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CTBI Community Trust Bancorp

Filed: 26 Feb 21, 8:07am


UNITED STATES
SECURITIES 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, 2020
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)
 
CTBIThe 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.

Yes
No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes
No 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes 
No

Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes 
No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See 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.

Yes
No


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes
No

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, 2020 was $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, 2021 was 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 27, 2021.





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CAUTIONARY STATEMENT
REGARDING FORWARD LOOKING STATEMENTS

Certain of the statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Community Trust Bancorp, Inc.’s (“CTBI”) actual results may differ materially from those included in the forward-looking statements. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may increase,” “may fluctuate,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” and “could.” These forward-looking statements involve risks and uncertainties including, but not limited to, economic conditions, portfolio growth, the credit performance of the portfolios, including bankruptcies, and seasonal factors; changes in general economic conditions including the performance of financial markets, prevailing inflation and interest rates, realized gains from sales of investments, gains from asset sales, and losses on commercial lending activities; 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.

PART I

Item 1.Business

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, 2020, CTBI had total consolidated assets of $5.1 billion and total consolidated deposits, including repurchase agreements, of $4.4 billion.  Total shareholders’ equity at December 31, 2020 was $654.9 million.  Trust assets under management at December 31, 2020 were $2.8 billion, including CTB’s investment portfolio totaling $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 18 to the consolidated financial statements for additional information regarding concentrations of credit.

We do not engage in any operations in foreign countries.

HUMAN 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, 2020, CTBI and subsidiaries had 998 full-time equivalent employees.  Females 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 competitive compensation, as well as a 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 Securities 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

Insured depository institutions are required to meet certain capital level requirements.  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 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 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.

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.  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%.

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.

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.  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 COVID-19 is causing worldwide concern and economic disruption.  Economic pressure on consumers and uncertainty regarding 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.  Unemployment 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;
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 inflation;
The rate of economic growth;
Employment levels;
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, 2020, CTBI had approximately $27.8 million in variable rate loans and $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.

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

 2020  2019  2018 
(in thousands) 
Average
Balances
  Interest  
Average
Rate
  
Average
Balances
  Interest  
Average
Rate
  
Average
Balances
  Interest  
Average
Rate
 
Earning assets:                           
Loans (1)(2)(3) $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  15,426   573   3.71   1,362   120   8.81   684   98   14.33 
Securities:                                    
U.S. Treasury and agencies  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)  93,368   3,012   3.23   86,811   2,980   3.43   102,396   3,539   3.46 
Other securities  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  15,349   532   3.47   16,695   947   5.67   21,264   1,303   6.13 
Federal funds sold  14   0   0.00   800   21   2.63   2,795   59   2.11 
Interest bearing deposits  248,599   715   0.29   211,078   4,480   2.12   138,794   2,567   1.85 
Other investments  245   3   1.22   936   14   1.50   6,432   88   1.37 
Investment in unconsolidated subsidiaries  1,847   46   2.49   1,851   75   4.05   1,850   70   3.78 
Total earning assets  4,562,172  $177,168   3.88%  4,043,975  $186,169   4.60%  3,913,596  $172,352   4.40%
Allowance for credit losses*  (45,040)          (35,122)          (35,711)        
   4,517,132           4,008,853           3,877,885         
Nonearning assets:                                    
Cash and due from banks  55,550           52,122           52,286         
Premises and equipment, net  56,835           59,326           45,970         
Other assets  208,643           207,723           211,256         
Total assets $4,838,160          $4,328,024          $4,187,397         
                                     
Interest bearing liabilities:                                    
Deposits:                                    
Savings and demand deposits $1,682,773  $5,732   0.34% $1,442,083  $14,875   1.03% $1,234,562  $8,443   0.68%
Time deposits  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  293,158   2,788   0.95   233,484   4,631   1.98   244,647   3,312   1.35 
Advances from Federal Home Loan Bank  473   0   0.00   1,959   39   1.99   1,512   27   1.79 
Long-term debt  57,841   1,431   2.47   58,815   2,418   4.11   59,341   2,242   3.78 
Finance lease liability  1,450   54   3.72   616   54   8.77   0   0   0 
Total interest bearing liabilities  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  1,030,911           828,281           810,270         
Other liabilities  59,904           55,736           34,394         
Total liabilities  4,202,182           3,732,687           3,640,756         
                                     
Shareholders’ equity  635,978           595,337           546,641         
Total liabilities and shareholders’ equity $4,838,160          $4,328,024          $4,187,397         
                                     
Net interest income, tax equivalent     $151,718          $145,656          $143,057     
Less tax equivalent interest income      727           771           902     
Net interest income     $150,991          $144,885          $142,155     
Net interest spread          3.06%          3.18%          3.35%
Benefit of interest free funding          0.27           0.42           0.31 
Net interest margin          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 2018, 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.


Net Interest Differential

The following table illustrates the approximate effect of volume and rate changes on net interest differentials between 2020 and 2019 and also between 2019 and 2018.

 
Total
Change
  Change Due to  
Total
Change
  Change Due to 
(in thousands) 
_2020/2019
  Volume  Rate  
_2019/2018
  Volume  Rate 
Interest income:                  
Loans $(4,668) $12,718  $(17,386) $10,403  $2,222  $8,181 
Loans held for sale  453   560   (107)  22   70   (48)
U.S. Treasury and agencies  (1,276)  3,050   (4,326)  2,278   696   1,582 
Tax exempt state and political subdivisions  32   218   (186)  (559)  (542)  (17)
Other securities  699   1,173   (474)  223   223   0 
Federal Reserve Bank and Federal Home Loan Bank stock  (415)  (81)  (334)  (356)  (295)  (61)
Federal funds sold  (21)  0   (21)  (38)  (34)  (4)
Interest bearing deposits  (3,765)  680   (4,445)  1,913   1,491   422 
Other investments  (11)  (12)  1   (74)  (69)  (5)
Investment in unconsolidated subsidiaries  (29)  0   (29)  5   0   5 
Total interest income  (9,001)  18,306   (27,307)  13,817   3,762   10,055 
                         
Interest expense:                        
Savings and demand deposits  (9,143)  2,151   (11,294)  6,432   1,598   4,834 
Time deposits  (3,051)  (615)  (2,436)  3,225   (1,601)  4,826 
Repurchase agreements and federal funds purchased  (1,843)  981   (2,824)  1,319   (145)  1,464 
Advances from Federal Home Loan Bank  (39)  0   (39)  12   9   3 
Long-term debt  (987)  (41)  (946)  176   (20)  196 
Finance lease liability  0   44   (44)  54   54   0 
Total interest expense  (15,063)  2,520   (17,583)  11,218   (105)  11,323 
                         
Net interest income $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.

