans will be converted from construction loans to permanent financing by a change in internal coding on the loans while the maturity date remains the same.
| | Maturity at December 31, 2019 | | | Maturity at December 31, 2020 | |
| (in thousands) | | Within One Year | | | After One but Within Five Years | | | After Five Years | | | Total | | | Within One Year | | | After One but Within Five Years | | | After Five Years | | | Total | |
| Commercial secured by real estate and commercial other | | $ | 235,617 | | | $ | 268,872 | | | $ | 1,055,169 | | | $ | 1,559,658 | | | $ | 213,943 | | | $ | 471,351 | | | $ | 1,086,569 | | | $ | 1,771,863 | |
| Commercial and real estate construction | | | 67,571 | | | | 18,339 | | | | 82,249 | | | | 168,159 | | | | 61,988 | | | | 18,220 | | | | 125,768 | | | | 205,976 | |
| | | $ | 303,188 | | | $ | 287,211 | | | $ | 1,137,418 | | | $ | 1,727,817 | | | $ | 275,931 | | | $ | 489,571 | | | $ | 1,212,337 | | | $ | 1,977,839 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Rate sensitivity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed rate | | $ | 64,673 | | | $ | 72,247 | | | $ | 43,285 | | | $ | 180,205 | | | $ | 53,395 | | | $ | 331,251 | | | $ | 22,277 | | | $ | 406,923 | |
| Adjustable rate | | | 238,515 | | | | 214,964 | | | | 1,094,133 | | | | 1,547,612 | | | | 222,536 | | | | 158,320 | | | | 1,190,060 | | | | 1,570,916 | |
| | | $ | 303,188 | | | $ | 287,211 | | | $ | 1,137,418 | | | $ | 1,727,817 | | | $ | 275,931 | | | $ | 489,571 | | | $ | 1,212,337 | | | $ | 1,977,839 | |
Nonperforming Assets
| (in thousands) | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | |
| Nonaccrual loans | | $ | 13,999 | | | $ | 11,867 | | | $ | 18,119 | | | $ | 16,623 | | | $ | 16,563 | | | $ | 9,444 | | | $ | 13,999 | | | $ | 11,867 | | | $ | 18,119 | | | $ | 16,623 | |
| 90 days or more past due and still accruing interest | | | 19,620 | | | | 10,198 | | | | 10,176 | | | | 10,847 | | | | 12,046 | | | | 17,133 | | | | 19,620 | | | | 10,198 | | | | 10,176 | | | | 10,847 | |
| Total nonperforming loans | | | 33,619 | | | | 22,065 | | | | 28,295 | | | | 27,470 | | | | 28,609 | | | | 26,577 | | | | 33,619 | | | | 22,065 | | | | 28,295 | | | | 27,470 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other repossessed assets | | | 0 | | | | 42 | | | | 155 | | | | 103 | | | | 183 | | | | 0 | | | | 0 | | | | 42 | | | | 155 | | | | 103 | |
| Foreclosed properties | | | 19,480 | | | | 27,273 | | | | 31,996 | | | | 35,856 | | | | 40,674 | | | | 7,694 | | | | 19,480 | | | | 27,273 | | | | 31,996 | | | | 35,856 | |
| Total nonperforming assets | | $ | 53,099 | | | $ | 49,380 | | | $ | 60,446 | | | $ | 63,429 | | | $ | 69,466 | | | $ | 34,271 | | | $ | 53,099 | | | $ | 49,380 | | | $ | 60,446 | | | $ | 63,429 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nonperforming assets to total loans and foreclosed properties | | | 1.62 | % | | | 1.53 | % | | | 1.92 | % | | | 2.13 | % | | | 2.38 | % | | | 0.96 | % | | | 1.62 | % | | | 1.53 | % | | | 1.92 | % | | | 2.13 | % |
| Allowance to nonperforming loans | | | 104.39 | % | | | 162.73 | % | | | 127.76 | % | | | 130.81 | % | | | 126.16 | % | | | 180.69 | % | | | 104.39 | % | | | 162.73 | % | | | 127.76 | % | | | 130.81 | % |
Nonaccrual and Past Due Loans
| (in thousands) | | 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 | | | 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 | |
| December 31, 2020 | | | | | | | | | | | | | | | | |
| Hotel/motel | | | $ | 0 | | | | 0.00 | % | | $ | 0 | | | | 0.00 | % | | $ | 260,699 | |
| Commercial real estate residential | | | | 1,225 | | | | 0.43 | | | | 4,776 | | | | 1.66 | | | | 287,928 | |
| Commercial real estate nonresidential | | | | 1,424 | | | | 0.19 | | | | 7,852 | | | | 1.06 | | | | 743,238 | |
| Dealer floorplans | | | | 0 | | | | 0.00 | | | | 0 | | | | 0.00 | | | | 69,087 | |
| Commercial other | | | | 867 | | | | 0.31 | | | | 269 | | | | 0.10 | | | | 279,908 | |
| Commercial unsecured PPP | | | | 0 | | | | 0.00 | | | | 0 | | | | 0.00 | | | | 252,667 | |
| Real estate mortgage | | | | 5,346 | | | | 0.68 | | | | 3,420 | | | | 0.44 | | | | 784,559 | |
| Home equity lines | | | | 582 | | | | 0.56 | | | | 392 | | | | 0.38 | | | | 103,770 | |
| Consumer direct | | | | 0 | | | | 0.00 | | | | 71 | | | | 0.05 | | | | 152,304 | |
| Consumer indirect | | | | 0 | | | | 0.00 | | | | 353 | | | | 0.06 | | | | 620,051 | |
| Total | | | $ | 9,444 | | | | 0.27 | % | | $ | 17,133 | | | | 0.48 | % | | $ | 3,554,211 | |
| | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial construction | | $ | 230 | | | | 0.22 | % | | $ | 237 | | | | 0.23 | % | | $ | 104,809 | | | $ | 230 | | | | 0.22 | % | | $ | 237 | | | | 0.23 | % | | $ | 104,809 | |
| Commercial secured by real estate | | | 3,759 | | | | 0.32 | | | | 8,820 | | | | 0.75 | | | | 1,169,975 | | | | 3,759 | | | | 0.32 | | | | 8,820 | | | | 0.75 | | | | 1,169,975 | |
| Equipment lease financing | | | 0 | | | | 0.00 | | | | 0 | | | | 0.00 | | | | 481 | | | | 0 | | | | 0.00 | | | | 0 | | | | 0.00 | | | | 481 | |
| Commercial other | | | 3,839 | | | | 0.99 | | | | 2,586 | | | | 0.66 | | | | 389,683 | | | | 3,839 | | | | 0.99 | | | | 2,586 | | | | 0.66 | | | | 389,683 | |
| Real estate construction | | | 634 | | | | 1.00 | | | | 0 | | | | 0.00 | | | | 63,350 | | | | 634 | | | | 1.00 | | | | 0 | | | | 0.00 | | | | 63,350 | |
| Real estate mortgage | | | 4,821 | | | | 0.66 | | | | 7,088 | | | | 0.97 | | | | 733,003 | | | | 4,821 | | | | 0.66 | | | | 7,088 | | | | 0.97 | | | | 733,003 | |
| Home equity | | | 716 | | | | 0.64 | | | | 344 | | | | 0.31 | | | | 111,894 | | | | 716 | | | | 0.64 | | | | 344 | | | | 0.31 | | | | 111,894 | |
| Consumer direct | | | 0 | | | | 0.00 | | | | 97 | | | | 0.07 | | | | 148,051 | | | | 0 | | | | 0.00 | | | | 97 | | | | 0.07 | | | | 148,051 | |
| Consumer indirect | | | 0 | | | | 0.00 | | | | 448 | | | | 0.08 | | | | 527,418 | | | | 0 | | | | 0.00 | | | | 448 | | | | 0.08 | | | | 527,418 | |
| Total | | $ | 13,999 | | | | 0.43 | % | | $ | 19,620 | | | | 0.60 | % | | $ | 3,248,664 | | | $ | 13,999 | | | | 0.43 | % | | $ | 19,620 | | | | 0.60 | % | | $ | 3,248,664 | |
| | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | | | | | | | | | | | | | | | | | | | | | |
| Commercial construction | | $ | 639 | | | | 0.77 | % | | $ | 58 | | | | 0.07 | % | | $ | 82,715 | | |
| Commercial secured by real estate | | | 4,537 | | | | 0.38 | | | | 4,632 | | | | 0.39 | | | | 1,183,093 | | |
| Equipment lease financing | | | 0 | | | | 0.00 | | | | 0 | | | | 0.00 | | | | 1,740 | | |
| Commercial other | | | 797 | | | | 0.21 | | | | 581 | | | | 0.15 | | | | 377,198 | | |
| Real estate construction | | | 22 | | | | 0.04 | | | | 6 | | | | 0.01 | | | | 57,160 | | |
| Real estate mortgage | | | 5,395 | | | | 0.75 | | | | 4,095 | | | | 0.57 | | | | 722,417 | | |
| Home equity | | | 477 | | | | 0.45 | | | | 246 | | | | 0.23 | | | | 106,299 | | |
| Consumer direct | | | 0 | | | | 0.00 | | | | 74 | | | | 0.05 | | | | 144,289 | | |
| Consumer indirect | | | 0 | | | | 0.00 | | | | 506 | | | | 0.09 | | | | 533,727 | | |
| Total | | $ | 11,867 | | | | 0.37 | % | | $ | 10,198 | | | | 0.32 | % | | $ | 3,208,638 | | |
Discussion of the Nonaccrual Policy
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 to the consolidated financial statements 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, 2019.2020. See note 1918 to the consolidated financial statements for further information.
Analysis of the Allowance for Credit Losses
| (in thousands) | | 2020 | |
| Beginning balance, prior to adoption of ASC 326 | | $ | 35,096 | |
| | | | | |
| Impact of ASC 326 | | | 3,040 | |
| | | | | |
| Loans charged off: | | | | |
| Hotel/motel | | | (43 | ) |
| Commercial real estate residential | | | (182 | ) |
| Commercial real estate nonresidential | | | (941 | ) |
| Dealer floorplans | | | (26 | ) |
| Commercial other | | | (3,339 | ) |
| Commercial unsecured SBA PPP | | | 0 | |
| Real estate mortgage | | | (321 | ) |
| Home equity lines | | | (4 | ) |
| Consumer direct | | | (927 | ) |
| Consumer indirect | | | (4,670 | ) |
| Total charge-offs | | | (10,453 | ) |
| | | | | |
| Recoveries of loans previously charged off: | | | | |
| Hotel/motel | | | 0 | |
| Commercial real estate residential | | | 156 | |
| Commercial real estate nonresidential | | | 90 | |
| Dealer floorplans | | | 0 | |
| Commercial other | | | 423 | |
| Commercial unsecured SBA PPP | | | 0 | |
| Real estate mortgage | | | 72 | |
| Home equity lines | | | 10 | |
| Consumer direct | | | 510 | |
| Consumer indirect | | | 3,031 | |
| Total recoveries | | | 4,292 | |
| | | | | |
| Net charge-offs: | | | | |
| Hotel/motel | | | (43 | ) |
| Commercial real estate residential | | | (26 | ) |
| Commercial real estate nonresidential | | | (851 | ) |
| Dealer floorplans | | | (26 | ) |
| Commercial other | | | (2,916 | ) |
| Commercial unsecured SBA PPP | | | 0 | |
| Real estate mortgage | | | (249 | ) |
| Home equity lines | | | 6 | |
| Consumer direct | | | (417 | ) |
| Consumer indirect | | | (1,639 | ) |
| Total net charge-offs | | | (6,161 | ) |
| | | | | |
| Provisions charged against operations | | | 16,047 | |
| | | | | |
| Balance, end of year | | $ | 48,022 | |
| | | | | |
| Allocation of allowance, end of year: | | | | |
| Unallocated | | | 0 | |
| Balance, end of year | | $ | 48,022 | |
| | | | | |
| Allocation of ACL, end of year: | | | | |
| Hotel/motel | | $ | 6,356 | |
| Commercial real estate residential | | | 4,464 | |
| Commercial real estate nonresidential | | | 11,086 | |
| Dealer floorplans | | | 1,382 | |
| Commercial other | | | 4,289 | |
| Commercial unsecured SBA PPP | | | 0 | |
| Real estate mortgage | | | 7,832 | |
| Home equity lines | | | 844 | |
| Consumer direct | | | 1,863 | |
| Consumer indirect | | | 9,906 | |
| Total | | $ | 48,022 | |
| | | | | |
| Average loans outstanding, net of deferred loan fees and costs and unamortized premiums | | $ | 3,453,529 | |
| Loans outstanding at end of year, net of deferred loan fees and costs and unamortized premiums | | $ | 3,554,211 | |
| | | | | |
| Net charge-offs to average loan type: | | | | |
| Hotel/motel | | | 0.02 | % |
| Commercial real estate residential | | | 0.01 | |
| Commercial real estate nonresidential | | | 0.11 | |
| Dealer floorplans | | | 0.04 | |
| Commercial other | | | 0.98 | |
| Commercial unsecured SBA PPP | | | 0.00 | |
| Real estate mortgage | | | 0.03 | |
| Home equity lines | | | (0.01 | ) |
| Consumer direct | | | 0.28 | |
| Consumer indirect | | | 0.28 | |
| Total | | | 0.18 | % |
| | | | | |
| Other ratios: | | | | |
| Allowance to net loans, end of year | | | 1.35 | % |
| Provision for loan losses to average loans | | | 0.46 | % |
Analysis of the Allowance for Loan and Lease Losses
| (in thousands) | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | |
| Allowance for loan and lease losses, beginning of year | | $ | 35,908 | | | $ | 36,151 | | | $ | 35,933 | | | $ | 36,094 | | | $ | 34,447 | |
| Loans charged off: | | | | | | | | | | | | | | | | | | | | |
| Commercial construction | | | (72 | ) | | | 0 | | | | (10 | ) | | | (316 | ) | | | (3 | ) |
| Commercial secured by real estate | | | (727 | ) | | | (988 | ) | | | (2,038 | ) | | | (1,641 | ) | | | (1,379 | ) |
| Commercial other | | | (2,179 | ) | | | (1,513 | ) | | | (1,893 | ) | | | (2,136 | ) | | | (1,961 | ) |
| Real estate construction | | | (100 | ) | | | (33 | ) | | | 0 | | | | (192 | ) | | | (135 | ) |
| Real estate mortgage | | | (767 | ) | | | (1,004 | ) | | | (615 | ) | | | (1,043 | ) | | | (1,421 | ) |
| Home equity | | | (139 | ) | | | (69 | ) | | | (178 | ) | | | (54 | ) | | | (129 | ) |
| Consumer direct | | | (1,100 | ) | | | (997 | ) | | | (965 | ) | | | (1,236 | ) | | | (1,306 | ) |
| Consumer indirect | | | (4,652 | ) | | | (6,394 | ) | | | (5,386 | ) | | | (5,050 | ) | | | (3,536 | ) |
| Total charge-offs | | | (9,736 | ) | | | (10,998 | ) | | | (11,085 | ) | | | (11,668 | ) | | | (9,870 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Recoveries of loans previously charged off: | | | | | | | | | | | | | | | | | | | | |
| Commercial construction | | | 12 | | | | 61 | | | | 49 | | | | 36 | | | | 13 | |
| Commercial secured by real estate | | | 358 | | | | 224 | | | | 75 | | | | 178 | | | | 60 | |
| Commercial other | | | 509 | | | | 643 | | | | 532 | | | | 439 | | | | 585 | |
| Real estate construction | | | 0 | | | | 0 | | | | 0 | | | | 7 | | | | 4 | |
| Real estate mortgage | | | 152 | | | | 85 | | | | 87 | | | | 101 | | | | 117 | |
| Home equity | | | 23 | | | | 14 | | | | 4 | | | | 9 | | | | 54 | |
| Consumer direct | | | 400 | | | | 445 | | | | 525 | | | | 615 | | | | 435 | |
| Consumer indirect | | | 2,651 | | | | 3,116 | | | | 2,510 | | | | 2,250 | | | | 1,599 | |
| Total recoveries | | | 4,105 | | | | 4,588 | | | | 3,782 | | | | 3,635 | | | | 2,867 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net charge-offs: | | | | | | | | | | | | | | | | | | | | |
| Commercial construction | | | (60 | ) | | | 61 | | | | 39 | | | | (280 | ) | | | 10 | |
| Commercial secured by real estate | | | (369 | ) | | | (764 | ) | | | (1,963 | ) | | | (1,463 | ) | | | (1,319 | ) |
| Commercial other | | | (1,670 | ) | | | (870 | ) | | | (1,361 | ) | | | (1,697 | ) | | | (1,376 | ) |
| Real estate construction | | | (100 | ) | | | (33 | ) | | | 0 | | | | (185 | ) | | | (131 | ) |
| Real estate mortgage | | | (615 | ) | | | (919 | ) | | | (528 | ) | | | (942 | ) | | | (1,304 | ) |
| Home equity | | | (116 | ) | | | (55 | ) | | | (174 | ) | | | (45 | ) | | | (75 | ) |
| Consumer direct | | | (700 | ) | | | (552 | ) | | | (440 | ) | | | (621 | ) | | | (871 | ) |
| Consumer indirect | | | (2,001 | ) | | | (3,278 | ) | | | (2,876 | ) | | | (2,800 | ) | | | (1,937 | ) |
| Total net charge-offs | | | (5,631 | ) | | | (6,410 | ) | | | (7,303 | ) | | | (8,033 | ) | | | (7,003 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Provisions charged against operations | | | 4,819 | | | | 6,167 | | | | 7,521 | | | | 7,872 | | | | 8,650 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, end of year | | $ | 35,096 | | | $ | 35,908 | | | $ | 36,151 | | | $ | 35,933 | | | $ | 36,094 | |
| | | | | | | | | | | | | | | | | | | | | |
| Allocation of allowance, end of year: | | | | | | | | | | | | | | | | | | | | |
| Commercial construction | | $ | 1,299 | | | $ | 862 | | | $ | 686 | | | $ | 884 | | | $ | 2,199 | |
| Commercial secured by real estate | | | 14,025 | | | | 14,531 | | | | 14,509 | | | | 14,191 | | | | 14,434 | |
| Equipment lease financing | | | 4 | | | | 12 | | | | 18 | | | | 42 | | | | 79 | |
| Commercial other | | | 6,355 | | | | 4,993 | | | | 5,039 | | | | 4,656 | | | | 4,225 | |
| Real estate construction | | | 372 | | | | 512 | | | | 660 | | | | 629 | | | | 550 | |
| Real estate mortgage | | | 4,232 | | | | 4,433 | | | | 5,688 | | | | 6,027 | | | | 6,678 | |
| Home equity | | | 897 | | | | 841 | | | | 857 | | | | 774 | | | | 839 | |
| Consumer direct | | | 1,711 | | | | 1,883 | | | | 1,863 | | | | 1,885 | | | | 1,594 | |
| Consumer indirect | | | 6,201 | | | | 7,841 | | | | 6,831 | | | | 6,845 | | | | 5,496 | |
| Balance, end of year | | $ | 35,096 | | | $ | 35,908 | | | $ | 36,151 | | | $ | 35,933 | | | $ | 36,094 | |
| | | | | | | | | | | | | | | | | | | | | |
| Average loans outstanding, net of deferred loan costs and fees | | $ | 3,195,662 | | | $ | 3,150,878 | | | $ | 3,048,879 | | | $ | 2,916,031 | | | $ | 2,791,871 | |
| Loans outstanding at end of year, net of deferred loan costs and fees | | $ | 3,248,664 | | | $ | 3,208,638 | | | $ | 3,122,940 | | | $ | 2,938,371 | | | $ | 2,873,961 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net charge-offs to average loan type: | | | | | | | | | | | | | | | | | | | | |
| Commercial construction | | | 0.07 | % | | | (0.08 | )% | | | (0.05 | )% | | | 0.40 | % | | | (0.01 | )% |
| Commercial secured by real estate | | | 0.03 | | | | 0.06 | | | | 0.17 | | | | 0.14 | | | | 0.13 | |
| Commercial other | | | 0.43 | | | | 0.25 | | | | 0.39 | | | | 0.47 | | | | 0.39 | |
| Real estate construction | | | 0.17 | | | | 0.05 | | | | 0.00 | | | | 0.32 | | | | 0.21 | |
| Real estate mortgage | | | 0.09 | | | | 0.13 | | | | 0.07 | | | | 0.13 | | | | 0.18 | |
| Home equity | | | 0.11 | | | | 0.05 | | | | 0.18 | | | | 0.05 | | | | 0.08 | |
| Consumer direct | | | 0.48 | | | | 0.39 | | | | 0.33 | | | | 0.48 | | | | 0.71 | |
| Consumer indirect | | | 0.39 | | | | 0.64 | | | | 0.61 | | | | 0.67 | | | | 0.55 | |
| Total | | | 0.18 | % | | | 0.20 | % | | | 0.24 | % | | | 0.28 | % | | | 0.25 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Other ratios: | | | | | | | | | | | | | | | | | | | | |
| Allowance to net loans, end of year | | | 1.08 | % | | | 1.12 | % | | | 1.16 | % | | | 1.22 | % | | | 1.26 | % |
| Provision for loan losses to average loans | | | 0.15 | % | | | 0.20 | % | | | 0.25 | % | | | 0.27 | % | | | 0.31 | % |
The allowance for loan and leasecredit 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 1,1and 4 and 7 to the consolidated financial statements for further information.
Effective January 1, 2020, the allowance for loan and lease losses became the allowance for credit losses with the implementation of Accounting Standards Update (“ASU”) 2016-13, commonly referred to as CECL. The prior years’ disclosures for allowance for loan and lease losses is shown below.
| (in thousands) | | 2019 | | | 2018 | | | 2017 | | | 2016 | |
| Allowance for loan and lease losses, beginning of year | | $ | 35,908 | | | $ | 36,151 | | | $ | 35,933 | | | $ | 36,094 | |
| Loans charged off: | | | | | | | | | | | | | | | | |
| Commercial construction | | | (72 | ) | | | 0 | | | | (10 | ) | | | (316 | ) |
| Commercial secured by real estate | | | (727 | ) | | | (988 | ) | | | (2,038 | ) | | | (1,641 | ) |
| Commercial other | | | (2,179 | ) | | | (1,513 | ) | | | (1,893 | ) | | | (2,136 | ) |
| Real estate construction | | | (100 | ) | | | (33 | ) | | | 0 | | | | (192 | ) |
| Real estate mortgage | | | (767 | ) | | | (1,004 | ) | | | (615 | ) | | | (1,043 | ) |
| Home equity | | | (139 | ) | | | (69 | ) | | | (178 | ) | | | (54 | ) |
| Consumer direct | | | (1,100 | ) | | | (997 | ) | | | (965 | ) | | | (1,236 | ) |
| Consumer indirect | | | (4,652 | ) | | | (6,394 | ) | | | (5,386 | ) | | | (5,050 | ) |
| Total charge-offs | | | (9,736 | ) | | | (10,998 | ) | | | (11,085 | ) | | | (11,668 | ) |
| | | | | | | | | | | | | | | | | |
| Recoveries of loans previously charged off: | | | | | | | | | | | | | | | | |
| Commercial construction | | | 12 | | | | 61 | | | | 49 | | | | 36 | |
| Commercial secured by real estate | | | 358 | | | | 224 | | | | 75 | | | | 178 | |
| Commercial other | | | 509 | | | | 643 | | | | 532 | | | | 439 | |
| Real estate construction | | | 0 | | | | 0 | | | | 0 | | | | 7 | |
| Real estate mortgage | | | 152 | | | | 85 | | | | 87 | | | | 101 | |
| Home equity | | | 23 | | | | 14 | | | | 4 | | | | 9 | |
| Consumer direct | | | 400 | | | | 445 | | | | 525 | | | | 615 | |
| Consumer indirect | | | 2,651 | | | | 3,116 | | | | 2,510 | | | | 2,250 | |
| Total recoveries | | | 4,105 | | | | 4,588 | | | | 3,782 | | | | 3,635 | |
| | | | | | | | | | | | | | | | | |
| Net charge-offs: | | | | | | | | | | | | | | | | |
| Commercial construction | | | (60 | ) | | | 61 | | | | 39 | | | | (280 | ) |
| Commercial secured by real estate | | | (369 | ) | | | (764 | ) | | | (1,963 | ) | | | (1,463 | ) |
| Commercial other | | | (1,670 | ) | | | (870 | ) | | | (1,361 | ) | | | (1,697 | ) |
| Real estate construction | | | (100 | ) | | | (33 | ) | | | 0 | | | | (185 | ) |
| Real estate mortgage | | | (615 | ) | | | (919 | ) | | | (528 | ) | | | (942 | ) |
| Home equity | | | (116 | ) | | | (55 | ) | | | (174 | ) | | | (45 | ) |
| Consumer direct | | | (700 | ) | | | (552 | ) | | | (440 | ) | | | (621 | ) |
| Consumer indirect | | | (2,001 | ) | | | (3,278 | ) | | | (2,876 | ) | | | (2,800 | ) |
| Total net charge-offs | | | (5,631 | ) | | | (6,410 | ) | | | (7,303 | ) | | | (8,033 | ) |
| | | | | | | | | | | | | | | | | |
| Provisions charged against operations | | | 4,819 | | | | 6,167 | | | | 7,521 | | | | 7,872 | |
| | | | | | | | | | | | | | | | | |
| Balance, end of year | | $ | 35,096 | | | $ | 35,908 | | | $ | 36,151 | | | $ | 35,933 | |
| | | | | | | | | | | | | | | | | |
| Allocation of allowance, end of year: | | | | | | | | | | | | | | | | |
| Commercial construction | | $ | 1,299 | | | $ | 862 | | | $ | 686 | | | $ | 884 | |
| Commercial secured by real estate | | | 14,025 | | | | 14,531 | | | | 14,509 | | | | 14,191 | |
| Equipment lease financing | | | 4 | | | | 12 | | | | 18 | | | | 42 | |
| Commercial other | | | 6,355 | | | | 4,993 | | | | 5,039 | | | | 4,656 | |
| Real estate construction | | | 372 | | | | 512 | | | | 660 | | | | 629 | |
| Real estate mortgage | | | 4,232 | | | | 4,433 | | | | 5,688 | | | | 6,027 | |
| Home equity | | | 897 | | | | 841 | | | | 857 | | | | 774 | |
| Consumer direct | | | 1,711 | | | | 1,883 | | | | 1,863 | | | | 1,885 | |
| Consumer indirect | | | 6,201 | | | | 7,841 | | | | 6,831 | | | | 6,845 | |
| Balance, end of year | | $ | 35,096 | | | $ | 35,908 | | | $ | 36,151 | | | $ | 35,933 | |
| | | | | | | | | | | | | | | | | |
| Average loans outstanding, net of deferred loan fees and costs and unamortized premiums | | $ | 3,195,662 | | | $ | 3,150,878 | | | $ | 3,048,879 | | | $ | 2,916,031 | |
| Loans outstanding at end of year, net of deferred loan fees and costs and unamortized premiums | | $ | 3,248,664 | | | $ | 3,208,638 | | | $ | 3,122,940 | | | $ | 2,938,371 | |
| | | | | | | | | | | | | | | | | |
| Net charge-offs to average loan type: | | | | | | | | | | | | | | | | |
| Commercial construction | | | 0.07 | % | | | (0.08 | )% | | | (0.05 | )% | | | 0.40 | % |
| Commercial secured by real estate | | | 0.03 | | | | 0.06 | | | | 0.17 | | | | 0.14 | |
| Commercial other | | | 0.43 | | | | 0.25 | | | | 0.39 | | | | 0.47 | |
| Real estate construction | | | 0.17 | | | | 0.05 | | | | 0.00 | | | | 0.32 | |
| Real estate mortgage | | | 0.09 | | | | 0.13 | | | | 0.07 | | | | 0.13 | |
| Home equity | | | 0.11 | | | | 0.05 | | | | 0.18 | | | | 0.05 | |
| Consumer direct | | | 0.48 | | | | 0.39 | | | | 0.33 | | | | 0.48 | |
| Consumer indirect | | | 0.39 | | | | 0.64 | | | | 0.61 | | | | 0.67 | |
| Total | | | 0.18 | % | | | 0.20 | % | | | 0.24 | % | | | 0.28 | % |
| | | | | | | | | | | | | | | | | |
| Other ratios: | | | | | | | | | | | | | | | | |
| Allowance to net loans, end of year | | | 1.08 | % | | | 1.12 | % | | | 1.16 | % | | | 1.22 | % |
| Provision for loan losses to average loans | | | 0.15 | % | | | 0.20 | % | | | 0.25 | % | | | 0.27 | % |
Average Deposits and Other Borrowed Funds
| (in thousands) | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | |
| Deposits: | | | | | | | | | | | | | | | | | | |
| Noninterest bearing deposits | | $ | 828,281 | | | $ | 810,270 | | | $ | 778,304 | | | $ | 1,030,911 | | | $ | 828,281 | | | $ | 810,270 | |
| NOW accounts | | | 52,346 | | | | 57,166 | | | | 49,975 | | |
| Interest bearing deposits | | | | 75,183 | | | | 52,346 | | | | 57,166 | |
| Money market accounts | | | 983,530 | | | | 755,970 | | | | 668,609 | | | | 1,136,088 | | | | 983,530 | | | | 755,970 | |
| Savings accounts | | | 406,207 | | | | 421,426 | | | | 415,563 | | | | 471,502 | | | | 406,207 | | | | 421,426 | |
| Certificates of deposit of $100,000 or more | | | 534,835 | | | | 669,386 | | | | 628,165 | | | | 539,049 | | | | 534,835 | | | | 669,386 | |
| Certificates of deposit < $100,000 and other time deposits | | | 576,878 | | | | 586,644 | | | | 615,016 | | | | 536,623 | | | | 576,878 | | | | 586,644 | |
| Total deposits | | | 3,382,077 | | | | 3,300,862 | | | | 3,155,632 | | | | 3,789,356 | | | | 3,382,077 | | | | 3,300,862 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other borrowed funds: | | | | | | | | | | | | | | | | | | | | | | | | |
| Repurchase agreements and federal funds purchased | | | 233,484 | | | | 244,647 | | | | 258,419 | | | | 293,158 | | | | 233,484 | | | | 244,647 | |
| Advances from Federal Home Loan Bank | | | 1,959 | | | | 1,512 | | | | 38,287 | | | | 473 | | | | 1,959 | | | | 1,512 | |
| Long-term debt | | | 59,341 | | | | 59,341 | | | | 60,042 | | | | 59,291 | | | | 59,431 | | | | 59,341 | |
| Total other borrowed funds | | | 294,874 | | | | 305,500 | | | | 356,748 | | | | 352,922 | | | | 294,874 | | | | 305,500 | |
| Total deposits and other borrowed funds | | $ | 3,676,951 | | | $ | 3,606,362 | | | $ | 3,512,380 | | | $ | 4,142,278 | | | $ | 3,676,951 | | | $ | 3,606,362 | |
The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2020 occurred at November 30, 2020, with a month-end balance of $374.8 million. The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2019 occurred at November 30, 2019, with a month-end balance of $241.7 million. The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2018 occurred at June 30, 2018, with a month-end balance of $256.8 million. The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2017 occurred at March 31, 2017, with a month-end balance of $268.9 million.
Maturities and/or repricing of time deposits of $100,000 or more outstanding at December 31, 20192020 are summarized as follows:
| (in thousands) | | Certificates of Deposit | | | Other Time Deposits | | | Total | | | Certificates of Deposit | | | Other Time Deposits | | | Total | |
| Three months or less | | $ | 85,209 | | | $ | 6,911 | | | $ | 92,120 | | | $ | 91,481 | | | $ | 8,659 | | | $ | 100,140 | |
| Over three through six months | | | 85,173 | | | | 7,771 | | | | 92,944 | | | | 85,903 | | | | 9,776 | | | | 95,679 | |
| Over six through twelve months | | | 245,799 | | | | 17,208 | | | | 263,007 | | | | 263,774 | | | | 18,259 | | | | 282,033 | |
| Over twelve through sixty months | | | 125,256 | | | | 24,100 | | | | 149,356 | | | | 104,455 | | | | 23,916 | | | | 128,371 | |
| Over sixty months | | | 201 | | | | 0 | | | | 201 | | | | 0 | | | | 0 | | | | 0 | |
| | | $ | 541,638 | | | $ | 55,990 | | | $ | 597,628 | | | $ | 545,613 | | | $ | 60,610 | | | $ | 606,223 | |
Our main office, which is owned by Community Trust Bank, Inc., is located at 346 North Mayo Trail, Pikeville, Kentucky 41501. Following is a schedule of properties owned and leased by CTBI and its subsidiaries as of December 31, 2019:2020.
| Location | Location | Owned | Leased | Total | Owned | Leased | Total |
| Banking locations: | Banking locations: | | |
| Community Trust Bank, Inc. | Community Trust Bank, Inc. | | |
| * | Pikeville Market (lease land at 3 owned locations) | 9 | 1 | 10 | |
| | | 10 locations in Pike County, Kentucky | | |
| | Floyd/Knott/Johnson Market (lease land at 1 owned location) | 3 | 1 | 4 | |
| | | 2 locations in Floyd County, Kentucky, 1 location in Knott County, Kentucky, and 1 location in Johnson County, Kentucky | | |
| | Tug Valley Market (lease land at 1 owned location) | 2 | 0 | 2 | |
| | | 1 location in Pike County, Kentucky, 1 location in Mingo County, West Virginia | | |
| | Whitesburg Market (lease land at 1 owned location) | 4 | 1 | 5 | |
| | | 5 locations in Letcher County, Kentucky | | |
| | Hazard Market (lease land at 2 owned locations) | 3 | 0 | 3 | |
| | | 3 locations in Perry County, Kentucky | | |
| * | Lexington Market (lease land at 3 owned locations) | 4 | 2 | 6 | |
| | | 6 locations in Fayette County, Kentucky | | |
| | Winchester Market | 2 | 0 | 2 | |
| | | 2 locations in Clark County, Kentucky | | |
| | Richmond Market (lease land at 1 owned location) | 3 | 0 | 3 | |
| | | 3 locations in Madison County, Kentucky | | |
| | Mt. Sterling Market | 2 | 0 | 2 | |
| | | 2 locations in Montgomery County, Kentucky | | |
| * | Versailles Market (lease land at 1 owned location) | 2 | 3 | 5 | |
| | | 2 locations in Woodford County, Kentucky, 2 locations in Franklin County, Kentucky, and 1 location in Scott County, Kentucky | | |
| | Danville Market (lease land at 1 owned location) | 3 | 0 | 3 | |
| | | 2 locations in Boyle County, Kentucky and 1 location in Mercer County, Kentucky | | |
| * | Ashland Market (lease land at 1 owned location) | 5 | 0 | 5 | |
| | | 4 locations in Boyd County, Kentucky and 1 location in Greenup County, Kentucky | | |
| | Flemingsburg Market | 3 | 0 | 3 | |
| | | 3 locations in Fleming County, Kentucky | | |
| | Advantage Valley Market | 3 | 1 | 4 | |
| | | 2 locations in Lincoln County, West Virginia, 1 location in Wayne County, West Virginia, and 1 location in Cabell County, West Virginia | | |
| | Summersville Market | 1 | 0 | 1 | |
| | | 1 location in Nicholas County, West Virginia | | |
| | Middlesboro Market (lease land at 1 owned location) | 3 | 0 | 3 | |
| | | 3 locations in Bell County, Kentucky | | |
| | Williamsburg Market | 5 | 0 | 5 | |
| | | 2 locations in Whitley County, Kentucky and 3 locations in Laurel County, Kentucky | | |
| | Campbellsville Market (lease land at 2 owned locations) | 8 | 0 | 8 | |
| | | 2 locations in Taylor County, Kentucky, 2 locations in Pulaski County, Kentucky, 1 location in Adair County, Kentucky, 1 location in Green County, Kentucky, 1 location in Russell County, Kentucky, and 1 location in Marion County, Kentucky | | |
| | Mt. Vernon Market | 2 | 0 | 2 | |
| | | 2 locations in Rockcastle County, Kentucky | | |
| * | LaFollette Market | 3 | 0 | 3 | |
| | | 2 locations in Campbell County, Tennessee and 1 location in Anderson County, Tennessee | | |
| * Pikeville Market (lease land at 3 owned locations) | | 9 | 1 | 10 |
| 10 locations in Pike County, Kentucky | | |
| Floyd/Knott/Johnson Market (lease land at 1 owned location) | | 3 | 1 | 4 |
| 2 locations in Floyd County, Kentucky, 1 location in Knott County, Kentucky, and 1 location in Johnson County, Kentucky | | |
| Tug Valley Market (lease land at 1 owned location) | | 2 | 0 | 2 |
| 1 location in Pike County, Kentucky, 1 location in Mingo County, West Virginia | | |
| Whitesburg Market (lease land at 1 owned location) | | 4 | 1 | 5 |
| 5 locations in Letcher County, Kentucky | | |
| Hazard Market (lease land at 2 owned locations) | | 3 | 0 | 3 |
| 3 locations in Perry County, Kentucky | | |
| * Lexington Market (lease land at 3 owned locations) | | 4 | 2 | 6 |
| 6 locations in Fayette County, Kentucky | | |
| Winchester Market | | 2 | 0 | 2 |
| 2 locations in Clark County, Kentucky | | |
| Richmond Market (lease land at 1 owned location) | | 3 | 0 | 3 |
| 3 locations in Madison County, Kentucky | | |
| Mt. Sterling Market | | 2 | 0 | 2 |
| 2 locations in Montgomery County, Kentucky | | |
| * Versailles Market (lease land at 1 owned location) | | 2 | 3 | 5 |
| 2 locations in Woodford County, Kentucky, 2 locations in Franklin County, Kentucky, and 1 location in Scott County, Kentucky | | |
| Danville Market (lease land at 1 owned location) | | 3 | 0 | 3 |
| 2 locations in Boyle County, Kentucky and 1 location in Mercer County, Kentucky | | |
| *Ashland Market (lease land at 1 owned location) | | 5 | 0 | 5 |
| 4 locations in Boyd County, Kentucky and 1 location in Greenup County, Kentucky | | |
| Flemingsburg Market | | 3 | 0 | 3 |
| 3 locations in Fleming County, Kentucky | | |
| Advantage Valley Market | | 3 | 1 | 4 |
| 2 locations in Lincoln County, West Virginia, 1 location in Wayne County, West Virginia, and 1 location in Cabell County, West Virginia | | |
| Summersville Market | | 1 | 0 | 1 |
| 1 location in Nicholas County, West Virginia | | |
| Middlesboro Market (lease land at 1 owned location) | | 3 | 0 | 3 |
| 3 locations in Bell County, Kentucky | | |
| Williamsburg Market | | 5 | 0 | 5 |
| 2 locations in Whitley County, Kentucky and 3 locations in Laurel County, Kentucky | | |
| Campbellsville Market (lease land at 2 owned locations) | | 8 | 0 | 8 |
| 2 locations in Taylor County, Kentucky, 2 locations in Pulaski County, Kentucky, 1 location in Adair County, Kentucky, 1 location in Green County, Kentucky, 1 location in Russell County, Kentucky, and 1 location in Marion County, Kentucky | | |
| Mt. Vernon Market | | 2 | 0 | 2 |
| 2 locations in Rockcastle County, Kentucky | | |
*LaFollette Market | | 3 | 0 | 3 |
| 2 locations in Campbell County, Tennessee and 1 location in Anderson County, Tennessee | | |
| Total banking locations | Total banking locations | 70 | 9 | 79 | 70 | 9 | 79 |
| | | |
| Operational locations: | Operational locations: | | |
| Community Trust Bank, Inc. | Community Trust Bank, Inc. | | |
| | Pikeville (Pike County, Kentucky) (lease land at 1 owned location) | 1 | 0 | 1 | |
| Pikeville (Pike County, Kentucky) (lease land at 1 owned location) | | 1 | 0 | 1 |
| Total operational locations | Total operational locations | 1 | 0 | 1 | 1 | 0 | 1 |
| | | | |
| Total locations | Total locations | 71 | 9 | 80 | 71 | 9 | 80 |
*Community Trust and Investment Company has leased offices in the main office locations in these markets.
See notes 87 and 1615 to the consolidated financial statements included herein for the year ended December 31, 2019,2020, for additional information relating to lease commitments and amounts invested in premises and equipment.
Versailles Main location was sold in January 2021.
CTBI and 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 are without merit or that the ultimate liability, if any, will not materially affect our consolidated financial position or results of operations.
| Item 4. | Mine Safety Disclosures |
Not applicable.
Information about our Executive Officers
Set forth below are the executive officers of CTBI, their positions with CTBI, and the year in which they first became an executive officer.
Name and Age (1) | Positions and Offices Currently Held | Date First Became Executive Officer | | Principal Occupation |
| Jean R. Hale; 73 | Chairman, President and CEO | 1992 | | Chairman, President and CEO of Community Trust Bancorp, Inc. |
| | | | | |
| Mark A. Gooch; 61 | Executive Vice President and Secretary | 1997 | | President and CEO of Community Trust Bank, Inc. |
| | | | | |
| Larry W. Jones; 73 | Executive Vice President | 2002 | | Executive Vice President/ Central Kentucky Region President of Community Trust Bank, Inc. |
| | | | | |
| James B. Draughn; 60 | Executive Vice President | 2001 | | Executive Vice President/Operations of Community Trust Bank, Inc. |
| | | | | |
| Kevin J. Stumbo; 59 | Executive Vice President, Chief Financial Officer, and Treasurer | 2002 | | Executive Vice President/ Chief Financial Officer of Community Trust Bank, Inc. |
| | | | | |
| Ricky D. Sparkman; 57 | Executive Vice President | 2002 | | Executive Vice President/ South Central Region President of Community Trust Bank, Inc. |
| | | | | |
| Richard W. Newsom; 65 | Executive Vice President | 2002 | | Executive Vice President/ Eastern Region President of Community Trust Bank, Inc. |
| | | | | |
| James J. Gartner; 78 | Executive Vice President | 2002 | | Executive Vice President/ Chief Credit Officer of Community Trust Bank, Inc. |
| | | | | |
| Steven E. Jameson; 63 | Executive Vice President | 2004 | (2) | Executive Vice President/ Chief Internal Audit & Risk Officer |
| | | | | |
| D. Andrew Jones; 57 | Executive Vice President | 2010 | | Executive Vice President/ Northeastern Region President of Community Trust Bank, Inc. |
| | | | | |
| Andy D. Waters; 54 | Executive Vice President | 2011 | | President and CEO of Community Trust and Investment Company |
| | | | | |
| C. Wayne Hancock; 45 | Executive Vice President | 2014 | (3) | Executive Vice President/Senior Staff Attorney |
Name and Age (1) | Positions and Offices Currently Held | Date First Became Executive Officer | Principal Occupation |
| Jean R. Hale; 74 | Chairman, President and CEO | 1992 | | Chairman, President and CEO of Community Trust Bancorp, Inc. |
| | | | | |
| Mark A. Gooch; 62 | Executive Vice President and Secretary | 1997 | | President and CEO of Community Trust Bank, Inc. |
| | | | | |
| Larry W. Jones; 74 | Executive Vice President | 2002 | | Executive Vice President/ Central Kentucky Region President of Community Trust Bank, Inc. |
| | | | | |
| James B. Draughn; 61 | Executive Vice President | 2001 | | Executive Vice President/Operations of Community Trust Bank, Inc. |
| | | | | |
| Kevin J. Stumbo; 60 | Executive Vice President, Chief Financial Officer, and Treasurer | 2002 | | Executive Vice President/ Chief Financial Officer of Community Trust Bank, Inc. |
| | | | | |
| Ricky D. Sparkman; 58 | Executive Vice President | 2002 | | Executive Vice President/ South Central Region President of Community Trust Bank, Inc. |
| | | | | |
| Richard W. Newsom; 66 | Executive Vice President | 2002 | | Executive Vice President/ Eastern Region President of Community Trust Bank, Inc. |
| | | | | |
| James J. Gartner; 79 | Executive Vice President | 2002 | | Executive Vice President/ Chief Credit Officer of Community Trust Bank, Inc. |
| | | | | |
| Steven E. Jameson; 64 | Executive Vice President | 2004 | (2) | Executive Vice President/ Chief Internal Audit & Risk Officer |
| | | | | |
| D. Andrew Jones; 58 | Executive Vice President | 2010 | | Executive Vice President/ Northeastern Region President of Community Trust Bank, Inc. |
| | | | | |
| Andy D. Waters; 55 | Executive Vice President | 2011 | | President and CEO of Community Trust and Investment Company |
| | | | | |
| C. Wayne Hancock; 46 | Executive Vice President | 2014 | | Executive Vice President/Senior Staff Attorney |
| (1) | The ages listed for CTBI’s executive officers are as of February 28, 2020.26, 2021. |
| (2) | Mr. Jameson is a non-voting member of the Executive Committee. |
(3) | Mr. Hancock was employed as Senior Staff Attorney of Community Trust Bank, Inc. in September 2008. He was promoted to Senior Vice President in April 2009 and named Executive Vice President in April 2014. |
| Item 5. | Market for the Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities |
Our common stock is listed on The NASDAQ Global Select Market under the symbol CTBI. As of January 31, 2020,2021, there were approximately 5,2006,600 holders of record of our outstanding common shares.
Dividends
The annual dividend paid to our stockholders was increased from $1.38$1.48 per share to $1.48$1.53 per share during 2019.2020. We have adopted a conservative policy of cash dividends by generally maintaining an average annual cash dividend ratio of approximately 45%, with periodic stock dividends. The current year cash dividend ratio was 40.7%45.7%. Dividends are typically paid on a quarterly basis. Future dividends are subject to the discretion of CTBI’s Board of Directors, cash needs, general business conditions, dividends from our subsidiaries, and applicable governmental regulations and policies. For information concerning restrictions on dividends from the subsidiary bank to CTBI, see note 2120 to the consolidated financial statements included herein for the year ended December 31, 2019.2020.
Stock Repurchases
CTBI repurchased 32,664 shares of its common stock during 2020, leaving 1,034,706 shares remaining under CTBI’s current repurchase authorization. We did not acquire any shares of common stock through the stock repurchase program during the years 2019 and 2018. There are 67,371 shares remaining under CTBI’s current repurchase authorization.year 2019. For further information, see the Stock Repurchase Program section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Securities Authorized for Issuance Under Equity Compensation Plans
For information concerning securities authorized for issuance under CTBI’s equity compensation plans, see Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
Common Stock Performance
The following graph shows the cumulative total return experienced by CTBI’s shareholders during the last five years compared to the NASDAQ Stock Market (U.S.) and the NASDAQ Bank Stock Index. The graph assumes the investment of $100 on December 31, 20142015 in CTBI’s common stock and in each index and the reinvestment of all dividends paid during the five-year period.