Investment Portfolio

The maturity distribution and weighted average yields of debt securities at December 31, 2020 are as follows:

Available-for-sale

 Estimated Maturity at December 31, 2020 
  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 $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 $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 yields 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, 2020.

The book values of securities available-for-sale and securities held-to-maturity as of December 31, 2020 and 2019 are presented in note 3 to the consolidated financial statements.

The book value of debt securities at December 31, 2018 is presented below:

(in thousands) 
Available-
for-Sale
  
Held-to-
Maturity
 
U.S. Treasury and government agencies $219,358  $0 
State and political subdivisions  126,280   649 
U.S. government sponsored agency mortgage-backed securities  255,969   0 
Other debt securities  507   0 
Total debt securities $602,114  $649 

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%


(in thousands) 2019  2018  2017  2016 
Commercial:            
Construction $104,809  $82,715  $76,479  $66,998 
Secured by real estate  1,169,975   1,183,093   1,188,680   1,085,428 
Equipment lease financing  481   1,740   3,042   5,512 
Commercial other  389,683   377,198   351,034   350,159 
Total commercial  1,664,948   1,644,746   1,619,235   1,508,097 
                 
Residential:                
Real estate construction  63,350   57,160   67,358   57,966 
Real estate mortgage  733,003   722,417   709,570   702,969 
Home equity  111,894   106,299   99,356   91,511 
Total residential  908,247   885,876   876,284   852,446 
                 
Consumer:                
Consumer direct  148,051   144,289   137,754   133,093 
Consumer indirect  527,418   533,727   489,667   444,735 
Total consumer  675,469   678,016   627,421   577,828 
                 
Total loans $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%
Secured by real estate  36.01   36.87   38.06   36.94 
Equipment lease financing  0.01   0.05   0.10   0.18 
Commercial other  12.00   11.76   11.24   11.92 
Total commercial  51.25   51.26   51.85   51.32 
                 
Residential:                
Real estate construction  1.95   1.78   2.16   1.97 
Real estate mortgage  22.57   22.52   22.72   23.93 
Home equity  3.44   3.31   3.18   3.11 
Total residential  27.96   27.61   28.06   29.01 
                 
Consumer:                
Consumer direct  4.56   4.50   4.41   4.53 
Consumer indirect  16.23   16.63   15.68   15.14 
Total consumer  20.79   21.13   20.09   19.67 
                 
Total loans  100.00%  100.00%  100.00%  100.00%

The total loans above are net of deferred loan fees and 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, 2020 
(in thousands) 
Within One
Year
  
After One
but Within
Five Years
  
After Five
Years
  Total 
Commercial secured by real estate and commercial other $213,943  $471,351  $1,086,569  $1,771,863 
Commercial and real estate construction  61,988   18,220   125,768   205,976 
  $275,931  $489,571  $1,212,337  $1,977,839 
                 
Rate sensitivity:                
Fixed rate $53,395  $331,251  $22,277  $406,923 
Adjustable rate  222,536   158,320   1,190,060   1,570,916 
  $275,931  $489,571  $1,212,337  $1,977,839 

Nonperforming Assets

(in thousands) 2020  2019  2018  2017  2016 
Nonaccrual loans $9,444  $13,999  $11,867  $18,119  $16,623 
90 days or more past due and still accruing interest  17,133   19,620   10,198   10,176   10,847 
Total nonperforming loans  26,577   33,619   22,065   28,295   27,470 
                     
Other repossessed assets  0   0   42   155   103 
Foreclosed properties  7,694   19,480   27,273   31,996   35,856 
Total nonperforming assets $34,271  $53,099  $49,380  $60,446  $63,429 
                     
Nonperforming assets to total loans and foreclosed properties  0.96%  1.62%  1.53%  1.92%  2.13%
Allowance to nonperforming loans  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 
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 
Commercial secured by real estate  3,759   0.32   8,820   0.75   1,169,975 
Equipment lease financing  0   0.00   0   0.00   481 
Commercial other  3,839   0.99   2,586   0.66   389,683 
Real estate construction  634   1.00   0   0.00   63,350 
Real estate mortgage  4,821   0.66   7,088   0.97   733,003 
Home equity  716   0.64   344   0.31   111,894 
Consumer direct  0   0.00   97   0.07   148,051 
Consumer indirect  0   0.00   448   0.08   527,418 
Total $13,999   0.43% $19,620   0.60% $3,248,664 

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, 2020.  See note 18 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%

The allowance for credit 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 1and 4 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) 2020  2019  2018 
Deposits:         
Noninterest bearing deposits $1,030,911  $828,281  $810,270 
Interest bearing deposits  75,183   52,346   57,166 
Money market accounts  1,136,088   983,530   755,970 
Savings accounts  471,502   406,207   421,426 
Certificates of deposit of $100,000 or more  539,049   534,835   669,386 
Certificates of deposit < $100,000 and other time deposits  536,623   576,878   586,644 
Total deposits  3,789,356   3,382,077   3,300,862 
             
Other borrowed funds:            
Repurchase agreements and federal funds purchased  293,158   233,484   244,647 
Advances from Federal Home Loan Bank  473   1,959   1,512 
Long-term debt  59,291   59,431   59,341 
Total other borrowed funds  352,922   294,874   305,500 
Total deposits and other borrowed funds $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.

Maturities and/or repricing of time deposits of $100,000 or more outstanding at December 31, 2020 are summarized as follows:

(in thousands) Certificates of Deposit  Other Time Deposits  Total 
Three months or less $91,481  $8,659  $100,140 
Over three through six months  85,903   9,776   95,679 
Over six through twelve months  263,774   18,259   282,033 
Over twelve through sixty months  104,455   23,916   128,371 
Over sixty months  0   0   0 
  $545,613  $60,610  $606,223 

Item 2.Properties

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, 2020.

LocationOwnedLeasedTotal
Banking locations:   
Community Trust Bank, Inc.   
* Pikeville Market (lease land at 3 owned locations)9110
10 locations in Pike County, Kentucky   
Floyd/Knott/Johnson Market (lease land at 1 owned location)314
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)202
1 location in Pike County, Kentucky, 1 location in Mingo County, West Virginia   
Whitesburg Market (lease land at 1 owned location)415
5 locations in Letcher County, Kentucky   
Hazard Market (lease land at 2 owned locations)303
3 locations in Perry County, Kentucky   
* Lexington Market (lease land at 3 owned locations)426
6 locations in Fayette County, Kentucky   
Winchester Market202
2 locations in Clark County, Kentucky   
Richmond Market (lease land at 1 owned location)303
3 locations in Madison County, Kentucky   
Mt. Sterling Market202
2 locations in Montgomery County, Kentucky   
* Versailles Market (lease land at 1 owned location)235
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)303
2 locations in Boyle County, Kentucky and 1 location in Mercer County, Kentucky   
*Ashland Market (lease land at 1 owned location)505
4 locations in Boyd County, Kentucky and 1 location in Greenup County, Kentucky   
Flemingsburg Market303
3 locations in Fleming County, Kentucky   
Advantage Valley Market314
2 locations in Lincoln County, West Virginia, 1 location in Wayne County, West Virginia, and 1 location in Cabell County, West Virginia   
Summersville Market101
1 location in Nicholas County, West Virginia   
Middlesboro Market (lease land at 1 owned location)303
3 locations in Bell County, Kentucky   
Williamsburg Market505
2 locations in Whitley County, Kentucky and 3 locations in Laurel County, Kentucky   
Campbellsville Market (lease land at 2 owned locations)808
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 Market202
2 locations in Rockcastle County, Kentucky   
*LaFollette Market
303
2 locations in Campbell County, Tennessee and 1 location in Anderson County, Tennessee   
Total banking locations70979
Operational locations:   
Community Trust Bank, Inc.   
Pikeville (Pike County, Kentucky) (lease land at 1 owned location)101
Total operational locations101
    
Total locations71980

*Community Trust and Investment Company has leased offices in the main office locations in these markets.

See notes 7 and 15 to the consolidated financial statements included herein for the year ended December 31, 2020, for additional information relating to lease commitments and amounts invested in premises and equipment.

Versailles Main location was sold in January 2021.

Item 3.Legal Proceedings

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; 74Chairman, President and CEO1992 Chairman, President and CEO of Community Trust Bancorp, Inc.
     
Mark A. Gooch; 62Executive Vice President and Secretary1997 President and CEO of Community Trust Bank, Inc.
     
Larry W. Jones; 74Executive Vice President2002 Executive Vice President/ Central Kentucky Region President of Community Trust Bank, Inc.
     
James B. Draughn; 61Executive Vice President2001 Executive Vice President/Operations of Community Trust Bank, Inc.
     
Kevin J. Stumbo; 60Executive Vice President, Chief Financial Officer, and Treasurer2002 Executive Vice President/ Chief Financial Officer of Community Trust Bank, Inc.
     
Ricky D. Sparkman; 58Executive Vice President2002 Executive Vice President/ South Central Region President of Community Trust Bank, Inc.
     
Richard W. Newsom; 66Executive Vice President2002 Executive Vice President/ Eastern Region President of Community Trust Bank, Inc.
     
James J. Gartner; 79Executive Vice President2002 Executive Vice President/ Chief Credit Officer of Community Trust Bank, Inc.
     
Steven E. Jameson; 64Executive Vice President2004(2)Executive Vice President/ Chief Internal Audit & Risk Officer
     
D. Andrew Jones; 58Executive Vice President2010 Executive Vice President/ Northeastern Region President of Community Trust Bank, Inc.
     
Andy D. Waters; 55Executive Vice President2011 President and CEO of Community Trust and Investment Company
     
C. Wayne Hancock; 46Executive Vice President2014 Executive Vice President/Senior Staff Attorney

(1)The ages listed for CTBI’s executive officers are as of February 26, 2021.

(2)Mr. Jameson is a non-voting member of the Executive Committee.

PART II

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, 2021, there were approximately 6,600 holders of record of our outstanding common shares.

Dividends

The annual dividend paid to our stockholders was increased from $1.48 per share to $1.53 per share during 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 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 20 to the consolidated financial statements included herein for the year ended December 31, 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 stock through the stock repurchase program during the 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, 2015 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

graphic

Fiscal Year Ending December 31 ($)     
 201520162017201820192020
Community Trust Bancorp, Inc.100.00145.48141.96123.55150.09124.15
NASDAQ Stock Market (U.S.)100.00113.01137.17129.71170.14206.32
NASDAQ Bank Stocks100.00126.54149.82125.25171.82149.83

Item 6.Selected Financial Data 2016-2020

(in thousands except ratios, per share amounts and # of employees)

Year Ended December 31 2020  2019  2018  2017  2016 
Interest income $176,441  $185,398  $171,450  $155,696  $146,576 
Interest expense  25,450   40,513   29,295   18,294   13,555 
Net interest income  150,991   144,885   142,155   137,402   133,021 
Provision for loan losses  16,047   4,819   6,167   7,521   7,872 
Noninterest income  54,560   50,184   51,952   48,508   48,441 
Noninterest expense  119,239   118,258   117,398   109,878   107,126 
Income before income taxes  70,265   71,992   70,542   68,511   66,464 
Income taxes  10,761   7,452   11,314   17,018   19,118 
Net income $59,504  $64,540  $59,228  $51,493  $47,346 
                     
Per common share:                    
Basic earnings per share $3.35  $3.64  $3.35  $2.92  $2.70 
Diluted earnings per share $3.35  $3.64  $3.35  $2.92  $2.70 
Cash dividends declared- $1.53  $1.48  $1.38  $1.30  $1.26 
as a % of net income  45.67%  40.66%  41.19%  44.52%  46.67%
Book value, end of year $36.77  $34.56  $31.81  $30.00  $28.40 
Market price, end of year $37.05  $46.64  $39.61  $47.10  $49.60 
Market to book value, end of year  1.01x  1.35x  1.25x  1.57x  1.75x
Price/earnings ratio, end of year  11.06x  12.81x  11.82x  16.13x  18.37x
Cash dividend yield, for the year  4.13%  3.17%  3.48%  2.76%  2.54%
                     