Comparison of 5 Year Cumulative Total Return
among Community Trust Bancorp, Inc., NASDAQ Stock Market (U.S.),
and NASDAQ Bank Stocks
| Fiscal Year Ending December 31 ($) | Fiscal Year Ending December 31 ($) | | Fiscal Year Ending December 31 ($) | | | | |
| | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
| Community Trust Bancorp, Inc. | 100.00 | 98.83 | 143.77 | 140.29 | 122.09 | 148.33 | 100.00 | 145.48 | 141.96 | 123.55 | 150.09 | 124.15 |
| NASDAQ Stock Market (U.S.) | 100.00 | 100.48 | 113.55 | 137.83 | 130.33 | 170.96 | 100.00 | 113.01 | 137.17 | 129.71 | 170.14 | 206.32 |
| NASDAQ Bank Stocks | 100.00 | 102.21 | 129.34 | 153.13 | 128.02 | 175.61 | 100.00 | 126.54 | 149.82 | 125.25 | 171.82 | 149.83 |
| Item 6. | Selected Financial Data 2015-20192016-2020 |
(in(in thousands except ratios, per share amounts and # of employees)
| Year Ended December 31 | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | |
| Interest income | | $ | 185,398 | | | $ | 171,450 | | | $ | 155,696 | | | $ | 146,576 | | | $ | 144,020 | | | $ | 176,441 | | | $ | 185,398 | | | $ | 171,450 | | | $ | 155,696 | | | $ | 146,576 | |
| Interest expense | | | 40,513 | | | | 29,295 | | | | 18,294 | | | | 13,555 | | | | 11,773 | | | | 25,450 | | | | 40,513 | | | | 29,295 | | | | 18,294 | | | | 13,555 | |
| Net interest income | | | 144,885 | | | | 142,155 | | | | 137,402 | | | | 133,021 | | | | 132,247 | | | | 150,991 | | | | 144,885 | | | | 142,155 | | | | 137,402 | | | | 133,021 | |
| Provision for loan losses | | | 4,819 | | | | 6,167 | | | | 7,521 | | | | 7,872 | | | | 8,650 | | | | 16,047 | | | | 4,819 | | | | 6,167 | | | | 7,521 | | | | 7,872 | |
| Noninterest income | | | 50,184 | | | | 51,952 | | | | 48,508 | | | | 48,441 | | | | 46,809 | | | | 54,560 | | | | 50,184 | | | | 51,952 | | | | 48,508 | | | | 48,441 | |
| Noninterest expense | | | 118,258 | | | | 117,398 | | | | 109,878 | | | | 107,126 | | | | 105,443 | | | | 119,239 | | | | 118,258 | | | | 117,398 | | | | 109,878 | | | | 107,126 | |
| Income before income taxes | | | 71,992 | | | | 70,542 | | | | 68,511 | | | | 66,464 | | | | 64,963 | | | | 70,265 | | | | 71,992 | | | | 70,542 | | | | 68,511 | | | | 66,464 | |
| Income taxes | | | 7,452 | | | | 11,314 | | | | 17,018 | | | | 19,118 | | | | 18,531 | | | | 10,761 | | | | 7,452 | | | | 11,314 | | | | 17,018 | | | | 19,118 | |
| Net income | | $ | 64,540 | | | $ | 59,228 | | | $ | 51,493 | | | $ | 47,346 | | | $ | 46,432 | | | $ | 59,504 | | | $ | 64,540 | | | $ | 59,228 | | | $ | 51,493 | | | $ | 47,346 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Per common share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic earnings per share | | $ | 3.64 | | | $ | 3.35 | | | $ | 2.92 | | | $ | 2.70 | | | $ | 2.66 | | | $ | 3.35 | | | $ | 3.64 | | | $ | 3.35 | | | $ | 2.92 | | | $ | 2.70 | |
| Diluted earnings per share | | $ | 3.64 | | | $ | 3.35 | | | $ | 2.92 | | | $ | 2.70 | | | $ | 2.66 | | | $ | 3.35 | | | $ | 3.64 | | | $ | 3.35 | | | $ | 2.92 | | | $ | 2.70 | |
| Cash dividends declared- | | $ | 1.48 | | | $ | 1.38 | | | $ | 1.30 | | | $ | 1.26 | | | $ | 1.22 | | | $ | 1.53 | | | $ | 1.48 | | | $ | 1.38 | | | $ | 1.30 | | | $ | 1.26 | |
| as a % of net income | | | 40.66 | % | | | 41.19 | % | | | 44.52 | % | | | 46.67 | % | | | 45.86 | % | | | 45.67 | % | | | 40.66 | % | | | 41.19 | % | | | 44.52 | % | | | 46.67 | % |
| Book value, end of year | | $ | 34.56 | | | $ | 31.81 | | | $ | 30.00 | | | $ | 28.40 | | | $ | 27.12 | | | $ | 36.77 | | | $ | 34.56 | | | $ | 31.81 | | | $ | 30.00 | | | $ | 28.40 | |
| Market price, end of year | | $ | 46.64 | | | $ | 39.61 | | | $ | 47.10 | | | $ | 49.60 | | | $ | 34.96 | | | $ | 37.05 | | | $ | 46.64 | | | $ | 39.61 | | | $ | 47.10 | | | $ | 49.60 | |
| Market to book value, end of year | | | 1.35 | x | | | 1.25 | x | | | 1.57 | x | | | 1.75 | x | | | 1.29 | x | | | 1.01 | x | | | 1.35 | x | | | 1.25 | x | | | 1.57 | x | | | 1.75 | x |
| Price/earnings ratio, end of year | | | 12.81 | x | | | 11.82 | x | | | 16.13 | x | | | 18.37 | x | | | 13.14 | x | | | 11.06 | x | | | 12.81 | x | | | 11.82 | x | | | 16.13 | x | | | 18.37 | x |
| Cash dividend yield, for the year | | | 3.17 | % | | | 3.48 | % | | | 2.76 | % | | | 2.54 | % | | | 3.49 | % | | | 4.13 | % | | | 3.17 | % | | | 3.48 | % | | | 2.76 | % | | | 2.54 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At year-end: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 4,366,003 | | | $ | 4,201,616 | | | $ | 4,136,231 | | | $ | 3,932,169 | | | $ | 3,903,934 | | | $ | 5,139,141 | | | $ | 4,366,003 | | | $ | 4,201,616 | | | $ | 4,136,231 | | | $ | 3,932,169 | |
| Long-term debt | | | 57,841 | | | | 59,341 | | | | 59,341 | | | | 61,341 | | | | 61,341 | | | | 57,841 | | | | 57,841 | | | | 59,341 | | | | 59,341 | | | | 61,341 | |
| Shareholders’ equity | | | 614,886 | | | | 564,150 | | | | 530,699 | | | | 500,615 | | | | 475,583 | | | | 654,865 | | | | 614,886 | | | | 564,150 | | | | 530,699 | | | | 500,615 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Averages: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets | | $ | 4,328,024 | | | $ | 4,187,397 | | | $ | 4,068,970 | | | $ | 3,920,257 | | | $ | 3,790,282 | | | $ | 4,838,160 | | | $ | 4,328,024 | | | $ | 4,187,397 | | | $ | 4,068,970 | | | $ | 3,920,257 | |
| Deposits, including repurchase agreements | | | 3,610,589 | | | | 3,540,717 | | | | 3,406,627 | | | | 3,306,550 | | | | 3,201,545 | | | | 4,079,810 | | | | 3,610,589 | | | | 3,540,717 | | | | 3,406,627 | | | | 3,306,550 | |
| Earning assets | | | 4,043,975 | | | | 3,913,596 | | | | 3,799,128 | | | | 3,652,714 | | | | 3,524,506 | | | | 4,562,172 | | | | 4,043,975 | | | | 3,913,596 | | | | 3,799,128 | | | | 3,652,714 | |
| Loans | | | 3,195,662 | | | | 3,150,878 | | | | 3,048,879 | | | | 2,916,031 | | | | 2,791,871 | | | | 3,453,529 | | | | 3,195,662 | | | | 3,150,878 | | | | 3,048,879 | | | | 2,916,031 | |
| Shareholders’ equity | | | 595,337 | | | | 546,641 | | | | 518,767 | | | | 494,398 | | | | 465,682 | | | | 635,978 | | | | 595,337 | | | | 546,641 | | | | 518,767 | | | | 494,398 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Profitability ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Return on average assets | | | 1.49 | % | | | 1.41 | % | | | 1.27 | % | | | 1.21 | % | | | 1.23 | % | | | 1.23 | % | | | 1.49 | % | | | 1.41 | % | | | 1.27 | % | | | 1.21 | % |
| Return on average equity | | | 10.84 | | | | 10.83 | | | | 9.93 | | | | 9.58 | | | | 9.97 | | | | 9.36 | | | | 10.84 | | | | 10.83 | | | | 9.93 | | | | 9.58 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity to assets, end of year | | | 14.08 | % | | | 13.43 | % | | | 12.83 | % | | | 12.73 | % | | | 12.18 | % | | | 12.74 | % | | | 14.08 | % | | | 13.43 | % | | | 12.83 | % | | | 12.73 | % |
| Average equity to average assets | | | 13.76 | | | | 13.05 | | | | 12.75 | | | | 12.61 | | | | 12.29 | | | | 13.15 | | | | 13.76 | | | | 13.05 | | | | 12.75 | | | | 12.61 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Risk based capital ratios: | | | | | | | | | | | | | | | | | | | | | |
| Tier 1 leverage | | | 14.01 | % | | | 13.51 | % | | | 12.89 | % | | | 12.75 | % | | | 12.40 | % | |
| Common equity Tier 1 capital | | | 17.18 | | | | 16.27 | | | | 15.33 | | | | 15.18 | | | | 14.58 | | |
| Tier 1 capital | | | 18.94 | | | | 18.12 | | | | 17.22 | | | | 17.25 | | | | 16.70 | | |
| Total capital | | | 20.05 | | | | 19.29 | | | | 18.41 | | | | 18.50 | | | | 17.95 | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Other significant ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance to net loans, end of year | | | 1.08 | % | | | 1.12 | % | | | 1.16 | % | | | 1.22 | % | | | 1.26 | % | | | 1.35 | % | | | 1.08 | % | | | 1.12 | % | | | 1.16 | % | | | 1.22 | % |
| Allowance to nonperforming loans, end of year | | | 104.39 | | | | 162.73 | | | | 127.76 | | | | 130.81 | | | | 126.16 | | | | 180.69 | | | | 104.39 | | | | 162.73 | | | | 127.76 | | | | 130.81 | |
| Nonperforming assets to loans and foreclosed properties, end of year | | | 1.62 | | | | 1.53 | | | | 1.92 | | | | 2.13 | | | | 2.38 | | | | 0.96 | | | | 1.62 | | | | 1.53 | | | | 1.92 | | | | 2.13 | |
Net interest margin, tax equivalent | | | 3.60 | | | | 3.66 | | | | 3.67 | | | | 3.70 | | | | 3.81 | | | | 3.33 | | | | 3.60 | | | | 3.66 | | | | 3.67 | | | | 3.70 | |
| Efficiency ratio* | | | 60.70 | | | | 60.17 | | | | 58.66 | | | | 58.54 | | | | 58.20 | | | | 58.30 | | | | 60.70 | | | | 60.17 | | | | 58.66 | | | | 58.54 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other statistics: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Average common shares outstanding | | | 17,724 | | | | 17,687 | | | | 17,631 | | | | 17,548 | | | | 17,431 | | | | 17,748 | | | | 17,724 | | | | 17,687 | | | | 17,631 | | | | 17,548 | |
| Number of full-time equivalent employees, end of year | | | 1,000 | | | | 978 | | | | 990 | | | | 996 | | | | 984 | | | | 998 | | | | 1,000 | | | | 978 | | | | 990 | | | | 996 | |
* Efficiency ratio is calculated by dividing noninterest expense by net interest income (tax equivalent) plus noninterest income minus securities gains (losses).
Quarterly Financial Data
(Unaudited)
(in thousands except ratios and per share amounts)
| Three Months Ended | | December 31 | | | September 30 | | | June 30 | | | March 31 | | | December 31 | | | September 30 | | | June 30 | | | March 31 | |
| 2019 | | | | | | | | | | | | | |
| 2020 | | | | | | | | | | | | | |
| Net interest income | | $ | 36,356 | | | $ | 36,519 | | | $ | 36,027 | | | $ | 35,983 | | | $ | 38,605 | | | $ | 37,680 | | | $ | 38,462 | | | $ | 36,244 | |
| Net interest income, taxable equivalent basis | | | 36,532 | | | | 36,702 | | | | 36,219 | | | | 36,203 | | | | 38,793 | | | | 37,869 | | | | 38,643 | | | | 36,413 | |
| Provision for loan losses | | | 1,813 | | | | 1,253 | | | | 1,563 | | | | 190 | | | | 956 | | | | 2,433 | | | | (49 | ) | | | 12,707 | |
| Noninterest income | | | 13,373 | | | | 12,389 | | | | 12,252 | | | | 12,170 | | | | 15,249 | | | | 14,911 | | | | 12,879 | | | | 11,521 | |
| Noninterest expense | | | 29,263 | | | | 29,882 | | | | 30,030 | | | | 29,083 | | | | 33,636 | | | | 29,473 | | | | 27,909 | | | | 28,221 | |
| Net income | | | 16,008 | | | | 15,269 | | | | 18,324 | | | | 14,939 | | | | 15,826 | | | | 17,447 | | | | 19,652 | | | | 6,579 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Per common share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic earnings per share | | $ | 0.90 | | | $ | 0.86 | | | $ | 1.03 | | | $ | 0.84 | | | $ | 0.89 | | | $ | 0.98 | | | $ | 1.11 | | | $ | 0.37 | |
| Diluted earnings per share | | | 0.90 | | | | 0.86 | | | | 1.03 | | | | 0.84 | | | | 0.89 | | | | 0.98 | | | | 1.11 | | | | 0.37 | |
| Dividends declared | | | 0.38 | | | | 0.38 | | | | 0.36 | | | | 0.36 | | | | 0.385 | | | | 0.385 | | | | 0.380 | | | | 0.380 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Selected ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Return on average assets, annualized | | | 1.46 | % | | | 1.40 | % | | | 1.69 | % | | | 1.42 | % | | | 1.24 | % | | | 1.38 | % | | | 1.63 | % | | | 0.60 | % |
| Return on average common equity, annualized | | | 10.35 | | | | 10.02 | | | | 12.45 | | | | 10.58 | | | | 9.64 | | | | 10.81 | | | | 12.66 | | | | 4.24 | |
| Net interest margin, annualized | | | 3.55 | | | | 3.59 | | | | 3.57 | | | | 3.70 | | | | 3.20 | | | | 3.16 | | | | 3.41 | | | | 3.58 | |
| Three Months Ended | | December 31 | | | September 30 | | | June 30 | | | March 31 | | | December 31 | | | September 30 | | | June 30 | | | March 31 | |
| 2018 | | | | | | | | | | | | | |
| 2019 | | | | | | | | | | | | | |
| Net interest income | | $ | 36,280 | | | $ | 36,136 | | | $ | 35,148 | | | $ | 34,591 | | | $ | 36,356 | | | $ | 36,519 | | | $ | 36,027 | | | $ | 35,983 | |
| Net interest income, taxable equivalent basis | | | 36,504 | | | | 36,362 | | | | 35,376 | | | | 34,815 | | | | 36,532 | | | | 36,702 | | | | 36,219 | | | | 36,203 | |
| Provision for loan losses | | | 1,749 | | | | 1,543 | | | | 1,929 | | | | 946 | | | | 1,813 | | | | 1,253 | | | | 1,563 | | | | 190 | |
| Noninterest income | | | 12,239 | | | | 12,663 | | | | 13,740 | | | | 13,310 | | | | 13,373 | | | | 12,389 | | | | 12,252 | | | | 12,170 | |
| Noninterest expense | | | 28,172 | | | | 28,106 | | | | 32,439 | | | | 28,681 | | | | 29,263 | | | | 29,882 | | | | 30,030 | | | | 29,083 | |
| Net income | | | 15,709 | | | | 16,106 | | | | 11,599 | | | | 15,814 | | | | 16,008 | | | | 15,269 | | | | 18,324 | | | | 14,939 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Per common share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic earnings per share | | $ | 0.89 | | | $ | 0.91 | | | $ | 0.66 | | | $ | 0.89 | | | $ | 0.90 | | | $ | 0.86 | | | $ | 1.03 | | | $ | 0.84 | |
| Diluted earnings per share | | | 0.89 | | | | 0.91 | | | | 0.66 | | | | 0.89 | | | | 0.90 | | | | 0.86 | | | | 1.03 | | | | 0.84 | |
| Dividends declared | | | 0.36 | | | | 0.36 | | | | 0.33 | | | | 0.33 | | | | 0.380 | | | | 0.380 | | | | 0.360 | | | | 0.360 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Selected ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Return on average assets, annualized | | | 1.48 | % | | | 1.52 | % | | | 1.11 | % | | | 1.55 | % | | | 1.46 | % | | | 1.40 | % | | | 1.69 | % | | | 1.42 | % |
| Return on average common equity, annualized | | | 11.16 | | | | 11.62 | | | | 8.56 | | | | 12.00 | | | | 10.35 | | | | 10.02 | | | | 12.45 | | | | 10.58 | |
| Net interest margin, annualized | | | 3.68 | | | | 3.68 | | | | 3.61 | | | | 3.65 | | | | 3.55 | | | | 3.59 | | | | 3.57 | | | | 3.70 | |
| Item 7. | 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 Item 8 of this annual report. The MD&A includes the following sections:
| ❖ | Financial Goals and Performance |
| ❖ | Results of Operations and Financial Condition |
| ❖ | Contractual Obligations and Commitments |
| ❖ | Liquidity and Market Risk |
| ❖ | 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 seventy-nine banking locations in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee, four trust offices across Kentucky, and one trust office in northeastern Tennessee. At December 31, 2019,2020, we had total consolidated assets of $4.4$5.1 billion and total consolidated deposits, including repurchase agreements, of $3.6$4.4 billion. Total shareholders’ equity at December 31, 20192020 was $614.9$654.9 million. Trust assets under management which are excluded from CTBI’s total consolidated assets, at December 31, 2019,2020 were $2.2 billion. Trust assets under management include$2.8 billion, including CTB’s investment portfolio totaling $0.6$1.0 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 this annual report.
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 2020.2021. Rather, the goals represent a range of target performance for 2020.2021. There is no assurance that any or all of these goals will be achieved. See “Cautionary Statement Regarding Forward Looking Statements.”
| 2019 Goals | 2019 Performance | 2020 Goals |
Basic earnings per share | $3.45 - $3.52 | $3.64 | $3.23 - $3.29 |
Net income | $61.3 - $62.6 million | $64.5 million | $57.5 - $58.6 million |
ROAA | 1.44% - 1.47% | 1.49% | 1.29% - 1.32% |
ROAE | 10.57% - 10.79% | 10.84% | 9.09% - 9.28% |
Revenues | $189.0 - $194.7 million | $195.1 million | $197.8 - $201.8 million |
Noninterest revenue as of % of total revenue | 23.00% - 26.00% | 25.34% | 24.00% - 26.00% |
Assets | $4.20 - $4.46 billion | $4.37 billion | $4.39 - $4.66 billion |
Loans | $3.31 - $3.45 billion | $3.25 billion | $3.33 - $3.47 billion |
Deposits, including repurchase agreements | $3.56 - $3.71 billion | $3.63 billion | $3.69 - $3.84 billion |
Shareholders’ equity | $584.0 - $607.8 million | $614.9 million | $632.1 - $657.9 million |
| 2020 Goals | 2020 Performance | 2021 Goals |
| Basic earnings per share | $3.23 - $3.29 | $3.35 | $3.76 - $3.92 |
| Net income | $57.5 - $58.6 million | $59.5 million | $67.1 - $69.8 million |
| ROAA | 1.29% - 1.32% | 1.23% | 1.30% - 1.35% |
| ROAE | 9.09% - 9.28% | 9.36% | 9.88% - 10.28% |
| Revenues | $197.8 - $201.8 million | $205.6 million | $209.6 - $218.1 million |
| Noninterest revenue as % of total revenue | 24.00% - 26.00% | 25.91% | 24.00% - 26.00% |
| Assets | $4.39 - $4.66 billion | $5.14 billion | $5.04 - $5.35 billion |
| Loans | $3.33 - $3.47 billion | $3.55 billion | $3.48 - $3.63 billion |
| Deposits, including repurchase agreements | $3.69 - $3.84 billion | $4.37 billion | $4.30 - $4.47 billion |
| Shareholders’ equity | $632.1 - $657.9 million | $654.9 million | $682.6 - $710.5 million |
COVID-19, the CARES Act, and Related Regulatory Actions
Impact of COVID-19
On January 30, 2020, the World Health Organization (“WHO”) announced that the outbreak of the novel coronavirus disease 2019 (COVID-19) constituted a public health emergency of international concern. On March 11, 2020, the WHO declared COVID-19 to be a global pandemic. The health concerns relating to the COVID-19 outbreak and related governmental actions taken to reduce the spread of the virus have significantly impacted the global economy (including the states and local economies in which we operate), disrupted supply chains, caused additional volatility in equity market valuations, and created significant volatility and disruption in financial markets. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders, and business limitations and shutdowns. Such measures have significantly contributed to increased volatile unemployment and negatively impacted consumer and business spending. While quarantine and lock-down orders have been lifted and vaccination efforts are underway, COVID-19 has not yet been contained and commercial activity has not yet returned to the levels existing prior to the pandemic outbreak. As a result, the demand for CTBI’s products and services has been, and will continue to be, significantly impacted.
Interest Rates
On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak have and may continue to negatively impact CTBI’s net interest income and noninterest income.
The CARES Act and the Paycheck Protection Program
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law, providing an approximately $2 trillion stimulus package that includes direct payments to individual taxpayers, economic stimulus to significantly impacted industry sectors, emergency funding for hospitals and providers, small business loans, increased unemployment benefits, and a variety of tax incentives.
For small businesses, eligible nonprofits and certain others, the CARES Act established a Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”). On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was enacted. Among other things, this legislation amends the initial CARES Act program by raising the appropriation level for PPP loans from $349 billion to $670 billion. The PPP was further modified on June 5, 2020, with the adoption of the Paycheck Protection Program Flexibility Act (the “Flexibility Act”), which extended the maturity date for PPP loans from two years to five years for loans disbursed on or after the date of enactment of the Flexibility Act. For PPP loans disbursed prior to such enactment, the Flexibility Act permits the borrower and lender to mutually agree to extend the term of the loan to five years. CTB actively participated in assisting its customers with applications for resources through the program. PPP loans earn interest at fixed rate of 1%. CTB anticipates that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of December 31, 2020, we closed 2,962 Paycheck Protection Program (PPP) loans totaling $277.0 million, stemming from the CARES Act passed by Congress as a stimulus response to the potential economic impacts of COVID-19. The initial phase of the PPP program expired on August 8, 2020, and the loan forgiveness process began shortly thereafter. Through December 31, 2020, we had $18.8 million of our PPP loans forgiven by the SBA. An additional stimulus package, included as part of the Consolidated Appropriations Act 2021, was signed into law in late December providing for an additional $284 billion in funding under the PPP, with authority to make loans under the program being extended through March 31, 2021. CTBI intends to participate in the second round of lending as soon as possible. As of February 15, 2021, CTBI has closed 437 loans totaling $42 million in new PPP loans stemming from the Consolidated Appropriations Act 2021.
Paycheck Protection Program Lending Facility
To provide liquidity to small business lenders and the broader credit markets, to help stabilize the financial system, and to provide economic relief to small businesses nationwide, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) authorized each of the Federal Reserve Banks to participate in the Paycheck Protection Program Lending Facility (the “PPPL Facility”), pursuant to the Federal Reserve Act. Under the PPPL Facility, each of the Federal Reserve Banks was authorized to extend non-recourse loans to eligible financial institutions such as CTB to fund loans guaranteed by the SBA under the PPP. CTB has not accessed funds under the PPPL Facility, but has until March 31, 2021 to do so, unless otherwise extended by the Federal Reserve and the Department of the Treasury.
Loan Modifications and Troubled Debt Restructurings
The CARES Act section 4013, which was signed into law on March 27, 2020, permitted financial institutions to suspend troubled debt restructuring (“TDR”) assessment and reporting requirements under generally accepted accounting principles (“GAAP”) for loan modifications. On April 7, 2020, the Federal Reserve Board, the Office of the Comptroller of the Currency (the “OCC”), and the Federal Deposit Insurance Corporation (the “FDIC” and, together with the Federal Reserve Board and the OCC, the “federal banking regulators”) issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, in response to the CARES Act legislation, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. This guidance stated that institutions generally do not need to categorize COVID-19-related modifications as troubled debt restructurings as long as the loans were not 30 days past due at December 31, 2019 and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings. This ability to exclude COVID-19-related modifications as troubled debt restructurings, which was set to expire on December 31, 2020, was extended under the Consolidated Appropriations Act 2021 to the earlier of (i) 60 days after the national emergency concerning the COVID-19 outbreak terminates, or (ii) January 1, 2022. See “Results of Operations and Financial Condition” of this MD&A for information relating to COVID-19 loan deferrals.
Regulatory Capital
Current Expected Credit Loss (“CECL”) Methodology. On March 27, 2020, federal banking regulators issued an interim final rule that delays the estimated impact on regulatory capital stemming from the implementation of Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) for a transition period of up to five years (the “CECL IFR”). The CECL IFR provided banking organizations that were required (as of January 1, 2020) to adopt CECL for accounting purposes under U.S. generally accepted accounting principles during 2020 an option to delay an estimate of CECL’s impact on regulatory capital. The capital relief in the CECL IFR is calibrated to approximate the difference in allowances under CECL relative to the incurred loss methodology for the first two years of the transition period. The cumulative difference at the end of the second year of the transition period is then phased in to regulatory capital over a three-year transition period. In this way, the CECL IFR gradually phases in the full effect of CECL on regulatory capital, providing a five-year transition period. CTBI adopted CECL effective January 1, 2020 and chose the option to delay the estimated impact on regulatory capital using the relief options described above. See “Critical Accounting Policies and Estimates – Allowance for Credit Losses” of this MD&A for additional information relating to CECL.
Community Bank Leverage Ratio. On April 6, 2020, federal banking regulators issued two interim final rules that made changes to the community bank leverage ratio (“CBLR”) framework and implemented certain directives of the CARES Act. Under the existing CBLR framework, which became effective as of January 1, 2020, community banks and holding companies (which includes CTB and CTBI) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, were eligible to opt-in to the CBLR framework. The community bank leverage ratio is the ratio of a banking organization’s Tier 1 capital to its average total consolidated assets, both as reported on the banking organization’s applicable regulatory filings. The first of the April 2020 interim final rules provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also established a two-quarter grace period for qualifying community banking organizations whose leverage ratios fell below the 8% CBLR requirement, so long as the banking organization maintained a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It established a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintained a two-quarter grace period for qualifying community banking organizations whose leverage ratios fell no more than 100 basis points below the applicable CBLR requirement. CTBI elected to use the CBLR framework. Under either framework, CTBI and CTB would be considered well-capitalized under the applicable guidelines. See note 20 to the consolidated financial statements for additional information regarding CTBI’s regulatory capital requirements.
Results of Operations and Financial Condition
We reported record earnings of $59.5 million, or $3.35 per basic share, for the year ended December 31, 2020 compared to $64.5 million, or $3.64 per basic share, for the year ended December 31, 2019 compared to $59.2 million, or $3.35 per basic share, for the year ended December 31, 2018. The increase in earnings year over year was impacted by a decrease in income tax expense, resulting from the 2019 changes in Kentucky tax law. In March and April of 2019, Kentucky enacted legislation requiring financial institutions to transition from a bank franchise tax to the Kentucky corporate income tax beginning in 2021 and provided guidance on combining returns with entities that have net operating loss carryforwards. As a result, in 2019, we recognized a net state income tax benefit of $2.7 million, or $0.15 per basic share, to record our Kentucky deferred tax asset at December 31, 2019.
20192020 Highlights
| ❖ | Net interest income for the year ended December 31, 20192020 increased $2.7$6.1 million, or 1.9%4.2%, from December 31, 20182019 with a 627 basis point decrease in our net interest margin and a $130.4$518.2 million increase in average earning assets. |
| ❖ | Provision for loancredit losses for the year ended December 31, 2019 decreased $1.32020 increased $11.2 million or 21.9%, from December 31, 2018.2019. |
| ❖ | Our loan portfolio increased $40.0$305.5 million, or 1.2%9.4%, from December 31, 2018.2019. |
| ❖ | Net loan charge-offs for the year ended December 31, 20192020 were $5.6$6.2 million, or 0.18% of average loans annualized, compared to $6.4$5.6 million, or 0.20%0.18%, experienced for the year 2018.2019. |
| ❖ | NonperformingAsset quality improved during the year 2020, as nonperforming loans at $33.6$26.6 million increased $11.6decreased $7.0 million, or 52.4%20.9%, from December 31, 2018.2019. Nonperforming assets at $53.1$34.3 million increased $3.7decreased $18.8 million, or 7.5%35.5%, from December 31, 2018.2019. |
| ❖ | Deposits,CTBI experienced significant deposit growth for the year 2020, as deposits, including repurchase agreements, increased $93.8$739.5 million, or 2.7%20.4%, from December 31, 2018.2019. |
| ❖ | Noninterest income for the year ended December 31, 2019 was a $1.82020 at $54.6 million increased $4.4 million, or 3.4%8.7%, decrease from prior year. The decrease in noninterest income from priorcompared to the year resulted from decreases in trust revenue, insurance commissions, loan related fees, net gains on other real estate owned, and bank owned life insurance proceeds. These declines were partially offset by increases in gains on sales of loans, deposit service charges, and securities gains.ended December 31, 2019. |
| ❖ | Noninterest expense for the year ended December 31, 20192020 was $118.3$1.0 million a $0.9 million, or 0.7%, increase from prior year. Theabove the year over year increase included increases in personnel expense, data processing expense, and net other real estate owned expense, offset partially by decreases in FDIC insurance premiums, occupancy expense, and repossession expense.ended December 31, 2019. |
COVID-19
34
We have worked diligently with our customers as we all continue to battle COVID-19. Through December 31, 2020, we processed 3,844 COVID-19 loan deferrals totaling $992 million. These loan deferrals and modifications were executed consistent with the guidelines of the CARES Act. Pursuant to the CARES Act, these loan deferrals are not included in our nonperforming loans.
CARES Act Loan Deferral Status
| | Deferrals | |
| | | One Time | | | Two Times | | | Three Times | | | Four Times | | | Outstanding | |
| (dollars in millions) | | Number | | | Amount | | | Number | | | Amount | | | Number | | | Amount | | | Number | | | Amount | | | Number | | | Amount | |
| Commercial | | | 841 | | | $ | 571 | | | | 153 | | | $ | 223 | | | | 45 | | | $ | 83 | | | | 5 | | | $ | 3 | | | | 109 | | | $ | 118 | |
| Residential | | | 552 | | | | 63 | | | | 100 | | | | 10 | | | | 15 | | | | 2 | | | | 1 | | | | 0 | | | | 108 | | | | 9 | |
| Consumer | | | 2,088 | | | | 36 | | | | 41 | | | | 1 | | | | 3 | | | | 0 | | | | 0 | | | | 0 | | | | 193 | | | | 3 | |
| | | | 3,481 | | | $ | 670 | | | | 294 | | | $ | 234 | | | | 63 | | | $ | 85 | | | | 6 | | | $ | 3 | | | | 410 | | | $ | 130 | |
We have also participated in the Paycheck Protection Program (PPP) as discussed in the COVID-19, the CARES Act, and Related Regulatory Actions section above. Of the 2,962 PPP loans we closed totaling $277.0 million, 2,817 were under $350 thousand, 132 were between $350 thousand and $2.0 million, and 13 were over $2.0 million. See below for additional information related to our PPP loans for the year ended December 31, 2020.
| (in thousands) | | Average Balance | | | Interest | | | Average Effective Rate | |
| PPP loans | | $ | 182,008 | | | $ | 5,638 | | | | 3.05 | % |
Income Statement Review
| (dollars in thousands) | | | | | | | | Change 2019 vs. 2018 | | | | Change 2020 vs. 2019 |
| Year Ended December 31 | | 2019 | | 2018 | | 2017 | | Amount | | Percent | | 2020 | 2019 | 2018 | Amount | Percent |
| Net interest income | | $ | 144,885 | | $ | 142,155 | | $ | 137,402 | | $ | 2,730 | | 1.9 | % | $150,991 | $144,885 | $142,155 | $6,106 | 4.2% |
| Provision for loan losses | | 4,819 | | 6,167 | | 7,521 | | (1,348 | ) | | (21.9 | ) | |
| Provision for credit losses | | 16,047 | 4,819 | 6,167 | 11,228 | 233.0 |
| Noninterest income | | 50,184 | | 51,952 | | 48,508 | | (1,768 | ) | | (3.4 | ) | 54,560 | 50,184 | 51,952 | 4,376 | 8.7 |
| Noninterest expense | | 118,258 | | 117,398 | | 109,878 | | 860 | | 0.7 | | 119,239 | 118,258 | 117,398 | 981 | 0.8 |
| Income taxes | | | 7,452 | | 11,314 | | 17,018 | | (3,862 | ) | | (34.1 | ) | 10,761 | 7,452 | 11,314 | 3,309 | 44.4 |
| Net income | | $ | 64,540 | | $ | 59,228 | | $ | 51,493 | | $ | 5,312 | | 9.0 | % | $59,504 | $64,540 | $59,228 | $(5,036) | (7.8)% |
| | | | | | | | | | | | | | | | |
| Average earning assets | | $ | 4,043,975 | | $ | 3,913,596 | | $ | 3,799,128 | | $ | 130,379 | | 3.3 | % | $4,562,172 | $4,043,975 | $3,913,596 | $518,197 | 12.8% |
| | | | | | | | | | | | | | | | |
| Yield on average earnings assets, tax equivalent* | | 4.60 | % | | 4.40 | % | | 4.15 | % | | 0.20 | % | | 4.5 | % | 3.88% | 4.60% | 4.40% | (0.72)% | (15.7)% |
| Cost of interest bearing funds | | 1.42 | % | | 1.05 | % | | 0.67 | % | | 0.37 | % | | 35.7 | % | 0.82% | 1.42% | 1.05% | (0.60)% | (42.3)% |
| | | | | | | | | | | | | | | | |
| Net interest margin, tax equivalent* | | 3.60 | % | | 3.66 | % | | 3.67 | % | | (0.06 | )% | | (1.5 | )% | 3.33% | 3.60% | 3.66% | (0.27)% | (7.5)% |
*Yield on average earning assets and net interest margin are computed on a taxable equivalent basis using a 21% tax rate for the years 2019 and 2018 and a 35% tax rate for the year 2017.rate.
Net Interest Income
Net interest income for the year ended December 31, 20192020 of $144.9$151.0 million increased $2.7$6.1 million, or 1.9%4.2%, from prior year. Average earning assets for the year 2020 increased $130.4$518.2 million over prior year. Our yield on average earning assets increased 20for the year 2020 decreased 72 basis points from prior year, as we continue to find limited high yield investment opportunities for our excess liquidity, while our cost of interest bearing funds increased 37decreased 60 basis points largely due to market forces.during the same time period. Our net interest margin for the year 20192020 declined 627 basis points from 20182019 to 3.60%3.33%. We experienced pressure on our net interest margin throughout the year driven by reductions in rates by the Federal Reserve during the first half of 2020 in response to the COVID 19 pandemic. The net interest margin was negatively impacted primarily by the repricing of interest-bearing assets exceeding that of interest-bearing liabilities in the current low rate environment. Average loans to deposits, including repurchase agreements, for the year ended December 31, 20192020 were 88.5%84.7% compared to 89.0%88.5% for the year ended December 31, 2018.2019.
Provision for LoanCredit Losses
The provision for loancredit losses added to the allowance and charged against current earnings for 20192020 of $4.8$16.0 million was a $1.3an $11.2 million decreaseincrease from prior year. This provision represented athe charge against current earnings in ordernecessary to maintain the allowance at an appropriate level determined using the accounting estimates described in the Critical Accounting Policies and Estimates section.
Noninterest Income
Noninterest income for the year ended December 31, 2019 was $50.22020 at $54.6 million a $1.8increased $4.4 million, or 3.4%8.7%, decrease from prior year.compared to the year ended December 31, 2019. The decrease increase in noninterest income from prior year resulted from decreases in trust revenue ($0.5 million), insurance commissions ($0.2 million), loan related fees ($1.0 million), net gains on other real estate owned ($0.6 million), and bank owned life insurance proceeds ($1.3 million). These declines were partially offset byis the result of increases in gains on sales of loans ($0.65.3 million), securities gains ($1.0 million), and loan related fees ($1.3 million), offset partially by declines in deposit service charges ($0.42.9 million), and securitiesdebt redemption gains ($0.90.2 million). The decrease in loan related fees isDeposit service charges declined primarily due to the impact to overdraft income of a decline inforgiveness period and higher customer liquidity resulting from the fair market value of our mortgage servicing rights.CARES Act.
Noninterest Expense
Noninterest expense for the year ended December 31, 20192020 at $119.2 million was $118.3$1.0 million a $0.9 million, or 0.7%,above the year ended December 31, 2019. The increase from prior year. Thein noninterest expense year over year increase included a $1.5 million increaseincreases in personnel expense a $0.7 million increase in($3.4 million), FDIC insurance premiums ($0.8 million), and data processing expense and a $1.2 million increase($0.5 million), partially offset by declines in net other real estate owned expense offset partially($2.8 million), marketing and promotional expense ($0.3 million), legal fees ($0.3 million), and loan related expense ($0.3 million). Personnel expense was impacted by a $0.9$2.4 million decrease in FDICcharge to post retirement benefits related to our bank owned life insurance premiums, a $0.3 million decrease in occupancy expense, and a $0.2 million decrease in repossession expense.
* Please refer to the Management Discussion and Analysis in our annual report on Form 10-Kas additional liability was recognized for the year ended December 31, 2018 for more detailed income discussion related to the year 2017.lower long-term interest rate environment and increased life expectancy in updated mortality tables.
Balance Sheet Review
CTBI’s total assets at $4.4$5.1 billion increased $164.4$773.1 million, or 3.9%17.7%, from December 31, 2018.2019. Loans outstanding at December 31, 20192020 were $3.2$3.6 billion, increasing $40.0$305.5 million, or 1.2%9.4%, year over year. We experienced growth during the year of $20.2$228.6 million in the commercial loan portfolio, $22.4$92.6 million in the residentialindirect loan portfolio, and $3.7$4.2 million in the consumer direct loan portfolio, offset partially by a $6.3$19.9 million decrease in the indirectresidential loan portfolio. Loans held for sale at $23.3 million at December 31, 2020 increased $22.1 million over prior year. The historically low mortgage loan rates have created a significant refinancing boom. During 2020, we closed and delivered 1,960 secondary market mortgage loans for a total of $341.7 million compared to 580 loans totaling $80.5 million in 2019. Correspondingly, our total mortgage servicing portfolio increased by $192.7 million during the year to $639.8 million. CTBI’s investment portfolio increased $6.7$397.4 million, or 1.1%66.0%, from December 31, 2018.2019. Deposits in other banks increased $126.6$78.0 million from December 31, 2018.2019. Deposits, including repurchase agreements, at $3.6$4.4 billion increased $93.8$739.5 million, or 2.7%20.4%, from December 31, 2018.2019.
Shareholders’ equity at December 31, 20192020 was $614.9$654.9 million, a 9.0%6.5% increase from the $564.2$614.9 million at December 31, 2018.2019. CTBI’s annualized dividend yield to shareholders as of December 31, 20192020 was 3.26%4.16%.
Loans
| (in thousands) | | December 31, 2019 | | | December 31, 2020 | |
| Loan Category | | Balance | | Variance from Prior Year | | Net Charge- Offs | | Nonperforming | | ALLL | | | Balance | | | Variance from Prior Year | | | Net Charge- Offs | | | Nonperforming | | | ACL | |
| Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Construction | | $ | 104,809 | | 26.7 | % | | $ | (60 | ) | | $ | 467 | | $ | 1,299 | | |
| Secured by real estate | | 1,169,975 | | (1.1 | ) | | (369 | ) | | 12,579 | | 14,025 | | |
| Equipment lease financing | | 481 | | (72.4 | ) | | 0 | | 0 | | 4 | | |
| Other commercial | | 389,683 | | 3.3 | | (1,670 | ) | | 6,425 | | 6,355 | | |
| Hotel/motel | | | $ | 260,699 | | | | 15.9 | % | | $ | (43 | ) | | $ | 0 | | | $ | 6,356 | |
| Commercial real estate residential | | | | 287,928 | | | | 6.8 | | | | (26 | ) | | | 6,001 | | | | 4,464 | |
| Commercial real estate nonresidential | | | | 743,238 | | | | (4.7 | ) | | | (851 | ) | | | 9,276 | | | | 11,086 | |
| Dealer floorplans | | | | 69,087 | | | | (17.6 | ) | | | (26 | ) | | | 0 | | | | 1,382 | |
| Commercial other | | | | 279,908 | | | | (8.6 | ) | | | (2,916 | ) | | | 1,136 | | | | 4,289 | |
| Commercial unsecured SBA PPP | | | | 252,667 | | | | 100.0 | | | | 0 | | | | 0 | | | | 0 | |
| Total commercial | | 1,664,948 | | 1.2 | | (2,099 | ) | | 19,471 | | 21,683 | | | | 1,893,527 | | | | 13.7 | | | | (3,862 | ) | | | 16,413 | | | | 27,577 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real estate construction | | 63,350 | | 10.8 | | (100 | ) | | 634 | | 372 | | |
| Real estate mortgage | | 733,003 | | 1.5 | | (615 | ) | | 11,909 | | 4,232 | | | | 784,559 | | | | (1.5 | ) | | | (249 | ) | | | 8,766 | | | | 7,832 | |
| Home equity | | 111,894 | | 5.3 | | (116 | ) | | 1,060 | | 897 | | | | 103,770 | | | | (7.3 | ) | | | 6 | | | | 974 | | | | 844 | |
| Total residential | | 908,247 | | 2.5 | | (831 | ) | | 13,603 | | 5,501 | | | | 888,329 | | | | (2.2 | ) | | | (243 | ) | | | 9,740 | | | | 8,676 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer direct | | 148,051 | | 2.6 | | (700 | ) | | 97 | | 1,711 | | | | 152,304 | | | | 2.9 | | | | (417 | ) | | | 71 | | | | 1,863 | |
| Consumer indirect | | 527,418 | | (1.2 | ) | | (2,001 | ) | | 448 | | 6,201 | | | | 620,051 | | | | 17.6 | | | | (1,639 | ) | | | 353 | | | | 9,906 | |
| Total consumer | | 675,469 | | (0.4 | ) | | (2,701 | ) | | 545 | | 7,912 | | | | 772,355 | | | | 14.3 | | | | (2,056 | ) | | | 424 | | | | 11,769 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total loans | | $ | 3,248,664 | | 1.2 | % | | $ | (5,631 | ) | | $ | 33,619 | | $ | 35,096 | | | $ | 3,554,211 | | | | 9.4 | % | | $ | (6,161 | ) | | $ | 26,577 | | | $ | 48,022 | |
Asset Quality
CTBI’s total nonperforming loans, not including troubled debt restructurings, were $26.6 million, or 0.75% of total loans, at December 31, 2020 compared to $33.6 million, or 1.03% of total loans, at December 31, 2019 compared to $22.1 million, or 0.69% of total loans, at December 31, 2018.2019. Accruing loans 90+ days past increased $9.4due decreased $2.5 million from December 31, 2018.2019. Nonaccrual loans increased $2.1decreased $4.6 million from December 31, 2018.2019. Accruing loans 30-89 days past due at $22.9$12.5 million was an increasea decrease of $0.3$10.5 million from December 31, 2018. We are currently working with three of our customers with total loans outstanding of approximately $11.2 million as they work their way through financial difficulties. While we do not expect significant losses in these credits, we expect it may take some time before these issues are resolvedand as a result our total level of past due loans may remain elevated for several quarters.2019. 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. CTB’s Loan Portfolio Risk Management Committee also meets quarterly focusing on the overall asset quality and risk metrics of the loan portfolio. 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%96% 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%86% 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, 2019 totaled $57.8 million compared to $46.4 million at December 31, 2018. Included in certain loan categories of impaired loans are troubled debt restructurings that were classified as impaired. At December 31, 2019, CTBI had $41.4 million in commercial loans secured by real estate, $3.0 million in commercial real estate construction loans, $11.1 million in commercial other loans, and $2.3 million in real estate mortgage loans that were modified in troubled debt restructurings and/or 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.
For further information regarding nonperforming loans, see note 4 to the consolidated financial statements.
Our reserve coverage (allowance for credit losses to nonperforming loans) at December 31, 2020 was 180.7% compared to 104.4% at December 31, 2019. Our credit loss reserve as a percentage of total loans outstanding at December 31, 2020 was 1.35%, an increase from the allowance for loan loss reserve incurred loss model of 1.08% from December 31, 2019.
Our level of foreclosed properties at $7.7 million at December 31, 2020 was a decrease of $11.8 million from the $19.5 million at December 31, 2019 was a decrease of $7.8 million from the $27.3 million at December 31, 2018.2019. Sales of foreclosed properties for the year ended December 31, 20192020 totaled $6.9$14.8 million while new foreclosed properties totaled $3.4$4.4 million. At December 31, 2019,2020, the book value of properties under contracts to sell was $3.1$1.2 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 fair market value below the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected sales costs. Charges to earnings in 20192020 to reflect the decrease in current market values of foreclosed properties totaled $4.3 million. There were 42 properties reappraised during 2019. Of these, 31 were written down by a total of $2.3$1.5 million. Charges during the year ended December 31, 20182019 were $2.5$4.3 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 ninety-twoeighty-six percent of our OREO properties and approximately 89% of the book value 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, 20192020 is shown below:
| (in thousands) | (in thousands) | | | | (in thousands) | |
| Appraisal Aging Analysis | Appraisal Aging Analysis | | Holding Period Analysis | | Appraisal Aging Analysis | Holding Period Analysis |
Days Since Last Appraisal | | Number of Properties | | Current Book Value | | Holding Period | | Current Book Value | | Number of Properties | Current Book Value | Holding Period | Current Book Value |
| | | | | | | | | | | | 17 | $1,953 | Less than one year | $2,579 |
| | | | | | | | | | 6 | 1,521 | 1 year | 1,346 |
| | | | | | | | | | 3 | 213 | 2 years | 656 |
| | | | | | | | | | 16 | 785 | 3 years | 690 |
| | | | | | | | | | 19 | 2,372 | 4 years | 267 |
| | | | | | | | | | 6 | 635 | 5 years | 360 |
| | | | | | | | | | 4 | 215 | 6 years | 809 |
| | | | | | | | | | | 71 | $7,694 | 7 years | 50 |
| | | | | | | | | | | | 8 years | 784 |
| | | | | | | | | | | | | 9 years | 153 |
| | | | | Total | $7,694 |
* Regulatory approval is required and has been obtained to hold theseforeclosed properties beyond the initial period of 5 years. Additional approval may beAdditionally, CTBI is required to continue to hold these properties should they not be liquidated during the extension period, which is typically one year. To the extent we are not able to sell adispose of any foreclosed property inthat has not been sold within 10 years, we will be required to relinquish ownership of that property.
years. As of December 31, 2018,2020, three foreclosed propertyproperties with a total book value of $2.4$0.2 million had been held by us for at least nine years. During the first nine months of 2019, we disposed of all of these properties at a loss of $0.9 million. At December 31, 2019, weOne property totaling $6.8 million that had been held no foreclosed property for nine years or more. However, if certain properties are left unsold, we will have properties reachat September 30, 2020 was sold during the nine year holding period in the yearfourth quarter 2020.