At year-end:                    
Total assets $5,139,141  $4,366,003  $4,201,616  $4,136,231  $3,932,169 
Long-term debt  57,841   57,841   59,341   59,341   61,341 
Shareholders’ equity  654,865   614,886   564,150   530,699   500,615 
                     
Averages:                    
Assets $4,838,160  $4,328,024  $4,187,397  $4,068,970  $3,920,257 
Deposits, including repurchase agreements  4,079,810   3,610,589   3,540,717   3,406,627   3,306,550 
Earning assets  4,562,172   4,043,975   3,913,596   3,799,128   3,652,714 
Loans  3,453,529   3,195,662   3,150,878   3,048,879   2,916,031 
Shareholders’ equity  635,978   595,337   546,641   518,767   494,398 
                     
Profitability ratios:                    
Return on average assets  1.23%  1.49%  1.41%  1.27%  1.21%
Return on average equity  9.36   10.84   10.83   9.93   9.58 
                     
Capital ratios:                    
Equity to assets, end of year  12.74%  14.08%  13.43%  12.83%  12.73%
Average equity to average assets  13.15   13.76   13.05   12.75   12.61 
                     
Other significant ratios:                    
Allowance to net loans, end of year  1.35%  1.08%  1.12%  1.16%  1.22%
Allowance to nonperforming loans, end of year  180.69   104.39   162.73   127.76   130.81 
Nonperforming assets to loans and foreclosed properties, end of year  0.96   1.62   1.53   1.92   2.13 
Net interest margin, tax equivalent  3.33   3.60   3.66   3.67   3.70 
Efficiency ratio*  58.30   60.70   60.17   58.66   58.54 
                     
Other statistics:                    
Average common shares outstanding  17,748   17,724   17,687   17,631   17,548 
Number of full-time equivalent employees, end of year  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 
2020            
Net interest income $38,605  $37,680  $38,462  $36,244 
Net interest income, taxable equivalent basis  38,793   37,869   38,643   36,413 
Provision for loan losses  956   2,433   (49)  12,707 
Noninterest income  15,249   14,911   12,879   11,521 
Noninterest expense  33,636   29,473   27,909   28,221 
Net income  15,826   17,447   19,652   6,579 
                 
Per common share:                
Basic earnings per share $0.89  $0.98  $1.11  $0.37 
Diluted earnings per share  0.89   0.98   1.11   0.37 
Dividends declared  0.385   0.385   0.380   0.380 
                 
Selected ratios:                
Return on average assets, annualized  1.24%  1.38%  1.63%  0.60%
Return on average common equity, annualized  9.64   10.81   12.66   4.24 
Net interest margin, annualized  3.20   3.16   3.41   3.58 

Three Months Ended December 31  September 30  June 30  March 31 
2019            
Net interest income $36,356  $36,519  $36,027  $35,983 
Net interest income, taxable equivalent basis  36,532   36,702   36,219   36,203 
Provision for loan losses  1,813   1,253   1,563   190 
Noninterest income  13,373   12,389   12,252   12,170 
Noninterest expense  29,263   29,882   30,030   29,083 
Net income  16,008   15,269   18,324   14,939 
                 
Per common share:                
Basic earnings per share $0.90  $0.86  $1.03  $0.84 
Diluted earnings per share  0.90   0.86   1.03   0.84 
Dividends declared  0.380   0.380   0.360   0.360 
                 
Selected ratios:                
Return on average assets, annualized  1.46%  1.40%  1.69%  1.42%
Return on average common equity, annualized  10.35   10.02   12.45   10.58 
Net interest margin, annualized  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:

Our Business

Financial Goals and Performance

Results of Operations and Financial Condition

Contractual Obligations and Commitments

Liquidity and Market Risk

Interest Rate Risk

Capital Resources

Impact of Inflation, Changing Prices, and Economic Conditions

Stock Repurchase Program

Critical Accounting Policies and Estimates

Our Business

Community Trust Bancorp, Inc. (“CTBI”) is a bank holding company headquartered in Pikeville, Kentucky.  Currently, we own one commercial bank, Community Trust Bank, Inc. (“CTB”) and one trust company, Community Trust and Investment Company.  Through our subsidiaries, we have 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, 2020, we had total consolidated assets of $5.1 billion and total consolidated deposits, including repurchase agreements, of $4.4 billion.  Total shareholders’ equity at December 31, 2020 was $654.9 million.  Trust assets under management at December 31, 2020 were $2.8 billion, including CTB’s investment portfolio totaling $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 2021.  Rather, the goals represent a range of target performance for 2021.  There is no assurance that any or all of these goals will be achieved.  See “Cautionary Statement Regarding Forward Looking Statements.”


 
2020 Goals2020 Performance2021 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
ROAA1.29% - 1.32%1.23%1.30% - 1.35%
ROAE9.09% - 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 revenue24.00% - 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 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.

2020 Highlights

Net interest income for the year ended December 31, 2020 increased $6.1 million, or 4.2%, from December 31, 2019 with a 27 basis point decrease in our net interest margin and a $518.2 million increase in average earning assets.

Provision for credit losses for the year ended December 31, 2020 increased $11.2 million from December 31, 2019.

Our loan portfolio increased $305.5 million, or 9.4%, from December 31, 2019.

Net loan charge-offs for the year ended December 31, 2020 were $6.2 million, or 0.18% of average loans annualized, compared to $5.6 million, or 0.18%, experienced for the year 2019.

Asset quality improved during the year 2020, as nonperforming loans at $26.6 million decreased $7.0 million, or 20.9%, from December 31, 2019.  Nonperforming assets at $34.3 million decreased $18.8 million, or 35.5%, from December 31, 2019.

CTBI experienced significant deposit growth for the year 2020, as deposits, including repurchase agreements, increased $739.5 million, or 20.4%, from December 31, 2019.