Net loan charge-offs for the year were $5.6$6.2 million, or 0.18% of average loans annualized, a decreasean increase from prior year’s $6.4$5.6 million, or 0.20%0.18% of average loans annualized. Of the total net charge-offs, $2.1$3.9 million were in commercial loans, $2.0$1.6 million were in indirect auto loans, $0.8$0.4 million were in direct consumer loans, and $0.3 million were in residential real estate mortgage loans, and $0.7 million were in direct consumer loans.
Our loan loss reserve as a percentage of total loans outstanding at December 31, 2019 decreased to 1.08% from the 1.12% at December 31, 2018. Our reserve coverage (allowance for loan and lease loss reserve to nonperforming loans) was 104.4% at December 31, 2019 compared to 162.7% at December 31, 2018.
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, 2019,2020, the aggregate contractual obligations and commitments are:
| Contractual Obligations: | | Payments Due by Period | | | Payments Due by Period | |
| (in thousands) | | Total | | | 1 Year | | | 2-5 Years | | | After 5 Years | | | Total | | | 1 Year | | | 2-5 Years | | | After 5 Years | |
| Deposits without stated maturity | | $ | 2,306,412 | | | $ | 2,306,412 | | | $ | 0 | | | $ | 0 | | | $ | 2,975,411 | | | $ | 2,975,411 | | | $ | 0 | | | $ | 0 | |
| Certificates of deposit and other time deposits | | | 1,099,160 | | | | 856,430 | | | | 242,125 | | | | 605 | | | | 1,040,671 | | | | 831,609 | | | | 208,795 | | | | 267 | |
| Repurchase agreements and federal funds purchased | | | 234,823 | | | | 234,823 | | | | 0 | | | | 0 | | | | 356,362 | | | | 356,362 | | | | 0 | | | | 0 | |
| Advances from Federal Home Loan Bank | | | 415 | | | | 22 | | | | 82 | | | | 311 | | | | 395 | | | | 22 | | | | 82 | | | | 291 | |
| Interest on advances from Federal Home Loan Bank* | | | 1 | | | | 0 | | | | 1 | | | | 0 | | | | 1 | | | | 0 | | | | 1 | | | | 0 | |
| Long-term debt | | | 57,841 | | | | 0 | | | | 0 | | | | 57,841 | | | | 57,841 | | | | 0 | | | | 0 | | | | 57,841 | |
| Interest on long-term debt* | | | 39,060 | | | | 2,071 | | | | 8,132 | | | | 28,857 | | | | 32,963 | | | | 1,087 | | | | 5,398 | | | | 26,478 | |
| Annual rental commitments under leases | | | 20,036 | | | | 1,745 | | | | 6,653 | | | | 11,638 | | | | 18,296 | | | | 1,792 | | | | 6,063 | | | | 10,441 | |
| Total contractual obligations | | $ | 3,757,748 | | | $ | 3,401,503 | | | $ | 256,993 | | | $ | 99,252 | | | $ | 4,481,940 | | | $ | 4,166,283 | | | $ | 220,339 | | | $ | 95,318 | |
*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 $57.8 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: | | Amount of Commitment - Expiration by Period | | | Amount of Commitment - Expiration by Period | |
| (in thousands) | | Total | | | 1 Year | | | 2-5 Years | | | After 5 Years | | | Total | | | 1 Year | | | 2-5 Years | | | After 5 Years | |
| Standby letters of credit | | $ | 30,679 | | | $ | 29,691 | | | $ | 988 | | | $ | 0 | | | $ | 32,126 | | | $ | 31,946 | | | $ | 180 | | | $ | 0 | |
| Commitments to extend credit | | | 564,229 | | | | 434,304 | | | | 77,365 | | | | 52,560 | | | | 623,920 | | | | 497,549 | | | | 52,938 | | | | 73,433 | |
| Total other commitments | | $ | 594,908 | | | $ | 463,995 | | | $ | 78,353 | | | $ | 52,560 | | | $ | 656,046 | | | $ | 529,495 | | | $ | 53,118 | | | $ | 73,433 | |
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 1817 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 and wholesale funding (including the use of wholesale brokered deposits). As of December 31, 2019,2020, we had approximately $264.7$338.2 million in cash and cash equivalents and approximately $599.8$997.3 million in securities valued at estimated fair value designated as available-for-sale and available to meet liquidity needs on a continuing basis compared to $141.5$264.7 million and $593.7$599.8 million at December 31, 2018.2019. Additional asset-driven liquidity is provided by the remainder of the securities portfolio and the repayment of loans. In addition to core deposit funding, we also have a variety of other short-term and long-term funding sources available. As ofAt December 31, 2019, we had wholesale$37.1 million in brokered deposits outstanding of $37.1 million with a weighted average maturity of 0.71 years compared to $42.3 million with a weighted average maturityyears. As of maturity of 1.58 years at December 31, 2018.2020, we no longer had wholesale brokered deposits outstanding. We also rely on Federal Home Loan Bank advances for both liquidity and management of our asset/liability position. Federal Home Loan Bank advances were $0.4 million at December 31, 20192020 and December 31, 2018.2019. As of December 31, 2019,2020, we had a $391.9$477.2 million available borrowing position with the Federal Home Loan Bank compared to $312.2$391.9 million at December 31, 2018.2019. We generally rely upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash for our investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, use of short-term borrowing facilities such as repurchase agreements and federal funds purchased, use of wholesale brokered deposits, and issuance of long-term debt. At December 31, 2019 and December 31, 2018,2020, we had $45$75 million in lines of credit with various correspondent banks available to meet any future cash needs.needs compared to $45 million at December 31, 2019. 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, 20192020 were deposits with the Federal Reserve of $203.6$280.7 million compared to $73.5$203.6 million at December 31, 2018. At December 31, 2018, cash and cash equivalents included federal funds sold of $1.1 million; however, we had no federal funds sold as of December 31, 2019. Additionally, we project cash flows from our investment portfolio to generate additional liquidity over the next 90 days.
The investment portfolio consists of investment grade short-term issues suitable for bank investments. The majority of the investment portfolio is in U.S. government and government sponsored agency issuances. At the end of 2019,December 31, 2020, available-for-sale (“AFS”) securities comprised substantially all of the total investment portfolio, and the AFS portfolio was approximately 98%152% of equity capital. Ninety-fourEighty-four percent of the pledge eligible portfolio was pledged.
Interest Rate Risk
We consider interest rate risk one of our most significant market risks. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of our net interest revenue is largely dependent upon the effective management of interest rate risk. We employ a variety of measurement techniques to identify and manage our interest rate risk including the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain, and as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.
CTBI’s Asset/Liability Management Committee (ALCO), which includes executive and senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk within Board-approved policy limits. Our current exposure to interest rate risks is determined by measuring the anticipated change in net interest income spread evenly over the twelve-month period.
The following table shows our estimated earnings sensitivity profile as of December 31, 2020:
Change in Interest Rates (basis points) | Percentage Change in Net Interest Income (12 Months) |
| +400 | 11.96% |
| +300 | 8.02% |
| +200 | 4.76% |
| +100 | 2.15% |
| -25 | (0.63)% |
The following table shows our estimated earnings sensitivity profile as of December 31, 2019:
Change in Interest Rates (basis points) | | | Percentage Change in Net Interest Income (12 Months) | |
| | +400 | | | | 11.22 | % |
| | +300 | | | | 8.61 | % |
| | +200 | | | | 5.78 | % |
| | +100 | | | | 2.83 | % |
| | -100 | | | | (2.65 | )% |
The following table shows our estimated earnings sensitivity profile as of December 31, 2018:
Change in Interest Rates (basis points) | | | Percentage Change in Net Interest Income (12 Months) | |
| | +400 | | | | 10.26 | % |
| | +300 | | | | 7.89 | % |
| | +200 | | | | 5.43 | % |
| | +100 | | | | 2.8 | % |
| | -100 | | | | (2.73 | )% |
| | -200 | | | | (4.90 | )% |
Change in Interest Rates (basis points) | Percentage Change in Net Interest Income (12 Months) |
| +400 | 11.22% |
| +300 | 8.61% |
| +200 | 5.78% |
| +100 | 2.83% |
| -100 | (2.65)% |
The simulation model used the yield curve spread evenly over a twelve-month period. The measurement at December 31, 20192020 estimates that our net interest income in an up-rate environment would increase by 11.22%11.96% at a 400 basis point change, 8.61%8.02% increase at a 300 basis point change, 5.78%4.76% increase at a 200 basis point change, and a 2.83%2.15% increase at a 100 basis point change. In a down-rate environment, net interest income would decrease 2.65%0.63% at a 10025 basis point change over one year. We actively manage our balance sheet and limit our exposure to long-term fixed rate financial instruments, including loans. 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 2020 and 2019, and 2018, $94.5proceeds of $347.0 million and $56.7$94.5 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, 20192020 is presented below. In the 12 month cumulative repricing gap, rate sensitive liabilities (“RSL”) exceeded rate sensitive assets (“RSA”) by $295.0$483.6 million.
(dollars in thousands) | | 1-3 Months | | | 4-6 Months | | | 7-9 Months | | | 10-12 Months | | | 2-3 Years | | | 4-5 Years | | | > 5 Years | | | 1-3 Months | | | 4-6 Months | | | 7-9 Months | | | 10-12 Months | | | 2-3 Years | | | 4-5 Years | | | > 5 Years | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets | | $ | 1,535,477 | | | $ | 276,520 | | | $ | 226,529 | | | $ | 251,621 | | | $ | 993,572 | | | $ | 463,368 | | | $ | 618,917 | | | $ | 1,910,156 | | | $ | 247,105 | | | $ | 211,578 | | | $ | 223,941 | | | $ | 1,190,898 | | | $ | 638,043 | | | $ | 717,420 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities and equity | | | 1,782,035 | | | | 161,664 | | | | 267,400 | | | | 374,013 | | | | 166,118 | | | | 81,008 | | | | 1,533,765 | | | | 2,265,588 | | | | 165,612 | | | | 266,824 | | | | 378,390 | | | | 141,450 | | | | 71,455 | | | | 1,849,821 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Periodic repricing gap | | | (246,559 | ) | | | 114,856 | | | | (40,871 | ) | | | (122,392 | ) | | | 827,454 | | | | 382,360 | | | | (914,848 | ) | | | (355,433 | ) | | | 81,493 | | | | (55,246 | ) | | | (154,449 | ) | | | 1,049,448 | | | | 566,588 | | | | (1,132,401 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative gap | | | (246,559 | ) | | | (131,703 | ) | | | (172,573 | ) | | | (294,966 | ) | | | 532,488 | | | | 914,848 | | | | 0 | | | | (355,433 | ) | | | (273,940 | ) | | | (329,186 | ) | | | (483,635 | ) | | | 565,814 | | | | 1,132,401 | | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| RSA/RSL | | | 0.86 | x | | | 1.71 | x | | | 0.85 | x | | | 0.67 | x | | | 5.98 | x | | | 5.72 | x | | | 0.40 | x | | | 0.84 | x | | | 1.49 | x | | | 0.79 | x | | | 0.59 | x | | | 8.42 | x | | | 8.93 | x | | | 0.39 | x |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative gap to total assets | | | (5.65 | )% | | | (3.02 | )% | | | (3.95 | )% | | | (6.76 | )% | | | 12.20 | % | | | 20.95 | % | | | 0.00 | % | | | (6.92 | )% | | | (5.33 | )% | | | (6.41 | )% | | | (9.41 | )% | | | 11.01 | % | | | 22.03 | % | | | 0.00 | % |
Capital Resources
We continue to grow our shareholders’ equity while also providing an annual dividend yield for the year 20192020 of 3.17%4.16% to shareholders. Shareholders’ equity increased 9.0%6.5% from December 31, 20182019 to $614.9$654.9 million at December 31, 2019.2020. Our primary source of capital growth is the retention of earnings. Cash dividends were $1.53 per share for 2020 compared to $1.48 per share for 2019 compared to $1.38 per share for 2018.2019. We retained 59.3%54.3% of our earnings in 20192020 compared to 58.8%59.3% in 2018.2019.
Basel III
On July 2, 2013, the Federal Reserve approved final rules that substantially amended the regulatory risk-based capital rules applicable to CTBI and CTB. The FDIC subsequently approved these rules. The final rules implemented the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.
The rules included new risk-based capital and leverage ratios, which were phased in from 2015 to January 2019, and refined the definition of what constitutes “capital” for purposes of calculating those ratios. The minimum capital level requirements applicable to CTBI and CTB under the final rules are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also established a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer began to be phased in on January 1, 2016 at 0.625% of risk-weighted assets increased by 0.625% annually until fully implemented in January 2019. An institution is subject to limitations on certain activities including payment of dividends, share repurchases, and discretionary bonuses to executive officers if its capital level is below the total capital plus capital conservation buffer amount.
The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including CTB, if their capital levels begin to show signs of weakness. These revisions took effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insuredInsured depository institutions are required to meet the followingcertain capital level requirements in order to qualify as “well capitalized:” (i) a common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8%; (iii) a total capital ratio of 10%; and (iv) a Tier 1 leverage ratio of 5%. We currently satisfy the well-capitalized and the capital conservation standards, and based on our current capital composition and levels, we anticipate that our capital ratios, on a Basel III basis, will continue to exceed the well-capitalized minimum capital requirements and capital conservation buffer standards.
requirements. On October 29, 2019, the Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currencyfederal banking regulators adopted a final rule to simplify the regulatory capital requirements for eligible community banks and holding companies that opt-in to the community bank leverage ratio framework (the “CBLR framework”), as required by Section 201 of the Economic Growth, Relief and Consumer Protection Act of 2018. Under the final rule, which became effective as of January 1, 2020, community banks and holding companies (which would includeincludes CTB and CTBI) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, would bewere eligible to opt-in to the CBLR framework. The community bank leverage ratio is the ratio of a banking organization’s Tier 1 capital to its average total consolidated assets, both as reported on the banking organization’s applicable regulatory filings. If this election is made, CTBI and CTB would satisfy their regulatory capital standards by calculating and reporting theAccordingly, a qualifying community banking organization that has a community bank leverage ratio insteadgreater than 9% will be considered to have met: (i) the risk-based and leverage capital requirements of the risk-weightedgenerally applicable capital ratios and minimum leveragerules; (ii) the capital ratio currently required and wouldrequirements in order to be deemed “well-capitalized”considered well-capitalized under the Federal Reserve Board’s and FDIC’s prompt corrective action rules so longframework; and (iii) any other applicable capital or leverage requirements.
In April 2020, as they continue to satisfy the qualifying criteriadirected by Section 4012 of the CARES Act, the regulatory agencies introduced temporary changes to the CBLR. These changes, which subsequently were adopted as a final rule, temporarily reduced the CBLR framework. CTBIrequirement to 8% through the end of calendar year 2020. Beginning in calendar year 2021, the CBLR requirement will increase to 8.5% for the calendar year before returning to 9% in calendar year 2022. The final rule also provides for a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement. Management has not yet decided whether it will take advantage ofelected to use the new CBLR framework or will continue with the existing layered ratio structure.for CTBI and CTB. Under either framework, CTBI and CTB would be considered well-capitalized under the applicable guidelines. CTBI’s CBLR ratio as of December 31, 2020 was 12.70%. CTB’s CBLR ratio as of December 31, 2020 was 12.13%.
As of December 31, 2019, CTBI had a common equity Tier 1 capital ratio of 17.18%, a Tier 1 capital ratio of 18.94%, a total capital ratio of 20.05%, and a Tier 1 leverage ratio of 14.01%. Our capital conservation buffer at December 31, 2019 was 12.05%. See note 21 to the consolidated financial statements for further information.
In December 2017, the Basel Committee on Banking Supervision unveiled the latest round of its regulatory framework, commonly referred to as Basel IV. The framework makes changes to the capital framework of Basel III and is targeted for a timeframe of 2022-2027 for implementation. The new framework appears designed to limit the flexibility of financial institutions using advanced approaches to calculate credit and other risks and also makes significant amendments to the standardized approaches to credit risk, credit valuation adjustment risk, and operational risk. The manner and the form in which the Basel IV framework will be implemented in the U.S. are uncertain.
As of December 31, 2019,2020, we are not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material adverse impact on our liquidity, capital resources, or operations.
Impact of Inflation, Changing Prices, and Economic Conditions
The majority of our assets and liabilities are monetary in nature. Therefore, CTBI differs greatly from most commercial and industrial companies that have significant investment in nonmonetary assets, such as fixed assets and inventories. However, inflation does have an important impact on the growth of assets in the banking industry and on the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other expenses, which tend to rise during periods of general inflation.
We believe one of the most significant impacts on financial and operating results is our ability to react to changes in interest rates. We seek to maintain an essentially balanced position between interest rate sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations.
BeginningWe are all finding ourselves living and operating in 2008,unprecedented times as the U.S. economy facedCOVID-19 pandemic is causing personal and financial hardship to our customers, employees, and communities. During these challenging times, we have instituted programs to support our customers with loan modifications, forbearance, and fee waivers and participated in programs created by the government stimulus programs like the Paycheck Protection Program, focused on helping small businesses keep their employees and meet their expenses as they are unable to operate due to mandated closures. We instituted programs supporting our employees focused on healthcare, childcare, and remote and split schedule work, as well as work space changes that allow for proper social distancing to keep our employees safe as we continue to operate as a severe economic crisis including a major recession from which recovery was slowcritical part of the economy. We continue to support our communities through donations to non-profit organizations as they strive to continue their commitments of serving those in need. We also continue to manage our company for the long term and uneven. Commerceour strong capital position and business growth in certain regionsculture of building communities built on trust will facilitate our ability to manage through these challenging times. Our results for 2020 were good, but the extraordinary changes in the U.S. remains reducedeconomic conditions and local governments and many businesses continue to experience financial difficulty. In some areasthe implications of the U.S., including certain partsimpact of COVID-19 to the future for our service area, unemployment levels remain elevated. There can be no assurance that these conditionscustomers had a material impact on our first quarter provision for credit losses. We will continue to improve and these conditions could worsen. In addition,serve our constituents while we all meet the levelchallenges of U.S. debt, the Federal Open Market Committee’s monetary policy, potential volatility in oil prices, U.S. tax law modifications, political events, and trade policies may have a destabilizing effect on financial markets or a negative effect on the economy.
Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent upon the business environment in the markets where we operate, in the states of Kentucky, West Virginia, and Tennessee and in the United States as a whole. While unemployment rates have improved in all of the markets in which we operate, unemployment rates in our markets remain high compared to the national average. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors.
While economic conditions in the United States and worldwide have improved since the recession, there can be no assurance that this improvement will continue or that another recession will not occur. Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in consumer and business spending, borrowing, and savings habits. Such conditions could adversely affect the credit quality of our loans and our business, financial condition, and results of operations.living with COVID-19.
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 both July 2000, May 2003, and May 2003. We have notMarch 2020. CTBI repurchased any32,664 shares of ourits common stock since February 2008. There are currently 67,370during the first quarter 2020, leaving 1,034,706 shares remaining under CTBI’sour current repurchase authorization. As of December 31, 2019,2020, a total of 2,432,6302,465,294 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 2019:2020:
| Board Authorizations | Repurchases* | Shares Available for Repurchase | Board Authorizations | Repurchases* | Shares Available for Repurchase |
| Average Price ($) | # of Shares | Average Price ($) | # of Shares |
| 1998 | 500,000 | - | 0 | | 500,000 | - | 0 | |
| 1999 | 0 | 14.45 | 144,669 | | 0 | 14.45 | 144,669 | |
| 2000 | 1,000,000 | 10.25 | 763,470 | | 1,000,000 | 10.25 | 763,470 | |
| 2001 | 0 | 13.35 | 489,440 | | 0 | 13.35 | 489,440 | |
| 2002 | 0 | 17.71 | 396,316 | | 0 | 17.71 | 396,316 | |
| 2003 | 1,000,000 | 19.62 | 259,235 | | 1,000,000 | 19.62 | 259,235 | |
| 2004 | 0 | 23.14 | 60,500 | | 0 | 23.14 | 60,500 | |
| 2005 | 0 | - | 0 | | 0 | - | 0 | |
| 2006 | 0 | - | 0 | | 0 | - | 0 | |
| 2007 | 0 | 28.56 | 216,150 | | 0 | 28.56 | 216,150 | |
| 2008 | 0 | 25.53 | 102,850 | | 0 | 25.53 | 102,850 | |
| 2009-2019 | 0 | - | 0 | | 0 | - | 0 | |
| 2020 | | 1,000,000 | 33.64 | 32,664 | |
| Total | 2,500,000 | 15.93 | 2,432,630 | 67,370 | 3,500,000 | 16.17 | 2,465,294 | 1,034,706 |
*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 debt securities into held-to-maturity, trading, or available-for-sale categories. Held-to-maturity securities are those which we have the positive intent and ability to hold to maturity and are reported at amortized cost. In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 320, Investments – Debt Securities, investments in debt securities that are not classified as held-to-maturity shall be classified in one of the following categories and measured at fair value in the statement of financial position:
a. Trading securities. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) shall be classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price.
b. Available-for-sale securities. Investments not classified as trading securities (nor as held-to-maturity securities) shall be classified as available-for-sale securities.
We do not have any securities that are classified as trading securities. Available-for-sale securities are reported at fair value, with unrealized gains and losses included as a separate component of shareholders’ equity, net of tax. If declines in fair value are other than temporary, the carrying value of the securities is written down to fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not credit related.
Gains or losses on disposition of debt securities are computed by specific identification for those securities. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings.
WhenWith the fair valueimplementation of Accounting Standards Update (“ASU”) No. 2016-13, commonly referred to as CECL, an allowance will be recognized for credit losses relative to available-for-sale securities rather than as a reduction in the cost basis of the security. Subsequent improvements in credit quality or reductions in estimated credit losses will be recognized immediately as a reversal of the previously recorded allowance, which aligns the income statement recognition of credit losses with the reporting period in which changes occur.
Held-to-maturity (“HTM”) securities will be subject to CECL. CECL will require an allowance on these held-to-maturity debt securities for lifetime expected credit losses, determined by adjusting historical loss information for current conditions and reasonable and supportable forecasts. The forward-looking evaluation of lifetime expected losses will be performed on a pooled basis for debt securities that share similar risk characteristics. These allowances for expected losses must be made by the holder of the HTM debt security when the 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-maturitypurchased. At December 31, 2020, CTBI held no securities are analyzed quarterly for possible other than temporary impairment. The analysis considers (i) whether we have the intent to sell our securities prior to recovery and/or maturity and (ii) whether it is more likely than not that we will not have to sell our securities prior to recovery and/or maturity. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on CTBI’s results of operations and financial condition.designated as held-to-maturity.
Subsequent to the January 1, 2018 effective date of ASU 2016-01, ASC 320 applies only to debtCTBI accounts for equity securities and ASCin accordance with Accounting Standards Codification (“ASC”) 321, Investments – Equity Securities, applies to equity securities.. ASC 321 requires equity investments (except those accounted for under the equity method and those that result in the consolidation of the investee) to be measured at fair value, with changes in fair values recognized in net income.
Equity securities with a readily determinable fair value are required to be measured at fair value, with changes in fair value recognized through net income. Equity securities without a readily determinable fair value are carried at cost, less any impairment, if any, plus or minus changes resulting from observable price changes for identical or similar investments. An election can be made, asAs permitted by ASC 321-10-35-2, CTBI can make an irrevocable election to subsequently measure an equity security without a readily determinable fair value, and all identical or similar investments of the same issuer, including future purchases of identical or similar investments of the same issuer, at fair value. Equity securities held by CTBI include securities without readily determinable fair values. CTBI has elected to accountmade this election for these securities at fair value.its Visa Class B equity securities. The fair value of these securities was determined by a third party service provider using Level 3 inputs as defined in ASC 820, Fair Value Measurement, and changes in fair value are recognized in income.
Loans – Loans with the ability and the intent to be held until maturity and/or payoff are reported at the carrying value of unpaid principal reduced by unearned interest, an allowance for loan and leasecredit losses, and unamortized deferred fees or costs.costs and premiums. 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.
The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The ability to exclude COVID-19-related modifications as troubled debt restructurings was extended under the Consolidated Appropriations Act 2021 to the earlier of (i) 60 days after the COVID-19 national emergency and (ii) January 1, 2022. CTBI elected to adopt these provisions of the CARES Act, as extended by the Consolidated Appropriations Act 2021.
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 LeaseCredit Losses – The Financial Accounting Standards Board (“FASB”) issued ASU 2016-13 in 2016 which introduced the current expected credit losses methodology (CECL) for estimating allowances for credit losses. This accounting change was effective January 1, 2020. CTBI measures expected credit losses of financial assets on a collective (pool) basis using loss-rate methods when the financial assets share similar risk characteristics. Loans that do not share risk characteristics are evaluated on an individual basis. Regardless of an initial measurement method, once it is determined that foreclosure is probable, the allowance for credit losses is measured based on the fair value of the collateral as of the measurement date. As a practical expedient, the fair value of the collateral may be used for a loan when determining the allowance for credit losses for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty. The fair value shall be adjusted for selling costs when foreclosure is probable. For collateral-dependent financial assets, the credit loss expected may be zero if the fair value less costs to sell exceed the amortized cost of the loan. Loans shall not be included in both collective assessments and individual assessments.
In the event that collection of principal becomes uncertain, CTBI has policies in place to reverse accrued interest in a timely manner. Therefore, CTBI elected ASU 2019-04 which allows that accrued interest would continue to be presented separately and not part of amortized cost on loan. The methodology used by CTBI is developed using the current loan balance, which is then compared to amortized cost balances to analyze the impact. The difference in amortized cost basis versus consideration of loan balances impacts the allowance for credit losses calculation by one basis point and is considered immaterial. The primary difference is for indirect lending premiums.
We maintain an allowance for loan and leasecredit losses (“ALLL”ACL”) 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.ACL.
We utilize an internal risk grading system for commercial credits. Those larger commercial credits that exhibit probable or observed credit weaknessesmeet the following criteria are subject to individual review.evaluation: the loan has an outstanding bank share balance of $1 million or greater and (i) has a criticized risk rating, (ii) is in nonaccrual status, (iii) is a TDR, or (iv) is 90 days or more past due. 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 loansloan segments 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.individual evaluation.
Homogenous loans, such as consumer installment, residential mortgages, and home equity lines are not individually risk graded. The associated ALLLACL for these loans is measured in pools with similar risk characteristics under ASC 450, Contingencies.326.
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 sellsell. For commercial loans greater than $1 million and classified as criticized, troubled debt restructuring, or nonaccrual, a specific reserve equalis established if a loss is determined to the difference between book value of the loanbe possible and the fair value assigned to the collateralthen charged-off once it is created until such time as the loan is foreclosed.probable. When the foreclosed collateral has been legally assigned to CTBI, the estimated fair value of the collateral less costs to sell is then transferred to other real estate owned or other repossessed assets, and a charge-off is taken for any remaining balance. When any unsecured commercial loan is considered uncollectable the loan is charged off no later than at 90 days past due.
All closed-end consumer loans (excluding conventional 1-4 family residential loans and installment and revolving loans secured by real estate) are charged off no later than 120 days (5 monthly payments) delinquent. If a loan is considered uncollectable, it is charged off earlier than 120 days delinquent. For conventional 1-4 family residential loans and installment and revolving loans secured by real estate, when a loan is 90 days past due, a current assessment of the value of the real estate is made. If the balance of the loan exceeds the fair value of the property, the loan is placed on nonaccrual. Foreclosure proceedings are normally initiated after 120 days. When the foreclosed property has been legally assigned to CTBI, the fair value less estimated costs to sell is transferred to other real estate owned and the remaining balance is taken as a charge-off.
Historical loss rates for loans are adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. We use twelve rolling quartersWith the implementation of ASC 326, weighted average life (“WAL”) calculations were completed as a tool to determine the life of CTBI’s various loan segments. Vintage modeling was used to determine the life of loan losses for our historical loss rate analysis. Factors that we considerconsumer and residential real estate loans. Static pool modeling was used to determine the life of loan losses for commercial loan segments. Qualitative factors used to derive CTBI’s total ACL 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. With the implementation of ASC 326, forecasting factors including unemployment rates and industry specific forecasts for industries in which our total exposure is 5% of capital or greater are also included as factors in the ACL model. Management continually reevaluates the other subjective factors included in its ALLLACL analysis.
Other Real Estate Owned – When foreclosed properties are acquired, appraisals are obtained and the properties are booked at the current fair market value less expected sales costs. Additionally, periodic updated appraisals are obtained on unsold foreclosed properties. When an updated appraisal reflects a fair market value below the current book value, a charge is booked to current earnings to reduce the property to its new fair market value less expected sales costs. Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months. All revenues and expenses related to the carrying of other real estate owned are recognized through the income statement.
Income Taxes– Income tax expense is based on the taxes due on the consolidated tax return plus deferred taxes based on the expected future tax benefits and consequences of temporary differences between carrying amounts and tax bases of assets and liabilities, using enacted tax rates. Any interest and penalties incurred in connection with income taxes are recorded as a component of income tax expense in the consolidated financial statements. During the years ended December 31, 2020, 2019, 2018, and 2017,2018, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes.
As a bank and trust company doing business in Kentucky, CTB and CTIC are subject to a capital-based Kentucky franchise tax and exempt from Kentucky corporate income tax. However, in March 2019, Kentucky enacted HB354, which will transition CTB and CTIC from the franchise tax to a corporate income tax beginning January 1, 2021. The current Kentucky corporate income tax rate is 5%. As of March 31, 2019, CTBI recorded a deferred tax liability, net of the federal benefit, of $1.0 million due to the enactment of HB354. While this deferred tax liability may be adjusted in 2020, we do not anticipate any further adjustments to have a significant impact to income.
In April 2019, Kentucky enacted HB458. HB458 allows for combined state income tax filing with CTBI, CTB, and CTIC. CTBI had previously filed a separate company return and generated net operating losses, in which it had maintained a valuation allowance against the related deferred tax asset. HB458 also allows for certain net operating losses to be utilized on a combined return. CTBI expects to file a combined return, beginning in 2021, and to utilize these previously generated losses. The tax benefit recorded in 2019 to reverse the valuation allowance on the deferred tax asset for these losses was $3.7 million.
As a result of these Kentucky tax law changes, in 2019, we recognized a state income tax benefit of $2.7 million, or $0.15 per basic share, net of federal income tax expense.
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
CTBI currently does not engage in any hedging activity or any derivative activity which management considers material. Analysis of CTBI’s interest rate sensitivity can be found in the Interest Rate Risk section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data
Community Trust Bancorp, Inc.
Consolidated Balance Sheets
(dollars in thousands) December 31 | | 2019 | | | 2018 | | | 2020 | | | 2019 | |
| Assets: | | | | | | | | | | | | |
| Cash and due from banks | | $ | 58,680 | | | $ | 64,632 | | | $ | 54,250 | | | $ | 58,680 | |
| Interest bearing deposits | | | 206,003 | | | | 75,718 | | | | 283,985 | | | | 206,003 | |
| Federal funds sold | | | 0 | | | | 1,100 | | |
| Cash and cash equivalents | | | 264,683 | | | | 141,450 | | | | 338,235 | | | | 264,683 | |
| | | | | | | | | | | | | | | | | |
| Certificates of deposit in other banks | | | 245 | | | | 3,920 | | | | 245 | | | | 245 | |
| Securities available-for-sale at fair value (amortized cost of $593,945 and $602,114, respectively) | | | 599,844 | | | | 593,746 | | |
| Securities held-to-maturity at amortized cost (fair value of $517 and $649, respectively) | | | 517 | | | | 649 | | |
| Debt securities available-for-sale at fair value (amortized cost of $978,774 and $593,945, respectively) | | | | 997,261 | | | | 599,844 | |
| Debt securities held-to-maturity at amortized cost (fair value of $0 and $517, respectively) | | | | 0 | | | | 517 | |
| Equity securities at fair value | | | 1,953 | | | | 1,173 | | | | 2,471 | | | | 1,953 | |
| Loans held for sale | | | 1,167 | | | | 2,461 | | | | 23,259 | | | | 1,167 | |
| | | | | | | | | | | | | | | | | |
| Loans | | | 3,248,664 | | | | 3,208,638 | | | | 3,554,211 | | | | 3,248,664 | |
| Allowance for loan and lease losses | | | (35,096 | ) | | | (35,908 | ) | |
| Allowance for credit losses* | | | | (48,022 | ) | | | (35,096 | ) |
| Net loans | | | 3,213,568 | | | | 3,172,730 | | | | 3,506,189 | | | | 3,213,568 | |
| | | | | | | | | | | | | | | | | |
| Premises and equipment, net | | | 44,046 | | | | 45,291 | | | | 42,001 | | | | 44,046 | |
| Right-of-use asset | | | 14,550 | | | | 0 | | |
| Right-of-use assets | | | | 13,215 | | | | 14,550 | |
| Federal Home Loan Bank stock | | | 10,474 | | | | 14,713 | | | | 10,048 | | | | 10,474 | |
| Federal Reserve Bank stock | | | 4,887 | | | | 4,887 | | | | 4,887 | | | | 4,887 | |
| Goodwill | | | 65,490 | | | | 65,490 | | | | 65,490 | | | | 65,490 | |
| Bank owned life insurance | | | 69,269 | | | | 67,076 | | | | 72,373 | | | | 69,269 | |
| Mortgage servicing rights | | | 3,263 | | | | 3,607 | | | | 4,068 | | | | 3,263 | |
| Other real estate owned | | | 19,480 | | | | 27,273 | | | | 7,694 | | | | 19,480 | |
| Accrued interest receivable | | | 14,836 | | | | 14,432 | | | | 15,818 | | | | 14,836 | |
| Other assets | | | 37,731 | | | | 42,718 | | | | 35,887 | | | | 37,731 | |
| Total assets | | $ | 4,366,003 | | | $ | 4,201,616 | | | $ | 5,139,141 | | | $ | 4,366,003 | |
| | | | | | | | | | | | | | | | | |
| Liabilities and shareholders’ equity: | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | |
| Noninterest bearing | | $ | 865,760 | | | $ | 803,316 | | | $ | 1,140,925 | | | $ | 865,760 | |
| Interest bearing | | | 2,539,812 | | | | 2,502,634 | | | | 2,875,157 | | | | 2,539,812 | |
| Total deposits | | | 3,405,572 | | | | 3,305,950 | | | | 4,016,082 | | | | 3,405,572 | |
| | | | | | | | | | | | | | | | | |
| Repurchase agreements | | | 226,917 | | | | 232,712 | | | | 355,862 | | | | 226,917 | |
| Federal funds purchased | | | 7,906 | | | | 1,180 | | | | 500 | | | | 7,906 | |
| Advances from Federal Home Loan Bank | | | 415 | | | | 436 | | | | 395 | | | | 415 | |
| Long-term debt | | | 57,841 | | | | 59,341 | | | | 57,841 | | | | 57,841 | |
| Deferred taxes | | | 5,110 | | | | 3,363 | | |
| Deferred tax liability | | | | 4,687 | | | | 5,110 | |
| Operating lease liability | | | 13,729 | | | | 0 | | | | 12,531 | | | | 13,729 | |
| Finance lease liability | | | 1,456 | | | | 0 | | | | 1,441 | | | | 1,456 | |
| Accrued interest payable | | | 2,839 | | | | 2,902 | | | | 1,243 | | | | 2,839 | |
| Other liabilities | | | 29,332 | | | | 31,582 | | | | 33,694 | | | | 29,332 | |
| Total liabilities | | | 3,751,117 | | | | 3,637,466 | | | | 4,484,276 | | | | 3,751,117 | |
| | | | | | | | | | | | | | | | | |
| Commitments and contingencies (notes 18 and 20) | | | | | | | | | |
| Commitments and contingencies (notes 17 and 19) | | | | 0 | | | | 0 | |
| | | | | | | | | | | | | | | | | |
| Shareholders’ equity: | | | | | | | | | | | | | | | | |
| Preferred stock, 300,000 shares authorized and unissued | | | - | | | | - | | | | 0 | | | | 0 | |
| Common stock, $5.00 par value, shares authorized 25,000,000; shares outstanding 2019 – 17,793,165; 2018 – 17,732,853 | | | 88,966 | | | | 88,665 | | |
| Common stock, $5.00 par value, shares authorized 25,000,000; shares outstanding 2020 – 17,810,401; 2019 – 17,793,165 | | | | 89,052 | | | | 88,966 | |
| Capital surplus | | | 224,907 | | | | 223,161 | | | | 225,507 | | | | 224,907 | |
| Retained earnings | | | 296,760 | | | | 258,935 | | | | 326,738 | | | | 296,760 | |
| Accumulated other comprehensive income (loss), net of tax | | | 4,253 | | | | (6,611 | ) | |
| Accumulated other comprehensive income, net of tax | | | | 13,568 | | | | 4,253 | |
| Total shareholders’ equity | | | 614,886 | | | | 564,150 | | | | 654,865 | | | | 614,886 | |
| | | | | | | | | | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 4,366,003 | | | $ | 4,201,616 | | | $ | 5,139,141 | | | $ | 4,366,003 | |
*Effective January 1, 2020, the allowance for loan and lease losses became the allowance for credit losses with the implementation of ASU 2016-13, commonly referred to as CECL.
See notes to consolidated financial statements.
Consolidated Statements of Income and Comprehensive Income
(in thousands except per share data) Year Ended December 31 | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | |
| Interest income: | | | | | | | | | | | | | | | | | | |
| Interest and fees on loans, including loans held for sale | | $ | 164,991 | | | $ | 154,552 | | | $ | 141,497 | | | $ | 160,826 | | | $ | 164,991 | | | $ | 154,552 | |
| Interest and dividends on securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable | | | 12,516 | | | | 10,015 | | | | 8,715 | | | | 11,939 | | | | 12,516 | | | | 10,015 | |
| Tax exempt | | | 2,354 | | | | 2,796 | | | | 3,011 | | | | 2,380 | | | | 2,354 | | | | 2,796 | |
| Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock | | | 947 | | | | 1,303 | | | | 1,189 | | | | 532 | | | | 947 | | | | 1,303 | |
| Interest on Federal Reserve Bank deposits | | | 4,434 | | | | 2,525 | | | | 1,068 | | | | 704 | | | | 4,434 | | | | 2,525 | |
| Other, including interest on federal funds sold | | | 156 | | | | 259 | | | | 216 | | | | 60 | | | | 156 | | | | 259 | |
| Total interest income | | | 185,398 | | | | 171,450 | | | | 155,696 | | | | 176,441 | | | | 185,398 | | | | 171,450 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest on deposits | | | 33,371 | | | | 23,714 | | | | 14,350 | | | | 21,177 | | | | 33,371 | | | | 23,714 | |
| Interest on repurchase agreements and federal funds purchased | | | 4,631 | | | | 3,312 | | | | 1,832 | | | | 2,788 | | | | 4,631 | | | | 3,312 | |
| Interest on advances from Federal Home Loan Bank | | | 39 | | | | 27 | | | | 427 | | | | 0 | | | | 39 | | | | 27 | |
| Interest on long-term debt | | | 2,472 | | | | 2,242 | | | | 1,685 | | | | 1,485 | | | | 2,472 | | | | 2,242 | |
| Total interest expense | | | 40,513 | | | | 29,295 | | | | 18,294 | | | | 25,450 | | | | 40,513 | | | | 29,295 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 144,885 | | | | 142,155 | | | | 137,402 | | | | 150,991 | | | | 144,885 | | | | 142,155 | |
| Provision for loan losses | | | 4,819 | | | | 6,167 | | | | 7,521 | | |
| Net interest income after provision for loan losses | | | 140,066 | | | | 135,988 | | | | 129,881 | | |
| Provision for credit losses* | | | | 16,047 | | | | 4,819 | | | | 6,167 | |
| Net interest income after provision for credit losses | | | | 134,944 | | | | 140,066 | �� | | | 135,988 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Service charges on deposit accounts | | | 26,359 | | | | 25,974 | | | | 25,121 | | | | 23,461 | | | | 26,359 | | | | 25,974 | |
| Gains on sales of loans, net | | | 1,880 | | | | 1,288 | | | | 1,320 | | | | 7,226 | | | | 1,880 | | | | 1,288 | |
| Trust and wealth management income | | | 10,804 | | | | 11,313 | | | | 10,453 | | | | 10,931 | | | | 10,804 | | | | 11,313 | |
| Loan related fees | | | 2,742 | | | | 3,729 | | | | 3,678 | | | | 4,041 | | | | 2,742 | | | | 3,729 | |
| Bank owned life insurance | | | 2,397 | | | | 3,672 | | | | 2,172 | | | | 2,306 | | | | 2,397 | | | | 3,672 | |
| Brokerage revenue | | | 1,367 | | | | 1,354 | | | | 1,324 | | | | 1,483 | | | | 1,367 | | | | 1,354 | |
| Securities gains (losses) | | | 783 | | | | (85 | ) | | | 73 | | | | 1,769 | | | | 783 | | | | (85 | ) |
| Other noninterest income | | | 3,852 | | | | 4,707 | | | | 4,367 | | | | 3,343 | | | | 3,852 | | | | 4,707 | |
| Total noninterest income | | | 50,184 | | | | 51,952 | | | | 48,508 | | | | 54,560 | | | | 50,184 | | | | 51,952 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
| Officer salaries and employee benefits | | | 12,614 | | | | 12,906 | | | | 11,823 | | | | 15,257 | | | | 12,614 | | | | 12,906 | |
| Other salaries and employee benefits | | | 50,413 | | | | 48,656 | | | | 47,006 | | | | 51,170 | | | | 50,413 | | | | 48,656 | |
| Occupancy, net | | | 7,845 | | | | 8,167 | | | | 8,072 | | | | 7,912 | | | | 7,845 | | | | 8,167 | |
| Equipment | | | 3,000 | | | | 2,878 | | | | 3,049 | | | | 2,737 | | | | 3,000 | | | | 2,878 | |
| Data processing | | | 7,417 | | | | 6,680 | | | | 7,100 | | | | 7,941 | | | | 7,417 | | | | 6,680 | |
| Bank franchise tax | | | 6,771 | | | | 6,557 | | | | 5,478 | | | | 7,299 | | | | 6,771 | | | | 6,557 | |
| Legal fees | | | 1,968 | | | | 1,637 | | | | 1,668 | | | | 1,634 | | | | 1,968 | | | | 1,637 | |
| Professional fees | | | 2,188 | | | | 2,093 | | | | 1,991 | | | | 2,091 | | | | 2,188 | | | | 2,093 | |
| Advertising and marketing | | | 3,283 | | | | 2,995 | | | | 2,721 | | | | 2,980 | | | | 3,283 | | | | 2,995 | |
| FDIC insurance | | | 266 | | | | 1,171 | | | | 1,239 | | | | 1,056 | | | | 266 | | | | 1,171 | |
| Other real estate owned provision and expense | | | 5,490 | | | | 4,324 | | | | 4,500 | | | | 2,655 | | | | 5,490 | | | | 4,324 | |
| Repossession expense | | | 1,042 | | | | 1,249 | | | | 911 | | | | 717 | | | | 1,042 | | | | 1,249 | |
| Amortization of limited partnership investments | | | 3,422 | | | | 2,527 | | | | 2,419 | | | | 3,759 | | | | 3,422 | | | | 2,527 | |
| Other noninterest expense | | | 12,539 | | | | 15,558 | | | | 11,901 | | | | 12,031 | | | | 12,539 | | | | 15,558 | |
| Total noninterest expense | | | 118,258 | | | | 117,398 | | | | 109,878 | | | | 119,239 | | | | 118,258 | | | | 117,398 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income before income taxes | | | 71,992 | | | | 70,542 | | | | 68,511 | | | | 70,265 | | | | 71,992 | | | | 70,542 | |
| Income taxes | | | 7,452 | | | | 11,314 | | | | 17,018 | | | | 10,761 | | | | 7,452 | | | | 11,314 | |
| Net income | | $ | 64,540 | | | $ | 59,228 | | | $ | 51,493 | | | $ | 59,504 | | | $ | 64,540 | | | $ | 59,228 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized holding gains (losses) on securities available-for-sale: | | | | | | | | | | | | | |
| Unrealized holding gains (losses) on debt securities available-for-sale: | | | | | | | | | | | | | |
| Unrealized holding gains (losses) arising during the period | | | 14,270 | | | | (5,393 | ) | | | (820 | ) | | | 13,839 | | | | 14,270 | | | | (5,393 | ) |
| Less: Reclassification adjustments for realized gains (losses) included in net income | | | 3 | | | | (821 | ) | | | 73 | | | | 1,251 | | | | 3 | | | | (821 | ) |
| Tax expense (benefit) | | | 3,403 | | | | (960 | ) | | | (312 | ) | | | 3,273 | | | | 3,403 | | | | (960 | ) |
| Other comprehensive income (loss), net of tax | | | 10,864 | | | | (3,612 | ) | | | (581 | ) | | | 9,315 | | | | 10,864 | | | | (3,612 | ) |
| Comprehensive income | | $ | 75,404 | | | $ | 55,616 | | | $ | 50,912 | | | $ | 68,819 | | | $ | 75,404 | | | $ | 55,616 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic earnings per share | | $ | 3.64 | | | $ | 3.35 | | | $ | 2.92 | | | $ | 3.35 | | | $ | 3.64 | | | $ | 3.35 | |
| Diluted earnings per share | | $ | 3.64 | | | $ | 3.35 | | | $ | 2.92 | | | $ | 3.35 | | | $ | 3.64 | | | $ | 3.35 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding-basic | | | 17,724 | | | | 17,687 | | | | 17,631 | | | | 17,748 | | | | 17,724 | | | | 17,687 | |
| Weighted average shares outstanding-diluted | | | 17,740 | | | | 17,703 | | | | 17,653 | | | | 17,756 | | | | 17,740 | | | | 17,703 | |
*Effective January 1, 2020, the provision for loan losses became the provision for credit losses with the implementation of ASU 2016-13, commonly referred to as CECL.
See notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders’ Equity
| (in thousands except per share and share amounts) | | Common Shares | | | Common Stock | | | Capital Surplus | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss), Net of Tax | | | Total | | | Common Shares | | | Common Stock | | | Capital Surplus | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss), Net of Tax | | | Total | |
| Balance, January 1, 2017 | | | 17,628,695 | | | $ | 88,144 | | | $ | 219,697 | | | $ | 195,078 | | | $ | (2,304 | ) | | $ | 500,615 | | |
| Net income | | | | | | | | | | | | | | | 51,493 | | | | | | | | 51,493 | | |
| Other comprehensive loss, net of tax of $(312) | | | | | | | | | | | | | | | | | | | (581 | ) | | | (581 | ) | |
| Cash dividends declared ($1.30 per share) | | | | | | | | | | | | | | | (22,924 | ) | | | | | | | (22,924 | ) | |
| Issuance of common stock | | | 55,191 | | | | 276 | | | | 1,237 | | | | | | | | | | | | 1,513 | | |
| Issuance of restricted stock | | | 23,668 | | | | 118 | | | | (118 | ) | | | | | | | | | | | 0 | | |
| Vesting of restricted stock | | | (11,965 | ) | | | (60 | ) | | | 60 | | | | | | | | | | | | 0 | | |
| Forfeiture of restricted stock | | | (2,677 | ) | | | (13 | ) | | | 13 | | | | | | | | | | | | 0 | | |
| Stock-based compensation | | | | | | | | | | | 583 | | | | | | | | | | | | 583 | | |
| Implementation of ASU 2018-02 | | | | | | | | | | | | | | | 621 | | | | (621 | ) | | | 0 | | |
| Balance, December 31, 2017 | | | 17,692,912 | | | | 88,465 | | | | 221,472 | | | | 224,268 | | | | (3,506 | ) | | | 530,699 | | |
| Balance, January 1, 2018 | | | | 17,692,912 | | | $ | 88,465 | | | $ | 221,472 | | | $ | 224,268 | | | $ | (3,506 | ) | | $ | 530,699 | |
| Net income | | | | | | | | | | | | | | | 59,228 | | | | | | | | 59,228 | | | | | | | | | | | | | | | | 59,228 | | | | | | | | 59,228 | |
| Other comprehensive loss, net of tax of $(960) | | | | | | | | | | | | | | | | | | | (3,612 | ) | | | (3,612 | ) | | | | | | | | | | | | | | | | | | | (3,612 | ) | | | (3,612 | ) |
| Cash dividends declared ($1.38 per share) | | | | | | | | | | | | | | | (24,412 | ) | | | | | | | (24,412 | ) | | | | | | | | | | | | | | | (24,412 | ) | | | | | | | (24,412 | ) |
| Issuance of common stock | | | 42,133 | | | | 211 | | | | 1,019 | | | | | | | | | | | | 1,230 | | | | 42,133 | | | | 211 | | | | 1,019 | | | | | | | | | | | | 1,230 | |
| Issuance of restricted stock | | | 11,320 | | | | 57 | | | | (57 | ) | | | | | | | | | | | 0 | | | | 11,320 | | | | 57 | | | | (57 | ) | | | | | | | | | | | 0 | |
| Vesting of restricted stock | | | (11,997 | ) | | | (60 | ) | | | 60 | | | | | | | | | | | | 0 | | | | (11,997 | ) | | | (60 | ) | | | 60 | | | | | | | | | | | | 0 | |
| Forfeiture of restricted stock | | | (1,515 | ) | | | (8 | ) | | | 8 | | | | | | | | | | | | 0 | | | | (1,515 | ) | | | (8 | ) | | | 8 | | | | | | | | | | | | 0 | |
| Stock-based compensation | | | | | | | | | | | 659 | | | | | | | | | | | | 659 | | | | | | | | | | | | 659 | | | | | | | | | | | | 659 | |
| Implementation of ASU 2014-09 | | | | | | | | | | | | | | | 358 | | | | | | | | 358 | | | | | | | | | | | | | | | | 358 | | | | | | | | 358 | |
| Implementation of ASU 2016-01 | | | | | | | | | | | | | | | (507 | ) | | | 507 | | | | 0 | | | | | | | | | | | | | | | | (507 | ) | | | 507 | | | | 0 | |
| Balance, December 31, 2018 | | | 17,732,853 | | | | 88,665 | | | | 223,161 | | | | 258,935 | | | | (6,611 | ) | | | 564,150 | | | | 17,732,853 | | | | 88,665 | | | | 223,161 | | | | 258,935 | | | | (6,611 | ) | | | 564,150 | |
| Net income | | | | | | | | | | | | | | | 64,540 | | | | | | | | 64,540 | | | | | | | | | | | | | | | | 64,540 | | | | | | | | 64,540 | |
| Other comprehensive income, net of tax of $3,403 | | | | | | | | | | | | | | | | | | | 10,864 | | | | 10,864 | | | | | | | | | | | | | | | | | | | | 10,864 | | | | 10,864 | |
| Cash dividends declared ($1.48 per share) | | | | | | | | | | | | | | | (26,235 | ) | | | | | | | (26,235 | ) | | | | | | | | | | | | | | | (26,235 | ) | | | | | | | (26,235 | ) |
| Issuance of common stock | | | 45,639 | | | | 228 | | | | 1,036 | | | | | | | | | | | | 1,264 | | | | 45,639 | | | | 228 | | | | 1,036 | | | | | | | | | | | | 1,264 | |
| Issuance of restricted stock | | | 27,921 | | | | 140 | | | | (140 | ) | | | | | | | | | | | 0 | | | | 27,921 | | | | 140 | | | | (140 | ) | | | | | | | | | | | 0 | |
| Vesting of restricted stock | | | (12,660 | ) | | | (64 | ) | | | 64 | | | | | | | | | | | | 0 | | | | (12,660 | ) | | | (64 | ) | | | 64 | | | | | | | | | | | | 0 | |
| Forfeiture of restricted stock | | | (588 | ) | | | (3 | ) | | | 3 | | | | | | | | | | | | 0 | | | | (588 | ) | | | (3 | ) | | | 3 | | | | | | | | | | | | 0 | |
| Stock-based compensation | | | | | | | | | | | 783 | | | | | | | | | | | | 783 | | | | | | | | | | | | 783 | | | | | | | | | | | | 783 | |
| Implementation of ASU 2016-02 | | | | | | | | | | | | | | | (480 | ) | | | 0 | | | | (480 | ) | | | | | | | | | | | | | | | (480 | ) | | | | | | | (480 | ) |
| Balance, December 31, 2019 | | | 17,793,165 | | | $ | 88,966 | | | $ | 224,907 | | | $ | 296,760 | | | $ | 4,253 | | | $ | 614,886 | | | | 17,793,165 | | | | 88,966 | | | | 224,907 | | | | 296,760 | | | | 4,253 | | | | 614,886 | |
| Net income | | | | | | | | | | | | | | | | 59,504 | | | | | | | | 59,504 | �� |
| Other comprehensive income, net of tax of $3,273 | | | | | | | | | | | | | | | | | | | | 9,315 | | | | 9,315 | |
| Cash dividends declared ($1.53 per share) | | | | | | | | | | | | | | | | (27,160 | ) | | | | | | | (27,160 | ) |
| Issuance of common stock | | | | 45,341 | | | | 226 | | | | 700 | | | | | | | | | | | | 926 | |
| Repurchase of common stock | | | | (32,664 | ) | | | (163 | ) | | | (936 | ) | | | | | | | | | | | (1,099 | ) |
| Issuance of restricted stock | | | | 21,544 | | | | 108 | | | | (108 | ) | | | | | | | | | | | 0 | |
| Vesting of restricted stock | | | | (16,985 | ) | | | (85 | ) | | | 85 | | | | | | | | | | | | 0 | |
| Forfeiture of restricted stock | | | | 0 | | | | 0 | | | | 0 | | | | | | | | | | | | 0 | |
| Stock-based compensation | | | | | | | | | | | | 859 | | | | | | | | | | | | 859 | |
| Implementation of ASU 2016-13 | | | | | | | | | | | | | | | | (2,366 | ) | | | | | | | (2,366 | ) |
| Balance, December 31, 2020 | | | | 17,810,401 | | | $ | 89,052 | | | $ | 225,507 | | | $ | 326,738 | | | $ | 13,568 | | | $ | 654,865 | |
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(in thousands) Year Ended December 31 | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | |
| Cash flows from operating activities: | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 64,540 | | | $ | 59,228 | | | $ | 51,493 | | | $ | 59,504 | | | $ | 64,540 | | | $ | 59,228 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | 5,515 | | | | 3,786 | | | | 4,007 | | | | 5,346 | | | | 5,515 | | | | 3,786 | |
| Deferred taxes | | | (1,412 | ) | | | (246 | ) | | | (3,090 | ) | | | (2,909 | ) | | | (1,412 | ) | | | (246 | ) |
| Stock-based compensation | | | 859 | | | | 710 | | | | 636 | | | | 944 | | | | 859 | | | | 710 | |
| Provision for loan losses | | | 4,819 | | | | 6,167 | | | | 7,521 | | |
| Provision for credit losses* | | | | 16,047 | | | | 4,819 | | | | 6,167 | |
| Write-downs of other real estate owned and other repossessed assets | | | 4,295 | | | | 2,530 | | | | 3,034 | | | | 1,454 | | | | 4,295 | | | | 2,530 | |
| Gains on sale of loans held for sale | | | (1,880 | ) | | | (1,288 | ) | | | (1,320 | ) | | | (7,226 | ) | | | (1,880 | ) | | | (1,288 | ) |
| Securities (gains) losses | | | (3 | ) | | | 85 | | | | (73 | ) | | | (1,251 | ) | | | (3 | ) | | | 85 | |
| Fair value adjustment in equity securities | | | (780 | ) | | | 0 | | | | 0 | | | | (518 | ) | | | (780 | ) | | | 0 | |
| Gain on debt repurchase | | | (219 | ) | | | 0 | | | | (560 | ) | | | 0 | | | | (219 | ) | | | 0 | |
| Gains (losses) on sale of assets, net | | | 360 | | | | (175 | ) | | | 40 | | |
| (Gains) losses on sale of assets, net | | | | 390 | | | | 360 | | | | (175 | ) |
| Proceeds from sale of mortgage loans held for sale | | | 94,507 | | | | 56,689 | | | | 59,400 | | | | 347,048 | | | | 94,507 | | | | 56,689 | |
| Funding of mortgage loans held for sale | | | (91,333 | ) | | | (56,829 | ) | | | (57,869 | ) | | | (361,913 | ) | | | (91,333 | ) | | | (56,829 | ) |
| Amortization of securities premiums and discounts, net | | | 5,042 | | | | 4,679 | | | | 3,437 | | | | 5,907 | | | | 5,042 | | | | 4,679 | |
| Change in cash surrender value of bank owned life insurance | | | (1,567 | ) | | | (2,924 | ) | | | (1,473 | ) | | | (1,371 | ) | | | (1,567 | ) | | | (2,924 | ) |
| Payment of operating lease liabilities | | | (1,663 | ) | | | 0 | | | | 0 | | | | (1,682 | ) | | | (1,663 | ) | | | 0 | |
| Mortgage servicing rights: | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair value adjustments | | | 975 | | | | 343 | | | | 361 | | | | 1,064 | | | | 975 | | | | 343 | |
| New servicing assets created | | | (631 | ) | | | (466 | ) | | | (412 | ) | | | (1,869 | ) | | | (631 | ) | | | (466 | ) |
| Changes in: | | | | | | | | | | | | | | | | | | | | | | | | |
| Accrued interest receivable | | | (404 | ) | | | (1,094 | ) | | | (1,416 | ) | | | (982 | ) | | | (404 | ) | | | (1,094 | ) |
| Other assets | | | 4,941 | | | | (14,694 | ) | | | (2,996 | ) | | | 1,845 | | | | 4,941 | | | | (14,694 | ) |
| Accrued interest payable | | | (63 | ) | | | (674 | ) | | | (1,028 | ) | | | (1,596 | ) | | | (63 | ) | | | (674 | ) |
| Other liabilities | | | (2,440 | ) | | | 9,660 | | | | 2,659 | | | | 4,147 | | | | (2,440 | ) | | | 9,660 | |
| Net cash provided by operating activities | | | 83,458 | | | | 65,487 | | | | 62,351 | | | | 62,379 | | | | 83,458 | | | | 65,487 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Certificates of deposit in other banks: | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchase of certificates of deposit | | | 0 | | | | 0 | | | | (11,760 | ) | | | (245 | ) | | | 0 | | | | 0 | |
| Maturity of certificates of deposit | | | 3,675 | | | | 5,880 | | | | 2,940 | | | | 245 | | | | 3,675 | | | | 5,880 | |
| Securities available-for-sale (AFS): | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchase of AFS securities | | | (196,727 | ) | | | (281,511 | ) | | | (231,680 | ) | | | (857,167 | ) | | | (196,727 | ) | | | (281,511 | ) |
| Proceeds from sales of AFS securities | | | 25,734 | | | | 153,315 | | | | 87,472 | | | | 186,194 | | | | 25,734 | | | | 153,315 | |
| Proceeds from prepayments, calls, and maturities of AFS securities | | | 174,125 | | | | 109,701 | | | | 159,584 | | | | 281,487 | | | | 174,125 | | | | 109,701 | |
| Securities held-to-maturity (HTM): | | | | | | | | | | | | | | | | | | | | | | | | |
| Proceeds from prepayments and maturities of HTM securities | | | 132 | | | | 10 | | | | 207 | | | | 517 | | | | 132 | | | | 10 | |
| Change in loans, net | | | (46,162 | ) | | | (93,151 | ) | | | (194,548 | ) | | | (306,523 | ) | | | (46,162 | ) | | | (93,151 | ) |
| Purchase of premises and equipment | | | (2,570 | ) | | | (2,832 | ) | | | (2,400 | ) | | | (1,482 | ) | | | (2,570 | ) | | | (2,832 | ) |
| Proceeds from sale and retirement of premises and equipment | | | 48 | | | | 97 | | | | 25 | | | | 1 | | | | 48 | | | | 97 | |
| Redemption of stock by Federal Home Loan Bank | | | 4,239 | | | | 3,214 | | | | 0 | | | | 426 | | | | 4,239 | | | | 3,214 | |
| Proceeds from sale of other real estate owned and repossessed assets | | | 3,641 | | | | 3,485 | | | | 3,574 | | | | 4,754 | | | | 3,641 | | | | 3,485 | |
| Additional investment in bank owned life insurance | | | (1,241 | ) | | | 0 | | | | 0 | | | | (1,733 | ) | | | (1,241 | ) | | | 0 | |
| Proceeds from settlement of bank owned life insurance | | | 615 | | | | 1,202 | | | | 0 | | | | 0 | | | | 615 | | | | 1,202 | |
| Net cash used in investing activities | | | (34,491 | ) | | | (100,590 | ) | | | (186,586 | ) | | | (693,526 | ) | | | (34,491 | ) | | | (100,590 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Change in deposits, net | | | 99,622 | | | | 42,087 | | | | 182,555 | | | | 610,510 | | | | 99,622 | | | | 42,087 | |
| Change in repurchase agreements and federal funds purchased, net | | | 931 | | | | (17,234 | ) | | | (4,755 | ) | | | 121,539 | | | | 931 | | | | (17,234 | ) |
| Advances from Federal Home Loan Bank | | | 30,000 | | | | 0 | | | | 350,000 | | | | 25,000 | | | | 30,000 | | | | 0 | |
| Payments on advances from Federal Home Loan Bank | | | (30,021 | ) | | | (409 | ) | | | (350,099 | ) | | | (25,020 | ) | | | (30,021 | ) | | | (409 | ) |
| Payment of finance lease liabilities | | | (14 | ) | | | 0 | | | | 0 | | | | (15 | ) | | | (14 | ) | | | 0 | |
| Repurchase of long-term debt | | | (1,281 | ) | | | 0 | | | | (1,440 | ) | | | 0 | | | | (1,281 | ) | | | 0 | |
| Issuance of common stock | | | 1,264 | | | | 1,230 | | | | 1,513 | | | | 926 | | | | 1,264 | | | | 1,230 | |
| Repurchase of stock | | | | (1,099 | ) | | | 0 | | | | 0 | |
| Dividends paid | | | (26,235 | ) | | | (24,395 | ) | | | (22,981 | ) | | | (27,142 | ) | | | (26,235 | ) | | | (24,395 | ) |
| Net cash provided by financing activities | | | 74,266 | | | | 1,279 | | | | 154,793 | | | | 704,699 | | | | 74,266 | | | | 1,279 | |
| Net increase (decrease) in cash and cash equivalents | | | 123,233 | | | | (33,824 | ) | | | 30,558 | | | | 73,552 | | | | 123,233 | | | | (33,824 | ) |
| Cash and cash equivalents at beginning of year | | | 141,450 | | | | 175,274 | | | | 144,716 | | | | 264,683 | | | | 141,450 | | | | 175,274 | |
| Cash and cash equivalents at end of year | | $ | 264,683 | | | $ | 141,450 | | | $ | 175,274 | | | $ | 338,235 | | | $ | 264,683 | | | $ | 141,450 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Supplemental disclosures: | | | | | | | | | | | | | | | | | | | | | | | | |
| Income taxes paid | | $ | 9,988 | | | $ | 9,700 | | | $ | 21,400 | | | $ | 13,275 | | | $ | 9,988 | | | $ | 9,700 | |
| Interest paid | | | 40,576 | | | | 28,621 | | | | 17,266 | | | | 27,047 | | | | 40,576 | | | | 28,621 | |
| Non-cash activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans to facilitate the sale of other real estate owned and repossessed assets | | | 2,879 | | | | 4,385 | | | | 2,679 | | | | 9,632 | | | | 2,879 | | | | 4,385 | |
| Common stock dividends accrued, paid in subsequent quarter | | | 221 | | | | 221 | | | | 205 | | | | 239 | | | | 221 | | | | 221 | |
| Real estate acquired in settlement of loans | | | 3,384 | | | | 5,459 | | | | 5,235 | | | | 4,446 | | | | 3,384 | | | | 5,459 | |
*Effective January 1, 2020, the provision for loan losses became the provision for credit losses with the implementation of ASU 2016-13, commonly referred to as CECL.
See notes to consolidated financial statements.
Notes 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 leasecredit 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 leasecredit 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 debt securities into held-to-maturity, trading, or available-for-sale categories. Held-to-maturity securities are those which we have the positive intent and ability to hold to maturity and are reported at amortized cost. In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 320, Investments – Debt Securities, investments in debt securities that are not classified as held-to-maturity shall be classified in one of the following categories and measured at fair value in the statement of financial position:
a. Trading securities. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) shall be classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price.
b. Available-for-sale securities. Investments not classified as trading securities (nor as held-to-maturity securities) shall be classified as available-for-sale securities.
We do not have any securities that are classified as trading securities. Available-for-sale securities are reported at fair value, with unrealized gains and losses included as a separate component of shareholders’ equity, net of tax. If declines in fair value are other than temporary, the carrying value of the securities is written down to fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not credit related.
Gains or losses on disposition of debt securities are computed by specific identification for those securities. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings.
WhenWith the fair valueimplementation of Accounting Standards Update (“ASU”)2016-13, commonly referred to as CECL, an allowance will be recognized for credit losses relative to available-for-sale securities rather than as a security is below its amortizedreduction in the 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 extentbasis of the impairmentsecurity. Subsequent improvements in credit quality or reductions in estimated credit losses will be recognized immediately as a reversal of the security may be different than previously estimated,recorded allowance, which could have a material effect on CTBI’s resultsaligns the income statement recognition of operations and financial condition.credit losses with the reporting period in which changes occur.
SubsequentHeld-to-maturity (“HTM”) securities will be subject to the January 1, 2018 effective date of ASU 2016-01, ASC 320 applies only toCECL. CECL will require an allowance on these held-to-maturity debt securities for lifetime expected credit losses, determined by adjusting historical loss information for current conditions and ASCreasonable and supportable forecasts. The forward-looking evaluation of lifetime expected losses will be performed on a pooled basis for debt securities that share similar risk characteristics. These allowances for expected losses must be made by the holder of the HTM debt security when the security is purchased. At December 31, 2020, CTBI held 0 securities designated as held-to-maturity.
CTBI accounts for equity securities in accordance with Accounting Standards Codification (“ASC”) 321, Investments – Equity Securities, applies to equity securities.. ASC 321 requires equity investments (except those accounted for under the equity method and those that result in the consolidation of the investee) to be measured at fair value, with changes in fair values recognized in net income.
Equity securities with a readily determinable fair value are required to be measured at fair value, with changes in fair value recognized through net income. Equity securities without a readily determinable fair value are carried at cost, less any impairment, if any, plus or minus changes resulting from observable price changes for identical or similar investments. An election can be made, asAs permitted by ASC 321-10-35-2, CTBI can make an irrevocable election to subsequently measure an equity security without a readily determinable fair value, and all identical or similar investments of the same issuer, including future purchases of identical or similar investments of the same issuer, at fair value. Equity securities held by CTBI include securities without readily determinable fair values. CTBI has elected to accountmade this election for these securities at fair value.its Visa Class B equity securities. The fair value of these securities was determined by a third party service provider using Level 3 inputs as defined in ASC 820, Fair Value Measurement, and changes in fair value are recognized in income.
Loans – Loans with the ability and the intent to be held until maturity and/or payoff are reported at the carrying value of unpaid principal reduced by unearned interest, an allowance for loan and leasecredit losses, and unamortized deferred fees or costs.costs and premiums. 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.
The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The ability to exclude COVID-19-related modifications as troubled debt restructurings was extended under the Consolidated Appropriations Act 2021 to the earlier of (i) 60 days after the COVID-19 national emergency and (ii) January 1, 2022. CTBI elected to adopt these provisions of the CARES Act, as extended by the Consolidated Appropriations Act 2021.
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.
Leases – ASU 2016-022016-02 established 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 are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. A lease is 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. ASU 2018-112018-11 provides a new transition method and a practical expedient for separating components of a contract.
Transition: Comparative Reporting at Adoption
The amendments in ASU 2018-112018-11 provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption consistent with preparers’ requests. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current generally accepted accounting principles (“GAAP”) in Topic 840, Leases. An entity that elects this additional (and optional) transition method must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840. The amendments do not change the existing disclosure requirements in Topic 840 (for example, they do not create interim disclosure requirements that entities previously were not required to provide).
Separating Components of a Contract
The amendments in ASU 2018-112018-11 provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606) and both of the following are met:
• The timing and pattern of transfer of the non-lease component(s) and associated lease component are the same. | ● | The timing and pattern of transfer of the non-lease component(s) and associated lease component are the same. |
| ● | • The lease component, if accounted for separately, would be classified as an operating lease. |
An entity electing this practical expedient (including an entity that accounts for the combined component entirely in Topic 606) is required to disclose certain information, by class of underlying asset, as specified in the ASU.
We elected the optional transition method of the modified retrospective approach provided in ASU 2018-112018-11 which was applied on January 1,2019. CTBI also elected certain relief options offered in ASU 2016-02,2016-02, including the package of practical expedients, the option not to separate lease and non-lease components, and instead to account for them as a single lease component for all classes of assets, the hindsight practical expedient to allow entities to use hindsight when determining lease term and impairment of right-of-use assets, and the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less).
Allowance for Loan and LeaseCredit Losses – The Financial Accounting Standards Board (“FASB”) issued ASU 2016-13 in 2016 which introduced the current expected credit losses methodology (CECL) for estimating allowances for credit losses. This accounting change was effective January 1, 2020. CTBI measures expected credit losses of financial assets on a collective (pool) basis using loss-rate methods when the financial assets share similar risk characteristics. Loans that do not share risk characteristics are evaluated on an individual basis. Regardless of an initial measurement method, once it is determined that foreclosure is probable, the allowance for credit losses is measured based on the fair value of the collateral as of the measurement date. As a practical expedient, the fair value of the collateral may be used for a loan when determining the allowance for credit losses for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty. The fair value shall be adjusted for selling costs when foreclosure is probable. For collateral-dependent financial assets, the credit loss expected may be zero if the fair value less costs to sell exceed the amortized cost of the loan. Loans shall not be included in both collective assessments and individual assessments.
In the event that collection of principal becomes uncertain, CTBI has policies in place to reverse accrued interest in a timely manner. Therefore, CTBI elected ASU 2019-04 which allows that accrued interest would continue to be presented separately and not part of amortized cost on loan. The methodology used by CTBI is developed using the current loan balance, which is then compared to amortized cost balances to analyze the impact. The difference in amortized cost basis versus consideration of loan balances impacts the allowance for credit losses calculation by 1 basis point and is considered immaterial. The primary difference is for indirect lending premiums.
We maintain an allowance for loan and leasecredit losses (“ALLL”ACL”) 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.ACL.
We utilize an internal risk grading system for commercial credits. Those larger commercial credits that exhibit probable or observed credit weaknessesmeet the following criteria are subject to individual review.evaluation: the loan has an outstanding bank share balance of $1 million or greater and (i) has a criticized risk rating, (ii) is in nonaccrual status, (iii) is a troubled debt restructuring (“TDR”), or (iv) is 90 days or more past due. 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 loansloan segments 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.individual evaluation.
Homogenous loans, such as consumer installment, residential mortgages, and home equity lines are not individually risk graded. The associated ALLLACL for these loans is measured in pools with similar risk characteristics under ASC 450, Contingencies.326.
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 sellsell. For commercial loans greater than $1 million and classified as criticized, troubled debt restructuring, or nonaccrual, a specific reserve equalis established if a loss is determined to the difference between book value of the loanbe possible and the fair value assigned to the collateralthen charged-off once it is created until such time as the loan is foreclosed.probable. When the foreclosed collateral has been legally assigned to CTBI, the estimated fair value of the collateral less costs to sell is then transferred to other real estate owned or other repossessed assets, and a charge-off is taken for any remaining balance. When any unsecured commercial loan is considered uncollectable the loan is charged off no later than at 90 days past due.
All closed-end consumer loans (excluding conventional 1-4 family residential loans and installment and revolving loans secured by real estate) are charged off no later than 120 days (5 monthly payments) delinquent. If a loan is considered uncollectable, it is charged off earlier than 120 days delinquent. For conventional 1-4 family residential loans and installment and revolving loans secured by real estate, when a loan is 90 days past due, a current assessment of the value of the real estate is made. If the balance of the loan exceeds the fair value of the property, the loan is placed on nonaccrual. Foreclosure proceedings are normally initiated after 120 days. When the foreclosed property has been legally assigned to CTBI, the fair value less estimated costs to sell is transferred to other real estate owned and the remaining balance is taken as a charge-off.
Historical loss rates for loans are adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. We use 12 rolling quartersWith the implementation of ASC 326, weighted average life (“WAL”) calculations were completed as a tool to determine the life of CTBI’s various loan segments. Vintage modeling was used to determine the life of loan losses for our historical loss rate analysis. Factors that we considerconsumer and residential real estate loans. Static pool modeling was used to determine the life of loan losses for commercial loan segments. Qualitative factors used to derive CTBI’s total ACL 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. With the implementation of ASC 326, forecasting factors including unemployment rates and industry specific forecasts for industries in which our total exposure is 5% of capital or greater are also included as factors in the ACL model. Management continually reevaluates the other subjective factors included in its ALLLACL analysis.
Prior to the adoption of ASU 2016-13, the allowance for loan losses on loans was established through a provision for loan losses charged to expense, which represented management’s best estimate of inherent losses that had been incurred within the existing portfolio of loans. The allowance for credit losses on loans included allowance allocations calculated in accordance with ASC Topic 310, Receivables and allowance allocations calculated in accordance with ASC Topic 450, Contingencies, as more fully described in our 2019 Form 10-K.
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.
Troubled Debt Restructurings – Troubled debt restructurings are certain loans that have been modified where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral of principal and/or interest payments, regardless of the period of the modification. All of the loans identified as troubled debt restructuring were modified due to financial stress of the borrower. In order to determine if a borrower is experiencing financial difficulty, an evaluation is performed to determine the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under CTBI’s internal underwriting policy.
When we modify loans and leases in a troubled debt restructuring, we evaluate any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan 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 troubled debt restructurings, including those that have payment defaults, for possible impairment and recognize impairment through the allowance.
Other Real Estate Owned – When foreclosed properties are acquired, appraisals are obtained and the properties are booked at the current fair market value less expected sales costs. Additionally, periodic updated appraisals are obtained on unsold foreclosed properties. When an updated appraisal reflects a fair market value below the current book value, a charge is booked to current earnings to reduce the property to its new fair market value less expected sales costs. Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months. All revenues and expenses related to the carrying of other real estate owned are recognized through the income statement.
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, 2015. Our core deposit intangible has been fully amortized since December 31, 2017.
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.
Revenue Recognition – The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, and investment securities, as well as revenue related to our mortgage servicingbanking activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of noninterest income are as follows:
| ● | Service charges on deposit accounts represents general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations is generally received at the time the performance obligations are satisfied. |
Service charges on deposit accounts represents general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations is generally received at the time the performance obligations are satisfied. | ● |
Trust and wealth management income represents monthly or quarterly fees due from wealth management customers as consideration for managing the customers’ assets. Wealth management and trust services include custody of assets, investment management, escrow services, fees for trust services, and similar fiduciary activities. Revenue is recognized when our performance obligation is completed each month or quarter, which is generally the time that payment is received.
| • | Brokerage revenue is either fee based and collected upon the settlement of the transaction or commission based and recognized when our performance obligation is completed each month or quarter, which is generally the time that payment is received. |
| ● | Brokerage revenue is transaction based and collected upon the settlement of the transaction. Other sales, such as life insurance, generate commissions from other third parties. These fees are generally collected monthly. |
| ● | Other noninterest income primarily includes items such as letter of credit fees, gains on sale of loans held for sale and servicing fees related to mortgage and commercial loans, none of which are subject to the requirements of ASC 606. |
Table of Contentscredit fees, gains on sale of loans held for sale and servicing fees related to mortgage and commercial loans, none of which are subject to the requirements of ASC 606.
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, 2020, 2019, 2018, and 2017,2018, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes.
As a bank and trust company doing business in Kentucky, CTB and CTIC are subject to a capital-based Kentucky franchise tax and exempt from Kentucky corporate income tax. However, in March 2019, Kentucky enacted HB354, which will transition CTB and CTIC from the franchise tax to a corporate income tax beginning January 1,2021. The current Kentucky corporate income tax rate is 5%. As of March 31,2019, CTBI recorded a deferred tax liability, net of the federal benefit, of $1.0 million due to the enactment of HB354. While this deferred tax liability may be adjusted in 2020, we do not anticipate any further adjustments to have a significant impact to income.
In April 2019, Kentucky enacted HB458. HB458 allows for combined state income tax filing with CTBI, CTB, and CTIC. CTBI had previously filed a separate company return and generated net operating losses, in which it had maintained a valuation allowance against the related deferred tax asset. HB458 also allows for certain net operating losses to be utilized on a combined return. CTBI expects to file a combined return, beginning in 2021, and to utilize these previously generated losses. The tax benefit recorded in 2019 to reverse the valuation allowance on the deferred tax asset for these losses was $3.7 million.
As a result of these Kentucky tax law changes, in 2019, we recognized a state income tax benefit of $2.7 million, or $0.15 per basic share, net of federal income tax.
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 1 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 1514 below. CTBI accounts for this plan under the recognition and measurement principles of ASC 718, Share-Based Payment. Share-based compensation restricted and performance-based stock units/awards are classified as equity awards and accounted for under the treasury stock method. Compensation expense for non-vested stock units/awards is based on the fair value of the award on the measurement date, which, for CTBI, is the date of the grant and is recognized ratably over the vesting or performance period of the award. The fair value of non-vested stock units/awards is generally the market price of CTBI’s stock on the date of grant. CTBI accounts for forfeitures on an actual basis.
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.
Revisions – Certain immaterial revisions have been made to the 2018 consolidated financial statements for amounts reported in the deferred tax footnote which are further described in note 14. These revisions did not have a significant impact on the financial statement line items impacted.
New Accounting Standards –
➢Leases – In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 were effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available.
In August 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. This ASU is intended to reduce costs and ease implementation of the leases standard for financial statement preparers. ASU 2018-11 provides a new transition method and a practical expedient for separating components of a contract.
Transition: Comparative Reporting at Adoption
The amendments in ASU 2018-11 provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption consistent with preparers’ requests. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP in Topic 840, Leases. An entity that elects this additional (and optional) transition method must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840. The amendments do not change the existing disclosure requirements in Topic 840 (for example, they do not create interim disclosure requirements that entities previously were not required to provide).
Separating Components of a Contract
The amendments in ASU 2018-11 provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606) and both of the following are met:
| ● | The timing and pattern of transfer of the non-lease component(s) and associated lease component are the same. |
| ● | The lease component, if accounted for separately, would be classified as an operating lease. |
An entity electing this practical expedient (including an entity that accounts for the combined component entirely in Topic 606) is required to disclose certain information, by class of underlying asset, as specified in the ASU.
We elected the optional transition method of the modified retrospective approach provided in ASU 2018-11 which was applied on January 1, 2019. CTBI also elected certain relief options offered in ASU 2016-02, including the package of practical expedients, the option not to separate lease and non-lease components, and instead to account for them as a single lease component for all classes of assets, the hindsight practical expedient to allow entities to use hindsight when determining lease term and impairment of right-of-use assets, and the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less). Refer to note 16 below for further information regarding the impact of adoption.
➢Accounting for Credit Losses – In June 2016, the FASB issued ASU No. 2016-13,2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.This ASU is commonly referred to as CECL“CECL” (Current Expected Credit Loss).The provisions of ASU 2016-132016-13 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 2016-132016-13 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. The standard also included revisions and updates to the required footnote disclosures. Refer to Note 4 below.
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 beare recorded through an allowance for credit losses rather than as a direct write-down to the security. Management estimates potential losses on unfunded commitments, which are not unconditionally cancellable by CTBI, by calculating an anticipated funding rate based on internal data and applies an estimated loss factor to the amounts expected to be funded. CTBI maintains an unfunded commitment allowance as part of other liabilities. The impact of the implementation of ASU No. 2016-13 was an increase of $112 thousand to this allowance and an $84 thousand impact to equity, net of tax.
ASU 2016-132016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,2019. CTB elected ASU 2019-04 which allows that accrued interest will continue to be presented separately and not part of amortized cost on loans. The difference in amortized cost basis versus consideration of loan balances impacts the ACL calculation by 1 basis point and is considered immaterial. The primary difference is for indirect lending premiums. Per ASC 326-20-30-2, if a loan does not share risk characteristics with other pooled loans, then the loan shall be evaluated for expected credit losses on an individual basis. In determining what loans should be evaluated individually, CTBI has established that any loan with a balance of $1.0 million or greater that has one of the following characteristics will be individually evaluated: has a criticized risk rating, is in nonaccrual status, is a TDR, or is 90 days or more past due.
Loans that meet the above criteria will be tested individually for loss exposure on a quarterly basis using a fair market value of the collateral securing the loan less estimated selling costs, when repayment is dependent upon sale of the collateral, as compared to the recorded investment of the loan (principal plus interest owed unless in a nonaccrual status). As an alternative, loans that are dependent upon the cash flows from business operations may be tested by determining the net present value of future cash flows discounted by the effective interest rate of the loan over the remaining term of the loan as appropriate. A specific valuation reserve will be established for any individually tested loans that have loss exposure unless a charge-down of the loan balance is more appropriate.
As previously disclosed, CTBI formed an implementation team to oversee the adoption of the ASU including assessing the impact on its accounting and disclosures. The implementation team was a cross-functional working group comprised of individuals from areas including credit, finance, and operations. The team has established the historical data available and has identified the loan segments to be analyzed. Credit losses for loans that no longer share similar risk characteristics are estimated on an individual basis. The team has determined the portfolio methodologies and relevant economic factors to be utilized and began running parallel with its current model as part of the monthly fourth quarter 2019 loan portfolio analysis. The team has developed a CECL allowance model which calculates reserves over the life of the loan and is largely driven by historical losses, portfolio characteristics, risk-grading, economic outlook, and other qualitative factors. The methodologies will utilize a single economic forecast over a two-yeartwelve month reasonable and supportable forecast period with immediate reversion to historical losses. WhileCTBI adopted this ASU effective January 1, 2020 using the models are operationally complete asmodified retrospective approach. The effect of January 1,2020, other required processes are being finalized.
It is estimated thatadoption was a $3.0 million increase in the allowance for credit losses at(formerly referred to as the time of adoption will increase by approximately $2.1 to $3.9 million, or 6% to 11%, with theallowance for loan losses) and a $112 thousand increase in the allowance being offset byother liabilities for off-balance sheet credit exposure with a charge to retained earnings,related decrease in shareholders’ equity of $2.4 million, net of deferred taxes. Adoption oftax. The table below shows the standard is not expected to have a material impact on our AFS or HTM investment portfolio’s or our off-balance sheet reserve. The ultimate impact of adopting the ASU, and at each subsequent reporting period, is highly dependent on credit quality, economic forecasts and conditions and composition of our loans, along with other management judgements. The transition adjustment to record the allowance for credit losses may fall outside of management’s estimated increase based on material changes in these items, specifically the economic forecast and conditions and loan composition, used in calculating the allowance for credit losses upon the adoption of CECL.ASU 2016-13 by major loan classifications:
| | December 31, 2019 Probable Incurred Losses | | | January 1, 2020 CECL Adoption | | | (dollars in thousands) | | Amount | | | % of Portfolio | | | Amount | | | % of Portfolio | | | Allowance for loan and lease losses transitioned to allowance for credit losses: | | | | | | | | | | | | | | Commercial | | $ | 21,683 | | | | 1.30 | % | | $ | 21,680 | | | | 1.30 | % | | Residential mortgage | | | 5,501 | | | | 0.61 | % | | | 7,319 | | | | 0.81 | % | | Consumer direct | | | 1,711 | | | | 1.16 | % | | | 1,671 | | | | 1.13 | % | | Consumer indirect | | | 6,201 | | | | 1.18 | % | | | 7,467 | | | | 1.42 | % | | Total allowance for loan and lease losses/allowance for credit losses | | $ | 35,096 | | | | 1.08 | % | | $ | 38,137 | | | | 1.17 | % | | | | | | | | | | | | | | | | | | | | Reserve for unfunded lending commitments | | $ | 274 | | | | | | | $ | 386 | | | | | |
In December 2018, the Office of the Comptroller of the Currency (the “OCC”), the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), and the FDIC (the “FDIC” and, together with the Federal Reserve Board and the OCC, the “federal banking regulators”) approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule providesprovided banking organizations the option to phase in over a three-year period the day-oneday-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard.
On March 27, 2020, pursuant to the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), federal banking regulators issued an interim final rule that delays the estimated impact on regulatory capital stemming from the implementation of CECL for a transition period of up to five years (the “CECL IFR”). The CECL IFR provides banking organizations that are required (as of January 1, 2020) to adopt CECL for accounting purposes under U.S. generally accepted accounting principles during 2020 an option to delay an estimate of CECL’s impact on regulatory capital. The capital relief in the CECL IFR is calibrated to approximate the difference in allowances under CECL relative to the incurred loss methodology for the first two years of the transition period. The cumulative difference at the end of the second year of the transition period is then phased in to regulatory capital over a three-year transition period. In this way, the CECL IFR gradually phases in the full effect of CECL on regulatory capital, providing a five-year transition period. CTBI is planningadopted CECL effective January 1, 2020 and chose the option to delay the estimated impact on adoptingregulatory capital using the capital transition relief over the permissible three-year period.options described above.
➢Simplifying the Test for Goodwill Impairment – In January 2017, the FASB issued ASU No. 2017-04,2017-04, 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 shouldyears, to be implemented on a prospective basis. Management does not expectCTBI adopted ASU 2017-04 to have an2017-04 with no impact on CTBI’sour consolidated financial statements.
➢Changes to the Disclosure Requirements for Fair Value Measurement– In August 2018, the FASB issued ASU 2018-13,2018-13, Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. ASU No. 2018-132018-13 modifies the disclosure requirements on fair value measurements in Topic 820 as follows:
Removals
The following disclosure requirements were removed from Topic 820:820:
The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy The policy for timing of transfers between levels The valuation processes for Level 3 fair value measurements
| ● | The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy |
| ● | The policy for timing of transfers between levels |
| ● | The valuation processes for Level 3 fair value measurements |
Modifications
The following disclosure requirements were modified in Topic 820:
For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and | ● | For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and |
| ● | The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. |
Additions
The following disclosure requirements were added to Topic 820:
The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. | ● | The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and |
| ● | The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. |
In addition, the amendments eliminate “at“at a minimum” from the phrase “an entity shall disclose at a minimum” to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements.
CTBI adopted ASU 2018-13 effective January 1, 2020 with minimal changes expected to our current reporting.
➢Accounting for Costs of Implementing a Cloud Computing Service Agreement– In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which reduces complexity for the accounting for costs of implementing a cloud computing service arrangement. This standard aligns the accounting for implementation costs of hosting arrangements, regardless of whether they convey a license to the hosted software.
The ASU aligns the following requirements for capitalizing implementation costs:
Those incurred in a hosting arrangement that is a service contract, and Those incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). | ● | Those incurred in a hosting arrangement that is a service contract, and |
| ● | Those incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license. |
This ASU was effective beginning January 1, 2020. We do not anticipate a2020 with no significant impact to our consolidated financial statements.
➢Simplifying the Accounting for Income Taxes– In December 2019, the FASB issued ASU 2019-12,2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing the following exceptions:
1. Exception to the incremental approach for intra period tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income);
2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment;
3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and
4. Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.
The amendments in this ASU also simplify the accounting for income taxes by doing the following:
1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax;
2. Requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction;
3. Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority;
4. Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date; and
5. Making minor codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.
For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,2020. Early adoption is permitted.We do not anticipate a significant impact to our consolidated financial statements.
➢Clarifying the Interactions between Topic 321, Topic 323, and Topic 815, a consensus of the FASB Emerging Task Force – In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The amendments in this ASU clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted for public business entities for periods for which financial statements have not yet been issued. The amendments in this ASU should be applied prospectively. Under a prospective transition, an entity should apply the amendments at the beginning of the interim period that includes the adoption date. We do not anticipate a significant impact to our consolidated financial statements.
➢Facilitation of the Effects of Reference Rate Reform on Financial Reporting – In April 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) —Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In response to concerns about structural risks of interbank offered rates, and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The amendments in this ASU provide optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects) of reference rate reform on financial reporting and provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This ASU applies only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this ASU are elective and are effective upon issuance for all entities. The adoption of this ASU is not expected to have material impact on our consolidated financial statements.
2. Cash and Due from Banks and Interest Bearing Deposits
Included in cash and due from banks and interest bearing deposits areat December 31, 2019 were amounts required to be held at the Federal Reserve or maintained in vault cash in accordance with regulatory reserve requirements. The balance requirements wererequirement was $78.0 million and $74.7 million at December 31, 2019 and 2018, respectively.2019. On March 26, 2020, the Federal Reserve Board eliminated the reserve requirement on deposits at the Federal Reserve so institutions could have additional liquidity to lend to customers.
At December 31, 2019,2020, CTBI had cash accounts which exceeded federally insured limits, and therefore arewere not subject to FDIC insurance, with $203.6$280.7 million in deposits with the Federal Reserve, $23.2$21.3 million in deposits with US Bank, $0.9$0.4 million in deposits with Fifth Third Bank, and $2.4$3.3 million in deposits with the Federal Home Loan Bank.
3. Securities
SecuritiesDebt 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.As of December 31, 2020, CTBI had 0 held-to-maturity securities.
The amortized cost and fair value of debt securities at December 31, 2020 are summarized as follows:
Available-for-Sale
| (in thousands) | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | | | U.S. Treasury and government agencies | | $ | 148,507 | | | $ | 483 | | | $ | (197 | ) | | $ | 148,793 | | | State and political subdivisions | | | 133,287 | | | | 7,132 | | | | (3 | ) | | | 140,416 | | | U.S. government sponsored agency mortgage-backed securities | | | 640,537 | | | | 11,648 | | | | (378 | ) | | | 651,807 | | | Other debt securities | | | 56,443 | | | | 10 | | | | (208 | ) | | | 56,245 | | | Total available-for-sale securities | | $ | 978,774 | | | $ | 19,273 | | | $ | (786 | ) | | $ | 997,261 | |
The amortized cost and fair value of debt securities at December 31, 2019 are summarized as follows:
Available-for-Sale
| (in thousands) | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | | | U.S. Treasury and government agencies | | $ | 171,250 | | | $ | 476 | | | $ | (576 | ) | | $ | 171,150 | | | State and political subdivisions | | | 99,403 | | | | 2,941 | | | | (37 | ) | | | 102,307 | | | U.S. government sponsored agency mortgage-backed securities | | | 291,874 | | | | 4,443 | | | | (1,072 | ) | | | 295,245 | | | Other debt securities | | | 31,418 | | | | 0 | | | | (276 | ) | | | 31,142 | | | Total available-for-sale securities | | $ | 593,945 | | | $ | 7,860 | | | $ | (1,961 | ) | | $ | 599,844 | |
Held-to-Maturity
| (in thousands) | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | | | State and political subdivisions | | $ | 517 | | | $ | 0 | | | $ | 0 | | | $ | 517 | | | Total held-to-maturity securities | | $ | 517 | | | $ | 0 | | | $ | 0 | | | $ | 517 | |
The amortized cost and fair value of debt securities at December 31, 2018 are summarized as follows:
Available-for-Sale
| (in thousands) | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | | | U.S. Treasury and government agencies | | $ | 219,358 | | | $ | 48 | | | $ | (1,468 | ) | | $ | 217,938 | | | State and political subdivisions | | | 126,280 | | | | 633 | | | | (2,425 | ) | | | 124,488 | | | U.S. government sponsored agency mortgage-backed securities | | | 255,969 | | | | 397 | | | | (5,547 | ) | | | 250,819 | | | Other debt securities | | | 507 | | | | 0 | | | | (6 | ) | | | 501 | | | Total available-for-sale securities | | $ | 602,114 | | | $ | 1,078 | | | $ | (9,446 | ) | | $ | 593,746 | |
Held-to-Maturity
| (in thousands) | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | | | State and political subdivisions | | $ | 649 | | | $ | 0 | | | $ | 0 | | | $ | 649 | | | Total held-to-maturity securities | | $ | 649 | | | $ | 0 | | | $ | 0 | | | $ | 649 | |
The amortized cost and fair value of debt securities at December 31, 20192020 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 | | | Available-for-Sale | | | (in thousands) | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | | | Due in one year or less | | $ | 84,795 | | | $ | 85,107 | | | $ | 517 | | | $ | 517 | | | $ | 77,420 | | | $ | 77,424 | | | Due after one through five years | | | 23,605 | | | | 23,963 | | | | 0 | | | | 0 | | | | 18,480 | | | | 19,005 | | | Due after five through ten years | | | 91,043 | | | | 91,175 | | | | 0 | | | | 0 | | | | 96,870 | | | | 98,417 | | | Due after ten years | | | 71,210 | | | | 73,212 | | | | 0 | | | | 0 | | | | 89,024 | | | | 94,363 | | | U.S. government sponsored agency mortgage-backed securities | | | 291,874 | | | | 295,245 | | | | 0 | | | | 0 | | | | 640,537 | | | | 651,807 | | | Other debt securities | | | 31,418 | | | | 31,142 | | | | 0 | | | | 0 | | | | 56,443 | | | | 56,245 | | | Total debt securities | | $ | 593,945 | | | $ | 599,844 | | | $ | 517 | | | $ | 517 | | | $ | 978,774 | | | $ | 997,261 | |
In 2019,2020, we had a net securities gain of $783 thousand.$1.8 million. There was a net gain of $3 thousand$1.3 million realized on sales and calls of AFS securities, consisting of a pre-tax gain of $80 thousand$1.5 million and a pre-tax loss of $77 thousand,$0.2 million, and an unrealized gain of $780 thousand$0.5 million from the fair market value adjustment of equity securities. There was a net lossgain of $85 thousand$0.8 million realized in 20182019 and a net gainloss of $73 thousand$0.1 million realized in 2017.2018.