Noninterest income for the year ended December 31, 2020 at $54.6 million increased $4.4 million, or 8.7%, compared to the year ended December 31, 2019.

Noninterest expense for the year ended December 31, 2020 was $1.0 million above the year ended December 31, 2019.

COVID-19

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.

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) 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 2020 vs. 2019
Year Ended December 31202020192018AmountPercent
Net interest income$150,991$144,885$142,155$6,1064.2%
Provision for credit losses16,0474,8196,16711,228233.0
Noninterest income54,56050,18451,9524,3768.7
Noninterest expense119,239118,258117,3989810.8
Income taxes10,7617,45211,3143,30944.4
Net income$59,504$64,540$59,228$(5,036)(7.8)%
      
Average earning assets$4,562,172$4,043,975$3,913,596$518,19712.8%
      
Yield on average earnings assets, tax equivalent*3.88%4.60%4.40%(0.72)%(15.7)%
Cost of interest bearing funds0.82%1.42%1.05%(0.60)%(42.3)%
      
Net interest margin,
tax equivalent*
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.

Net Interest Income

Net interest income for the year ended December 31, 2020 of $151.0 million increased $6.1 million, or 4.2%, from prior year.  Average earning assets for the year 2020 increased $518.2 million over prior year.  Our yield on average earning assets  for 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 decreased 60 basis points during the same time period.  Our net interest margin for the year 2020 declined 27 basis points from 2019 to 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, 2020 were 84.7% compared to 88.5% for the year ended December 31, 2019.

Provision for Credit Losses

The provision for credit losses added to the allowance and charged against current earnings for 2020 of $16.0 million was an $11.2 million increase from prior year.  This provision represented the charge necessary 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, 2020 at $54.6 million increased $4.4 million, or 8.7%, compared to the year ended December 31, 2019.  The increase in noninterest income from prior year is the result of increases in gains on sales of loans ($5.3 million), securities gains ($1.0 million), and loan related fees ($1.3 million), offset partially by declines in deposit service charges ($2.9 million) and debt redemption gains ($0.2 million).  Deposit service charges declined primarily due to the impact to overdraft income of a forgiveness period and higher customer liquidity resulting from the CARES Act.

Noninterest Expense

Noninterest expense for the year ended December 31, 2020 at $119.2 million was $1.0 million above the year ended December 31, 2019.   The increase in noninterest expense year over year included increases in personnel expense ($3.4 million), FDIC insurance premiums ($0.8 million), and data processing expense ($0.5 million), partially offset by declines in net other real estate owned expense ($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 $2.4 million charge to post retirement benefits related to our bank owned life insurance as additional liability was recognized for the lower long-term interest rate environment and increased life expectancy in updated mortality tables.

Balance Sheet Review

CTBI’s total assets at $5.1 billion increased $773.1 million, or 17.7%, from December 31, 2019.  Loans outstanding at December 31, 2020 were $3.6 billion, increasing $305.5 million, or 9.4%, year over year.  We experienced growth during the year of $228.6 million in the commercial loan portfolio, $92.6 million in the indirect loan portfolio, and $4.2 million in the consumer direct loan portfolio, offset partially by a $19.9 million decrease in the residential 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 $397.4 million, or 66.0%, from December 31, 2019.  Deposits in other banks increased $78.0 million from December 31, 2019.  Deposits, including repurchase agreements, at $4.4 billion increased $739.5 million, or 20.4%, from December 31, 2019.

Shareholders’ equity at December 31, 2020 was $654.9 million, a 6.5% increase from the $614.9 million at December 31, 2019.  CTBI’s annualized dividend yield to shareholders as of December 31, 2020 was 4.16%.

Loans

(in thousands) December 31, 2020 
Loan Category Balance  
Variance
from Prior
Year
  
Net Charge-
Offs
  Nonperforming  ACL 
Commercial:               
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  1,893,527   13.7   (3,862)  16,413   27,577 
                     
Residential:                    
Real estate mortgage  784,559   (1.5)  (249)  8,766   7,832 
Home equity  103,770   (7.3)  6   974   844 
Total residential  888,329   (2.2)  (243)  9,740   8,676 
                     
Consumer:                    
Consumer direct  152,304   2.9   (417)  71   1,863 
Consumer indirect  620,051   17.6   (1,639)  353   9,906 
Total consumer  772,355   14.3   (2,056)  424   11,769 
                     
Total loans $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.  Accruing loans 90+ days past due decreased $2.5 million from December 31, 2019.  Nonaccrual loans decreased $4.6 million from December 31, 2019.  Accruing loans 30-89 days past due at $12.5 million was a decrease of $10.5 million from December 31, 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, nonaccrual status, and adequate loan loss reserves.  The Loan Review Department has annually reviewed on average 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 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.  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.  Sales of foreclosed properties for the year ended December 31, 2020 totaled $14.8 million while new foreclosed properties totaled $4.4 million.  At December 31, 2020, the book value of properties under contracts to sell was $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 2020 to reflect the decrease in current market values of foreclosed properties totaled $1.5 million.  Charges during the year ended December 31, 2019 were $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 eighty-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.

The appraisal aging analysis of foreclosed properties, as well as the holding period, at December 31, 2020 is shown below:

(in thousands) 
Appraisal Aging AnalysisHolding Period Analysis
Days Since Last
Appraisal
Number of
Properties
Current Book
Value
Holding Period
Current Book
Value
Up to 3 months17$1,953Less than one year$2,579
3 to 6 months61,5211 year1,346
6 to 9 months32132 years656
9 to 12 months167853 years690
12 to 18 months192,3724 years267
18 to 24 months66355 years360
Over 24 months42156 years809
Total71$7,6947 years50
   8 years784
   9 years153
   Total$7,694

Regulatory approval is required and has been obtained to hold foreclosed properties beyond the initial period of 5 years.  Additionally, CTBI is required to dispose of any foreclosed property that has not been sold within 10 years.  As of December 31, 2020, three foreclosed properties with a total book value of $0.2 million had been held by us for at least nine years.  One property totaling $6.8 million that had been held for nine years at September 30, 2020 was sold during the fourth quarter 2020.