Equity Securities at Fair Value
In 2008, Visa distributed 9,918 shares of Visa Class B restricted stock to CTBI which, upon resolution of certain pending legal matters, will become unrestricted and convertible into Visa Class A shares. Following this distribution, significant concern existed about the ultimate realizable value of these shares, and because CTBI did not have a basis in the stock, the shares were previously not recorded as an asset on CTBI’s balance sheet. In recent years, the concern over the realizable value has stabilized, and in late 2017 and 2018, several sales of Visa Class B shares have occurred. While not traded in observable markets, these sales were reported by several financial institutions in various SEC 8-K and 10-K filings. In 2018, FASB issued a technical correction to its guidance regarding equity securities, ASC 321-10-35-2, allowing an entity to subsequently elect to record an equity security without a readily determinable fair value. In 2018, CTBI made the election permitted by ASC 321-10-35-2 to record its Visa Class B shares at fair value. On December 31, 2018, CTBI recorded a $1.2 million gain on the recognition of the fair value of 9,918 Visa Class B shares held in its portfolio. Equity securities at fair value as of December 31, 20192020 were $2.0 million.$2.5 million, as a result of a $0.5 million increase in the fair market value in 2020. The fair market value of equity securities increased $0.8 million in 2019. NaN equity securities were sold during 2020.
The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $354.5 million at December 31, 2020 and $239.1 million at December 31, 2019 and $258.8 million at December 31, 2018.2019.
The amortized cost of securities sold under agreements to repurchase amounted to $386.6 million at December 31, 2020 and $261.5 million at December 31, 2019 and $289.1 million at December 31, 2018.2019.
CTBI evaluates its investment portfolio on a quarterly basis for impairment. The analysis performed as of December 31, 20192020 indicates that all impairment is considered temporary, market and interest rate driven, and not credit-related. The percentage of total debt securities with unrealized losses as of December 31, 20192020 was 42.8%16.2% compared to 75.7%42.8% as of December 31, 2018. 2019. 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, 2020 that are not deemed to have credit losses. As stated above, CTBI had no HTM securities as of December 31, 2020.
Available-for-Sale
| (in thousands) | | Amortized Cost | | | Gross Unrealized Losses | | | Fair Value | | | Less Than 12 Months | | | | | | | | | | | U.S. Treasury and government agencies | | $ | 5,604 | | | $ | (7 | ) | | $ | 5,597 | | | State and political subdivisions | | | 534 | | | | (3 | ) | | | 531 | | | U.S. government sponsored agency mortgage-backed securities | | | 58,463 | | | | (336 | ) | | | 58,127 | | | Other debt securities | | | 22,660 | | | | (29 | ) | | | 22,631 | | | Total <12 months temporarily impaired AFS securities | | | 87,261 | | | | (375 | ) | | | 86,886 | | | | | | | | | | | | | | | | | 12 Months or More | | | | | | | | | | | | | | U.S. Treasury and government agencies | | | 46,163 | | | | (190 | ) | | | 45,973 | | | State and political subdivisions | | | 0 | | | | 0 | | | | 0 | | | U.S. government sponsored agency mortgage-backed securities | | | 2,801 | | | | (42 | ) | | | 2,759 | | | Other debt securities | | | 26,283 | | | | (179 | ) | | | 26,104 | | | Total ≥12 months temporarily impaired AFS securities | | | 75,247 | | | | (411 | ) | | | 74,836 | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | | | | U.S. Treasury and government agencies | | | 51,767 | | | | (197 | ) | | | 51,570 | | | State and political subdivisions | | | 534 | | | | (3 | ) | | | 531 | | | U.S. government sponsored agency mortgage-backed securities | | | 61,264 | | | | (378 | ) | | | 60,886 | | | Other debt securities | | | 48,943 | | | | (208 | ) | | | 48,735 | | | Total temporarily impaired AFS securities | | $ | 162,508 | | | $ | (786 | ) | | $ | 161,722 | |
The analysis performed as of December 31, 2019 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, 2019 that are not deemed to be other-than-temporarily impaired. There were no held-to-maturity securities that were deemed to be impaired as of December 31, 2019.
Available-for-Sale
| (in thousands) | | Amortized Cost | | | Gross Unrealized Losses | | | Fair Value | | | Less Than 12 Months | | | | | | | | | | | U.S. Treasury and government agencies | | $ | 25,955 | | | $ | (148 | ) | | $ | 25,807 | | | State and political subdivisions | | | 8,356 | | | | (37 | ) | | | 8,319 | | | U.S. government sponsored agency mortgage-backed securities | | | 19,317 | | | | (100 | ) | | | 19,217 | | | Other debt securities | | | 31,418 | | | | (276 | ) | | | 31,142 | | | Total <12 months temporarily impaired AFS securities | | | 85,046 | | | | (561 | ) | | | 84,485 | | | | | | | | | | | | | | | | | 12 Months or More | | | | | | | | | | | | | | U.S. Treasury and government agencies | | | 82,339 | | | | (428 | ) | | | 81,911 | | | State and political subdivisions | | | 0 | | | | 0 | | | | 0 | | | U.S. government sponsored agency mortgage-backed securities | | | 91,609 | | | | (972 | ) | | | 90,637 | | | Other debt securities | | | 0 | | | | 0 | | | | 0 | | | Total ≥12 months temporarily impaired AFS securities | | | 173,948 | | | | (1,400 | ) | | | 172,548 | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | | | | U.S. Treasury and government agencies | | | 108,294 | | | | (576 | ) | | | 107,718 | | | State and political subdivisions | | | 8,356 | | | | (37 | ) | | | 8,319 | | | U.S. government sponsored agency mortgage-backed securities | | | 110,926 | | | | (1,072 | ) | | | 109,854 | | | Other debt securities | | | 31,418 | | | | (276 | ) | | | 31,142 | | | Total temporarily impaired AFS securities | | $ | 258,994 | | | $ | (1,961 | ) | | $ | 257,033 | |
The analysis performed as of December 31, 2018 indicated that all impairment was considered temporary, market and interest rate driven, and not credit-related. The following tables provide the amortized cost, gross unrealized losses, and fair market value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of December 31, 2018 that are not deemed to be other-than-temporarily impaired. There were no held-to-maturity securities that were deemed to be impaired as of December 31, 2018.
Available-for-Sale
| (in thousands) | | Amortized Cost | | | Gross Unrealized Losses | | | Fair Value | | | Less Than 12 Months | | | | | | | | | | | U.S. Treasury and government agencies | | $ | 78,905 | | | $ | (271 | ) | | $ | 78,634 | | | State and political subdivisions | | | 21,707 | | | | (194 | ) | | | 21,513 | | | U.S. government sponsored agency mortgage-backed securities | | | 61,940 | | | | (377 | ) | | | 61,563 | | | Other debt securities | | | 507 | | | | (6 | ) | | | 501 | | | Total <12 months temporarily impaired AFS securities | | | 163,059 | | | | (848 | ) | | | 162,211 | | | | | | | | | | | | | | | | | 12 Months or More | | | | | | | | | | | | | | U.S. Treasury and government agencies | | | 97,955 | | | | (1,197 | ) | | | 96,758 | | | State and political subdivisions | | | 51,911 | | | | (2,231 | ) | | | 49,680 | | | U.S. government sponsored agency mortgage-backed securities | | | 147,658 | | | | (5,170 | ) | | | 142,488 | | | Other debt securities | | | 0 | | | | 0 | | | | 0 | | | Total ≥12 months temporarily impaired AFS securities | | | 297,524 | | | | (8,598 | ) | | | 288,926 | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | | | | U.S. Treasury and government agencies | | | 176,860 | | | | (1,468 | ) | | | 175,392 | | | State and political subdivisions | | | 73,618 | | | | (2,425 | ) | | | 71,193 | | | U.S. government sponsored agency mortgage-backed securities | | | 209,598 | | | | (5,547 | ) | | | 204,051 | | | Other debt securities | | | 507 | | | | (6 | ) | | | 501 | | | Total temporarily impaired AFS securities | | $ | 460,583 | | | $ | (9,446 | ) | | $ | 451,137 | |
U.S. Treasury and Government Agencies
The unrealized losses in U.S. Treasury and government agencies were caused by interest rate increases.changes. 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, 2019, because CTBI does not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost, which may be maturity.cost.
State and Political Subdivisions
The unrealized losses in securities of state and political subdivisions were caused by interest rate increases.changes. 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, 2019, because CTBI does not intend to sell the investments before recovery of their amortized cost and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost, which may be maturity.cost.
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.changes. 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, 2019, because (i) the decline in market value is attributable to changes in interest rates and not credit quality, (ii) CTBI does not intend to sell the investments and (iii) it is not more likely than not we will be required to sell the investments before recovery of their amortized cost, which may be maturity.cost.
Other Debt Securities
The unrealized losses in other debt securities were caused by interest rate increases.changes. 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, 2019, because CTBI does not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost, which may be maturity.cost.
4. Loans
Major classifications of loans, net of unearned income, deferred loan origination fees and costs, and net premiums on acquired loans, are summarized as follows:
(in thousands) | | December 31 2019 | | | December 31 2018 | | | Commercial construction | | $ | 104,809 | | | $ | 82,715 | | | Commercial secured by real estate | | | 1,169,975 | | | | 1,183,093 | | | Equipment lease financing | | | 481 | | | | 1,740 | | | Commercial other | | | 389,683 | | | | 377,198 | | | Real estate construction | | | 63,350 | | | | 57,160 | | | Real estate mortgage | | | 733,003 | | | | 722,417 | | | Home equity | | | 111,894 | | | | 106,299 | | | Consumer direct | | | 148,051 | | | | 144,289 | | | Consumer indirect | | | 527,418 | | | | 533,727 | | | Total loans | | $ | 3,248,664 | | | $ | 3,208,638 | |
(in thousands) | | December 31 2020 | | | Hotel/motel | | $ | 260,699 | | | Commercial real estate residential | | | 287,928 | | | Commercial real estate nonresidential | | | 743,238 | | | Dealer floorplans | | | 69,087 | | | Commercial other | | | 279,908 | | | Commercial unsecured SBA PPP | | | 252,667 | | | Commercial loans | | | 1,893,527 | | | | | | | | | Real estate mortgage | | | 784,559 | | | Home equity lines | | | 103,770 | | | Residential loans | | | 888,329 | | | | | | | | | Consumer direct | | | 152,304 | | | Consumer indirect | | | 620,051 | | | Consumer loans | | | 772,355 | | | | | | | | | Loans and lease financing | | $ | 3,554,211 | |
(in thousands) | | December 31 2019 | | | Commercial construction | | $ | 104,809 | | | Commercial secured by real estate | | | 1,169,975 | | | Equipment lease financing | | | 481 | | | Commercial other | | | 389,683 | | | Real estate construction | | | 63,350 | | | Real estate mortgage | | | 733,003 | | | Home equity | | | 111,894 | | | Consumer direct | | | 148,051 | | | Consumer indirect | | | 527,418 | | | Total loans | | $ | 3,248,664 | |
The segments presented for December 31, 2020 reflect the implementation of ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, while the December 31, 2019 totals are presented under the previous incurred loss model. CTB adopted ASC 326 for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results of reporting periods beginning January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.
The loan portfolios presented above are net of unearned fees and unamortized premiums. Unearned fees included above totaled $9.3 million as of December 31, 2020 and $2.3 million as of December 31, 2019 while the unamortized premiums on the indirect lending portfolio totaled $23.8 million as of December 31, 2020 and $20.6 million as of December 31, 2019.
CTBI has segregated and evaluates its loan portfolio through 910 portfolio segments.segments with similar risk characteristics. 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.
CommercialHotel/motel loans are a significant concentration for CTBI, representing approximately 7.3% of total loans. This industry has unique risk characteristics as it is highly susceptible to changes in the domestic and global economic environments, which can cause the industry to experience substantial volatility. Additionally, any hotel/motel construction loans would be included in this segment as CTBI’s 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 theseprimarily completed as one loan going from construction to permanent financing. These loans are generally short-term with permanent financing upon completion.originated based on the borrower’s ability to service the debt and secondarily based on the fair value of the underlying collateral.
Commercial real estate residential loans includeare commercial purpose construction and permanent financed loans for commercial purpose 1-4 family/multi-family properties. 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.
Commercial real estate nonresidential loans are 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. Construction for commercial real estate nonresidential loans are also included in this segment as these loans are generally one loan for construction to permanent financing.
Prior to the implementation of ASU No. 2016-13, all commercial real estate loans were segmented together with construction loans presented separately.
Equipment lease financing loansDealer floorplans have historically been reviewed by management as a separate segment of the commercial loan portfolio; although, for reporting to the Securities and Exchange Commission, they were combined within the commercial other segment. With the implementation of ASU No. 2016-13, CTBI segmented dealer floorplans separately as they are fixed or variable leases for commercial purposes.a unique product with unique risk factors. The primary unique factor relevant to dealer floorplans is the ability of the borrower to misappropriate funds provided at the point of sale as their floorplan is collateralized under a blanket security agreement and without specific liens on individual units. This risk is mitigated by the use of periodic inventory audits. These audits are performed monthly and follow up is required on any out of compliance items identified. These audits are subject to increasing frequency when fact patterns suggest more scrutiny is required.
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.
67CTBI participated in the Paycheck Protection Program (“PPP”) established by the CARES Act resulting in a new loan segment of unsecured commercial other loans that are one hundred percent guaranteed by the Small Business Administration (“SBA”). These loans, which are subject to forgiveness, have maturities of either two or three to five years, depending on when the loan was made. These loans currently have no allowance for credit losses.
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.loans and also include real estate construction loans which are typically for owner-occupied properties. The terms of the real estate construction loans are generally short-term with permanent financing upon completion. 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 primarily revolving adjustable rate credit lines secured by real property.
Consumer direct loans are a mixture of fixed rate and adjustable rate products comprised of unsecured loans, consumer revolving credit lines, deposit secured loans, and all other consumer purpose loans.
Consumer indirect loans are fixed rate loans secured by automobiles, trucks, vans, and recreational vehicles originated at the selling dealership underwritten and purchased by CTBI’s indirect lending department. Both new and used products are financed. Only dealers who have executed dealer agreements with CTBI participate in the indirect lending program.
Not included in the loan balances above were loans held for sale in the amount of $1.2$23.3 million atDecember 31, 2020 and $1.2 million at December 31, 2019.
The following table presents the balance in the allowance for credit losses (“ACL”) for the year ended December 31, 2020:
| | Year Ended December 31, 2020 | | | (in thousands) | | Hotel/ Motel | | | Commercial Real Estate Residential | | | Commercial Real Estate Nonresidential | | | Dealer Floorplans | | | Commercial Other | | | Real Estate Mortgage | | | Home Equity | | | Consumer Direct | | | Consumer Indirect | | | Total | | | ACL | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Beginning balance, prior to adoption of ASC 326 | | $ | 3,371 | | | $ | 3,439 | | | $ | 8,515 | | | $ | 802 | | | $ | 5,556 | | | $ | 4,604 | | | $ | 897 | | | $ | 1,711 | | | $ | 6,201 | | | $ | 35,096 | | | Impact of adoption of ASC 326 | | | 170 | | | | (721 | ) | | | 119 | | | | 820 | | | | (391 | ) | | | 1,893 | | | | (75 | ) | | | (40 | ) | | | 1,265 | | | | 3,040 | | | Provision charged to expense | | | 2,858 | | | | 1,772 | | | | 3,303 | | | | (214 | ) | | | 2,040 | | | | 1,584 | | | | 16 | | | | 609 | | | | 4,079 | | | | 16,047 | | | Losses charged off | | | (43 | ) | | | (182 | ) | | | (941 | ) | | | (26 | ) | | | (3,339 | ) | | | (321 | ) | | | (4 | ) | | | (927 | ) | | | (4,670 | ) | | | (10,453 | ) | | Recoveries | | | 0 | | | | 156 | | | | 90 | | | | 0 | | | | 423 | | | | 72 | | | | 10 | | | | 510 | | | | 3,031 | | | | 4,292 | | | Ending balance | | $ | 6,356 | | | $ | 4,464 | | | $ | 11,086 | | | $ | 1,382 | | | $ | 4,289 | | | $ | 7,832 | | | $ | 844 | | | $ | 1,863 | | | $ | 9,906 | | | $ | 48,022 | |
The following table presents details of the allowance for loan and lease losses (“ALLL”) segregated by loan portfolio segment as of December 31, 2019, calculated in accordance with our prior incurred loss methodology described in our 2019 Form 10-K.
| | Year Ended December 31, 2019 | | | (in thousands) | | Commercial Construction | | | Commercial Secured by Real Estate | | | Equipment Lease Financing | | | Commercial Other | | | Real Estate Construction | | | Real Estate Mortgage | | | Home Equity | | | Consumer Direct | | | Consumer Indirect | | | Total | | | ALLL | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, beginning of year | | $ | 862 | | | $ | 14,531 | | | $ | 12 | | | $ | 4,993 | | | $ | 512 | | | $ | 4,433 | | | $ | 841 | | | $ | 1,883 | | | $ | 7,841 | | | $ | 35,908 | | | Provision charged to expense | | | 497 | | | | (137 | ) | | | (8 | ) | | | 3,032 | | | | (40 | ) | | | 414 | | | | 172 | | | | 528 | | | | 361 | | | | 4,819 | | | Losses charged off | | | (72 | ) | | | (727 | ) | | | 0 | | | | (2,179 | ) | | | (100 | ) | | | (767 | ) | | | (139 | ) | | | (1,100 | ) | | | (4,652 | ) | | | (9,736 | ) | | Recoveries | | | 12 | | | | 358 | | | | 0 | | | | 509 | | | | 0 | | | | 152 | | | | 23 | | | | 400 | | | | 2,651 | | | | 4,105 | | | Balance, end of year | | $ | 1,299 | | | $ | 14,025 | | | $ | 4 | | | $ | 6,355 | | | $ | 372 | | | $ | 4,232 | | | $ | 897 | | | $ | 1,711 | | | $ | 6,201 | | | $ | 35,096 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ending balance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | 99 | | | $ | 227 | | | $ | 0 | | | $ | 886 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,212 | | | Collectively evaluated for impairment | | $ | 1,200 | | | $ | 13,798 | | | $ | 4 | | | $ | 5,469 | | | $ | 372 | | | $ | 4,232 | | | $ | 897 | | | $ | 1,711 | | | $ | 6,201 | | | $ | 33,884 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ending balance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | 3,010 | | | $ | 41,379 | | | $ | 0 | | | $ | 11,073 | | | $ | 0 | | | $ | 2,309 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 57,771 | | | Collectively evaluated for impairment | | $ | 101,799 | | | $ | 1,128,596 | | | $ | 481 | | | $ | 378,610 | | | $ | 63,350 | | | $ | 730,694 | | | $ | 111,894 | | | $ | 148,051 | | | $ | 527,418 | | | $ | 3,190,893 | |
CTBI derived its ACL balance by using vintage modeling for the consumer and $2.5residential portfolios. Static pool models incorporating losses by credit risk rating were developed to determine credit loss balances for the commercial loan segments.
Qualitative loss factors are based on CTBI's judgment of delinquency trends, level of nonperforming loans, trend in loan losses, supervision and administration, quality control exceptions, and reasonable and supportable forecasts based on unemployment rates and industry concentrations. CTBI has determined that twelve months represents a reasonable and supportable forecast period and reverts back to a historical loss rate immediately. CTBI leverages economic projections from a reputable and independent third party to form its loss driver forecasts over the twelve month forecast period. Other internal and external indicators of economic forecasts are also considered by CTBI when developing the forecast metrics.
CTBI also has an inherent model risk allocation included in its ACL calculation to allow for certain known model limitations as well as other potential risks not quantified elsewhere. Management has identified the following known model limitations and made adjustments through this portion of the calculation for them: (1) The inability to completely identify revolving lines of credit within the commercial other segment. Management had to make assumptions regarding commercial renewals as those renewals are not tracked well by its loan system. (2) The inability within the model to estimate the value of modifications made under troubled debt restructurings. Management has manually calculated the estimated impact based on research of modified terms for troubled debt restructurings.
With the continued impact of the global COVID-19 pandemic and the fact that there is no immediate end foreseen, this has been identified as a significant specific event that could impact our customers’ ability to pay. CTBI added a new factor during the year as an allocation to recognize when there are significant events occurring that could impact the loan portfolio. Management noted that the qualitative factors for current delinquency trends and our levels of nonperforming loans were driving a reduction in the overall calculation for our ACL. Management was concerned that these factors may have been artificially influenced by the current credit environment and the number of loans that have received payment deferrals. Given this uncertainty, management elected to include this new significant event qualitative factor to anticipate continued impact of COVID-19 once further deferments are no longer available and SBA Payroll Protection Programs end.
Also included in inherent model risk at implementation was the estimated allowance for previously impaired loans that had not been changed on CTBI’s loan system. There were certain loans that met the definition of impaired previously that management did not consider to have significantly different risk characteristics based on the ACL methodology and segmentation, and therefore determined they would no longer require individual analysis. The inherent model risk factor was decreased by $1.6 million at in the first quarter 2020 as formerly impaired loans that are no longer individually analyzed were reassigned and returned to the appropriate loan segments where the historical loss and other qualitative factors were applied.
Allocations to the allowance for credit losses for the year ended December 31, 2018.2020 totaled $16.0 million, an increase of $11.2 million from December 31, 2019. The implementation of ASC 326 increased our reserves $3.0 million on January 1, 2020. The 2020 economic decline, as well as increases to CTBI’s forecast factors for expected continued decline in hotel/motel, lessors of nonresidential properties, and lessors of residential properties industries over the forecast period, was the primary driver of the increase in the ACL. Our reserve coverage (allowance for credit losses to nonperforming loans) at December 31, 2020 was 180.7% compared to the allowance for loan and lease losses to nonperforming loans of 104.4% at December 31, 2019. Our credit loss reserve as a percentage of total loans outstanding at December 31, 2020 was at 1.35% above the allowance for loan loss reserve incurred loss model of 1.08% from December 31, 2019.
Refer to noteNote 1 aboveto the condensed consolidated financial statements for further information regarding our nonaccrual policy. Nonaccrual loans segregated by class of loans for both December 31, 2020 and 2019 and loans 90 days past due and still accruing for December 31, 2020 only, segregated by class of loans were as follows:
| (in thousands) | | December 31 2019 | | | December 31 2018 | | | Commercial: | | | | | | | | Commercial construction | | $ | 230 | | | $ | 639 | | | Commercial secured by real estate | | | 3,759 | | | | 4,537 | | | Commercial other | | | 3,839 | | | | 797 | | | | | | | | | | | | | Residential: | | | | | | | | | | Real estate construction | | | 634 | | | | 22 | | | Real estate mortgage | | | 4,821 | | | | 5,395 | | | Home equity | | | 716 | | | | 477 | | | Total nonaccrual loans | | $ | 13,999 | | | $ | 11,867 | |
| | December 31, 2020 | | | (in thousands) | | Nonaccrual Loans with No ACL | | | Nonaccrual Loans with ACL | | | 90+ and Still Accruing | | | Total Nonperforming Loans | | | | | | | | | | | | | | | | | Hotel/motel | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | Commercial real estate residential | | | 0 | | | | 1,225 | | | | 4,776 | | | | 6,001 | | | Commercial real estate nonresidential | | | 0 | | | | 1,424 | | | | 7,852 | | | | 9,276 | | | Commercial other | | | 0 | | | | 867 | | | | 269 | | | | 1,136 | | | Total commercial loans | | | 0 | | | | 3,516 | | | | 12,897 | | | | 16,413 | | | | | | | | | | | | | | | | | | | | | Real estate mortgage | | | 0 | | | | 5,346 | | | | 3,420 | | | | 8,766 | | | Home equity lines | | | 0 | | | | 582 | | | | 392 | | | | 974 | | | Total residential loans | | | 0 | | | | 5,928 | | | | 3,812 | | | | 9,740 | | | | | | | | | | | | | | | | | | | | | Consumer direct | | | 0 | | | | 0 | | | | 71 | | | | 71 | | | Consumer indirect | | | 0 | | | | 0 | | | | 353 | | | | 353 | | | Total consumer loans | | | 0 | | | | 0 | | | | 424 | | | | 424 | | | | | | | | | | | | | | | | | | | | | Loans and lease financing | | $ | 0 | | | $ | 9,444 | | | $ | 17,133 | | | $ | 26,577 | |
CTBI recognized $31 thousand in interest income on the above nonaccrual loans for the year ended December 31, 2020.
| (in thousands) | | December 31, 2019 | | | Commercial: | | | | | Commercial construction | | $ | 230 | | | Commercial secured by real estate | | | 3,759 | | | Commercial other | | | 3,839 | | | | | | | | | Residential: | | | | | | Real estate construction | | | 634 | | | Real estate mortgage | | | 4,821 | | | Home equity | | | 716 | | | Total nonaccrual loans | | $ | 13,999 | |
The following tables present CTBI’s loan portfolio aging analysis, segregated by class, as of December 31, 2020 and December 31, 2019 (includes loans 90 days past due and 2018:still accruing as well):
| | December 31, 2019 | | | (in thousands) | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | 90+ Days Past Due | | | Total Past Due | | | Current | | | Total Loans | | | 90+ and Accruing* | | | Commercial: | | | | | | | | | | | | | | | | | | | | | | | Commercial construction | | $ | 118 | | | $ | 0 | | | $ | 467 | | | $ | 585 | | | $ | 104,224 | | | $ | 104,809 | | | $ | 237 | | | Commercial secured by real estate | | | 2,734 | | | | 5,969 | | | | 12,366 | | | | 21,069 | | | | 1,148,906 | | | | 1,169,975 | | | | 8,820 | | | Equipment lease financing | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 481 | | | | 481 | | | | 0 | | | Commercial other | | | 880 | | | | 284 | | | | 6,267 | | | | 7,431 | | | | 382,252 | | | | 389,683 | | | | 2,586 | | | Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate construction | | | 117 | | | | 52 | | | | 634 | | | | 803 | | | | 62,547 | | | | 63,350 | | | | 0 | | | Real estate mortgage | | | 774 | | | | 5,376 | | | | 10,320 | | | | 16,470 | | | | 716,533 | | | | 733,003 | | | | 7,088 | | | Home equity | | | 1,084 | | | | 412 | | | | 736 | | | | 2,232 | | | | 109,662 | | | | 111,894 | | | | 344 | | | Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consumer direct | | | 945 | | | | 230 | | | | 97 | | | | 1,272 | | | | 146,779 | | | | 148,051 | | | | 97 | | | Consumer indirect | | | 4,037 | | | | 909 | | | | 447 | | | | 5,393 | | | | 522,025 | | | | 527,418 | | | | 448 | | | Total | | $ | 10,689 | | | $ | 13,232 | | | $ | 31,334 | | | $ | 55,255 | | | $ | 3,193,409 | | | $ | 3,248,664 | | | $ | 19,620 | |
| | December 31, 2020 | | | (in thousands) | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | 90+ Days Past Due | | | Total Past Due | | | Current | | | Total Loans | | | Hotel/motel | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 260,699 | | | $ | 260,699 | | | Commercial real estate residential | | | 722 | | | | 413 | | | | 5,577 | | | | 6,712 | | | | 281,216 | | | | 287,928 | | | Commercial real estate nonresidential | | | 1,199 | | | | 0 | | | | 8,703 | | | | 9,902 | | | | 733,336 | | | | 743,238 | | | Dealer floorplans | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 69,087 | | | | 69,087 | | | Commercial other | | | 658 | | | | 136 | | | | 835 | | | | 1,629 | | | | 278,279 | | | | 279,908 | | | Commercial unsecured SBA PPP | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 252,667 | | | | 252,667 | | | Total commercial loans | | | 2,579 | | | | 549 | | | | 15,115 | | | | 18,243 | | | | 1,875,284 | | | | 1,893,527 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate mortgage | | | 1,784 | | | | 3,501 | | | | 6,897 | | | | 12,182 | | | | 772,377 | | | | 784,559 | | | Home equity lines | | | 509 | | | | 305 | | | | 919 | | | | 1,733 | | | | 102,037 | | | | 103,770 | | | Total residential loans | | | 2,293 | | | | 3,806 | | | | 7,816 | | | | 13,915 | | | | 874,414 | | | | 888,329 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consumer direct | | | 659 | | | | 87 | | | | 71 | | | | 817 | | | | 151,487 | | | | 152,304 | | | Consumer indirect | | | 2,960 | | | | 973 | | | | 353 | | | | 4,286 | | | | 615,765 | | | | 620,051 | | | Total consumer loans | | | 3,619 | | | | 1,060 | | | | 424 | | | | 5,103 | | | | 767,252 | | | | 772,355 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and lease financing | | $ | 8,491 | | | $ | 5,415 | | | $ | 23,355 | | | $ | 37,261 | | | $ | 3,516,950 | | | $ | 3,554,211 | |
| | December 31, 2018 | | | December 31, 2019 | | | (in thousands) | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | 90+ Days Past Due | | | Total Past Due | | | Current | | | Total Loans | | | 90+ and Accruing* | | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | 90+ Days Past Due | | | Total Past Due | | | Current | | | Total Loans | | | 90+ and Accruing* | | | Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial construction | | $ | 87 | | | $ | 58 | | | $ | 698 | | | $ | 843 | | | $ | 81,872 | | | $ | 82,715 | | | $ | 58 | | | $ | 118 | | | $ | 0 | | | $ | 467 | | | $ | 585 | | | $ | 104,224 | | | $ | 104,809 | | | $ | 237 | | | Commercial secured by real estate | | | 6,287 | | | | 1,204 | | | | 8,776 | | | | 16,267 | | | | 1,166,826 | | | | 1,183,093 | | | | 4,632 | | | | 2,734 | | | | 5,969 | | | | 12,366 | | | | 21,069 | | | | 1,148,906 | | | | 1,169,975 | | | | 8,820 | | | Equipment lease financing | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 1,740 | | | | 1,740 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 481 | | | | 481 | | | | 0 | | | Commercial other | | | 1,057 | | | | 94 | | | | 1,067 | | | | 2,218 | | | | 374,980 | | | | 377,198 | | | | 581 | | | | 880 | | | | 284 | | | | 6,267 | | | | 7,431 | | | | 382,252 | | | | 389,683 | | | | 2,586 | | | Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate construction | | | 144 | | | | 438 | | | | 28 | | | | 610 | | | | 56,550 | | | | 57,160 | | | | 6 | | | | 117 | | | | 52 | | | | 634 | | | | 803 | | | | 62,547 | | | | 63,350 | | | | 0 | | | Real estate mortgage | | | 1,272 | | | | 5,645 | | | | 7,607 | | | | 14,524 | | | | 707,893 | | | | 722,417 | | | | 4,095 | | | | 774 | | | | 5,376 | | | | 10,320 | | | | 16,470 | | | | 716,533 | | | | 733,003 | | | | 7,088 | | | Home equity | | | 898 | | | | 365 | | | | 441 | | | | 1,704 | | | | 104,595 | | | | 106,299 | | | | 246 | | | | 1,084 | | | | 412 | | | | 736 | | | | 2,232 | | | | 109,662 | | | | 111,894 | | | | 344 | | | Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consumer direct | | | 918 | | | | 191 | | | | 74 | | | | 1,183 | | | | 143,106 | | | | 144,289 | | | | 74 | | | | 945 | | | | 230 | | | | 97 | | | | 1,272 | | | | 146,779 | | | | 148,051 | | | | 97 | | | Consumer indirect | | | 4,715 | | | | 975 | | | | 507 | | | | 6,197 | | | | 527,530 | | | | 533,727 | | | | 506 | | | | 4,037 | | | | 909 | | | | 447 | | | | 5,393 | | | | 522,025 | | | | 527,418 | | | | 448 | | | Total | | $ | 15,378 | | | $ | 8,970 | | | $ | 19,198 | | | $ | 43,546 | | | $ | 3,165,092 | | | $ | 3,208,638 | | | $ | 10,198 | | | | Loans and lease financing | | | $ | 10,689 | | | $ | 13,232 | | | $ | 31,334 | | | $ | 55,255 | | | $ | 3,193,409 | | | $ | 3,248,664 | | | $ | 19,620 | |
*90+ and Accruing are also included in 90+ Days Past Due column.
The risk characteristics of CTBI’s material portfolio segments are as follows:
Hotel/motel loans are a significant concentration for CTBI, representing approximately 7.3% of total loans. This industry has unique risk characteristics as it is highly susceptible to changes in the domestic and global economic environments, which can cause the industry to experience substantial volatility. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Hotel/motel 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. Management monitors and evaluates all commercial real estate loans based on collateral and risk grade criteria. Commercial construction loans generally are made to customers for the purpose of building income-producing properties, and any hotel/motel construction loan would be included in this segment. 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 residential loans are commercial purpose construction and permanent financed loans for commercial purpose 1-4 family/multi-family properties. All commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Management monitors and evaluates all commercial real estate loans based on collateral and risk grade criteria. Commercial residential 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 nonresidential loans are secured by nonfarm, nonresidential properties, farmland, and other commercial real estate. Construction for commercial real estate nonresidential loans are also included in this segment as these loans are generally one loan for construction to permanent financing. All 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 all commercial real estate loans based on collateral and risk grade criteria. Commercial nonresidential 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.
Prior to the implementation of ASU No. 2016-13, all commercial real estate loans were segmented together with construction loans presented separately.
Dealer floorplans have historically been reviewed by management as a separate segment of the commercial loan portfolio; although, for reporting to the Securities and Exchange Commission, they were combined within the commercial other segment. With the implementation of ASU No. 2016-13, CTBI segmented dealer floorplans separately as they are a unique product with unique risk factors. CTBI maintains strict processing procedures over its floorplan product with any exceptions requested by a loan officer approved by the appropriate loan committee and the floorplan manager.
Commercial other 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. As we underwrite our equipment lease financing in a manner similar to our commercial loan portfolio described below, the risk characteristics for equipment lease financingthis portfolio mirror that of the commercial loan portfolio.
CTBI’s participation in the CARES Act PPP loan program has resulted in a new loan segment of unsecured commercial other loans that are one hundred percent SBA guaranteed. These loans, which are subject to forgiveness, have maturities of either two or three to five years, depending on when the loans were made. These loans currently have no allowance for credit losses.
With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, CTBI generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences. Residential construction loans are handled through the home mortgage area of the bank. The repayment ability of the borrower and the maximum loan-to-value ratio are calculated using the normal mortgage lending criteria. Draws are processed based on percentage of completion stages including normal inspection procedures. Such loans generally convert to term loans after the completion of construction.
Consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Our determination of a borrower’s ability to repay these loans is primarily dependent on the personal income and credit rating of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
The indirect lending area of the bank generally deals with purchasing/funding consumer contracts with new and used automobile dealers. The dealers generate consumer loan applications which are forwarded to the indirect loan processing area for approval or denial. Loan approvals or denials are based on the creditworthiness and repayment ability of the borrower, and on the collateral value. The dealers may have limited recourse agreements with CTB.
Credit Quality Indicators:Indicators
CTBI categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. CTBI also considers the fair value of the underlying collateral and the strength and willingness of the guarantor(s). CTBI analyzes commercial loans individually by classifying the loans as to credit risk. Loans classified as loss, doubtful, substandard, or special mention are reviewed quarterly by CTBI for further deterioration or improvement to determine if appropriately classified and valued if deemed impaired. All other commercial loan reviews are completed every 12 to 18 months. In addition, during the renewal process of any loan, as well as if a loan becomes past due or if other information becomes available, CTBI will evaluate the loan grade. CTBI uses the following definitions for risk ratings:
| ➢ | Pass grades include investment grade, low risk, moderate risk, and acceptable risk loans. The loans range from loans that have no chance of resulting in a loss to loans that have a limited chance of resulting in a loss. Customers in this grade have excellent to fair credit ratings. The cash flows are adequate to meet required debt repayments. |
| ➢ | Watch graded loans are loans that warrant extra management attention but are not currently criticized. Loans on the watch list may be potential troubled credits or may warrant “watch” status for a reason not directly related to the asset quality of the credit. The watch grade is a management tool to identify credits which may be candidates for future classification or may temporarily warrant extra management monitoring. |
| ➢ | Other assets especially mentioned (OAEM) reflects loans that are currently protected but are potentially weak. These loans constitute an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an unwarranted risk in light of circumstances surrounding a specific asset. Loans in this grade display potential weaknesses which may, if unchecked or uncorrected, inadequately protect CTBI’s credit position at some future date. The loans may be adversely affected by economic or market conditions. |
| ➢ | Substandard grading indicates that the loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. These loans have a well-defined weakness or weaknesses that jeopardize the orderly liquidation of the debt with the distinct possibility that CTBI will sustain some loss if the deficiencies are not corrected. |
| ➢ | Doubtful graded loans have the weaknesses inherent in the substandard grading with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The probability of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to CTBI’s advantage or strengthen the asset(s), its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. |
The following tables present the credit risk profile of CTBI’s commercial loan portfolio based on rating category and payment activity, segregated by class of loans asand based on last credit decision or year of December 31, 2019 and 2018:origination:
| (in thousands) | | Commercial Construction | | | Commercial Secured by Real Estate | | | Equipment Leases | | | Commercial Other | | | Total | | | | December 31, 2019 | | | | | | | | | | | | | | | | | | | | Term Loans Amortized Cost Basis by Origination Year | | (in thousands) | | | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | Prior | | | Revolving Loans | | | Total | | | Hotel/motel | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk rating: | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | $ | 98,102 | | | $ | 1,036,573 | | | $ | 481 | | | $ | 358,203 | | | $ | 1,493,359 | | | $ | 11,507 | | | $ | 70,504 | | | $ | 27,453 | | | $ | 39,651 | | | $ | 6,357 | | | $ | 22,372 | | | $ | 0 | | | $ | 177,844 | | | Watch | | | 3,595 | | | | 54,338 | | | | 0 | | | | 13,618 | | | | 71,551 | | | | 23,951 | | | | 2,506 | | | | 3,366 | | | | 2,102 | | | | 16,740 | | | | 7,422 | | | | | | | | 56,087 | | | OAEM | | | 254 | | | | 27,964 | | | | 0 | | | | 6,065 | | | | 34,283 | | | | 0 | | | | 1,993 | | | | 9,576 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 11,569 | | | Substandard | | | 2,858 | | | | 51,068 | | | | 0 | | | | 11,737 | | | | 65,663 | | | | 0 | | | | 0 | | | | 0 | | | | 1,113 | | | | 8,840 | | | | 5,246 | | | | 0 | | | | 15,199 | | | Doubtful | | | 0 | | | | 32 | | | | 0 | | | | 60 | | | | 92 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Total | | $ | 104,809 | | | $ | 1,169,975 | | | $ | 481 | | | $ | 389,683 | | | $ | 1,664,948 | | | | Total hotel/motel | | | $ | 35,458 | | | $ | 75,003 | | | $ | 40,395 | | | $ | 42,866 | | | $ | 31,937 | | | $ | 35,040 | | | $ | 0 | | | $ | 260,699 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | | Commercial real estate residential | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk rating: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | $ | 74,222 | | | $ | 1,038,309 | | | $ | 1,740 | | | $ | 327,431 | | | $ | 1,441,702 | | | $ | 85,403 | | | $ | 39,238 | | | $ | 29,179 | | | $ | 17,390 | | | $ | 21,272 | | | $ | 46,419 | | | $ | 10,470 | | | $ | 249,371 | | | Watch | | | 3,070 | | | | 71,834 | | | | 0 | | | | 28,986 | | | | 103,890 | | | | 1,714 | | | | 2,214 | | | | 2,438 | | | | 2,962 | | | | 4,520 | | | | 5,306 | | | | 182 | | | | 19,336 | | | OAEM | | | 1,594 | | | | 19,734 | | | | 0 | | | | 5,735 | | | | 27,063 | | | | 1,921 | | | | 1,361 | | | | 323 | | | | 142 | | | | 129 | | | | 0 | | | | 0 | | | | 3,876 | | | Substandard | | | 3,829 | | | | 53,125 | | | | 0 | | | | 14,970 | | | | 71,924 | | | | 4,301 | | | | 606 | | | | 1,991 | | | | 4,076 | | | | 1,108 | | | | 3,263 | | | | 0 | | | | 15,345 | | | Doubtful | | | 0 | | | | 91 | | | | 0 | | | | 76 | | | | 167 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Total | | $ | 82,715 | | | $ | 1,183,093 | | | $ | 1,740 | | | $ | 377,198 | | | $ | 1,644,746 | | | | Total commercial real estate residential | | | $ | 93,339 | | | $ | 43,419 | | | $ | 33,931 | | | $ | 24,570 | | | $ | 27,029 | | | $ | 54,988 | | | $ | 10,652 | | | $ | 287,928 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial real estate nonresidential | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk rating: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | | $ | 125,205 | | | $ | 97,204 | | | $ | 77,685 | | | $ | 80,416 | | | $ | 100,740 | | | $ | 165,839 | | | $ | 25,524 | | | $ | 672,613 | | | Watch | | | | 5,133 | | | | 3,175 | | | | 5,075 | | | | 6,366 | | | | 3,020 | | | | 11,046 | | | | 601 | | | | 34,416 | | | OAEM | | | | 0 | | | | 887 | | | | 68 | | | | 0 | | | | 0 | | | | 3,382 | | | | 115 | | | | 4,452 | | | Substandard | | | | 7,254 | | | | 6,152 | | | | 3,471 | | | | 2,462 | | | | 1,358 | | | | 10,817 | | | | 215 | | | | 31,729 | | | Doubtful | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 28 | | | | 0 | | | | 28 | | | Total commercial real estate nonresidential | | | $ | 137,592 | | | $ | 107,418 | | | $ | 86,299 | | | $ | 89,244 | | | $ | 105,118 | | | $ | 191,112 | | | $ | 26,455 | | | $ | 743,238 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Dealer floorplans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk rating: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 68,610 | | | $ | 68,610 | | | Watch | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 477 | | | | 477 | | | OAEM | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Substandard | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Doubtful | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Total dealer floorplans | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 69,087 | | | $ | 69,087 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk rating: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | | $ | 75,014 | | | $ | 26,385 | | | $ | 33,825 | | | $ | 13,975 | | | $ | 6,225 | | | $ | 22,733 | | | $ | 78,547 | | | $ | 256,704 | | | Watch | | | | 2,888 | | | | 378 | | | | 1,130 | | | | 555 | | | | 464 | | | | 595 | | | | 7,030 | | | | 13,040 | | | OAEM | | | | 25 | | | | 0 | | | | 5,056 | | | | 181 | | | | 367 | | | | 0 | | | | 124 | | | | 5,753 | | | Substandard | | | | 2,136 | | | | 556 | | | | 318 | | | | 460 | | | | 460 | | | | 411 | | | | 70 | | | | 4,411 | | | Doubtful | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Total commercial other | | | $ | 80,063 | | | $ | 27,319 | | | $ | 40,329 | | | $ | 15,171 | | | $ | 7,516 | | | $ | 23,739 | | | $ | 85,771 | | | $ | 279,908 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial unsecured SBA PPP | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk rating: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | | $ | 252,667 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 252,667 | | | Watch | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | OAEM | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Substandard | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Doubtful | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Total commercial unsecured SBA PPP | | | $ | 252,667 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 252,667 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk rating: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | | $ | 549,796 | | | $ | 233,331 | | | $ | 168,142 | | | $ | 151,432 | | | $ | 134,594 | | | $ | 257,363 | | | $ | 183,151 | | | $ | 1,677,809 | | | Watch | | | | 33,686 | | | | 8,273 | | | | 12,009 | | | | 11,985 | | | | 24,744 | | | | 24,369 | | | | 8,290 | | | | 123,356 | | | OAEM | | | | 1,946 | | | | 4,241 | | | | 15,023 | | | | 323 | | | | 496 | | | | 3,382 | | | | 239 | | | | 25,650 | | | Substandard | | | | 13,691 | | | | 7,314 | | | | 5,780 | | | | 8,111 | | | | 11,766 | | | | 19,737 | | | | 285 | | | | 66,684 | | | Doubtful | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 28 | | | | 0 | | | | 28 | | | Total commercial loans | | | $ | 599,119 | | | $ | 253,159 | | | $ | 200,954 | | | $ | 171,851 | | | $ | 171,600 | | | $ | 304,879 | | | $ | 191,965 | | | $ | 1,893,527 | |
| (in thousands) | | Commercial Construction | | | Commercial Secured by Real Estate | | | Equipment Leases | | | Commercial Other | | | Total | | | December 31, 2019 | | | | | | | | | | | | | | | | | Pass | | $ | 98,102 | | | $ | 1,036,573 | | | $ | 481 | | | $ | 358,203 | | | $ | 1,493,359 | | | Watch | | | 3,595 | | | | 54,338 | | | | 0 | | | | 13,618 | | | | 71,551 | | | OAEM | | | 254 | | | | 27,964 | | | | 0 | | | | 6,065 | | | | 34,283 | | | Substandard | | | 2,858 | | | | 51,068 | | | | 0 | | | | 11,737 | | | | 65,663 | | | Doubtful | | | 0 | | | | 32 | | | | 0 | | | | 60 | | | | 92 | | | Total | | $ | 104,809 | | | $ | 1,169,975 | | | $ | 481 | | | $ | 389,683 | | | $ | 1,664,948 | |
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, 2019 and 2018:class:
| (in thousands) | | Real Estate Construction | | | Real Estate Mortgage | | | Home Equity | | | Consumer Direct | | | Consumer Indirect | | | Total | | | December 31, 2019 | | | | | | | | | | | | | | | | | | | | Performing | | $ | 62,716 | | | $ | 721,094 | | | $ | 110,834 | | | $ | 147,954 | | | $ | 526,970 | | | $ | 1,569,568 | | | Nonperforming (1) | | | 634 | | | | 11,909 | | | | 1,060 | | | | 97 | | | | 448 | | | | 14,148 | | | Total | | $ | 63,350 | | | $ | 733,003 | | | $ | 111,894 | | | $ | 148,051 | | | $ | 527,418 | | | $ | 1,583,716 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | Performing | | $ | 57,132 | | | $ | 712,927 | | | $ | 105,576 | | | $ | 144,215 | | | $ | 533,221 | | | $ | 1,553,071 | | | Nonperforming (1) | | | 28 | | | | 9,490 | | | | 723 | | | | 74 | | | | 506 | | | | 10,821 | | | Total | | $ | 57,160 | | | $ | 722,417 | | | $ | 106,299 | | | $ | 144,289 | | | $ | 533,727 | | | $ | 1,563,892 | |
| | Term Loans Amortized Cost Basis by Origination Year | | | | | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | Prior | | | Revolving Loans | | | Total | | | Home equity lines | | | | | | | | | | | | | | | | | | | | | | | | | | Performing | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 23 | | | $ | 12,049 | | | $ | 90,724 | | | $ | 102,796 | | | Nonperforming | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 585 | | | | 389 | | | | 974 | | | Total home equity lines | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 23 | | | $ | 12,634 | | | $ | 91,113 | | | $ | 103,770 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mortgage loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Performing | | $ | 214,629 | | | $ | 119,301 | | | $ | 56,812 | | | $ | 60,915 | | | $ | 48,253 | | | $ | 275,883 | �� | | $ | 0 | | | $ | 775,793 | | | Nonperforming | | | 0 | | | | 436 | | | | 303 | | | | 314 | | | | 352 | | | | 7,361 | | | | 0 | | | | 8,766 | | | Total mortgage loans | | $ | 214,629 | | | $ | 119,737 | | | $ | 57,115 | | | $ | 61,229 | | | $ | 48,605 | | | $ | 283,244 | | | $ | 0 | | | $ | 784,559 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Performing | | $ | 214,629 | | | $ | 119,301 | | | $ | 56,812 | | | $ | 60,915 | | | $ | 48,276 | | | $ | 287,932 | | | $ | 90,724 | | | $ | 878,589 | | | Nonperforming | | | 0 | | | | 436 | | | | 303 | | | | 314 | | | | 352 | | | | 7,946 | | | | 389 | | | | 9,740 | | | Total residential loans | | $ | 214,629 | | | $ | 119,737 | | | $ | 57,115 | | | $ | 61,229 | | | $ | 48,628 | | | $ | 295,878 | | | $ | 91,113 | | | $ | 888,329 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consumer direct loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Performing | | $ | 72,677 | | | $ | 32,993 | | | $ | 18,461 | | | $ | 9,157 | | | $ | 6,581 | | | $ | 12,364 | | | $ | 0 | | | $ | 152,233 | | | Nonperforming | | | 7 | | | | 57 | | | | 0 | | | | 7 | | | | 0 | | | | 0 | | | | 0 | | | | 71 | | | Total consumer direct loans | | $ | 72,684 | | | $ | 33,050 | | | $ | 18,461 | | | $ | 9,164 | | | $ | 6,581 | | | $ | 12,364 | | | $ | 0 | | | $ | 152,304 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consumer indirect loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Performing | | $ | 301,494 | | | $ | 135,123 | | | $ | 100,482 | | | $ | 50,665 | | | $ | 23,777 | | | $ | 8,157 | | | $ | 0 | | | $ | 619,698 | | | Nonperforming | | | 27 | | | | 115 | | | | 118 | | | | 52 | | | | 30 | | | | 11 | | | | 0 | | | | 353 | | | Total consumer indirect loans | | $ | 301,521 | | | $ | 135,238 | | | $ | 100,600 | | | $ | 50,717 | | | $ | 23,807 | | | $ | 8,168 | | | $ | 0 | | | $ | 620,051 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consumer loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Performing | | $ | 374,171 | | | $ | 168,116 | | | $ | 118,943 | | | $ | 59,822 | | | $ | 30,358 | | | $ | 20,521 | | | $ | 0 | | | $ | 771,931 | | | Nonperforming | | | 34 | | | | 172 | | | | 118 | | | | 59 | | | | 30 | | | | 11 | | | | 0 | | | | 424 | | | Total consumer loans | | $ | 374,205 | | | $ | 168,288 | | | $ | 119,061 | | | $ | 59,881 | | | $ | 30,388 | | | $ | 20,532 | | | $ | 0 | | | $ | 772,355 | |
| (in thousands) | | Real Estate Construction | | | Real Estate Mortgage | | | Home Equity | | | Consumer Direct | | | Consumer Indirect | | | Total | | | December 31, 2019 | | | | | | | | | | | | | | | | | | | | Performing | | $ | 62,716 | | | $ | 721,094 | | | $ | 110,834 | | | $ | 147,954 | | | $ | 526,970 | | | $ | 1,569,568 | | | Nonperforming | | | 634 | | | | 11,909 | | | | 1,060 | | | | 97 | | | | 448 | | | | 14,148 | | | Total | | $ | 63,350 | | | $ | 733,003 | | | $ | 111,894 | | | $ | 148,051 | | | $ | 527,418 | | | $ | 1,583,716 | |
(1)
A loan is considered nonperforming if it is 90 days or more past due and/or on nonaccrual.