Net loan charge-offs for the year were $6.2 million, or 0.18% of average loans annualized, an increase from prior year’s $5.6 million, or 0.18% of average loans annualized.  Of the total net charge-offs, $3.9 million were in commercial loans, $1.6 million were in indirect auto loans, $0.4 million were in direct consumer loans, and $0.3 million were in residential real estate mortgage loans.

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, 2020, the aggregate contractual obligations and commitments are:

Contractual Obligations: Payments Due by Period 
(in thousands) Total  1 Year  2-5 Years  After 5 Years 
Deposits without stated maturity $2,975,411  $2,975,411  $0  $0 
Certificates of deposit and other time deposits  1,040,671   831,609   208,795   267 
Repurchase agreements and federal funds purchased  356,362   356,362   0   0 
Advances from Federal Home Loan Bank  395   22   82   291 
Interest on advances from Federal Home Loan Bank*  1   0   1   0 
Long-term debt  57,841   0   0   57,841 
Interest on long-term debt*  32,963   1,087   5,398   26,478 
Annual rental commitments under leases  18,296   1,792   6,063   10,441 
Total contractual obligations $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 
(in thousands) Total  1 Year  2-5 Years  After 5 Years 
Standby letters of credit $32,126  $31,946  $180  $0 
Commitments to extend credit  623,920   497,549   52,938   73,433 
Total other commitments $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 17 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, 2020, we had approximately $338.2 million in cash and cash equivalents and approximately $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 $264.7 million and $599.8 million at December 31, 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.  At December 31, 2019, we had $37.1 million in brokered deposits with a weighted average maturity of 0.71 years.  As of December 31, 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, 2020 and December 31, 2019.  As of December 31, 2020, we had a $477.2 million available borrowing position with the Federal Home Loan Bank compared to $391.9 million at December 31, 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, 2020, we had $75 million in lines of credit with various correspondent banks available to meet any future cash 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, 2020 were deposits with the Federal Reserve of $280.7 million compared to $203.6 million at 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 December 31, 2020, available-for-sale (“AFS”) securities comprised all of the total investment portfolio, and the AFS portfolio was approximately 152% of equity capital.  Eighty-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)
+40011.96%
+3008.02%
+2004.76%
+1002.15%
-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)
+40011.22%
+3008.61%
+2005.78%
+1002.83%
-100(2.65)%

The simulation model used the yield curve spread evenly over a twelve-month period.  The measurement at December 31, 2020 estimates that our net interest income in an up-rate environment would increase by 11.96% at a 400 basis point change, 8.02% increase at a 300 basis point change, 4.76% increase at a 200 basis point change, and a 2.15% increase at a 100 basis point change.  In a down-rate environment, net interest income would decrease 0.63% at a 25 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, proceeds of $347.0 million and $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, 2020 is presented below.  In the 12 month cumulative repricing gap, rate sensitive liabilities (“RSL”) exceeded rate sensitive assets (“RSA”) by $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
 
                      
Assets $1,910,156  $247,105  $211,578  $223,941  $1,190,898  $638,043  $717,420 
                             
Liabilities and
equity
  2,265,588   165,612   266,824   378,390   141,450   71,455   1,849,821 
                             
Periodic repricing gap  (355,433)  81,493   (55,246)  (154,449)  1,049,448   566,588   (1,132,401)
                             
Cumulative gap  (355,433)  (273,940)  (329,186)  (483,635)  565,814   1,132,401   0 
                             
RSA/RSL  0.84x  1.49x  0.79x  0.59x  8.42x  8.93x  0.39x
                             
Cumulative gap to total assets  (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 2020 of 4.16% to shareholders.  Shareholders’ equity increased 6.5% from December 31, 2019 to $654.9 million at December 31, 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.  We retained 54.3% of our earnings in 2020 compared to 59.3% in 2019.

Insured depository institutions are required to meet certain capital level requirements.  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 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 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.  Accordingly, a qualifying community banking organization that has a community bank leverage ratio greater than 9% will be considered to have met: (i) the risk-based and leverage capital requirements of the generally applicable capital rules; (ii) the capital ratio requirements in order to be considered well-capitalized under the prompt corrective action framework; and (iii) any other applicable capital or leverage requirements.

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.  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 elected to use the CBLR framework 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, 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.

We are all finding ourselves living and operating in unprecedented times as the COVID-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 critical 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 our strong capital position and culture 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 economic conditions and the implications of the impact of COVID-19 to the future for our customers had a material impact on our first quarter provision for credit losses.  We will continue to serve our constituents while we all meet the challenges of 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 July 2000, May 2003, and March 2020.  CTBI repurchased 32,664 shares of its common stock during the first quarter 2020, leaving 1,034,706 shares remaining under our current repurchase authorization.  As of December 31, 2020, a total of 2,465,294 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 2020:

Board
Authorizations
Repurchases*
Shares Available for
Repurchase
 Average Price ($)# of Shares
1998500,000-0 
1999014.45144,669 
20001,000,00010.25763,470 
2001013.35489,440 
2002017.71396,316 
20031,000,00019.62259,235 
2004023.1460,500 
20050-0 
20060-0 
2007028.56216,150 
2008025.53102,850 
2009-20190-0 
20201,000,00033.6432,664 
Total3,500,00016.172,465,2941,034,706

*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.

With the implementation 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 purchased.  At December 31, 2020, CTBI held no securities designated as held-to-maturity.

CTBI accounts for equity securities in accordance with Accounting Standards Codification (“ASC”) 321, Investments – 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.  As 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.  CTBI has made this election for 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 credit losses, and unamortized deferred fees or 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.  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 Credit 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 credit losses (“ACL”) at a level that is appropriate to cover estimated credit losses on individually evaluated loans, 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 ACL.

We utilize an internal risk grading system for commercial credits.  Those credits that meet the following criteria are subject to individual 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.  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 loan segments not subject to individual evaluation.

Homogenous loans, such as consumer installment, residential mortgages, and home equity lines are not individually risk graded.  The associated ACL for these loans is measured in pools with similar risk characteristics under ASC 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 sell.  For commercial loans greater than $1 million and classified as criticized, troubled debt restructuring, or nonaccrual, a specific reserve is established if a loss is determined to be possible and then charged-off once it is 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.  With 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 consumer 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, trends in loan losses, 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 ACL 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, and 2018, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes.

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
 2020  2019 
Assets:      
Cash and due from banks $54,250  $58,680 
Interest bearing deposits  283,985   206,003 
Cash and cash equivalents  338,235   264,683 
         
Certificates of deposit in other banks  245   245 
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  2,471   1,953 
Loans held for sale  23,259   1,167 
         
Loans  3,554,211   3,248,664 
Allowance for credit losses*  (48,022)  (35,096)
Net loans  3,506,189   3,213,568 
         
Premises and equipment, net  42,001   44,046 
Right-of-use assets  13,215   14,550 
Federal Home Loan Bank stock  10,048   10,474 
Federal Reserve Bank stock  4,887   4,887 
Goodwill  65,490   65,490 
Bank owned life insurance  72,373   69,269 
Mortgage servicing rights  4,068   3,263 
Other real estate owned  7,694   19,480 
Accrued interest receivable  15,818   14,836 
Other assets  35,887   37,731 
Total assets $5,139,141  $4,366,003 
         
Liabilities and shareholders’ equity:        
Deposits:        
Noninterest bearing $1,140,925  $865,760 
Interest bearing  2,875,157   2,539,812 
Total deposits  4,016,082   3,405,572 
         
Repurchase agreements  355,862   226,917 
Federal funds purchased  500   7,906 
Advances from Federal Home Loan Bank  395   415 
Long-term debt  57,841   57,841 
Deferred tax liability  4,687   5,110 
Operating lease liability  12,531   13,729 
Finance lease liability  1,441   1,456 
Accrued interest payable  1,243   2,839 
Other liabilities  33,694   29,332 
Total liabilities  4,484,276   3,751,117 
         
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 2020 – 17,810,401; 2019 – 17,793,165  89,052   88,966 
Capital surplus  225,507   224,907 
Retained earnings  326,738   296,760 
Accumulated other comprehensive income, net of tax  13,568   4,253 
Total shareholders’ equity  654,865   614,886 
         
Total liabilities and shareholders’ equity $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
 2020  2019  2018 
Interest income:         
Interest and fees on loans, including loans held for sale $160,826  $164,991  $154,552 
Interest and dividends on securities:            
Taxable  11,939   12,516   10,015 
Tax exempt  2,380   2,354   2,796 
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock  532   947   1,303 
Interest on Federal Reserve Bank deposits  704   4,434   2,525 
Other, including interest on federal funds sold  60   156   259 
Total interest income  176,441   185,398   171,450 
             
Interest expense:            
Interest on deposits  21,177   33,371   23,714 
Interest on repurchase agreements and federal funds purchased  2,788   4,631   3,312 
Interest on advances from Federal Home Loan Bank  0   39   27 
Interest on long-term debt  1,485   2,472   2,242 
Total interest expense  25,450   40,513   29,295 
             
Net interest income  150,991   144,885   142,155 
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  23,461   26,359   25,974 
Gains on sales of loans, net  7,226   1,880   1,288 
Trust and wealth management income  10,931   10,804   11,313 
Loan related fees  4,041   2,742   3,729 
Bank owned life insurance  2,306   2,397   3,672 
Brokerage revenue  1,483   1,367   1,354 
Securities gains (losses)  1,769   783   (85)
Other noninterest income  3,343   3,852   4,707 
Total noninterest income  54,560   50,184   51,952 
             
Noninterest expense:            
Officer salaries and employee benefits  15,257   12,614   12,906 
Other salaries and employee benefits  51,170   50,413   48,656 
Occupancy, net  7,912   7,845   8,167 
Equipment  2,737   3,000   2,878 
Data processing  7,941   7,417   6,680 
Bank franchise tax  7,299   6,771   6,557 
Legal fees  1,634   1,968   1,637 
Professional fees  2,091   2,188   2,093 
Advertising and marketing  2,980   3,283   2,995 
FDIC insurance  1,056   266   1,171 
Other real estate owned provision and expense  2,655   5,490   4,324 
Repossession expense  717   1,042   1,249 
Amortization of limited partnership investments  3,759   3,422   2,527 
Other noninterest expense  12,031   12,539   15,558 
Total noninterest expense  119,239   118,258   117,398 
             
Income before income taxes  70,265   71,992   70,542 
Income taxes  10,761   7,452   11,314 
Net income $59,504  $64,540  $59,228 
             
Other comprehensive income (loss):            
Unrealized holding gains (losses) on debt securities available-for-sale:            
Unrealized holding gains (losses) arising during the period  13,839   14,270   (5,393)
Less: Reclassification adjustments for realized gains (losses) included in net income  1,251   3   (821)
Tax expense (benefit)  3,273   3,403   (960)
Other comprehensive income (loss), net of tax  9,315   10,864   (3,612)
Comprehensive income $68,819  $75,404  $55,616 
             
Basic earnings per share $3.35  $3.64  $3.35 
Diluted earnings per share $3.35  $3.64  $3.35 
             