The total of consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings arebegan, but have been suspended, was $2.9 million at December 31, 2020. The total of consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings were in process totaled $2.4 million at December 31, 2019 compared to $3.3 was $2.4 million at December 31, 2018..
A loan is considered impaired, inIn accordance with ASC 326-20-30-2, if a loan does not share risk characteristics with other pooled loans in determining 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 onallowance for credit losses, the loan payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection.shall be evaluated for expected credit losses on an individual basis. Of the loans that CTBI has individually evaluated, the loans listed below by segment are those that are collateral dependent:
| | December 31, 2020 | | | (in thousands) | | Number of Loans | | | Recorded Investment | | | Specific Reserve | | | Hotel/motel | | | 5 | | | $ | 26,194 | | | $ | 250 | | | Commercial real estate residential | | | 4 | | | | 7,833 | | | | 0 | | | Commercial real estate nonresidential | | | 12 | | | | 24,497 | | | | 200 | | | Commercial other | | | 1 | | | | 5,050 | | | | 0 | | | Total collateral dependent loans | | | 22 | | | $ | 63,574 | | | $ | 450 | |
The hotel/motel, commercial real estate residential, and commercial real estate nonresidential segments are all collateralized with real estate. The one loan listed in the commercial other segment is collateralized by various chattel and real estate collateral with $5.1 million collateralized by a leasehold mortgage and assignment of lease on commercial property as well as furniture, fixtures, and equipment of the leasehold property.
Prior to the adoption of ASC 326 on January 1, 2020, loans were reported as impaired when, based on then current information and events, it was probable we would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan was impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. 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, 2019 2018, and 2017:2018.
| | December 31, 2019 | | | December 31, 2019 | | | (in thousands) | | Recorded Balance | | | Unpaid Contractual Principal Balance | | | Specific Allowance | | | Average Investment in Impaired Loans | | | *Interest Income Recognized | | | Recorded Balance | | | Unpaid Contractual Principal Balance | | | Specific Allowance | | | Average Investment in Impaired Loans | | | *Interest Income Recognized | | | Loans without a specific valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial construction | | $ | 2,836 | | | $ | 2,837 | | | $ | 0 | | | $ | 3,234 | | | $ | 170 | | | $ | 2,836 | | | $ | 2,837 | | | $ | 0 | | | $ | 3,234 | | | $ | 170 | | | Commercial secured by real estate | | | 40,346 | | | | 41,557 | | | | 0 | | | | 36,976 | | | | 1,601 | | | | 40,346 | | | | 41,557 | | | | 0 | | | | 36,976 | | | | 1,601 | | | Commercial other | | | 7,829 | | | | 9,489 | | | | 0 | | | | 9,889 | | | | 460 | | | | 7,829 | | | | 9,489 | | | | 0 | | | | 9,889 | | | | 460 | | | Real estate mortgage | | | 2,309 | | | | 2,309 | | | | 0 | | | | 2,385 | | | | 85 | | | | 2,309 | | | | 2,309 | | | | 0 | | | | 2,385 | | | | 85 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans with a specific valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial construction | | | 174 | | | | 174 | | | | 99 | | | | 215 | | | | 11 | | | | 174 | | | | 174 | | | | 99 | | | | 215 | | | | 11 | | | Commercial secured by real estate | | | 1,033 | | | | 2,176 | | | | 227 | | | | 1,678 | | | | 15 | | | | 1,033 | | | | 2,176 | | | | 227 | | | | 1,678 | | | | 15 | | | Commercial other | | | 3,244 | | | | 3,244 | | | | 886 | | | | 1,323 | | | | 29 | | | | 3,244 | | | | 3,244 | | | | 886 | | | | 1,323 | | | | 29 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Totals: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial construction | | | 3,010 | | | | 3,011 | | | | 99 | | | | 3,449 | | | | 181 | | | | 3,010 | | | | 3,011 | | | | 99 | | | | 3,449 | | | | 181 | | | Commercial secured by real estate | | | 41,379 | | | | 43,733 | | | | 227 | | | | 38,654 | | | | 1,616 | | | | 41,379 | | | | 43,733 | | | | 227 | | | | 38,654 | | | | 1,616 | | | Commercial other | | | 11,073 | | | | 12,733 | | | | 886 | | | | 11,212 | | | | 489 | | | | 11,073 | | | | 12,733 | | | | 886 | | | | 11,212 | | | | 489 | | | Real estate mortgage | | | 2,309 | | | | 2,309 | | | | 0 | | | | 2,385 | | | | 85 | | | | 2,309 | | | | 2,309 | | | | 0 | | | | 2,385 | | | | 85 | | | Total | | $ | 57,771 | | | $ | 61,786 | | | $ | 1,212 | | | $ | 55,700 | | | $ | 2,371 | | | $ | 57,771 | | | $ | 61,786 | | | $ | 1,212 | | | $ | 55,700 | | | $ | 2,371 | |
| | December 31, 2018 | | | December 31, 2018 | | | (in thousands) | | Recorded Balance | | | Unpaid Contractual Principal Balance | | | Specific Allowance | | | Average Investment in Impaired Loans | | | *Interest Income Recognized | | | Recorded Balance | | | Unpaid Contractual Principal Balance | | | Specific Allowance | | | Average Investment in Impaired Loans | | | *Interest Income Recognized | | | Loans without a specific valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial construction | | $ | 4,100 | | | $ | 4,100 | | | $ | 0 | | | $ | 3,923 | | | $ | 171 | | | $ | 4,100 | | | $ | 4,100 | | | $ | 0 | | | $ | 3,923 | | | $ | 171 | | | Commercial secured by real estate | | | 29,645 | | | | 31,409 | | | | 0 | | | | 30,250 | | | | 1,412 | | | | 29,645 | | | | 31,409 | | | | 0 | | | | 30,250 | | | | 1,412 | | | Commercial other | | | 8,285 | | | | 9,982 | | | | 0 | | | | 8,774 | | | | 530 | | | | 8,285 | | | | 9,982 | | | | 0 | | | | 8,774 | | | | 530 | | | Real estate construction | | | 0 | | | | 0 | | | | 0 | | | | 106 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 106 | | | | 0 | | | Real estate mortgage | | | 1,882 | | | | 1,882 | | | | 0 | | | | 1,666 | | | | 41 | | | | 1,882 | | | | 1,882 | | | | 0 | | | | 1,666 | | | | 41 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans with a specific valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial construction | | | 127 | | | | 127 | | | | 50 | | | | 42 | | | | 0 | | | | 127 | | | | 127 | | | | 50 | | | | 42 | | | | 0 | | | Commercial secured by real estate | | | 1,854 | | | | 2,983 | | | | 605 | | | | 2,051 | | | | 1 | | | | 1,854 | | | | 2,983 | | | | 605 | | | | 2,051 | | | | 1 | | | Commercial other | | | 473 | | | | 473 | | | | 146 | | | | 285 | | | | 16 | | | | 473 | | | | 473 | | | | 146 | | | | 285 | | | | 16 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Totals: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial construction | | | 4,227 | | | | 4,227 | | | | 50 | | | | 3,965 | | | | 171 | | | | 4,227 | | | | 4,227 | | | | 50 | | | | 3,965 | | | | 171 | | | Commercial secured by real estate | | | 31,499 | | | | 34,392 | | | | 605 | | | | 32,301 | | | | 1,413 | | | | 31,499 | | | | 34,392 | | | | 605 | | | | 32,301 | | | | 1,413 | | | Commercial other | | | 8,758 | | | | 10,455 | | | | 146 | | | | 9,059 | | | | 546 | | | | 8,758 | | | | 10,455 | | | | 146 | | | | 9,059 | | | | 546 | | | Real estate construction | | | 0 | | | | 0 | | | | 0 | | | | 106 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 106 | | | | 0 | | | Real estate mortgage | | | 1,882 | | | | 1,882 | | | | 0 | | | | 1,666 | | | | 41 | | | | 1,882 | | | | 1,882 | | | | 0 | | | | 1,666 | | | | 41 | | | Total | | $ | 46,366 | | | $ | 50,956 | | | $ | 801 | | | $ | 47,097 | | | $ | 2,171 | | | $ | 46,366 | | | $ | 50,956 | | | $ | 801 | | | $ | 47,097 | | | $ | 2,171 | |
| | December 31, 2017 | | | (in thousands) | | Recorded Balance | | | Unpaid Contractual Principal Balance | | | Specific Allowance | | | Average Investment in Impaired Loans | | | *Interest Income Recognized | | | Loans without a specific valuation allowance: | | | | | | | | | | | | | | | | | Commercial construction | | $ | 4,431 | | | $ | 4,439 | | | $ | 0 | | | $ | 4,835 | | | $ | 200 | | | Commercial secured by real estate | | | 28,480 | | | | 30,365 | | | | 0 | | | | 27,753 | | | | 1,344 | | | Equipment lease financing | | | 0 | | | | 0 | | | | 0 | | | | 34 | | | | 0 | | | Commercial other | | | 9,481 | | | | 11,252 | | | | 0 | | | | 10,444 | | | | 539 | | | Real estate construction | | | 318 | | | | 318 | | | | 0 | | | | 534 | | | | 0 | | | Real estate mortgage | | | 1,564 | | | | 1,570 | | | | 0 | | | | 1,591 | | | | 36 | | | | | | | | | | | | | | | | | | | | | | | | | Loans with a specific valuation allowance: | | | | | | | | | | | | | | | | | | | | | | Commercial construction | | | 153 | | | | 173 | | | | 25 | | | | 155 | | | | 0 | | | Commercial secured by real estate | | | 2,985 | | | | 4,095 | | | | 966 | | | | 3,932 | | | | 8 | | | Commercial other | | | 0 | | | | 0 | | | | 0 | | | | 65 | | | | 0 | | | | | | | | | | | | | | | | | | | | | | | | | Totals: | | | | | | | | | | | | | | | | | | | | | | Commercial construction | | | 4,584 | | | | 4,612 | | | | 25 | | | | 4,990 | | | | 200 | | | Commercial secured by real estate | | | 31,465 | | | | 34,460 | | | | 966 | | | | 31,685 | | | | 1,352 | | | Equipment lease financing | | | 0 | | | | 0 | | | | 0 | | | | 34 | | | | 0 | | | Commercial other | | | 9,481 | | | | 11,252 | | | | 0 | | | | 10,509 | | | | 539 | | | Real estate construction | | | 318 | | | | 318 | | | | 0 | | | | 534 | | | | 0 | | | Real estate mortgage | | | 1,564 | | | | 1,570 | | | | 0 | | | | 1,591 | | | | 36 | | | Total | | $ | 47,412 | | | $ | 52,212 | | | $ | 991 | | | $ | 49,343 | | | $ | 2,127 | |
*Cash basis interest is substantially the same as interest income recognized.
Included in certain loan categories of impaired loans are certain loans that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral of principal and/or interest payments, regardless of the period of the modification. All of the loans identified as troubled debt restructuring were modified due to financial stress of the borrower. In order to determine if a borrower is experiencing financial difficulty, an evaluation is performed to determine the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under CTBI’s internal underwriting policy.
When we modify loans and leases in a troubled debt restructuring, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan 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.
Certain loans have been 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, 20192020 and 2018:2019:
| | Year Ended December 31, 2019 | | | Year Ended December 31, 2020 | | | (in thousands) | | Number of Loans | | | Term Modification | | | Rate Modification | | | Combination | | | Post- Modification Outstanding Balance | | | | Commercial: | | | | | | | | | | | | | | | | | | Commercial construction | | | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | | Commercial secured by real estate | | | 17 | | | | 6,105 | | | | 0 | | | | 679 | | | | 6,784 | | | | | | | Pre-Modification Outstanding Balance | | (in thousands) | | | Number of Loans | | | Term Modification | | | Combination | | | Total Modification | | | Commercial real estate residential | | | | 12 | | | $ | 4,694 | | | $ | 1,809 | | | $ | 6,503 | | | Commercial real estate nonresidential | | | | 18 | | | | 7,295 | | | | 782 | | | | 8,077 | | | Hotel/motel | | | | 1 | | | | 1,113 | | | | 0 | | | | 1,113 | | | Commercial other | | | 17 | | | | 1,565 | | | | 0 | | | | 264 | | | | 1,829 | | | | 12 | | | | 637 | | | | 53 | | | | 690 | | | Residential: | | | | | | | | | | | | | | | | | | | | | | | Total commercial loans | | | | 43 | | | | 13,739 | | | | 2,644 | | | | 16,383 | | | | | | | | | | | | | | | | | | | | | | Real estate mortgage | | | 1 | | | | 463 | | | | 0 | | | | 0 | | | | 463 | | | | 4 | | | | 1,496 | | | | 0 | | | | 1,496 | | | Total residential loans | | | | 4 | | | | 1,496 | | | | 0 | | | | 1,496 | | | | | | | | | | | | | | | | | | | | | | Total troubled debt restructurings | | | 35 | | | $ | 8,133 | | | $ | 0 | | | $ | 943 | | | $ | 9,076 | | | | 47 | | | $ | 15,235 | | | $ | 2,644 | | | $ | 17,879 | |
| | Year Ended December 31, 2018 | | | Year Ended December 31, 2020 | | | (in thousands) | | Number of Loans | | | Term Modification | | | Rate Modification | | | Combination | | | Post- Modification Outstanding Balance | | | | Commercial: | | | | | | | | | | | | | | | | | | Commercial construction | | | 5 | | | $ | 2,182 | | | $ | 0 | | | $ | 15 | | | $ | 2,197 | | | | Commercial secured by real estate | | | 24 | | | | 4,004 | | | | 0 | | | | 1,383 | | | | 5,387 | | | | | | | Post-Modification Outstanding Balance | | (in thousands) | | | Number of Loans | | | Term Modification | | | Combination | | | Total Modification | | | Commercial real estate residential | | | | 12 | | | $ | 4,696 | | | $ | 1,809 | | | $ | 6,505 | | | Commercial real estate nonresidential | | | | 18 | | | | 7,349 | | | | 782 | | | | 8,131 | | | Hotel/motel | | | | 1 | | | | 1,113 | | | | 0 | | | | 1,113 | | | Commercial other | | | 8 | | | | 465 | | | | 0 | | | | 0 | | | | 465 | | | | 12 | | | | 571 | | | | 51 | | | | 622 | | | Residential: | | | | | | | | | | | | | | | | | | | | | | | Total commercial loans | | | | 43 | | | | 13,729 | | | | 2,642 | | | | 16,371 | | | | | | | | | | | | | | | | | | | | | | Real estate mortgage | | | 3 | | | | 264 | | | | 0 | | | | 704 | | | | 968 | | | | 4 | | | | 1,479 | | | | 0 | | | | 1,479 | | | Total residential loans | | | | 4 | | | | 1,479 | | | | 0 | | | | 1,479 | | | | | | | | | | | | | | | | | | | | | | Total troubled debt restructurings | | | 40 | | | $ | 6,915 | | | $ | 0 | | | $ | 2,102 | | | $ | 9,017 | | | | 47 | | | $ | 15,208 | | | $ | 2,642 | | | $ | 17,850 | |
| | Year Ended December 31, 2019 | | | (in thousands) | | Number of Loans | | | Term Modification | | | Rate Modification | | | Combination | | | Post- Modification Outstanding Balance | | | Commercial: | | | | | | | | | | | | | | | | | Commercial secured by real estate | | | 17 | | | $ | 6,105 | | | $ | 0 | | | $ | 679 | | | $ | 6,784 | | | Commercial other | | | 17 | | | | 1,565 | | | | 0 | | | | 264 | | | | 1,829 | | | Residential: | | | | | | | | | | | | | | | | | | | | | | Real estate mortgage | | | 1 | | | | 463 | | | | 0 | | | | 0 | | | | 463 | | | Total troubled debt restructurings | | | 35 | | | $ | 8,133 | | | $ | 0 | | | $ | 943 | | | $ | 9,076 | |
No charge-offs have resulted from modifications for any of the presented periods. We had commitments to extend additional credit in the amount of $82$85 thousand and $45$82 thousand respectively, at December 31, 2020 and 2019 and 2018,respectively, on loans that were considered troubled debt restructurings.
Loans retain their accrual status at the time of their modification. As a result, if a loan is on nonaccrual at the time it is modified, it stays as nonaccrual, and if a loan is on accrual at the time of the modification, it generally stays on accrual. Commercial and consumer loans modified in a troubled debt restructuring are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a troubled debt restructuring subsequently default, CTBI evaluates the loan for possible further impairment. The allowance for loan losses may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. Presented below, segregated by class of loans, are loans that were modified as troubled debt restructurings within the past twelve months which have subsequently defaulted. CTBI considers a loan in default when it is 90 days or more past due or transferred to nonaccrual. Presented below, segregated by segment, are troubled debt restructurings for which there was a payment default during the periods indicated and such default was within twelve months of the loan modification.
| (in thousands) | | Year Ended December 31, 2019 | | | Year Ended December 31, 2020 | | | | | Number of Loans | | | Recorded Balance | | | Number of Loans | | | Recorded Balance | | | Commercial: | | | | | | | | | | | | | | Commercial construction | | | 0 | | | $ | 0 | | | | Commercial secured by real estate | | | 1 | | | | 30 | | | | Commercial other | | | 1 | | | | 34 | | | | 3 | | | $ | 368 | | | | | | | | | | | | | | Residential: | | | | | | | | | | | Real estate mortgage | | | 1 | | | | 463 | | | | Total defaulted restructured loans | | | 3 | | | $ | 527 | | | | 3 | | | $ | 368 | |
| (in thousands) | | Year Ended December 31, 2018 | | | Year Ended December 31, 2019 | | | | | Number of Loans | | | Recorded Balance | | | Number of Loans | | | Recorded Balance | | | Commercial: | | | | | | | | | | | | | | Commercial construction | | | 2 | | | $ | 148 | | | | 0 | | | $ | 0 | | | Commercial secured by real estate | | | 1 | | | | 17 | | | | 1 | | | | 30 | | | Commercial other | | | 1 | | | | 84 | | | | 1 | | | | 34 | | | | | | | | | | | | | | Residential: | | | | | | | | | | | Real estate mortgage | | | | 1 | | | | 463 | | | Total defaulted restructured loans | | | 4 | | | $ | 249 | | | | 3 | | | $ | 527 | |
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.
The following table presents the components of mortgage banking income:
(in thousands) Year Ended December 31 | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | Net gain on sale of mortgage loans held for sale | | $ | 1,746 | | | $ | 1,288 | | | $ | 1,232 | | | $ | 7,226 | | | $ | 1,746 | | | $ | 1,288 | | | Net loan servicing income (expense) | | | | | | | | | | | | | | | Net loan servicing income (expense): | | | | | | | | | | | | | | | Servicing fees | | | 1,297 | | | | 1,275 | | | | 1,255 | | | | 1,515 | | | | 1,297 | | | | 1,275 | | | Late fees | | | 72 | | | | 73 | | | | 84 | | | | 52 | | | | 72 | | | | 73 | | | Ancillary fees | | | 190 | | | | 282 | | | | 239 | | | | 1,310 | | | | 190 | | | | 282 | | | Fair value adjustments | | | (975 | ) | | | (343 | ) | | | (361 | ) | | | (1,064 | ) | | | (975 | ) | | | (343 | ) | | Net loan servicing income | | | 584 | | | | 1,287 | | | | 1,217 | | | | 1,813 | | | | 584 | | | | 1,287 | | | Mortgage banking income | | $ | 2,330 | | | $ | 2,575 | | | $ | 2,449 | | | $ | 9,039 | | | $ | 2,330 | | | $ | 2,575 | |
Mortgage loans serviced for others are not included in the accompanying balance sheets. Loans serviced for the benefit of others (primarily FHLMC) totaled $486$650 million, $462$486 million, and $462 million at December 31, 2020, 2019, 2018, and 2017,2018, respectively. Servicing loans for others generally consistsconsist 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 $1.4$2.0 million, $1.01.4 million, and $1.0 million at December 31, 2020, 2019, 2018, and 2017,2018, respectively.
Activity for capitalized mortgage servicing rights using the fair value method is as follows:
| (in thousands) | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | Fair value of MSRs, beginning of period | | $ | 3,607 | | | $ | 3,484 | | | $ | 3,433 | | | | Fair value of MSRs, beginning of year | | | $ | 3,263 | | | $ | 3,607 | | | $ | 3,484 | | | New servicing assets created | | | 631 | | | | 466 | | | | 412 | | | | 1,869 | | | | 631 | | | | 466 | | | Change in fair value during the period due to: | | | | | | | | | | | | | | | Change in fair value during the year due to: | | | | | | | | | | | | | | | Time decay (1) | | | (167 | ) | | | (189 | ) | | | (184 | ) | | | (135 | ) | | | (167 | ) | | | (189 | ) | | Payoffs (2) | | | (293 | ) | | | (227 | ) | | | (268 | ) | | | (766 | ) | | | (293 | ) | | | (227 | ) | | Changes in valuation inputs or assumptions (3) | | | (515 | ) | | | 73 | | | | 91 | | | | (163 | ) | | | (515 | ) | | | 73 | | | Fair value of MSRs, end of period | | $ | 3,263 | | | $ | 3,607 | | | $ | 3,484 | | | | Fair value of MSRs, end of year | | | $ | 4,068 | | | $ | 3,263 | | | $ | 3,607 | |
| (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 $4.1 million, $3.3 million, $3.6 million, and $3.5$3.6 million at December 31, 2020, 2019, 2018, and 2017,2018, respectively. Fair values for the years ended December 31, 2020, 2019, 2018, and 20172018 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 2.69%1.67%, 2.57%2.69%, and 3.03%2.57%, respectively. Prepayment speeds generated using the Andrew Davidson Prepayment Model averaged 11.7%15.7%, 9.5%11.7%, and 10.0%9.5% at December 31, 2020, 2019, 2018, and 2017,2018, 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 20192020 and 20182019 is as follows:
| (in thousands) | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | Related party extensions of credit, beginning of period | | $ | 19,463 | | | $ | 16,832 | | | | Related party extensions of credit, beginning of year | | | $ | 37,816 | | | $ | 19,463 | | | New loans and advances on lines of credit | | | 1 | | | | 6,425 | | | | 2,193 | | | | 1 | | | Repayments | | | (1,686 | ) | | | (3,794 | ) | | | (1,948 | ) | | | (1,686 | ) | | Increase (decrease) due to changes in related parties | | | 20,038 | | | | 0 | | | | Related party extensions of credit, end of period | | $ | 37,816 | | | $ | 19,463 | | | | Increase due to changes in related parties | | | | 0 | | | | 20,038 | | | Related party extensions of credit, end of year | | | $ | 38,061 | | | $ | 37,816 | |
The aggregate balances of related party deposits at December 31, 2020 and 2019 and 2018 were $20.9$23.4 million and $16.6$20.9 million, respectively.
A director of CTBI is a shareholder in a law firm that provided services to CTBI and its subsidiaries during the years 2020, 2019, 2018, and 2017.2018. Approximately $1.1$0.8 million in legal fees and $0.1 million in expenses paid on behalf of CTBI, $1.2$0.9 million total, were paid to this law firm during each2020. A refund was issued for several years of adjustments reducing the yearstotal paid in 2020 to $0.6 million. Approximately $1.1 million in legal fees and $0.1 million in expenses, $1.2 million total, were paid during 2019, 2018, and 2017.approximately $1.1 million in legal fees and $0.1 million in expenses, $1.2 million total, were paid during 2018.
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, 2019, 2018, and 2017:
| 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands) | | Commercial Construction | | | Commercial Secured by Real Estate | | | Equipment Lease Financing | | | Commercial Other | | | Real Estate Construction | | | Real Estate Mortgage | | | Home Equity | | | Consumer Direct | | | Consumer Indirect | | | Total | | | ALLL | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, beginning of year | | $ | 862 | | | $ | 14,531 | | | $ | 12 | | | $ | 4,993 | | | $ | 512 | | | $ | 4,433 | | | $ | 841 | | | $ | 1,883 | | | $ | 7,841 | | | $ | 35,908 | | | Provision charged to expense | | | 497 | | | | (137 | ) | | | (8 | ) | | | 3,032 | | | | (40 | ) | | | 414 | | | | 172 | | | | 528 | | | | 361 | | | | 4,819 | | | Losses charged off | | | (72 | ) | | | (727 | ) | | | 0 | | | | (2,179 | ) | | | (100 | ) | | | (767 | ) | | | (139 | ) | | | (1,100 | ) | | | (4,652 | ) | | | (9,736 | ) | | Recoveries | | | 12 | | | | 358 | | | | 0 | | | | 509 | | | | 0 | | | | 152 | | | | 23 | | | | 400 | | | | 2,651 | | | | 4,105 | | | Balance, end of year | | $ | 1,299 | | | $ | 14,025 | | | $ | 4 | | | $ | 6,355 | | | $ | 372 | | | $ | 4,232 | | | $ | 897 | | | $ | 1,711 | | | $ | 6,201 | | | $ | 35,096 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ending balance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | 99 | | | $ | 227 | | | $ | 0 | | | $ | 886 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,212 | | | Collectively evaluated for impairment | | $ | 1,200 | | | $ | 13,798 | | | $ | 4 | | | $ | 5,469 | | | $ | 372 | | | $ | 4,232 | | | $ | 897 | | | $ | 1,711 | | | $ | 6,201 | | | $ | 33,884 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ending balance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | 3,010 | | | $ | 41,379 | | | $ | 0 | | | $ | 11,073 | | | $ | 0 | | | $ | 2,309 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 57,771 | | | Collectively evaluated for impairment | | $ | 101,799 | | | $ | 1,128,596 | | | $ | 481 | | | $ | 378,610 | | | $ | 63,350 | | | $ | 730,694 | | | $ | 111,894 | | | $ | 148,051 | | | $ | 527,418 | | | $ | 3,190,893 | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands) | | Commercial Construction | | | Commercial Secured by Real Estate | | | Equipment Lease Financing | | | Commercial Other | | | Real Estate Construction | | | Real Estate Mortgage | | | Home Equity | | | Consumer Direct | | | Consumer Indirect | | | Total | | | ALLL | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, beginning of year | | $ | 686 | | | $ | 14,509 | | | $ | 18 | | | $ | 5,039 | | | $ | 660 | | | $ | 5,688 | | | $ | 857 | | | $ | 1,863 | | | $ | 6,831 | | | $ | 36,151 | | | Provision charged to expense | | | 115 | | | | 786 | | | | (6 | ) | | | 824 | | | | (115 | ) | | | (336 | ) | | | 39 | | | | 572 | | | | 4,288 | | | | 6,167 | | | Losses charged off | | | 0 | | | | (988 | ) | | | 0 | | | | (1,513 | ) | | | (33 | ) | | | (1,004 | ) | | | (69 | ) | | | (997 | ) | | | (6,394 | ) | | | (10,998 | ) | | Recoveries | | | 61 | | | | 224 | | | | 0 | | | | 643 | | | | 0 | | | | 85 | | | | 14 | | | | 445 | | | | 3,116 | | | | 4,588 | | | Balance, end of year | | $ | 862 | | | $ | 14,531 | | | $ | 12 | | | $ | 4,993 | | | $ | 512 | | | $ | 4,433 | | | $ | 841 | | | $ | 1,883 | | | $ | 7,841 | | | $ | 35,908 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ending balance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | 50 | | | $ | 605 | | | $ | 0 | | | $ | 146 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 801 | | | Collectively evaluated for impairment | | $ | 812 | | | $ | 13,926 | | | $ | 12 | | | $ | 4,847 | | | $ | 512 | | | $ | 4,433 | | | $ | 841 | | | $ | 1,883 | | | $ | 7,841 | | | $ | 35,107 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ending balance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | 4,227 | | | $ | 31,499 | | | $ | 0 | | | $ | 8,758 | | | $ | 0 | | | $ | 1,882 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 46,366 | | | Collectively evaluated for impairment | | $ | 78,488 | | | $ | 1,151,594 | | | $ | 1,740 | | | $ | 368,440 | | | $ | 57,160 | | | $ | 720,535 | | | $ | 106,299 | | | $ | 144,289 | | | $ | 533,727 | | | $ | 3,162,272 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (in thousands) | | Commercial Construction | | | Commercial Secured by Real Estate | | | Equipment Lease Financing | | | Commercial Other | | | Real Estate Construction | | | Real Estate Mortgage | | | Home Equity | | | Consumer Direct | | | Consumer Indirect | | | Total | | | ALLL | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, beginning of year | | $ | 884 | | | $ | 14,191 | | | $ | 42 | | | $ | 4,656 | | | $ | 629 | | | $ | 6,027 | | | $ | 774 | | | $ | 1,885 | | | $ | 6,845 | | | $ | 35,933 | | | Provision charged to expense | | | (237 | ) | | | 2,281 | | | | (24 | ) | | | 1,744 | | | | 31 | | | | 189 | | | | 257 | | | | 418 | | | | 2,862 | | | | 7,521 | | | Losses charged off | | | (10 | ) | | | (2,038 | ) | | | 0 | | | | (1,893 | ) | | | 0 | | | | (615 | ) | | | (178 | ) | | | (965 | ) | | | (5,386 | ) | | | (11,085 | ) | | Recoveries | | | 49 | | | | 75 | | | | 0 | | | | 532 | | | | 0 | | | | 87 | | | | 4 | | | | 525 | | | | 2,510 | | | | 3,782 | | | Balance, end of year | | $ | 686 | | | $ | 14,509 | | | $ | 18 | | | $ | 5,039 | | | $ | 660 | | | $ | 5,688 | | | $ | 857 | | | $ | 1,863 | | | $ | 6,831 | | | $ | 36,151 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ending balance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | 25 | | | $ | 966 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 991 | | | Collectively evaluated for impairment | | $ | 661 | | | $ | 13,543 | | | $ | 18 | | | $ | 5,039 | | | $ | 660 | | | $ | 5,688 | | | $ | 857 | | | $ | 1,863 | | | $ | 6,831 | | | $ | 35,160 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ending balance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | 4,584 | | | $ | 31,465 | | | $ | 0 | | | $ | 9,481 | | | $ | 318 | | | $ | 1,564 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 47,412 | | | Collectively evaluated for impairment | | $ | 71,895 | | | $ | 1,157,215 | | | $ | 3,042 | | | $ | 341,553 | | | $ | 67,040 | | | $ | 708,006 | | | $ | 99,356 | | | $ | 137,754 | | | $ | 489,667 | | | $ | 3,075,528 | |
8.7. Premises and Equipment
Premises and equipment are summarized as follows:
(in thousands) December 31 | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | Land and buildings | | $ | 80,552 | | | $ | 79,815 | | | $ | 80,959 | | | $ | 80,552 | | | Leasehold improvements | | | 4,805 | | | | 4,805 | | | | 4,805 | | | | 4,805 | | | Furniture, fixtures, and equipment | | | 39,964 | | | | 38,576 | | | | 40,615 | | | | 39,964 | | | Construction in progress | | | 75 | | | | 1,396 | | | | 498 | | | | 75 | | | Total premises and equipment | | | 125,396 | | | | 124,592 | | | | 126,877 | | | | 125,396 | | | Less accumulated depreciation and amortization | | | (81,350 | ) | | | (79,301 | ) | | | (84,876 | ) | | | (81,350 | ) | | Premises and equipment, net | | $ | 44,046 | | | $ | 45,291 | | | $ | 42,001 | | | $ | 44,046 | |
Depreciation and amortization of premises and equipment for 2020, 2019, and 2018 and 2017 was $3.8$3.5 million, $3.8 million, and $3.9$3.8 million, respectively.
9.8. Other Real Estate Owned
Activity for other real estate owned was as follows:
| (in thousands) | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | Beginning balance of other real estate owned | | $ | 27,273 | | | $ | 31,996 | | | $ | 19,480 | | | $ | 27,273 | | | New assets acquired | | | 3,384 | | | | 5,459 | | | | 4,446 | | | | 3,384 | | | Fair value adjustments | | | (4,253 | ) | | | (2,530 | ) | | | (1,454 | ) | | | (4,253 | ) | | Sale of assets | | | (6,924 | ) | | | (7,652 | ) | | | (14,778 | ) | | | (6,924 | ) | | Ending balance of other real estate owned | | $ | 19,480 | | | $ | 27,273 | | | $ | 7,694 | | | $ | 19,480 | |
Carrying costs and fair value adjustments associated with foreclosed properties were $2.7 million, $5.5 million, and $4.3 million for 2020, 2019, and $4.5 million for 2019, 2018, and 2017, 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 | | 2019 | | | 2018 | | | 1-4 family | | $ | 3,630 | | | $ | 5,253 | | | Construction/land development/other | | | 10,211 | | | | 15,017 | | | Multifamily | | | 88 | | | | 88 | | | Non-farm/non-residential | | | 5,551 | | | | 6,915 | | | Total foreclosed properties | | $ | 19,480 | | | $ | 27,273 | |
(in thousands) December 31 | | 2020 | | | 2019 | | | 1-4 family | | $ | 1,888 | | | $ | 3,630 | | | Construction/land development/other | | | 1,069 | | | | 10,211 | | | Multifamily | | | 88 | | | | 88 | | | Non-farm/non-residential | | | 4,649 | | | | 5,551 | | | Total foreclosed properties | | $ | 7,694 | | | $ | 19,480 | |
10.9. Deposits
Major classifications of deposits are categorized as follows:
(in thousands) December 31 | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | Noninterest bearing deposits | | $ | 865,760 | | | $ | 803,316 | | | $ | 1,140,925 | | | $ | 865,760 | | | NOW accounts | | | 51,179 | | | | 56,964 | | | | Interest bearing demand deposits | | | | 78,308 | | | | 51,179 | | | Money market deposits | | | 985,322 | | | | 887,288 | | | | 1,228,742 | | | | 985,322 | | | Savings | | | 404,151 | | | | 406,749 | | | | 527,436 | | | | 404,151 | | | Certificates of deposit and other time deposits of $100,000 or more | | | 597,628 | | | | 651,967 | | | | 606,223 | | | | 597,628 | | | Certificates of deposit and other time deposits less than $100,000 | | | 501,532 | | | | 499,666 | | | | 434,448 | | | | 501,532 | | | Total deposits | | $ | 3,405,572 | | | $ | 3,305,950 | | | $ | 4,016,082 | | | $ | 3,405,572 | |
Certificates of deposit and other time deposits of $250,000 or more at December 31, 20192020 and 20182019 were $227.7$234.9 million and $219.0$227.7 million, respectively. Wholesale brokered deposits at December 31, 2019 and 2018 were $37.1 million and $42.3 million, respectively.$37.1 million. As of December 31, 2020, we 0 longer had wholesale brokered deposits outstanding.
Maturities of certificates of deposits and other time deposits are presented below:
| | Maturities by Period at December 31, 2019 | | | Maturities by Period at December 31, 2020 | | | (in thousands) | | Total | | | Within 1 Year | | | 2 Years | | | 3 Years | | | 4 Years | | | 5 Years | | | After 5 Years | | | Total | | | Within 1 Year | | | 2 Years | | | 3 Years | | | 4 Years | | | 5 Years | | | After 5 Years | | Certificates of deposit and other time deposits of $100,000 or more | | $ | 597,628 | | | $ | 448,071 | | | $ | 69,580 | | | $ | 32,525 | | | $ | 20,513 | | | $ | 26,738 | | | $ | 201 | | | $ | 606,223 | | | $ | 477,852 | | | $ | 60,412 | | | $ | 23,079 | | | $ | 26,430 | | | $ | 18,450 | | | $ | 0 | | | Certificates of deposit and other time deposits less than $100,000 | | | 501,532 | | | | 408,359 | | | | 42,944 | | | | 18,423 | | | | 16,316 | | | | 15,086 | | | | 404 | | | | 434,448 | | | | 353,757 | | | | 34,505 | | | | 20,347 | | | | 15,949 | | | | 9,623 | | | | 267 | | | Total maturities | | $ | 1,099,160 | | | $ | 856,430 | | | $ | 112,524 | | | $ | 50,948 | | | $ | 36,829 | | | $ | 41,824 | | | $ | 605 | | | $ | 1,040,671 | | | $ | 831,609 | | | $ | 94,917 | | | $ | 43,426 | | | $ | 42,379 | | | $ | 28,073 | | | $ | 267 | |
11.10. Borrowings
Short-term debt is categorized as follows:
(in thousands) December 31 | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | Repurchase agreements | | $ | 226,917 | | | $ | 232,712 | | | $ | 355,862 | | | $ | 226,917 | | | Federal funds purchased | | | 7,906 | | | | 1,180 | | | | 500 | | | | 7,906 | | | Total short-term debt | | $ | 234,823 | | | $ | 233,892 | | | $ | 356,362 | | | $ | 234,823 | |
All federal funds purchased mature and reprice daily. See note 1211 for information regarding the maturities of our repurchase agreements. The average rates paid for federal funds purchased and repurchase agreements on December 31, 20192020 were 1.45%0.00%% and 1.82%0.34%, respectively.
The maximum balance for repurchase agreements at any month-end during 20192020 occurred at March 31, 2019,November 30, 2020, with a month-end balance of $237.5$373.4 million. The average balance of repurchase agreements for the year was $228.5$290.5 million.
Long-term debt is categorized as follows:
(in thousands) December 31 | | 2019 | | | 2018 | | | 2020 | | | 2019 | | Junior subordinated debentures, 3.50%, due 6/1/37 | | $ | 57,841 | | | $ | 59,341 | | | Junior subordinated debentures, 1.82%, due 6/1/37 | | | $ | 57,841 | | | $ | 57,841 | |
On March 30, 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. In May 2017, CTBI was able to purchase $2.0 million of the junior subordinated debentures in the open market at a purchase price of $1.4 million, resulting in a gain of $0.6 million. In August 2019, an additional $1.5 million was purchased in the open market at a price of $1.3 million, resulting in a gain of $0.2 million. The junior subordinated debentures will be retained by CTBI until maturity, and CTBI will continue to report the junior subordinated debentures at the net amount outstanding of $57.8 million.
On November 27, 2019,2020, the coupon rate was set at 3.50%1.82% for the March 2, 20201, 2021 distribution date, which was based on the three-month LIBOR rate as of November 27, 20192020 of 1.91%0.23% plus 1.59%.
12.11. 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 saleavailable-for-sale pledged as collateral under repurchase agreements totaled $264.9$397.4 million and $285.2$264.9 million at December 31, 20192020 and December 31, 2018,2019, 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, 20192020 and December 31, 20182019 is presented in the following tables:
| | December 31, 2019 | | | December 31, 2020 | | | | | Remaining Contractual Maturity of the Agreements | | | Remaining Contractual Maturity of the Agreements | | | (in thousands) | | Overnight and
Continuous | | | Up to 30 days | | | 30-90 days | | | Greater Than
90 days | | | Total | | | Overnight and
Continuous | | | Up to 30 days | | | 30-90 days | | | Greater Than
90 days | | | Total | | | Repurchase agreements and repurchase-to-maturity transactions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Treasury and government agencies | | $ | 15,001 | | | $ | 0 | | | $ | 3,479 | | | $ | 58,953 | | | $ | 77,433 | | | $ | 8,777 | | | $ | 0 | | | $ | 2,831 | | | $ | 31,800 | | | $ | 43,408 | | | State and political subdivisions | | | 51,193 | | | | 0 | | | | 1,768 | | | | 11,165 | | | | 64,126 | | | | 54,639 | | | | 0 | | | | 1,132 | | | | 21,421 | | | | 77,192 | | | U.S. government sponsored agency mortgage-backed securities | | | 35,480 | | | | 0 | | | | 1,996 | | | | 47,882 | | | | 85,358 | | | | 33,040 | | | | 0 | | | | 101,037 | | | | 101,185 | | | | 235,262 | | | Total | | $ | 101,674 | | | $ | 0 | | | $ | 7,243 | | | $ | 118,000 | | | $ | 226,917 | | | $ | 96,456 | | | $ | 0 | | | $ | 105,000 | | | $ | 154,406 | | | $ | 355,862 | |
| | December 31, 2018 | | | December 31, 2019 | | | | | Remaining Contractual Maturity of the Agreements | | | Remaining Contractual Maturity of the Agreements | | | (in thousands) | | Overnight and
Continuous | | | Up to 30 days | | | 30-90 days | | | Greater Than
90 days | | | Total | | | Overnight and
Continuous | | | Up to 30 days | | | 30-90 days | | | Greater Than
90 days | | | Total | | | Repurchase agreements and repurchase-to-maturity transactions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Treasury and government agencies | | $ | 25,346 | | | $ | 0 | | | $ | 2,548 | | | $ | 60,699 | | | $ | 88,593 | | | $ | 15,001 | | | $ | 0 | | | $ | 3,479 | | | $ | 58,953 | | | $ | 77,433 | | | State and political subdivisions | | | 58,864 | | | | 0 | | | | 2,995 | | | | 10,384 | | | | 72,243 | | | | 51,193 | | | | 0 | | | | 1,768 | | | | 11,165 | | | | 64,126 | | | U.S. government sponsored agency mortgage-backed securities | | | 22,076 | | | | 0 | | | | 1,877 | | | | 47,923 | | | | 71,876 | | | | 35,480 | | | | 0 | | | | 1,996 | | | | 47,882 | | | | 85,358 | | | Total | | $ | 106,286 | | | $ | 0 | | | $ | 7,420 | | | $ | 119,006 | | | $ | 232,712 | | | $ | 101,674 | | | $ | 0 | | | $ | 7,243 | | | $ | 118,000 | | | $ | 226,917 | |
13.12. Advances from Federal Home Loan Bank
Federal Home Loan Bank advances consisted of the following monthly amortizing borrowings at December 31:
| (in thousands) | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | Monthly amortizing | | $ | 415 | | | $ | 436 | | | $ | 395 | | | $ | 415 | | | Total FHLB advances | | $ | 415 | | | $ | 436 | | | $ | 395 | | | $ | 415 | |
The advances from the FHLB that require monthly principal payments were due for repayment as follows:
| | Principal Payments Due by Period at December 31, 2019 | | | Principal Payments Due by Period at December 31, 2020 | | | (in thousands) | | Total | | | Within 1 Year | | | 2 Years | | | 3 Years | | | 4 Years | | | 5 Years | | | After 5 Years | | | Total | | | Within 1 Year | | | 2 Years | | | 3 Years | | | 4 Years | | | 5 Years | | | After 5 Years | | | Outstanding advances, weighted average interest rate – 0.06% | | $ | 415 | | | $ | 22 | | | $ | 20 | | | $ | 21 | | | $ | 20 | | | $ | 21 | | | $ | 311 | | | $ | 395 | | | $ | 22 | | | $ | 20 | | | $ | 21 | | | $ | 20 | | | $ | 21 | | | $ | 291 | |
At December 31, 2019,2020, CTBI had monthly amortizing FHLB advances totaling $0.4 million at a weighted average interest rate of 0.06%.
Advances totaling $0.4 million at December 31, 20192020 were collateralized by FHLB stock of $10.5$10.0 million and a blanket lien on qualifying 1-4 family first mortgage loans. As of December 31, 2019,2020, CTBI had a $606.7$531.4 million FHLB borrowing capacity with $0.4 million in advances and $214.4$53.8 million in letters of credit used for public fund pledging leaving $391.9$477.2 million available for additional advances. The advances had fixed interest rates of 0.00%% and 2.00% with a weighted average rate of 0.06%. The advances are subject to restrictions or penalties in the event of prepayment.
14.13. Income Taxes
The components of the provision for income taxes, exclusive of tax effect of unrealized AFS securities gains and losses, are as follows:
| (in thousands) | | 2019 | | | 2018 | | | 2017 | | | Current income tax expense | | $ | 8,864 | | | $ | 11,560 | | | $ | 20,108 | | | Deferred income tax expense (benefit) | | | 2,030 | | | | (246 | ) | | | (259 | ) | | Effect of Tax Cuts & Jobs Act benefit | | | 0 | | | | 0 | | | | (2,831 | ) | | Effect of Kentucky tax legislation benefit | | | (3,442 | ) | | | 0 | | | | 0 | | | Total income tax expense | | $ | 7,452 | | | $ | 11,314 | | | $ | 17,018 | |
The Tax Cuts and Jobs Act (the “Act”) was enacted in December 2017. The Act reduced the U.S. federal corporate tax rate from 35 percent to 21 percent. As of December 31, 2018, we completed our accounting for the tax effects of enactment of the Act. The effect of the Tax Cuts and Jobs Act (benefit) listed above for the year 2017, reflects the revaluation of our net deferred tax liability based on a U.S. federal tax rate of 21 percent.
| (in thousands) | | 2020 | | | 2019 | | | 2018 | | | Current federal income tax expense | | $ | 12,884 | | | $ | 8,351 | | | $ | 11,042 | | | Current state income tax expense | | | 786 | | | | 513 | | | | 518 | | | Deferred income tax expense (benefit) | | | (2,900 | ) | | | 2,030 | | | | (246 | ) | | Effect of Kentucky tax legislation benefit | | | (9 | ) | | | (3,442 | ) | | | 0 | | | Total income tax expense | | $ | 10,761 | | | $ | 7,452 | | | $ | 11,314 | |
A reconciliation of income tax expense at the statutory rate to our actual income tax expense is shown below:
| (in thousands) | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | Computed at the statutory rate | | $ | 15,118 | | | | 21.00 | % | | $ | 14,814 | | | | 21.00 | % | | $ | 23,979 | | | | 35.00 | % | | $ | 14,755 | | | | 21.00 | % | | $ | 15,118 | | | | 21.00 | % | | $ | 14,814 | | | | 21.00 | % | | Adjustments resulting from: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Tax-exempt interest | | | (563 | ) | | | (0.78 | ) | | | (673 | ) | | | (0.95 | ) | | | (1,259 | ) | | | (1.84 | ) | | | (547 | ) | | | (0.78 | ) | | | (563 | ) | | | (0.78 | ) | | | (673 | ) | | | (0.95 | ) | | Housing and new markets credits | | | (4,471 | ) | | | (6.21 | ) | | | (2,635 | ) | | | (3.73 | ) | | | (2,579 | ) | | | (3.76 | ) | | | (4,194 | ) | | | (5.97 | ) | | | (4,471 | ) | | | (6.21 | ) | | | (2,635 | ) | | | (3.73 | ) | | Dividends received deduction | | | 0 | | | | - | | | | (9 | ) | | | (0.01 | ) | | | (129 | ) | | | (0.19 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (9 | ) | | | (0.01 | ) | | Bank owned life insurance | | | (284 | ) | | | (0.39 | ) | | | (599 | ) | | | (0.85 | ) | | | (492 | ) | | | (0.72 | ) | | | (277 | ) | | | (0.39 | ) | | | (284 | ) | | | (0.39 | ) | | | (599 | ) | | | (0.85 | ) | | ESOP dividend deduction | | | (203 | ) | | | (0.28 | ) | | | (188 | ) | | | (0.27 | ) | | | (319 | ) | | | (0.47 | ) | | | (221 | ) | | | (0.32 | ) | | | (203 | ) | | | (0.28 | ) | | | (188 | ) | | | (0.27 | ) | | Stock option exercises and restricted stock vesting | | | (10 | ) | | | (0.01 | ) | | | (39 | ) | | | (0.06 | ) | | | (170 | ) | | | (0.25 | ) | | | (10 | ) | | | (0.01 | ) | | | (10 | ) | | | (0.01 | ) | | | (39 | ) | | | (0.06 | ) | | Effect of Tax Cuts & Jobs Act | | | 0 | | | | - | | | | 0 | | | | - | | | | (2,831 | ) | | | (4.13 | ) | | | Effect of KY tax legislation | | | (2,719 | ) | | | (3.78 | ) | | | 0 | | | | - | | | | 0 | | | | - | | | | (7 | ) | | | (0.01 | ) | | | (2,719 | ) | | | (3.78 | ) | | | 0 | | | | 0 | | | State income taxes | | | 405 | | | | 0.56 | | | | 409 | | | | 0.58 | | | | 429 | | | | 0.63 | | | | 621 | | | | 0.88 | | | | 405 | | | | 0.56 | | | | 409 | | | | 0.58 | | | Split dollar life insurance | | | | 529 | | | | 0.75 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Other | | | 179 | | | | 0.24 | | | | 234 | | | | 0.33 | | | | 389 | | | | 0.57 | | | | 112 | | | | 0.16 | | | | 179 | | | | 0.24 | | | | 234 | | | | 0.33 | | | Total | | $ | 7,452 | | | | 10.35 | % | | $ | 11,314 | | | | 16.04 | % | | $ | 17,018 | | | | 24.84 | % | | $ | 10,761 | | | | 15.31 | % | | $ | 7,452 | | | | 10.35 | % | | $ | 11,314 | | | | 16.04 | % |
The components of the net deferred tax liability as of December 31 are as follows:
| (in thousands) | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | Deferred tax assets: | | | | | | | | | | | | | | Allowance for loan and lease losses | | $ | 8,757 | | | $ | 7,541 | | | | Interest on nonperforming loans | | | 485 | | | | 531 | | | | Allowance for credit/loan and lease losses* | | | $ | 11,982 | | | $ | 8,757 | | | Interest on nonaccrual loans | | | | 471 | | | | 485 | | | Accrued expenses | | | 1,100 | | | | 1,093 | | | | 1,444 | | | | 1,100 | | | Allowance for other real estate owned | | | 1,437 | | | | 1,435 | | | | 593 | | | | 1,437 | | | Unrealized losses on AFS securities | | | 0 | | | | 1,757 | | | | State net operating loss carryforward | | | 3,786 | | | | 3,957 | | | | 3,975 | | | | 3,786 | | | Lease liabilities | | | 3,859 | | | | 0 | | | | 3,468 | | | | 3,859 | | | Other | | | 294 | | | | 164 | | | | 470 | | | | 294 | | | Total deferred tax assets | | | 19,718 | | | | 16,478 | | | | 22,403 | | | | 19,718 | | | | | | | | | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | | | | | | | | | Depreciation and amortization | | | (15,048 | ) | | | (12,210 | ) | | | (15,006 | ) | | | (15,048 | ) | | FHLB stock dividends | | | (1,441 | ) | | | (1,704 | ) | | | (1,245 | ) | | | (1,441 | ) | | Loan fee income | | | (656 | ) | | | (419 | ) | | | (238 | ) | | | (656 | ) | | Mortgage servicing rights | | | (814 | ) | | | (757 | ) | | | (1,015 | ) | | | (814 | ) | | Right of use assets | | | (3,698 | ) | | | 0 | | | | Unrealized gains on AFS securities | | | (1,534 | ) | | | 0 | | | | (4,807 | ) | | | (1,534 | ) | | Limited partnership investments | | | (326 | ) | | | (257 | ) | | | (414 | ) | | | (326 | ) | | Right of use assets | | | | (3,297 | ) | | | (3,698 | ) | | Other | | | (1,101 | ) | | | (537 | ) | | | (1,068 | ) | | | (1,101 | ) | | Total deferred tax liabilities | | | (24,618 | ) | | | (15,884 | ) | | | (27,090 | ) | | | (24,618 | ) | | | | | | | | | | | | | | | | | | | | Beginning balance for valuation allowance for deferred tax asset | | | 3,957 | | | | 3,930 | | | | 210 | | | | 3,957 | | | Change in valuation allowance | | | (3,747 | ) | | | 27 | | | | (210 | ) | | | (3,747 | ) | | Ending balance for valuation allowance for deferred tax asset | | | 210 | | | $ | 3,957 | | | | 0 | | | | 210 | | | | | | | | | | | | | | | | | | | | | Net deferred tax liability | | $ | (5,110 | ) | | $ | (3,363 | ) | | $ | (4,687 | ) | | $ | (5,110 | ) |
*Effective January 1, 2020, the allowance for loan and lease losses became the allowance for credit losses with the implementation of ASU 2016-13, commonly referred to as CECL.
In 2020 and 2019, CTBI recognized a gross tax benefit of $9 thousand and $3.4 million in 2019respectively, as a result of the recently enacted tax legislation enacted by the Commonwealth of Kentucky. As a result of HB 458 on combined reporting, CTBI recorded a deferred tax asset for the Kentucky net operating loss carryforward. The losses are expected to be utilized when CTBI begins filing a combined Kentucky income tax return with CTB and CTIC. A valuation allowance is maintained for the loss that will expire in 2020. The loss carryforward is $96.0$100.6 million and expires over varying periods through 2039.
The Kentucky deferred tax asset amounts and related valuation allowance for holding company net operating losses were previously reported at net due to a full valuation allowance and the immaterial nature of amounts. The 2018 amounts reported herein have been revised to report the items gross.2040.
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 2016,2017, and state and local income tax examinations by tax authorities for years before 2015.2016. 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.
14. Employee Benefits
CTBI maintains 2 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) who are credited with one year of service (12 consecutive month period with at least 1,000 hours). 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 8% of gross pay. CTBI may, at its discretion, contribute an additional percentage of covered employees’ compensation. CTBI’s matching contributions were $1.2 million, $1.1 million, and $1.1 million for the three years ended December 31, 2020, 2019 and 2018, and $1.0 million for the year ended December 31, 2017.2018; respectively. The 401(k) Plan owned 479,489, 424,591, 416,360, and 406,021416,360 shares of CTBI’s common stock at December 31, 2020, 2019, 2018, and 2017,2018, respectively. Substantially all shares owned by the 401(k) Plan 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 has the same entrance requirements as the 401(k) Plan above. CTBI currently contributes 4% of covered employees’ compensation to the ESOP. The ESOP uses the contributions to acquire shares of CTBI’s common stock. CTBI’s contributions to the ESOP were $1.8 million, $1.7 million for the year ended December 31, 2019 and $1.6 million for the three years ended December 31, 20182020, 2019 and 2017.2018; respectively. The ESOP owned 778,269, 738,212, 726,327, and 737,079726,327 shares of CTBI’s common stock at December 31, 2020, 2019, 2018, and 2017,2018, 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.
Stock-Based Compensation:
As of December 31, 2019,2020, CTBI maintained 1 active and 1 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 2015 Plan has 550,000 shares authorized, 481,396459,852 of which were available at December 31, 2019.2020. 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. 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, 2019:2020:
Plan Category (shares in thousands) | | Number of Shares to Be Issued Upon Exercise | | | Weighted Average Price | | | Shares Available for Future Issuance | | | Number of Shares to Be Issued Upon Exercise | | | Weighted Average Price | | | Shares Available for Future Issuance | | | Equity compensation plans approved by shareholders: | | | | | | | | | | | | | | | | | | | | Stock options | | | 20 | | | $ | 32.04 | | | | 481(a | ) | | | 20 | | | $ | 32.27 | | | | 460(a | ) | | Restricted stock | | (c) | | | (b) | | | (a) | | | (c) 0 | | | (b) 0 | | | (a) 0 | | | Performance units | | (d) | | | (b) | | | (a) | | | (d) 0 | | | (b) 0 | | | (a) 0 | | | Stock appreciation rights (“SARs”) | | (e) | | | (b) | | | (a) | | | (e) 0 | | | (b) 0 | | | (a) 0 | | | Total | | | | | | | | | | | 481 | | | | | | | | | | | | 460 | |
| (a) | Under the 2015 Plan, 550,000 shares are authorized for issuance; 72,90994,453 have been issued as of December 31, 20192020 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. |
| (c) | 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. |
| (d) | NaN performance units payable in stock had been issued as of December 31, 2019.2020. The maximum payment that can be made pursuant to performance units granted to any one participant in any calendar year is $1,000,000. |
| (e) | NaN SARS have been issued. The maximum number of shares with respect to which SARs may be granted to a participant during any calendar year is 100,000 shares. |
The following table details the shares available for future issuance under the 2015 Plan at December 31, 2019.2020.
| Plan Category | | Shares Available for Future Issuance | | Shares available at January 1, 20192020 | | | 508,729481,396 | | | Stock option grants | | | 0 | | | Restricted stock grants | | | (27,92121,544 | ) | | Forfeitures | | | 5880 | | Shares available for future issuance at December 31, 20192020 | | | 481,396459,852 | |
There were 0 stock options granted in 2017, 20182020, 2019, or 2019. 2018.
The 2015 Plan:
CTBI’s stock option activity for the 2015 Plan for the years ended December 31, 2020, 2019, 2018, and 20172018 is summarized as follows:
| December 31 | | 2019 | | | _2018* | | | 2017 | | | 2020 | | | _2019 | | | _2018* | | | | | Options | | | Weighted Average Exercise Price | | | Options | | | Weighted Average Exercise Price | | | Options | | | Weighted Average Exercise Price | | | Options | | | Weighted Average Exercise Price | | | Options | | | Weighted Average Exercise Price | | | Options | | | Weighted Average Exercise Price | | | Outstanding at beginning of year | | | 0 | | | $ | 0 | | | | 10,000 | | | $ | 33.55 | | | | 10,000 | | | $ | 33.55 | | | | 0 | | | $ | 0 | | | | 0 | | | $ | 0 | | | | 10,000 | | | $ | 33.55 | | | Granted | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Exercised | | | 0 | | | | 0 | | | | (10,000 | ) | | | 33.55 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (10,000 | ) | | | 33.55 | | | Forfeited/expired | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Outstanding at end of year | | | 0 | | | $ | 0 | | | | 0 | | | $ | 0 | | | | 10,000 | | | $ | 33.55 | | | | 0 | | | $ | 0 | | | | 0 | | | $ | 0 | | | | 0 | | | $ | 0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exercisable at end of year | | | 0 | | | $ | 0 | | | | 0 | | | $ | 0 | | | | 0 | | | $ | 0 | | | | 0 | | | $ | 0 | | | | 0 | | | $ | 0 | | | | 0 | | | $ | 0 | |
*Pursuant to the 2015 Plan provisions, the death of the option holder accelerated the vesting of 10,000 shares in 2018.
There were 0 options granted from the 2015 Plan for the years 2020, 2019, 2018, or 2017.2018.
The following table shows the intrinsic values of options exercised, exercisable, and outstanding for the 2015 Plan for the years ended December 31, 2020, 2019, 2018 and 2017:2018:
| (in thousands) | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | Options exercised | | $ | 0 | | | $ | 140 | | | | 0 | | | $ | 0 | | | $ | 0 | | | $ | 140 | | | Options exercisable | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Outstanding options | | | 0 | | | | 0 | | | | 136 | | | | 0 | | | | 0 | | | | 0 | |
The following table shows restricted stock activity for the 2015 Plan for the years ended December 31, 2020, 2019, 2018 and 2017:2018:
| December 31 | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | | | Grants | | | Weighted Average Fair Value at Grant | | | Grants | | | Weighted Average Fair Value at Grant | | | Grants | | | Weighted Average Fair Value at Grant | | | Grants | | | Weighted Average Fair Value at Grant | | | Grants | | | Weighted Average Fair Value at Grant | | | Grants | | | Weighted Average Fair Value at Grant | | | Outstanding at beginning of year | | | 34,255 | | | $ | 44.46 | | | | 33,085 | | | $ | 41.84 | | | | 17,496 | | | $ | 33.55 | | | | 50,992 | | | $ | 43.08 | | | | 34,255 | | | $ | 44.46 | | | | 33,085 | | | $ | 41.84 | | | Granted | | | 27,921 | | | | 41.12 | | | | 11,320 | | | | 49.30 | | | | 23,668 | | | | 46.45 | | | | 21,544 | | | | 44.64 | | | | 27,921 | | | | 41.12 | | | | 11,320 | | | | 49.30 | | | Vested | | | (10,596 | ) | | | 42.39 | | | | (8,761 | ) | | | 40.46 | | | | (5,751 | ) | | | 35.79 | | | | (16,985 | ) | | | 41.92 | | | | (10,596 | ) | | | 42.39 | | | | (8,761 | ) | | | 40.46 | | | Forfeited | | | (588 | ) | | | 43.04 | | | | (1,389 | ) | | | 46.77 | | | | (2,328 | ) | | | 41.31 | | | | 0 | | | | 0 | | | | (588 | ) | | | 43.04 | | | | (1,389 | ) | | | 46.77 | | | Outstanding at end of year | | | 50,992 | | | $ | 43.08 | | | | 34,255 | | | $ | 44.46 | | | | 33,085 | | | $ | 41.84 | | | | 55,551 | | | $ | 44.04 | | | | 50,992 | | | $ | 43.08 | | | | 34,255 | | | $ | 44.46 | |
The 2006 Plan:
CTBI’s stock option activity for the 2006 Plan for the years ended December 31, 2020, 2019, 2018, and 20172018 is summarized as follows:
| December 31 | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | | | Options | | | Weighted Average Exercise Price | | | Options | | | Weighted Average Exercise Price | | | Options | | | Weighted Average Exercise Price | | | Options | | | Weighted Average Exercise Price | | | Options | | | Weighted Average Exercise Price | | | Options | | | Weighted Average Exercise Price | | | Outstanding at beginning of year | | | 32,571 | | | $ | 32.47 | | | | 35,376 | | | $ | 31.90 | | | | 61,041 | | | $ | 29.84 | | | | 20,495 | | | $ | 32.04 | | | | 32,571 | | | $ | 32.47 | | | | 35,376 | | | $ | 31.90 | | | Granted | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Exercised | | | (12,076 | ) | | | 33.19 | | | | (2,475 | ) | | | 25.52 | | | | (25,665 | ) | | | 27.01 | | | | (495 | ) | | | 22.81 | | | | (12,076 | ) | | | 33.19 | | | | (2,475 | ) | | | 25.52 | | | Forfeited/expired | | | 0 | | | | 0 | | | | (330 | ) | | | 23.79 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (330 | ) | | | 23.79 | | | Outstanding at end of year | | | 20,495 | | | $ | 32.04 | | | | 32,571 | | | $ | 32.47 | | | | 35,376 | | | $ | 31.90 | | | | 20,000 | | | $ | 32.27 | | | | 20,495 | | | $ | 32.04 | | | | 32,571 | | | $ | 32.47 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exercisable at end of year | | | 495 | | | $ | 22.81 | | | | 2,571 | | | $ | 25.11 | | | | 5,376 | | | $ | 25.22 | | | | 20,000 | | | $ | 32.27 | | | | 495 | | | $ | 22.81 | | | | 2,571 | | | $ | 25.11 | |
A summary of the status of CTBI’s 2006 Plan for nonvested options as of December 31, 2019,2020, and changes during the year ended December 31, 2019,2020, is presented as follows:
| Nonvested Options | | Options | | | Weighted Average Grant Date Fair Value | | | Options | | | Weighted Average Grant Date Fair Value | | | Nonvested at January 1, 2019 | | | 30,000 | | | $ | 6.98 | | | | Nonvested at January 1, 2020 | | | | 20,000 | | | $ | 6.59 | | | Granted | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Vested | | | 10,000 | | | | 7.76 | | | | 20,000 | | | | 6.59 | | | Forfeited | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Nonvested at December 31, 2019 | | | 20,000 | | | $ | 6.59 | | | | Nonvested at December 31, 2020 | | | | 0 | | | $ | 0 | |
The weighted average remaining contractual term in years of the options outstanding at December 31, 20192020 was 5.04.1 years.
There were 0 options granted from the 2006 Plan for the years 2020, 2019, , 2018 and 2017.
The following table shows the intrinsic values of options exercised, exercisable, and outstanding for the 2006 Plan for the years ended December 31, 2020, 2019, 2018, and 2017:2018:
| (in thousands) | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | Options exercised | | $ | 135 | | | $ | 56 | | | $ | 537 | | | $ | 11 | | | $ | 135 | | | $ | 56 | | | Options exercisable | | | 12 | | | | 37 | | | | 118 | | | | 96 | | | | 12 | | | | 37 | | | Outstanding options | | | 299 | | | | 233 | | | | 538 | | | | 96 | | | | 299 | | | | 233 | |
The following table shows restricted stock activity for the years ended December 31, 2020, 2019, 2018, and 2017:2018:
| December 31 | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | | | Grants | | | Weighted Average Fair Value at Grant | | | Grants | | | Weighted Average Fair Value at Grant | | | Grants | | | Weighted Average Fair Value at Grant | | | Grants | | | Weighted Average Fair Value at Grant | | | Grants | | | Weighted Average Fair Value at Grant | | | Grants | | | Weighted Average Fair Value at Grant | | | Outstanding at beginning of year | | | 2,064 | | | $ | 32.27 | | | | 5,426 | | | $ | 33.24 | | | | 11,989 | | | $ | 32.85 | | | | 0 | | | $ | 0 | | | | 2,064 | | | $ | 32.27 | | | | 5,426 | | | $ | 33.24 | | | Granted | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Vested | | | (2,064 | ) | | $ | 32.27 | | | | (3,236 | ) | | | 33.90 | | | | (6,214 | ) | | | 32.48 | | | | 0 | | | | 0 | | | | (2,064 | ) | | | 32.27 | | | | (3,236 | ) | | | 33.90 | | | Forfeited | | | 0 | | | | 0 | | | | (126 | ) | | | 32.27 | | | | (349 | ) | | | 33.31 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (126 | ) | | | 32.27 | | | Outstanding at end of year | | | 0 | | | $ | 0.00 | | | | 2,064 | | | $ | 32.27 | | | | 5,426 | | | $ | 33.24 | | | | 0 | | | $ | 0.00 | | | | 0 | | | $ | 0 | | | | 2,064 | | | $ | 32.27 | |
The following table shows the unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans at December 31, 2020, 2019, 2018, and 20172018 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, 2020, 2019, 2018, and 2017.2018.
| (in thousands) | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | Unrecognized compensation cost of unvested share-based compensation arrangements granted under the plan at year-end | | $ | 1,410 | | | $ | 1,072 | | | $ | 1,242 | | | $ | 1,512 | | | $ | 1,410 | | | $ | 1,072 | | | Grant date fair value of shares vested for the year | | | 605 | | | | 645 | | | | 564 | | | | 887 | | | | 605 | | | | 645 | | | Cash received from option exercises under all share-based payment arrangements for the year | | | 401 | | | | 399 | | | | 693 | | | | 11 | | | | 401 | | | | 399 | | | Tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements for the year | | | 27 | | | | 49 | | | | 138 | | | | 1 | | | | 27 | | | | 49 | |
The unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans at December 31, 20192020 is expected to be recognized over a weighted-average period of 1.92.5 years.
16.15. Leases
On January 1, 2019, CTBI adopted ASU No. 2016-02, Leases, (Topic 842) and all subsequent ASUs that modified Topic 842. Based on leases outstanding at December 31, 2018, the impact of adoption was recording a lease liability of approximately $16.1 million, a right-of-use asset of approximately $15.5 million, and a cumulative-effect adjustment to retained earnings of approximately $0.5 million, net of a $0.1 million adjustment to our deferred tax liability. CTBI has 1 finance lease for property but no material subleasessublease or leasing arrangements for which it is the lessor ofor property or equipment.
CTBI has operating leases for banking and ATM locations. These leases have remaining lease terms of 1 year to 45 years, some of which include options to extend the leases for up to 5 years. We evaluated the original lease terms for each operating lease, some of which include options to extend the leases for up to 5 years, using hindsight. These options, some of which include variable costs related to rent escalations based on recent financial indices, such as the Consumer Price Index, where CTBI estimates future rent increases, are included in the calculation of the lease liability and right-of-use asset when management determines it is reasonably certain the option will be exercised. CTBI determines this on each lease by considering all relevant contract-based, asset-based, market-based, and entity-based economic factors. Right-of-use assets and lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate on a collateralized basis, over a similar term at the lease commencement date. Right-of-use assets are further adjusted for prepaid rent, lease incentives, and initial direct costs, if any.
The components of lease expense for the year ended December 31, 20192020 were as follows:
| (in thousands) | | Year Ended December 31, 2019 | | | Year Ended December 31, 2020 | | | Year Ended December 31, 2019 | | | Finance lease cost: | | | | | | | | | | | Amortization of right-of-use assets – finance leases | | $ | 52 | | | $ | 50 | | | $ | 52 | | | Interest on lease liabilities – finance leases | | | 54 | | | | 53 | | | | 54 | | | Total finance lease cost | | | 106 | | | | 103 | | | | 106 | | | | | | | | | | | | | | | | | Short-term lease cost | | | 306 | | | | 294 | | | | 306 | | | Operating lease cost | | | 1,773 | | | | 1,769 | | | | 1,773 | | | | | | | | | | | | | | | | | Sublease income | | | 257 | | | | 253 | | | | 257 | | | | | | | | | | | | | | | | | Total lease cost | | $ | 1,928 | | | $ | 1,913 | | | $ | 1,928 | |
Supplemental cash flow information related to CTBI’s operating and finance leases for the year ended December 31, 20192020 was as follows:
| (in thousands) | | Year Ended December 31, 2019 | | | Year Ended December 31, 2020 | | | Year Ended December 31, 2019 | | | Finance lease – operating cash flows | | $ | 54 | | | $ | 53 | | | $ | 54 | | | Finance lease – financing cash flows | | | 14 | | | $ | 15 | | | $ | 14 | | | Operating lease – operating cash flows (fixed payments) | | | 1,665 | | | $ | 1,682 | | | $ | 1,665 | | | Operating lease – operating cash flows (liability reduction) | | | $ | 1,198 | | | $ | 0 | | | New right-of-use assets – operating leases | | | 9 | | | $ | 0 | | | $ | 9 | | | New right-of-use assets – financing leases | | | 0 | | | | Weighted average lease term – financing leases | | 26.02 years | | | 25.02 years | | | 26.02 years | | | Weighted average lease term – operating leases | | 13.84 years | | | 13.46 years | | | 13.84 years | | | Weighted average discount rate – financing leases | | | 3.70 | % | | | 3.70 | % | | | 3.70 | % | | Weighted average discount rate – operating leases | | | 3.45 | % | | | 3.43 | % | | | 3.45 | % |
Maturities of lease liabilities as of December 31, 20192020 are as follows:
| (in thousands) | | Operating Leases | | | Finance Leases | | | 2019 | | $ | 1,677 | | | $ | 68 | | | 2020 | | | 1,710 | | | | 75 | | | 2021 | | | 1,703 | | | | 75 | | | 2022 | | | 1,626 | | | | 75 | | | 2023 | | | 1,313 | | | | 75 | | | Thereafter | | | 9,654 | | | | 1,985 | | | Total lease payments | | | 17,683 | | | | 2,353 | | | Less imputed interest | | | (3,954 | ) | | | (897 | ) | | Total | | $ | 13,729 | | | $ | 1,456 | |
At December 31, 2018 , minimum non-cancellable rental payments were as follows:
| (in thousands) | | Operating Lease Payments | | | Operating Leases | | | Finance Leases | | | 2019 | | $ | 1,999 | | | | 2020 | | | 1,710 | | | | 2021 | | | 1,737 | | | $ | 1,717 | | | $ | 75 | | | 2022 | | | 1,760 | | | | 1,703 | | | | 75 | | | 2023 | | | 1,696 | | | | 1,626 | | | | 75 | | | 2024 | | | | 1,313 | | | | 75 | | | 2025 | | | | 1,121 | | | | 75 | | | Thereafter | | | 13,031 | | | | 8,528 | | | | 1,913 | | | Total lease payments | | | | 16,008 | | | | 2,288 | | | Less imputed interest | | | | (3,477 | ) | | | (847 | ) | | Total | | $ | 21,933 | | | $ | 12,531 | | | $ | 1,441 | |
17.16. Fair Market Value of Financial Assets and Liabilities
Fair Value Measurements
ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. In this standard, the FASB clarifies the principle that fair value should be based on the exit price when pricing the asset or liability. In support of this principle, ASC 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:
Level 1 Inputs – Quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in determining an exit price for the assets or liabilities.
Recurring Measurements
The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis as of December 31, 20192020 and December 31, 20182019 and indicate the level within the fair value hierarchy of the valuation techniques.
| (in thousands) | | | | | Fair Value Measurements at December 31, 2019 Using | | | | | | Fair Value Measurements at December 31, 2020 Using | | | | | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Assets measured – recurring basis | | | | | | | | | | | | | | | | | | | | | | | | | | Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Treasury and government agencies | | $ | 171,150 | | | $ | 54,263 | | | $ | 116,887 | | | $ | 0 | | | $ | 148,793 | | | $ | 74,991 | | | $ | 73,802 | | | $ | 0 | | | State and political subdivisions | | | 102,307 | | | | 0 | | | | 102,307 | | | | 0 | | | | 140,416 | | | | 0 | | | | 140,416 | | | | 0 | | U.S. government sponsored agency mortgage-backed securities | | | 295,245 | | | | 0 | | | | 295,245 | | | | 0 | | | | 651,807 | | | | 0 | | | | 651,807 | | | | 0 | | | Other debt securities | | | 31,142 | | | | 0 | | | | 31,142 | | | | 0 | | | | 56,245 | | | | 0 | | | | 56,245 | | | | 0 | | | Equity securities at fair value | | | 1,953 | | | | 0 | | | | 0 | | | | 1,953 | | | | 2,471 | | | | 0 | | | | 0 | | | | 2,471 | | | Mortgage servicing rights | | | 3,263 | | | | 0 | | | | 0 | | | | 3,263 | | | | 4,068 | | | | 0 | | | | 0 | | | | 4,068 | |
| (in thousands) | | | | | Fair Value Measurements at December 31, 2018 Using | | | | | | Fair Value Measurements at December 31, 2019 Using | | | | | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Assets measured – recurring basis | | | | | | | | | | | | | | | | | | | | | | | | | | Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Treasury and government agencies | | $ | 217,938 | | | $ | 91,028 | | | $ | 126,910 | | | $ | 0 | | | $ | 171,150 | | | $ | 54,263 | | | $ | 116,887 | | | $ | 0 | | | State and political subdivisions | | | 124,488 | | | | 0 | | | | 124,488 | | | | 0 | | | | 102,307 | | | | 0 | | | | 102,307 | | | | 0 | | U.S. government sponsored agency mortgage-backed securities | | | 250,819 | | | | 0 | | | | 250,819 | | | | 0 | | | | 295,245 | | | | 0 | | | | 295,245 | | | | 0 | | | Other debt securities | | | 501 | | | | 0 | | | | 501 | | | | 0 | | | | 31,142 | | | | 0 | | | | 31,142 | | | | 0 | | | Equity securities at fair value | | | 1,173 | | | | 0 | | | | 0 | | | | 1,173 | | | | 1,953 | | | | 0 | | | | 0 | | | | 1,953 | | | Mortgage servicing rights | | | 3,607 | | | | 0 | | | | 0 | | | | 3,607 | | | | 3,263 | | | | 0 | | | | 0 | | | | 3,263 | |
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 0 liabilities measured and recorded at fair value as of December 31, 20192020 and December 31, 2018.2019. There have been no significant changes in the valuation techniques during the year ended December 31, 2019.2020. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Available-for-Sale Securities
Securities classified as available-for-sale are reported at fair value on a recurring basis. U.S. Treasury and government agencies are classified as Level 1 of the valuation hierarchy where quoted market prices are available in the active market on which the individual securities are traded.
If quoted market prices are not available, CTBI obtains fair value measurements from an independent pricing service, such as Interactive Data, which utilizes pricing models to determine fair value measurement. CTBI reviews the pricing quarterly to verify the reasonableness of the pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other factors. U.S. Treasury and government agencies, state and political subdivisions, U.S. government sponsored agency mortgage-backed securities, and other debt securities are classified as Level 2 inputs.
In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements are estimated on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States.
Equity Securities at Fair Value
As of December 31, 20192020 and December 31, 2018,2019, the only securities owned by CTBI that were valued using Level 3 criteria are Visa Class B Stock (included in equity securities at fair value). In determining fairFair value for Visa Class B Stock CTBI utilizes the expertise of an independent third party. Accordingly, fair value is determined by the independent third party using an income approach by utilizing assumptions about factors such as quarterly common stock dividend payments, the conversion of the securities to the relevant Class A Stock shares subject to the prevailing conversion rate and conversion date. We have reviewed the assumptions, processes, and conclusions of the third party provider. We have determined these assumptions, processes, and conclusions to be reasonable and appropriate in determining the fair value of this asset. See the table below for inputs and valuation techniques used for Level 3 equity securities.
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active, open market with readily observable prices. CTBI reports mortgage servicing rights at fair value on a recurring basis with subsequent remeasurement of MSRs based on change in fair value.
In determining fair value, CTBI utilizes the expertise of an independent third party. Accordingly, fair value is determined by the independent third party by utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements of mortgage servicing rights are tested for impairment on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States. We have reviewed the assumptions, processes, and conclusions of the third party provider. We have determined these assumptions, processes, and conclusions to be reasonable and appropriate in determining the fair value of this asset. See the table below for inputs and valuation techniques used for Level 3 mortgage servicing rights.
Transfers between Levels
There were 0 transfers between Levels 1, 2, and 3 as of December 31, 2019.
Level 3 Reconciliation
Following is a reconciliation of the beginning and ending balances of recurring fair value measurements, recognized infor the accompanying balance sheetperiods indicated, using significant unobservable (Level 3) inputs:
| (in thousands) | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | | | Equity Securities at Fair Value | | | Mortgage Servicing Rights | | | Equity Securities at Fair Value | | | Mortgage Servicing Rights | | | Equity Securities at Fair Value | | | Mortgage Servicing Rights | | | Equity Securities at Fair Value | | | Mortgage Servicing Rights | | | Beginning balance | | $ | 1,173 | | | $ | 3,607 | | | $ | 0 | | | $ | 3,484 | | | $ | 1,953 | | | $ | 3,263 | | | $ | 1,173 | | | $ | 3,607 | | | Total unrealized gains (losses) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Included in net income | | | 780 | | | | (515 | ) | | | 1,173 | | | | 73 | | | | 518 | | | | (163 | ) | | | 780 | | | | (515 | ) | | Issues | | | 0 | | | | 631 | | | | 0 | | | | 466 | | | | 0 | | | | 1,869 | | | | 0 | | | | 631 | | | Settlements | | | 0 | | | | (460 | ) | | | 0 | | | | (416 | ) | | | 0 | | | | (901 | ) | | | 0 | | | | (460 | ) | | Ending balance | | $ | 1,953 | | | $ | 3,263 | | | $ | 1,173 | | | $ | 3,607 | | | $ | 2,471 | | | $ | 4,068 | | | $ | 1,953 | | | $ | 3,263 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | $ | 780 | | | $ | (515 | ) | | $ | 1,173 | | | $ | 73 | | | $ | 518 | | | $ | (163 | ) | | $ | 780 | | | $ | (515 | ) |
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) | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | Total gains (losses) | | $ | (195 | ) | | $ | 830 | | | | Total losses | | | $ | (546 | ) | | $ | (195 | ) |
Nonrecurring Measurements
The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a nonrecurring basis as of December 31, 20192020 and December 31, 20182019 and indicate the level within the fair value hierarchy of the valuation techniques.
| (in thousands) | | | | | Fair Value Measurements at December 31, 2019 Using | | | | | | Fair Value Measurements at December 31, 2020 Using | | | | | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Assets measured – nonrecurring basis | | | | | | | | | | | | | | | | | | | | | | | | | | Impaired loans (collateral dependent) | | $ | 3,217 | | | $ | 0 | | | $ | 0 | | | $ | 3,217 | | | | Collateral dependent loans | | | $ | 1,768 | | | $ | 0 | | | $ | 0 | | | $ | 1,768 | | | Other real estate owned | | | 12,593 | | | | 0 | | | | 0 | | | | 12,593 | | | | 2,395 | | | | 0 | | | | 0 | | | | 2,395 | |
| (in thousands) | | | | | Fair Value Measurements at December 31, 2018 Using | | | | | | Fair Value Measurements at December 31, 2019 Using | | | | | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Assets measured – nonrecurring basis | | | | | | | | | | | | | | | | | | | | | | | | | | Impaired loans (collateral dependent) | | $ | 747 | | | $ | 0 | | | $ | 0 | | | $ | 747 | | | $ | 3,217 | | | $ | 0 | | | $ | 0 | | | $ | 3,217 | | | Other real estate owned | | | 6,500 | | | | 0 | | | | 0 | | | | 6,500 | | | | 12,593 | | | | 0 | | | | 0 | | | | 12,593 | |
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.
ImpairedCollateral Dependent 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,collateral-dependent are loans for which based on current information and events, itthe repayment is probable thatexpected to be provided substantially through 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 priceoperation or current appraised valuesale of the collateral or (ii)when the full charge-off of the loan carrying value.borrower is experiencing financial difficulty in accordance with ASC 326-20-35-5. Fair value adjustments on impairedcollateral-dependent loans disclosed above were $0.7$0.5 million and $0.3$0.7 million for the years ended December 31, 20192020 and December 31, 2018,2019, 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 owned disclosed above were $3.2$0.7 million and $1.8$3.2 million for the years ended December 31, 20192020 and December 31, 2018,2019, 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.
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, 20192020 and December 31, 2018.2019.
| (in thousands) | Quantitative Information about Level 3 Fair Value Measurements | | Fair Value at December 31, 2020 | Valuation Technique(s) | Unobservable Input | Range (Weighted Average) | | Equity securities at fair value | $2,471 | Discount cash flows, computer pricing model | Discount rate | 8.0% - 12.0% (10.0%) | | | | Conversion date | Dec 2022 – Dec 2026 (Dec 2024) | | | | | | | Mortgage servicing rights | $4,068 | Discount cash flows, computer pricing model | Constant prepayment rate | 0.0% - 32.8% (15.7%) | | | | Probability of default | 0.0% - 100.0% (1.7%) | | | | Discount rate | 10.0% - 11.5% (10.1%) | | | | | | | Collateral-dependent loans | $1,768 | Market comparable properties | Marketability discount | 17.5% - 31.5% (24.5%) | | | | | | | Other real estate owned | $2,395 | Market comparable properties | Comparability adjustments | (9.1%) - 64.3% (12.8%) |
| (in thousands) | Quantitative Information about Level 3 Fair Value Measurements | | | Fair Value at December 31, 2019 | Valuation Technique(s) | Unobservable Input | Range (Weighted Average) | | Equity securities at fair value | $1,953 | Discount cash flows, computer pricing model | Discount rate | 8.0% - 12.0% (10.0%) | | | | | Conversion date | Dec 2022 –- Dec 2026 (Dec 2024) | | | | | | | | Mortgage servicing rights | $3,263 | Discount cash flows, computer pricing model | Constant prepayment rate | 0.0% - 24.3% (11.7%) | | | | | Probability of default | 0.0% - 100.0% (2.7%) | | | | | Discount rate | 10.0% - 11.5% (10.1%) | | | | | | | | Impaired loans (collateral-dependent) | $3,217 | Market comparable properties | Marketability discount | 7.0% - 99.0% (46.0%) | | | | | | | | Other real estate owned | $12,593 | Market comparable properties | Comparability adjustments | 6.0% - 29.8% (11.3%) |
(in thousands) | Quantitative Information about Level 3 Fair Value Measurements | | Fair Value at
December 31,
2018
| Valuation
Technique(s)
| Unobservable Input | Range
(Weighted
Average)
| Equity securities at fair value | $1,173 | Discount cash flows, computer pricing model | Discount rate | 8.0% - 12.0%
(10.0%)
| | | | Conversion date | Dec 2022 - Dec 2026 (Dec 2024)
| | | | | | Mortgage servicing rights | $3,607 | Discount cash flows, computer pricing model | Constant prepayment rate | 7.0% - 28.1%
(9.5%)
| | | | Probability of default | 0.0% - 100.0%
(2.6%)
| | | | Discount rate | 10.0% - 11.5%
(10.1%)
| | | | | | Impaired loans (collateral-dependent) | $747 | Market comparable properties | Marketability discount | 0.0% - 95.1%
(41.5%)
| | | | | | Other real estate owned | $6,500 | Market comparable properties | Comparability adjustments | 6.0% - 47.6%
(14.9%)
|
Sensitivity of Significant Unobservable Inputs
The following is a discussion of the sensitivityuncertainty of significant unobservable inputs,fair value measurements, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.
Equity Securities at Fair Value
Fair market value for equity securities is derived based on unobservable inputs, such as the discount rate, quarterly dividends payable to the Visa Class B common stock and the prevailing conversion rate at the conversion date. The most recent conversion rate of 1.6228 and the most recent dividend rate of 0.48680.5193 were used to derive the fair value estimate. Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for discount rate is accompanied by a directionally opposite change in the fair value estimate.
Mortgage Servicing Rights
Fair market value for mortgage servicing rights is derived based on unobservable inputs, such as prepayment speeds of the underlying loans generated using the Andrew Davidson Prepayment Model, FHLMC/FNMA guidelines, the weighted average life of the loan, the discount rate, the weighted average coupon, and the weighted average default rate. Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for prepayment speeds is accompanied by a directionally opposite change in the assumption for interest rates.
Fair Value of Financial Instruments
The following table presents estimated fair value of CTBI’s financial instruments as of December 31, 20192020 and indicates the level within the fair value hierarchy of the valuation techniques. In accordance with the prospective adoption of ASU 2016-01, the fair values as of December 31, 20192020 were measured using an exit price notion.
(in thousands) | | | | | Fair Value Measurements at December 31, 2019 Using | | | | | | Fair Value Measurements at December 31, 2020 Using | | | | | Carrying Amount | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Carrying Amount | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 264,683 | | | $ | 264,683 | | | $ | 0 | | | $ | 0 | | | $ | 338,235 | | | $ | 338,235 | | | $ | 0 | | | $ | 0 | | | Certificates of deposit in other banks | | | 245 | | | | 0 | | | | 245 | | | | 0 | | | | 245 | | | | 0 | | | | 245 | | | | 0 | | | Securities available-for-sale | | | 599,844 | | | | 54,263 | | | | 545,581 | | | | 0 | | | | Securities held-to-maturity | | | 517 | | | | 0 | | | | 517 | | | | 0 | | | | Debt securities available-for-sale | | | | 997,261 | | | | 74,991 | | | | 922,270 | | | | 0 | | | Equity securities at fair value | | | 1,953 | | | | 0 | | | | 0 | | | | 1,953 | | | | 2,471 | | | | 0 | | | | 0 | | | | 2,471 | | | Loans held for sale | | | 1,167 | | | | 1,191 | | | | 0 | | | | 0 | | | | 23,259 | | | | 23,884 | | | | 0 | | | | 0 | | | Loans, net | | | 3,213,568 | | | | 0 | | | | 0 | | | | 3,283,876 | | | | 3,506,189 | | | | 0 | | | | 0 | | | | 3,658,554 | | | Federal Home Loan Bank stock | | | 10,474 | | | | 0 | | | | 10,474 | | | | 0 | | | | 10,048 | | | | 0 | | | | 10,048 | | | | 0 | | | Federal Reserve Bank stock | | | 4,887 | | | | 0 | | | | 4,887 | | | | 0 | | | | 4,887 | | | | 0 | | | | 4,887 | | | | 0 | | | Accrued interest receivable | | | 14,836 | | | | 0 | | | | 14,836 | | | | 0 | | | | 15,818 | | | | 0 | | | | 15,818 | | | | 0 | | | Mortgage servicing rights | | | 3,263 | | | | 0 | | | | 0 | | | | 3,263 | | | | 4,068 | | | | 0 | | | | 0 | | | | 4,068 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits | | $ | 3,405,572 | | | $ | 865,760 | | | $ | 2,560,271 | | | $ | 0 | | | $ | 4,016,082 | | | $ | 1,140,925 | | | $ | 2,913,217 | | | $ | 0 | | | Repurchase agreements | | | 226,917 | | | | 0 | | | | 0 | | | | 226,921 | | | | 355,862 | | | | 0 | | | | 0 | | | | 355,918 | | | Federal funds purchased | | | 7,906 | | | | 0 | | | | 7,906 | | | | 0 | | | | 500 | | | | 0 | | | | 500 | | | | 0 | | | Advances from Federal Home Loan Bank | | | 415 | | | | 0 | | | | 446 | | | | 0 | | | | 395 | | | | 0 | | | | 436 | | | | 0 | | | Long-term debt | | | 57,841 | | | | 0 | | | | 0 | | | | 49,382 | | | | 57,841 | | | | 0 | | | | 0 | | | | 40,081 | | | Accrued interest payable | | | 2,839 | | | | 0 | | | | 2,839 | | | | 0 | | | | 1,243 | | | | 0 | | | | 1,243 | | | | 0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unrecognized financial instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Letters of credit | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | Commitments to extend credit | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Forward sale commitments | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
The following table presents estimated fair value of CTBI’s financial instruments as of December 31, 20182019 and indicates the level within the fair value hierarchy of the valuation techniques.
(in thousands) | | | | | Fair Value Measurements at December 31, 2018 Using | | | | | | Fair Value Measurements at December 31, 2019 Using | | | | | Carrying Amount | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Carrying Amount | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 141,450 | | | $ | 141,450 | | | $ | 0 | | | $ | 0 | | | $ | 264,683 | | | $ | 264,683 | | | $ | 0 | | | $ | 0 | | | Certificates of deposit in other banks | | | 3,920 | | | | 0 | | | | 3,914 | | | | 0 | | | | 245 | | | | 0 | | | | 245 | | | | 0 | | | Securities available-for-sale | | | 593,746 | | | | 91,028 | | | | 502,718 | | | | 0 | | | | Securities held-to-maturity | | | 649 | | | | 0 | | | | 649 | | | | 0 | | | | Debt securities available-for-sale | | | | 599,844 | | | | 54,263 | | | | 545,581 | | | | 0 | | | Debt securities held-to-maturity | | | | 517 | | | | 0 | | | | 517 | | | | 0 | | | Equity securities at fair value | | | 1,173 | | | | 0 | | | | 0 | | | | 1,173 | | | | 1,953 | | | | 0 | | | | 0 | | | | 1,953 | | | Loans held for sale | | | 2,461 | | | | 2,518 | | | | 0 | | | | 0 | | | | 1,167 | | | | 1,191 | | | | 0 | | | | 0 | | | Loans, net | | | 3,172,730 | | | | 0 | | | | 0 | | | | 3,175,908 | | | | 3,213,568 | | | | 0 | | | | 0 | | | | 3,283,876 | | | Federal Home Loan Bank stock | | | 14,713 | | | | 0 | | | | 14,713 | | | | 0 | | | | 10,474 | | | | 0 | | | | 10,474 | | | | 0 | | | Federal Reserve Bank stock | | | 4,887 | | | | 0 | | | | 4,887 | | | | 0 | | | | 4,887 | | | | 0 | | | | 4,887 | | | | 0 | | | Accrued interest receivable | | | 14,432 | | | | 0 | | | | 14,432 | | | | 0 | | | | 14,836 | | | | 0 | | | | 14,836 | | | | 0 | | | Mortgage servicing rights | | | 3,607 | | | | 0 | | | | 0 | | | | 3,607 | | | | 3,263 | | | | 0 | | | | 0 | | | | 3,263 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits | | $ | 3,305,950 | | | $ | 803,316 | | | $ | 2,513,084 | | | $ | 0 | | | $ | 3,405,572 | | | $ | 865,760 | | | $ | 2,560,271 | | | $ | 0 | | | Repurchase agreements | | | 232,712 | | | | 0 | | | | 0 | | | | 232,796 | | | | 226,917 | | | | 0 | | | | 0 | | | | 226,921 | | | Federal funds purchased | | | 1,180 | | | | 0 | | | | 1,180 | | | | 0 | | | | 7,906 | | | | 0 | | | | 7,906 | | | | 0 | | | Advances from Federal Home Loan Bank | | | 436 | | | | 0 | | | | 468 | | | | 0 | | | | 415 | | | | 0 | | | | 446 | | | | 0 | | | Long-term debt | | | 59,341 | | | | 0 | | | | 0 | | | | 44,166 | | | | 57,841 | | | | 0 | | | | 0 | | | | 49,382 | | | Accrued interest payable | | | 2,902 | | | | 0 | | | | 2,902 | | | | 0 | | | | 2,839 | | | | 0 | | | | 2,839 | | | | 0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unrecognized financial instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Letters of credit | | | | | | | | | | | | | | | | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | Commitments to extend credit | | $ | 0 | | | $ | 0 | | | | 0 | | | $ | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Forward sale commitments | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
18.17. 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) | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | Standby letters of credit | | $ | 30,679 | | | $ | 29,410 | | | $ | 32,126 | | | $ | 30,679 | | | Commitments to extend credit | | | 564,229 | | | | 510,513 | | | | 623,920 | | | | 564,229 | | | Total off-balance sheet financial instruments | | $ | 594,908 | | | $ | 539,923 | | | $ | 656,046 | | | $ | 594,908 | |
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, 2019,2020, we maintained a credit loss reserve recorded in other liabilities of approximately $8 thousand$0.1 million 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 leasecredit losses. Approximately 67%65% of the total standby letters of credit are secured, with $15.0$15.3 million of the total $30.7$32.1 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.
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, 2019,2020, a credit loss reserve recorded in other liabilities of $266 thousand$0.6 million 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, 20192020 of $42.2$25.2 million had interest rates ranging predominantly from 3.75%3.63% to 5.50%, respectively, and terms predominantly three yearsone year or less. These credit commitments were based on prevailing rates, terms, and conditions applicable to other loans being made at December 31, 2019.2020.
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 $3.8$19.0 million and $2.8$3.8 million at December 31, 20192020 and 2018,2019, respectively, and mortgage loans held for sale amounted to $1.2$23.3 million and $2.5$1.2 million for the years ended December 31, 20192020 and 2018,2019, respectively.
19.18. 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 leasecredit losses are not exceeded. At December 31, 20192020 and 2018,2019, our concentrations of hotel/motel industry credits were 43%44% and 41%43% of Tier 1 Capital plus the allowance for loan and leasecredit losses, respectively. Lessors of non-residential buildings credits were 38% and 39%, respectively. Lessors of residential buildings and dwellings were 41%37% and 41%, respectively. Lessors of non-residential buildings credits were 39% and 38%, respectively. These percentages are within our internally established limits regarding concentrations of credit.
20.19. 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, 20192020 are without merit or that the ultimate liability, if any, will not materially affect our consolidated financial position or results of operations.
21.20. 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 2020,2021, approximately $68.8$66.6 million plus any 20202021 net profits can be paid by CTB without prior regulatory approval.
The Federal Reserve Bank adopted quantitative measures which assign risk weightingsCTBI and CTB are subject to assets and off-balance sheet items and also define and set minimumvarious regulatory capital requirements (risk based capital ratios).administered by the federal banking agencies. Failure to meet certainminimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material adverse effect on our consolidatedCTBI’s financial statements. On July 2, 2013, the Federal Reserve approved final rulesUnder regulatory capital adequacy guidelines, CTBI and CTB must meet specific capital guidelines that substantially amendedinvolve quantitative measures of CTBI’s and CTB’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Additionally, CTB must meet specific capital guidelines to be considered well capitalized per the regulatory risk-basedframework for prompt corrective action. CTBI’s and CTB’s capital rules applicableamounts and classifications are also subject to CTBIqualitative judgments by regulators about components, risk weightings, and CTB. The FDIC subsequently approved these rules. The final rules implemented the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.other factors.
The rules included new risk-based capital and leverage ratios, which were phased in from 2015 to January 2019, and refined the definition of what constitutes “capital” for purposes of calculating those ratios. The minimum capital level requirements applicable to CTBI and CTB undermust maintain certain minimum capital ratios as set forth in the table below for capital adequacy purposes. On October 29, 2019, federal banking regulators adopted a final rule to simplify the regulatory capital requirements for eligible community banks and holding companies that opt-in to the community bank leverage ratio framework (the “CBLR framework”), as required by Section 201 of the Economic Growth, Relief and Consumer Protection Act of 2018. Under the final rules are: (i)rule, which became effective as of January 1, 2020, community banks and holding companies (which includes CTB and CTBI) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a common equityleverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, were eligible to opt-in to the CBLR framework. The community bank leverage ratio is the ratio of a banking organization’s Tier 1 capital ratioto its average total consolidated assets, both as reported on the banking organization’s applicable regulatory filings.
In April 2020, as directed by Section 4012 of 4.5%the CARES Act, the regulatory agencies introduced temporary changes to the CBLR. These changes, which subsequently were adopted as a final rule, temporarily reduced the CBLR requirement to 8% through the end of risk-weighted assets; (ii)calendar year 2020. Beginning in calendar year 2021, the CBLR requirement will increase to 8.5% for the calendar year before returning to 9% in calendar year 2022. The final rule also provides for a Tier 1two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement. Management elected to use the CBLR framework for CTBI and CTB. Before electing to use the CBLR framework, CTBI and CTB were required to maintain a capital ratio of 6% of risk-weighted assets; (iii) a totalconservation buffer above certain minimum risk-based capital ratio of 8% of risk-weighted assets;ratios for capital adequacy purposes in order to avoid certain restrictions on capital distributions and (iv) a Tier 1 leverage ratio of 4% of adjusted quarterly average assets for all institutions. Tier 1 capital consists principally of shareholders’ equityother payments including capital-qualifying subordinated debt but excluding unrealized gains and losses on securities available-for-sale, less goodwilldividends, share repurchases, and certain other intangibles. Total capital consists of Tier 1 capital plus certain debt instruments and the reserve for credit losses, subject to limitation. The final rules also established a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital.compensation. The capital conservation buffer began to be phased in on January 1, 2016 at 0.625% of risk-weighted assets increased by 0.625% annually until fully implemented in January 2019. An institution is subject to limitations on certain activities including payment of dividends, share repurchases,was 2.5%, and discretionary bonuses to executive officers if its capital level is below the total capital plus capital conservation buffer amount.
The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, includingCTBI and CTB if their capital levels begin to show signs of weakness. These revisions took effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complementboth exceeded the capital conservation buffer insured depository institutions are required to meet the following capital level requirements in order to qualifyrequirement at that time. Management believes, as “well capitalized:” (i) a common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8%; (iii) a total capital ratio of 10%; and (iv) a Tier 1 leverage ratio of 5%. We had Tier 1 leverage, common equity Tier 1 capital, Tier 1, and total capital ratios above the well-capitalized levels and we exceeded the capital conservation standards at December 31, 20192020, that CTBI and 2018. Based on our currentCTB meet all capital compositionadequacy requirements to which they are subject and levels, we anticipatethere were no conditions or events subsequent to December 31, 2020 that our capital ratios, on a Basel III basis, will continue to exceed the well-capitalized minimum capital requirements and capital conservation buffer standards.would change CTBI’s or CTB’s category.
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 addressed supervisory concerns, competitive equity considerations, and the accounting for trust preferred securities. The final rule also strengthened 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.
Consolidated Capital Ratios
| | Actual | | | For Capital Adequacy Purposes | | | (in thousands) | | Amount | | | Ratio | | | Amount | | | Ratio | | | As of December 31, 2019: | | | | | | | | | | | | | | Tier 1 capital (to average assets) | | $ | 601,142 | | | | 14.01 | % | | $ | 171,632 | | | | 4.00 | % | | Common equity Tier 1 capital (to risk weighted assets) | | | 545,142 | | | | 17.18 | | | | 142,790 | | | | 4.50 | | | Tier 1 capital (to risk weighted assets) | | | 601,142 | | | | 18.94 | | | | 190,436 | | | | 6.00 | | | Total capital (to risk weighted assets) | | | 636,512 | | | | 20.05 | | | | 253,970 | | | | 8.00 | | | | | | | | | | | | | | | | | | | | | As of December 31, 2018: | | | | | | | | | | | | | | | | | | Tier 1 capital (to average assets) | | $ | 562,771 | | | | 13.51 | % | | $ | 166,623 | | | | 4.00 | % | | Common equity Tier 1 capital (to risk weighted assets) | | | 505,271 | | | | 16.27 | | | | 139,749 | | | | 4.50 | | | Tier 1 capital (to risk weighted assets) | | | 562,771 | | | | 18.12 | | | | 186,348 | | | | 6.00 | | | Total capital (to risk weighted assets) | | | 598,934 | | | | 19.29 | | | | 248,391 | | | | 8.00 | |
| | Actual | | | For Capital Adequacy Purposes | | | (in thousands) | | Amount | | | Ratio | | | Amount | | | Ratio | | | As of December 31, 2020: | | | | | | | | | | | | | | CBLR | | $ | 636,672 | | | | 12.70 | % | | $ | 401,158 | | | | 8.00 | % |
| As of December 31, 2019: | | | | | | | | | | | | | | Tier 1 capital (to average assets) | | $ | 601,142 | | | | 14.01 | % | | $ | 171,632 | | | | 4.00 | % | | Common equity Tier 1 capital (to risk weighted assets) | | | 545,142 | | | | 17.18 | | | | 142,790 | | | | 4.50 | | | Tier 1 capital (to risk weighted assets) | | | 601,142 | | | | 18.94 | | | | 190,436 | | | | 6.00 | | | Total capital (to risk weighted assets) | | | 636,512 | | | | 20.05 | | | | 253,970 | | | | 8.00 | |
Community Trust Bank, Inc.’s Capital Ratios
| | Actual | | | For Capital Adequacy Purposes | | | To Be Well-Capitalized Under Prompt Corrective Action Provision | | | (in thousands) | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | As of December 31, 2019: | | | | | | | | | | | | | | | | | | | | Tier 1 capital (to average assets) | | $ | 570,256 | | | | 13.34 | % | | $ | 170,991 | | | | 4.00 | % | | $ | 213,739 | | | | 5.00 | % | | Common equity Tier 1 capital (to risk weighted assets) | | | 570,256 | | | | 18.01 | | | | 142,485 | | | | 4.50 | | | | 205,811 | | | | 6.50 | | | Tier 1 capital (to risk weighted assets) | | | 570,256 | | | | 18.01 | | | | 189,980 | | | | 6.00 | | | | 253,306 | | | | 8.00 | | | Total capital (to risk weighted assets) | | | 605,625 | | | | 19.12 | | | | 253,400 | | | | 8.00 | | | | 316,749 | | | | 10.00 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2018: | | | | | | | | | | | | | | | | | | | | | | | | | | Tier 1 capital (to average assets) | | $ | 536,992 | | | | 12.94 | % | | $ | 165,994 | | | | 4.00 | % | | $ | 207,493 | | | | 5.00 | % | | Common equity Tier 1 capital (to risk weighted assets) | | | 536,992 | | | | 17.33 | | | | 139,438 | | | | 4.50 | | | | 201,411 | | | | 6.50 | | | Tier 1 capital (to risk weighted assets) | | | 536,992 | | | | 17.33 | | | | 185,918 | | | | 6.00 | | | | 247,890 | | | | 8.00 | | | Total capital (to risk weighted assets) | | | 573,155 | | | | 18.50 | | | | 247,851 | | | | 8.00 | | | | 309,814 | | | | 10.00 | |
| | Actual | | | For Capital Adequacy Purposes | | | To Be Well-Capitalized Under Prompt Corrective Action Provision | | | (in thousands) | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | As of December 31, 2020: | | | | | | | | | | | | | | | | | | | | CBLR | | $ | 605,606 | | | | 12.13 | % | | $ | 399,303 | | | | 8.00 | % | | | N/A | | | | N/A | |
| As of December 31, 2019: | | | | | | | | | | | | | | | | | | | | Tier 1 capital (to average assets) | | $ | 570,256 | | | | 13.34 | % | | $ | 170,991 | | | | 4.00 | % | | $ | 213,739 | | | | 5.00 | % | | Common equity Tier 1 capital (to risk weighted assets) | | | 570,256 | | | | 18.01 | | | | 142,485 | | | | 4.50 | | | | 205,811 | | | | 6.50 | | | Tier 1 capital (to risk weighted assets) | | | 570,256 | | | | 18.01 | | | | 189,980 | | | | 6.00 | | | | 253,306 | | | | 8.00 | | | Total capital (to risk weighted assets) | | | 605,625 | | | | 19.12 | | | | 253,400 | | | | 8.00 | | | | 316,749 | | | | 10.00 | |
22.21. Parent Company Financial Statements
Condensed Balance Sheets
(in thousands) December 31 | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | Assets: | | | | | | | | | | | | | | Cash on deposit | | $ | 2,089 | | | $ | 1,939 | | | $ | 1,505 | | | $ | 2,089 | | | Investment in and advances to subsidiaries | | | 667,206 | | | | 620,701 | | | | 707,943 | | | | 667,206 | | | Goodwill | | | 4,973 | | | | 4,973 | | | | 4,973 | | | | 4,973 | | | Premises and equipment, net | | | 153 | | | | 219 | | | | 96 | | | | 153 | | | Deferred taxes | | | 5,100 | | | | 193 | | | | Deferred tax asset | | | | 4,649 | | | | 5,100 | | | Other assets | | | 44 | | | | 45 | | | | 45 | | | | 44 | | | Total assets | | $ | 679,565 | | | $ | 628,070 | | | $ | 719,211 | | | $ | 679,565 | | | | | | | | | | | | | | | | | | | | | Liabilities and shareholders’ equity: | | | | | | | | | | | | | | | | | | Long-term debt | | $ | 61,341 | | | $ | 61,341 | | | $ | 61,341 | | | $ | 61,341 | | | Other liabilities | | | 3,338 | | | | 2,579 | | | | 3,005 | | | | 3,338 | | | Total liabilities | | | 64,679 | | | | 63,920 | | | | 64,346 | | | | 64,679 | | | | | | | | | | | | | | | | | | | | | Shareholders’ equity | | | 614,886 | | | | 564,150 | | | | 654,865 | | | | 614,886 | | | | | | | | | | | | | | | | | | | | | Total liabilities and shareholders’ equity | | $ | 679,565 | | | $ | 628,070 | | | $ | 719,211 | | | $ | 679,565 | |
Condensed Statements of Income and Comprehensive Income
(in thousands) Year Ended December 31 | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | Income: | | | | | | | | | | | | | | | | | | | | Dividends from subsidiary banks | | $ | 30,152 | | | $ | 26,750 | | | $ | 24,661 | | | | Dividends from subsidiaries | | | $ | 29,593 | | | $ | 30,152 | | | $ | 26,750 | | | Other income | | | 757 | | | | 489 | | | | 904 | | | | 476 | | | | 757 | | | | 489 | | | Total income | | | 30,909 | | | | 27,239 | | | | 25,565 | | | | 30,069 | | | | 30,909 | | | | 27,239 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | Interest expense | | | 2,520 | | | | 2,318 | | | | 1,723 | | | | 1,519 | | | | 2,520 | | | | 2,318 | | | Depreciation expense | | | 144 | | | | 135 | | | | 116 | | | | 112 | | | | 144 | | | | 135 | | | Other expenses | | | 3,273 | | | | 3,156 | | | | 2,858 | | | | 3,302 | | | | 3,273 | | | | 3,156 | | | Total expenses | | | 5,937 | | | | 5,609 | | | | 4,697 | | | | 4,933 | | | | 5,937 | | | | 5,609 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income before income taxes and equity in undistributed income of subsidiaries | | | 24,972 | | | | 21,630 | | | | 20,868 | | | | 25,136 | | | | 24,972 | | | | 21,630 | | | Income tax benefit | | | (4,947 | ) | | | (1,219 | ) | | | (1,445 | ) | | | (576 | ) | | | (4,947 | ) | | | (1,219 | ) | | Income before equity in undistributed income of subsidiaries | | | 29,919 | | | | 22,849 | | | | 22,313 | | | | 25,712 | | | | 29,919 | | | | 22,849 | | | Equity in undistributed income of subsidiaries | | | 34,621 | | | | 36,379 | | | | 29,180 | | | | 33,792 | | | | 34,621 | | | | 36,379 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | $ | 64,540 | | | $ | 59,228 | | | $ | 51,493 | | | $ | 59,504 | | | $ | 64,540 | | | $ | 59,228 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive gain (loss): | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized holding gains (losses) on securities available-for-sale : | | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized holding gains (losses) arising during the period | | | 14,270 | | | | (5,393 | ) | | | (820 | ) | | | 13,839 | | | | 14,270 | | | | (5,393 | ) | | Less: Reclassification adjustments for realized gains (losses) included in net income | | | 3 | | | | (821 | ) | | | 73 | | | | 1,251 | | | | 3 | | | | (821 | ) | | Tax expense (benefit) | | | 3,403 | | | | (960 | ) | | | (312 | ) | | | 3,273 | | | | 3,403 | | | | (960 | ) | | Other comprehensive gain (loss), net of tax | | | 10,864 | | | | (3,612 | ) | | | (581 | ) | | | 9,315 | | | | 10,864 | | | | (3,612 | ) | | Comprehensive income | | $ | 75,404 | | | $ | 55,616 | | | $ | 50,912 | | | $ | 68,819 | | | $ | 75,404 | | | $ | 55,616 | |
Condensed Statements of Cash Flows
(in thousands) Year Ended December 31 | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | Net income | | $ | 64,540 | | | $ | 59,228 | | | $ | 51,493 | | | $ | 59,504 | | | $ | 64,540 | | | $ | 59,228 | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation | | | 144 | | | | 135 | | | | 116 | | | | 112 | | | | 144 | | | | 135 | | | Equity in undistributed earnings of subsidiaries | | | (34,621 | ) | | | (36,379 | ) | | | (29,180 | ) | | | (33,792 | ) | | | (34,621 | ) | | | (36,379 | ) | | Deferred taxes | | | (4,907 | ) | | | (12 | ) | | | 192 | | | | 451 | | | | (4,907 | ) | | | (12 | ) | | Stock-based compensation | | | 859 | | | | 710 | | | | 636 | | | | 944 | | | | 859 | | | | 710 | | | Gain on debt repurchase | | | (219 | ) | | | 0 | | | | (560 | ) | | | 0 | | | | (219 | ) | | | 0 | | | Changes in: | | | | | | | | | | | | | | | | | | | | | | | | | | Other assets | | | 1 | | | | (50 | ) | | | (47 | ) | | | (115 | ) | | | 1 | | | | (50 | ) | | Other liabilities | | | 683 | | | | 53 | | | | 412 | | | | (318 | ) | | | 683 | | | | 53 | | | Net cash provided by operating activities | | | 26,480 | | | | 23,685 | | | | 23,062 | | | | 26,786 | | | | 26,480 | | | | 23,685 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | Payment for investment in subsidiary | | | (1,281 | ) | | | 0 | | | | (1,440 | ) | | | 0 | | | | (1,281 | ) | | | 0 | | | Purchase of premises and equipment | | | (78 | ) | | | (81 | ) | | | (179 | ) | | | (55 | ) | | | (78 | ) | | | (81 | ) | | Net cash used in investing activities | | | (1,359 | ) | | | (81 | ) | | | (1,619 | ) | | | (55 | ) | | | (1,359 | ) | | | (81 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | Issuance of common stock | | | 1,264 | | | | 1,230 | | | | 1,513 | | | | 926 | | | | 1,264 | | | | 1,230 | | | Repurchase of common stock | | | | (1,099 | ) | | | 0 | | | | 0 | | | Dividends paid | | | (26,235 | ) | | | (24,395 | ) | | | (22,981 | ) | | | (27,142 | ) | | | (26,235 | ) | | | (24,395 | ) | | Net cash used in financing activities | | | (24,971 | ) | | | (23,165 | ) | | | (21,468 | ) | | | (27,315 | ) | | | (24,971 | ) | | | (23,165 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net increase (decrease) in cash and cash equivalents | | | 150 | | | | 439 | | | | (25 | ) | | | (584 | ) | | | 150 | | | | 439 | | | Cash and cash equivalents at beginning of year | | | 1,939 | | | | 1,500 | | | | 1,525 | | | | 2,089 | | | | 1,939 | | | | 1,500 | | | Cash and cash equivalents at end of year | | $ | 2,089 | | | $ | 1,939 | | | $ | 1,500 | | | $ | 1,505 | | | $ | 2,089 | | | $ | 1,939 | |
22. Revenue Recognition
CTBI’s primary source of revenue is interest income generated from loans and investment securities. Interest income is recognized according to the terms of the financial instrument agreement over the life of the loan or investment security unless it is determined that the counterparty is unable to continue making interest payments. Interest income also includes prepaid interest fees from commercial customers, which approximates the interest foregone on the balance of the loan prepaid.
CTBI's additional source of income, also referred to as noninterest income, includes service charges on deposit accounts, gains on sales of loans, trust and wealth management income, loan related fees, brokerage revenue, and other miscellaneous income and is largely based on contracts with customers. In these cases, CTBI recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. CTBI considers a customer to be any party to which we will provide goods or services that are an output of CTBI’s ordinary activities in exchange for consideration. There is little seasonality with regards to revenue from contracts with customers and all inter-company revenue is eliminated when CTBI’s financial statements are consolidated.
Generally, CTBI enters into contracts with customers that are short-term in nature where the performance obligations are fulfilled and payment is processed at the same time. Such examples include revenue related to merchant fees, interchange fees, and investment services income. In addition, revenue generated from existing customer relationships such as deposit accounts are also considered short-term in nature, because the relationship may be terminated at any time and payment is processed at the time performance obligations are fulfilled. As a result, CTBI does 0t have contract assets, contract liabilities, or related receivable accounts for contracts with customers. In cases where collectability is a concern, CTBI does not record revenue.
Generally, the pricing of transactions between CTBI and each customer is either (i) established within a legally enforceable contract between the two parties, as is the case with loan sales, or (ii) disclosed to the customer at a specific point in time, as is the case when a deposit account is opened or before a new loan is underwritten. Fees are usually fixed at a specific amount or as a percentage of a transaction amount. No judgment or estimates by management are required to record revenue related to these transactions and pricing is clearly identified within these contracts.
CTBI primarily operates in Kentucky and contiguous areas. Therefore, all significant operating decisions are based upon analysis of CTBI as 1 operating segment.
We disaggregate our revenue from contracts with customers by contract-type and timing of revenue recognition, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Noninterest income not generated from customers during CTBI’s ordinary activities primarily relates to mortgage servicing rights, gains/losses on the sale of investment securities, gains/losses on the sale of other real estate owned, gains/losses on the sale of property, plant and equipment, and income from bank owned life insurance.
For more information related to our components of noninterest income, see the Consolidated Statements of Income and Comprehensive Income above.
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) | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | Numerator: | | | | | | | | | | | | | | | | | | | | Net income | | $ | 64,540 | | | $ | 59,228 | | | $ | 51,493 | | | $ | 59,504 | | | $ | 64,540 | | | $ | 59,228 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Denominator: | | | | | | | | | | | | | | | | | | | | | | | | | | Basic earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average shares | | | 17,724 | | | | 17,687 | | | | 17,631 | | | | 17,748 | | | | 17,724 | | | | 17,687 | | | Diluted earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | Dilutive effect of equity grants | | | 16 | | | | 16 | | | | 22 | | | | 8 | | | | 16 | | | | 16 | | | Adjusted weighted average shares | | | 17,740 | | | | 17,703 | | | | 17,653 | | | | 17,756 | | | | 17,740 | | | | 17,703 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | Basic earnings per share | | $ | 3.64 | | | $ | 3.35 | | | $ | 2.92 | | | $ | 3.35 | | | $ | 3.64 | | | $ | 3.35 | | | Diluted earnings per share | | | 3.64 | | | | 3.35 | | | | 2.92 | | | | 3.35 | | | | 3.64 | | | | 3.35 | |
There were 0 options to purchase common shares that were excluded from the diluted calculations above for the years ended December 31, 2020, 2019, 2018, and 2017.2018. In addition to in-the-money stock options, unvested restricted stock grants were also used in the calculation of diluted earnings per share based on the treasury method.
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, 2020, 2019, 2018, and 20172018 were:
| | Amounts Reclassified from AOCI | | | Amounts Reclassified from AOCI | | Year Ended December 31 (in thousands) | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | Affected line item in the statements of income | | | | | | | | | | | | | | | | | | | | Securities gains (losses) | | $ | 3 | | | $ | (821 | ) | | $ | 73 | | | $ | 1,251 | | | $ | 3 | | | $ | (821 | ) | | Tax expense (benefit) | | | 1 | | | | (172 | ) | | | 26 | | | | 325 | | | | 1 | | | | (172 | ) | | Total reclassifications out of AOCI | | $ | 2 | | | $ | (649 | ) | | $ | 47 | | | $ | 926 | | | $ | 2 | | | $ | (649 | ) |
25. COVID-19 and CARES Act Loan Activities
CTBI has been and continues to be committed to serving the needs of our customers in an ever changing environment. COVID-19 has caused major concerns for the communities we serve and our entire country. With this in mind, Community Trust Bank, Inc. instituted multiple relief actions in an effort to assist our customers during this very difficult time. CTBI’s management team activated its Pandemic Response Team, with representation from all areas of our company, to continually discuss the current situation, safety, and needs of our customers and employees. We have worked diligently with our customers as we all continue to battle COVID-19. Included in the relief actions the bank implemented during this past year are waivers of overdraft/returned item fees and telephone transfer fees for a period of 30 days ending April 22, 2020, suspension of residential foreclosure actions through March 31, 2021, and several loan assistance programs designed to assist those customers experiencing, or, likely to experience, financial difficulties directly related to COVID-19 causing loss of individual income and/or household income. Through December 31, 2020, we processed 3,844 COVID-19 loan deferrals totaling $992 million. These loan deferrals and modifications were executed consistent with the guidelines of the CARES Act. Pursuant to the CARES Act, these loan deferrals are not included in our nonperforming loans.
Our customers have shown improvement in their ability to resume payments as 3,071 (representing $540 million) had resumed payment status at December 31, 2020. At December 31, 2020 the number of customers with CARES Act deferrals reduced to 410 for a total outstanding amount of $130 million. See below for further detail regarding the types of deferrals received.
CARES Act Loan Deferral Status
| | | Deferrals | | | | | One Time | | | Two Times | | | Three Times | | | Four Times | | | Outstanding | | | (dollars in millions) | | Number | | | Amount | | | Number | | | Amount | | | Number | | | Amount | | | Number | | | Amount | | | Number | | | Amount | | | Commercial | | | 841 | | | $ | 571 | | | | 153 | | | $ | 223 | | | | 45 | | | $ | 83 | | | | 5 | | | $ | 3 | | | | 109 | | | $ | 118 | | | Residential | | | 552 | | | | 63 | | | | 100 | | | | 10 | | | | 15 | | | | 2 | | | | 1 | | | | 0 | | | | 108 | | | | 9 | | | Consumer | | | 2,088 | | | | 36 | | | | 41 | | | | 1 | | | | 3 | | | | 0 | | | | 0 | | | | 0 | | | | 193 | | | | 3 | | | | | | 3,481 | | | $ | 670 | | | | 294 | | | $ | 234 | | | | 63 | | | $ | 85 | | | | 6 | | | $ | 3 | | | | 410 | | | $ | 130 | |
We have also participated in the Paycheck Protection Program (PPP) stemming from the CARES Act passed by Congress as a stimulus response to the potential economic impacts of COVID-19. As of December 31, 2020, we closed 2,962 Paycheck Protection Program (PPP) loans totaling $277.0 million, stemming from the CARES Act passed by Congress as a stimulus response to the potential economic impacts of COVID-19. Of these, 2,817 were under $350 thousand, 132 were between $350 thousand and $2.0 million, and 13 were over $2.0 million. The initial phase of the PPP program expired on August 8, 2020, and the loan forgiveness process began shortly thereafter. Through December 31, 2020, we have had $18.8 million of our PPP loans forgiven by the U.S. Small Business Administration (SBA). An additional stimulus package, included as part of Consolidated Appropriations Act 2021, was signed into law in late December providing for an additional $284 billion in funding under the PPP, with authority to make loans under the program being extended through March 31, 2021. CTBI intends to participate in the second round of lending as soon as possible. See below for additional information related to our PPP loans for the year ended December 31, 2020.
| (dollars in thousands) | | Average Balance | | | Interest | | | Average Effective Rate | | | PPP loans | | $ | 182,008 | | | $ | 5,638 | | | | 3.05 | % |
CTBI has also taken many steps to protect the safety of our employees and customers by adjusting branch operations and decreasing lobby usage as needed, encouraging drive-thru and ATM use along with internet banking, having employees work remotely or work split-shifts when possible, implementing social distancing guidelines, and consolidating operations.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders, Board of Directors, and Audit Committee Community Trust Bancorp, Inc. Pikeville, Kentucky
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Community Trust Bancorp, Inc. (Company) as of December 31, 20192020 and 2018,2019, 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, 2019,2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Community Trust Bancorp, Inc.the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019,2020, 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) (PCAOB), Community Trust Bancorp, Inc.’sthe Company’s internal control over financial reporting as of December 31, 2019,2020, 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 February 28, 2020,26, 2021 expressed an unqualified opinion on the effectiveness of Community Trust Bancorp, Inc.’s internal control over financial reporting.reporting.
Adoption of New Accounting Standard
As discussed in Note 1 and Note 4 to the consolidated financial statements, the Company has changed its method of accounting for credit losses in 2020 due to the adoption of Accounting Standards Codification Topic 326, Financial Instruments––Credit Losses. As discussed below, the allowance for credit losses is considered as a critical audit matter.
Basis for Opinion
These financial statements are the responsibility of Community Trust Bancorp, Inc.’sthe Company’s management. Our responsibility is to express an opinion on Community Trust Bancorp, Inc.’sthe Company’s financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Community Trust Bancorp, Inc.the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit mattersmatter communicated below are mattersis a matter arising from the current-period audit of the financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Allowance for LoanCredit Losses
The Company adopted Accounting Standards Codification 326 effective January 1, 2020. As more fully described in NoteNotes 1 and 4 to the consolidated financial statements, Community Trust Bancorp, Inc.the Company estimates the allowance for loan and lease loss (ALLL)credit losses (ACL) 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. The determination of the ALLLACL requires significant judgment reflecting Community Trust Bancorp, Inc.’sthe Company’s best estimate of probable loan and leaseexpected credit losses. Impairment on loans determined to be impaired isExpected credit losses are measured on a loan-by-loancollective (pool) basis using a combination of loss-rate methods when the financial assets share similar risk characteristics. Loans that do not share similar risk characteristics are evaluated on an individual basis. Historical loss rates reflecting estimated life of loan losses are analyzed and applied to their respective loan segments comprised of loans not considered impaired.subject to individual evaluation. Historical loss rates are adjusted for significant factors that, in management’s judgement, reflectedjudgment, reflect the impact of any current conditions on loss recognition.recognition, as well as for certain known model limitations. Forecast factors are developed based on information obtained from external sources, as well as consideration of other internal information, and are included in the ACL model for a reasonable and supportable 12-month forecast period, with loss factors immediately reverting back to historic loss rates. Management continually reevaluates the other subjective and forecast factors included in its ALLLACL analysis.
We identified the valuation of the ALLLACL as a critical audit matter. The primary reason for our determination that the allowance for loan lossesACL is a critical audit matter is that auditing the estimated allowance for loan lossesACL involved significant judgment and complex review. Auditing the ALLLACL involved a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s model selections, segmentation, weighted average life calculations, assessment of economic conditions and other environmental factors, assessment of forecast factors, evaluating the adequacy of specific allowances associated with impairedindividually evaluated loans and assessing the appropriateness of loan grades.
Our audit procedures related to the estimated allowance for loan lossesACL included the following procedures, among others.
Obtaining an understanding of the Company’s process for establishing the ACL, including model selection and the implementation of the calculation and the qualitative and forecast factor adjustments of the ACL and any limitations of the model Testing the design and operating effectiveness of internal controls, including those related to technology, over the ALLLACL calculation including data completeness and accuracy, verification of historical net loss data and calculated net loss rates, the establishment of qualitative and forecast adjustments, grading and risk classification of loans by segment, including internal independent loan review functions, establishment of specific reserves on impairedindividually evaluated loans and management’s review controls over the ALLLACL as a whole.whole
Testing of completeness and accuracy of the information utilized in the calculation of the allowance for credit losses,ACL, including reports used in management review controls over the ALLL.
Testing clerical/clerical and computational accuracy of the formulas within the calculation spreadsheet.
Evaluating how historical losses for each segment are analyzed using a model that is appropriate for the related loan segment, and applied to their respective outstanding balances Evaluating segmentation of the loan portfolio for reasonableness based on risk characteristics of the pooled loans Evaluating the qualitative factor adjustments, to the historical loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions. assumptions
Evaluating management’s risk ratings of loans through utilizing internal specialistsprofessionals to assist us in evaluating the appropriateness of loan grades and identification of impaired loans.
Evaluating specific reserves on impaired loans.individually analyzed loans
Preparation of an independent estimate of an acceptable range of the allowance for loan lossqualitative and forecast factors included in the ACL to compare to management’s estimate.estimate
Evaluating overall reasonableness of estimated reserve by considering past performance of Community Trust Bancorp, Inc.’sthe Company’s loan portfolio, trends in credit quality of the loan portfolio and trends in peer institutionsthe credit quality and ALLL,of peer institutions and comparing the trends to the Company’s allowance for loan lossACL trends for directional consistency compared to previous years.
Emphasis of Matter
As discussed in Note 1 and Note 16 to the consolidated financial statements, Community Trust Bancorp, Inc. has changed its method of accounting for leases in 2019 due to the adoption of Topic 842.years
/s/ BKD, LLP
We have served as Community Trust Bancorp, Inc.’s auditor since 2006.
Louisville, Kentucky February 28, 202026, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders, Board of Directors, and Audit Committee Community Trust Bancorp, Inc. Pikeville, Kentucky
Opinion on the Internal Control over Financial Reporting
We have audited Community Trust Bancorp, Inc.’s (Company) internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control––Integrated Framework:Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, Community Trust Bancorp, Inc.the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control––Integrated Framework:Framework (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of Community Trust Bancorp, Inc.the Company and our report dated February 28, 2020,26, 2021, expressed an unqualified opinion thereon.
Basis for Opinion
Community Trust Bancorp, Inc.’sThe 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, included in the accompanying management report on internal control.. Our responsibility is to express an opinion on Community Trust Bancorp, Inc.’sthe Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Community Trust Bancorp, Inc.the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definitions and Limitations of Internal Control over Financial Reporting
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.
/s/ BKD, LLP
Louisville, Kentucky February 28, 202026, 2021
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
CTBI’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31, 2019,2020, an evaluation was carried out by CTBI’s management, with the participation of our Chief Executive Officer and our Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, management concluded that disclosure controls and procedures as of December 31, 20192020 were effective in ensuring material information required to be disclosed in this annual report on Form 10-K was recorded, processed, summarized, and reported on a timely basis.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 20192020 based on the control criteria in the 2013 COSO Framework issued by the Committee of Sponsoring Organizations (“COSO”) 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, 2019.2020.
There were no changes in CTBI’s internal control over financial reporting that occurred during the year ended December 31, 20192020 that have materially affected, or are reasonably likely to materially affect, CTBI’s internal control over financial reporting.
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:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
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
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, 20192020 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, 2019.2020.
The effectiveness of CTBI’s internal control over financial reporting as of December 31, 20192020 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.
February 28, 202026, 2021 | /s/ Jean R. Hale | | | | Jean R. Hale | | | | Chairman, President, and | | Chief Executive Officer | | | | | | | /s/ Kevin J. Stumbo | | | | Kevin J. Stumbo | | | | Executive Vice President, Chief Financial Officer, | | and Treasurer | |
| Item 9B. | Other Information |
None.
| Item 10. | Directors, Executive Officers, and Corporate Governance |
The information required by this item (other than disclosure of our executive officers, which is included in Part I, Item 1 of this report) is omitted, because CTBI is filing a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report which includes the required information. The required information contained in CTBI’s proxy statement is incorporated herein by reference.
| Item 11. | Executive Compensation |
The information required by this item is omitted because CTBI is filing a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report which includes the required information. The required information contained in CTBI’s proxy statement is incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
The information required by this item other than the information provided below is omitted, because CTBI is filing a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report which includes the required information. The required information contained in CTBI’s proxy statement is incorporated herein by reference.
Equity Compensation Plan Information
The following table provides information as of December 31, 2019,2020, with respect to compensation plans under which common shares of CTBI are authorized for issuance to officers or employees in exchange for consideration in the form of services provided to CTBI and/or its subsidiaries. At December 31, 2019,2020, we maintained one active and one inactive incentive stock option 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 2015 Plan has 550,000 shares authorized, 481,396459,852 of which were available at December 31, 2019.2020. 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.
| | A | | | B | | | C | | Plan Category (shares in thousands) | | Number of Common Shares to be Issued Upon Exercise | | | Weighted Average Price | | | Number of Securities Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in Column A) | | | Equity compensation plans approved by shareholders: | | | | | | | | | | | | | | Stock options | | | 20 | | | $ | 32.04 | | | | 481 | | | Equity compensation plans not approved by shareholders | | | 0 | | | | -- | | | | 0 | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | 481 | |
| A | B | C | Plan Category (shares in thousands) | Number of Common Shares to be Issued Upon Exercise | Weighted Average Price | Number of Securities Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in Column A) | | Equity compensation plans approved by shareholders: | | | | | Stock options | 20 | $32.27 | 460 | | Equity compensation plans not approved by shareholders | 0 | -- | 0 | | | | | | | Total | | | 460 |
Additional information regarding CTBI’s stock option plans can be found in notes 1 and 1514 to the consolidated financial statements.
| Item 13. | Certain Relationships, Related Transactions, and Director Independence |
The information required by this item is omitted, because CTBI is filing a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report which includes the required information. The required information contained in CTBI’s proxy statement is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services |
The information required by this item is omitted, because CTBI is filing a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report which includes the required information. The required information contained in CTBI’s proxy statement is incorporated herein by reference.
| Item 15. | Exhibits and Financial Statement Schedules |
(a) | 1. | (a) 1. Financial Statements |
The following financial statements of CTBI and the auditor’s report thereon are filed as part of this Form 10-K under Item 8. Financial Statements and Supplementary Data:
Consolidated Balance Sheets Consolidated Statements of Income and Other Comprehensive Income Consolidated Statements of Shareholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm
| 2. | 2. Financial Statement Schedules |
All required financial statement schedules for CTBI have been included in this Form 10-K in the consolidated financial statements or the related footnotes.
| Exhibit No. | Description of Exhibits | | 3.1 | Articles of Incorporation and all amendments thereto {incorporated by reference to registration statement no. 33-35138} | | | | | By-laws of CTBI as amended July 25, 1995 {incorporated by reference to registration statement no. 33-61891} | | | | | By-laws of CTBI as amended January 29, 2008 {incorporated by reference to current report on Form 8-K filed January 30, 2008} | | | | | 4.1 | Description of CTBI’s Securities Registered under Section 12 of the Securities Exchange Act of 1934 {incorporated by reference to Form 10-K for the fiscal year ended December 31, 2019} | | | | | Community Trust Bancorp, Inc. Employee Stock Ownership Plan (effective January 1, 2007) {incorporated herein by reference to Form 10-K for the fiscal year ended December 31, 2006 under SEC file no. 000-111-29} | | | | | Community Trust Bancorp, Inc. Savings and Employee Stock Ownership Plan (Amendment Number One effective January 1, 2002, Amendment Number Two effective January 1, 2004, Amendment Number Three effective March 28, 2005, and Amendment Number Four effective January 1, 2006) {incorporated herein by reference to Form 10-K for the fiscal year ended December 31, 2006 under SEC file no. 000-111-29} | | | | | Community Trust Bancorp, Inc. 1998 Stock Option Plan {incorporated by reference to registration statement no. 333-74217} | | | | | Community Trust Bancorp, Inc. 2006 Stock Ownership Incentive Plan {incorporated by reference to Proxy Statement dated March 24, 2006} | | | | | Form of Severance Agreement between Community Trust Bancorp, Inc. and executive officers (currently in effect with respect to twelve executive officers) {incorporated herein by reference to Form 10-K for the fiscal year ended December 31, 2001 under SEC file no. 000-111-29} | | | | Senior Management Incentive Compensation Plan (2020)(2021) {incorporated herein by reference to current report on Form 8-K dated January 28, 2020}26, 2021} | | | | | Restricted Stock Agreement {incorporated herein by reference to Form 10-K for the fiscal year ended December 31, 2011 under SEC file no. 000-111-29} | | | | | Employee Incentive Compensation Plan (2020)(2021) {incorporated herein by reference to current report on Form 8-K dated January 28, 2020}26, 2021} |
| | | Amendment to the Community Trust Bancorp, Inc. 2006 Stock Ownership Incentive Plan {incorporated herein by reference to current report on Form 8-K dated January 24, 2012} | | | | | Community Trust Bancorp, Inc. 2015 Stock Ownership Incentive Plan {incorporated herein by reference to registration statement no. 333-208053} | | |
| Community Trust Bancorp, Inc. 2018 Executive Committee Long-Term Incentive Compensation Plan {incorporated herein by reference to current report on Form 8-K dated January 23, 2018} | | | | Community Trust Bancorp, Inc. 2019 Executive Committee Long-Term Incentive Compensation Plan {incorporated herein by reference to current report on Form 8-K dated January 29, 2019} | | | | | Community Trust Bancorp, Inc. 2020 Executive Committee Long-Term Incentive Compensation Plan {incorporated herein by reference to current report on Form 8-K dated January 28, 2020} | | | | Community Trust Bancorp, Inc. 2021 Executive Committee Long-Term Incentive Compensation Plan {incorporated herein by reference to current report on Form 8-K dated January 26, 2021} | | | | | Subsidiaries of the Registrant | | | | | Consent of BKD, LLP, Independent Registered Public Accounting Firm | | | | | Certification of Principal Executive Officer (Jean R. Hale, Chairman, President, and Chief Executive Officer) | | | | | Certification of Principal Financial Officer (Kevin J. Stumbo, Executive Vice President, Chief Financial Officer, and Treasurer) | | | | | Certification of Jean R. Hale, Chairman, President and CEO, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | Certification of Kevin J. Stumbo, Executive Vice President, Chief Financial Officer, and Treasurer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | Community Trust Bancorp, Inc. Dividend Reinvestment Plan, as amended December 20, 2013 {incorporated by reference to registration statement no. 333-193011} | | | | | 101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL | | | | | 101.SCH | Inline XBRL Taxonomy Extension Schema | | | | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | | | | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | | | | | 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | | | | | 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | | | | | 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
* Management contracts and compensatory plans and arrangements required to be filed as exhibits pursuant to Item 15(b) of this report.
+ Furnished with this report.
The response to this portion of Item 15 is submitted in (a) 3. above.
| (c) | Financial Statement Schedules |
None
| Item 16. | Form 10-K Summary |
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | COMMUNITY TRUST BANCORP, INC. | | | | | | | February 28, 2020 | 26, 2021 | By: | /s/ Jean R. Hale | | | | | Jean R. Hale | | | | Chairman, President, and Chief Executive Officer | | | | | Jean R. Hale | | | | | Chairman, President, and Chief Executive Officer | | | | | | | | | | /s/ Kevin J. Stumbo | | | | | | | Kevin J. Stumbo | | | | | Kevin J. Stumbo | | | | | Executive Vice President, Chief Financial Officer, and Treasurer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
February 28, 202026, 2021 | /s/ Jean R. Hale | | Chairman, President, and Chief Executive Officer | | | Jean R. Hale | | | | | | | | February 28, 202026, 2021 | /s/ Kevin J. Stumbo | | Executive Vice President, Chief Financial Officer, and Treasurer | | | Kevin J. Stumbo | | | | | | | | February 28, 202026, 2021 | /s/ Charles J. Baird | | Director | | | Charles J. Baird | | | | | | | | February 28, 202026, 2021 | /s/ Nick Carter | | Director | | | Nick Carter | | | | | | | | February 28, 202026, 2021 | /s/ Franklin H. Farris, Jr. | | Director | | | Franklin H. Farris, Jr. | | | | | | | | February 28, 202026, 2021 | /s/ Eugenia “Crit” Luallen | | Director | | Eugenia “Crit” Luallen | | | | | | | | February 26, 2021 | /s/ James E. McGhee, II | | Director | | | James E. McGhee II | | | | | | | | February 28, 202026, 2021 | /s/ Franky Minnifield | | Director | | Franky Minnifield | | | | | | | | February 26, 2021 | /s/ M. Lynn Parrish | | Director | | | M. Lynn Parrish | | | | | | | | February 28, 202026, 2021 | /s/ Anthony W. St. Charles | | Director | | | Anthony W. St. Charles | | |
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