Weighted average shares outstanding-basic  17,748   17,724   17,687 
Weighted average shares outstanding-diluted  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 
Balance, January 1, 2018  17,692,912  $88,465  $221,472  $224,268  $(3,506) $530,699 
Net income              59,228       59,228 
Other comprehensive loss, net of tax of $(960)                  (3,612)  (3,612)
Cash dividends declared ($1.38 per share)              (24,412)      (24,412)
Issuance of common stock  42,133   211   1,019           1,230 
Issuance of restricted stock  11,320   57   (57)          0 
Vesting of restricted stock  (11,997)  (60)  60           0 
Forfeiture of restricted stock  (1,515)  (8)  8           0 
Stock-based compensation          659           659 
Implementation of ASU 2014-09              358       358 
Implementation of ASU 2016-01              (507)  507   0 
Balance, December 31, 2018  17,732,853   88,665   223,161   258,935   (6,611)  564,150 
Net income              64,540       64,540 
Other comprehensive income, net of tax of $3,403                  10,864   10,864 
Cash dividends declared ($1.48 per share)              (26,235)      (26,235)
Issuance of common stock  45,639   228   1,036           1,264 
Issuance of restricted stock  27,921   140   (140)          0 
Vesting of restricted stock  (12,660)  (64)  64           0 
Forfeiture of restricted stock  (588)  (3)  3           0 
Stock-based compensation          783           783 
Implementation of ASU 2016-02              (480)      (480)
Balance, December 31, 2019  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
 2020  2019  2018 
Cash flows from operating activities:         
Net income $59,504  $64,540  $59,228 
Adjustments to reconcile net income to net cash provided by operating activities:            
Depreciation and amortization  5,346   5,515   3,786 
Deferred taxes  (2,909)  (1,412)  (246)
Stock-based compensation  944   859   710 
Provision for credit losses*  16,047   4,819   6,167 
Write-downs of other real estate owned and other repossessed assets  1,454   4,295   2,530 
Gains on sale of loans held for sale  (7,226)  (1,880)  (1,288)
Securities (gains) losses  (1,251)  (3)  85 
Fair value adjustment in equity securities  (518)  (780)  0 
Gain on debt repurchase  0   (219)  0 
(Gains) losses on sale of assets, net  390   360   (175)
Proceeds from sale of mortgage loans held for sale  347,048   94,507   56,689 
Funding of mortgage loans held for sale  (361,913)  (91,333)  (56,829)
Amortization of securities premiums and discounts, net  5,907   5,042   4,679 
Change in cash surrender value of bank owned life insurance  (1,371)  (1,567)  (2,924)
Payment of operating lease liabilities  (1,682)  (1,663)  0 
Mortgage servicing rights:            
Fair value adjustments  1,064   975   343 
New servicing assets created  (1,869)  (631)  (466)
Changes in:            
Accrued interest receivable  (982)  (404)  (1,094)
Other assets  1,845   4,941   (14,694)
Accrued interest payable  (1,596)  (63)  (674)
Other liabilities  4,147   (2,440)  9,660 
Net cash provided by operating activities  62,379   83,458   65,487 
             
Cash flows from investing activities:            
Certificates of deposit in other banks:            
Purchase of certificates of deposit  (245)  0   0 
Maturity of certificates of deposit  245   3,675   5,880 
Securities available-for-sale (AFS):            
Purchase of AFS securities  (857,167)  (196,727)  (281,511)
Proceeds from sales of AFS securities  186,194   25,734   153,315 
Proceeds from prepayments, calls, and maturities of AFS securities  281,487   174,125   109,701 
Securities held-to-maturity (HTM):            
Proceeds from prepayments and maturities of HTM securities  517   132   10 
Change in loans, net  (306,523)  (46,162)  (93,151)
Purchase of premises and equipment  (1,482)  (2,570)  (2,832)
Proceeds from sale and retirement of premises and equipment  1   48   97 
Redemption of stock by Federal Home Loan Bank  426   4,239   3,214 
Proceeds from sale of other real estate owned and repossessed assets  4,754   3,641   3,485 
Additional investment in bank owned life insurance  (1,733)  (1,241)  0 
Proceeds from settlement of bank owned life insurance  0   615   1,202 
Net cash used in investing activities  (693,526)  (34,491)  (100,590)
             
Cash flows from financing activities:            
Change in deposits, net  610,510   99,622   42,087 
Change in repurchase agreements and federal funds purchased, net  121,539   931   (17,234)
Advances from Federal Home Loan Bank  25,000   30,000   0 
Payments on advances from Federal Home Loan Bank  (25,020)  (30,021)  (409)
Payment of finance lease liabilities  (15)  (14)  0 
Repurchase of long-term debt  0   (1,281)  0 
Issuance of common stock  926   1,264   1,230 
Repurchase of stock  (1,099)  0   0 
Dividends paid  (27,142)  (26,235)  (24,395)
Net cash provided by financing activities  704,699   74,266   1,279 
Net increase (decrease) in cash and cash equivalents  73,552   123,233   (33,824)
Cash and cash equivalents at beginning of year  264,683   141,450   175,274 
Cash and cash equivalents at end of year $338,235  $264,683  $141,450 
             
Supplemental disclosures:            
Income taxes paid $13,275  $9,988  $9,700 
Interest paid  27,047   40,576   28,621 
Non-cash activities:            
Loans to facilitate the sale of other real estate owned and repossessed assets  9,632   2,879   4,385 
Common stock dividends accrued, paid in subsequent quarter  239   221   221 
Real estate acquired in settlement of loans  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 credit 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 credit 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.


With the implementation 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 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 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. 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. As 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. CTBI has made this election for 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 credit losses, and unamortized deferred fees or 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. 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 2016-02 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 2018-11 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 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 2018-11 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).


Allowance for Credit 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 credit losses (“ACL”) at a level that is appropriate to cover estimated credit losses on individually evaluated loans, 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 ACL.


We utilize an internal risk grading system for commercial credits.  Those credits that meet the following criteria are subject to individual 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. 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 loan segments not subject to individual evaluation.


Homogenous loans, such as consumer installment, residential mortgages, and home equity lines are not individually risk graded. The associated ACL for these loans is measured in pools with similar risk characteristics under ASC 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 sell. For commercial loans greater than $1 million and classified as criticized, troubled debt restructuring, or nonaccrual, a specific reserve is established if a loss is determined to be possible and then charged-off once it is 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. With 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 consumer 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, trends in loan losses, 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 ACL 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. 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.


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 banking 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.

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. 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.


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, and 2018, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes.


Earnings Per Share (“EPS”) – Basic EPS is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding, excluding restricted shares.


Diluted EPS adjusts the number of weighted average shares of common stock outstanding by the dilutive effect of stock options, including restricted shares, as prescribed in ASC 718, Share-Based Payment.


Segments  Management analyzes the operation of CTBI assuming 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 14 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.


New Accounting Standards


          Accounting for Credit Losses – In 2016, the FASB issued 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. This ASU requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets. 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 are 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 2016-13 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 utilize a single economic forecast over a twelve month reasonable and supportable forecast period with immediate reversion to historical losses. CTBI adopted this ASU effective January 1, 2020 using the modified retrospective approach. The effect of adoption was a $3.0 million increase in the allowance for credit losses (formerly referred to as the allowance for loan losses) and a $112 thousand increase in other liabilities for off-balance sheet credit exposure with a related decrease in shareholders’ equity of $2.4 million, net of deferred tax. The table below shows the impact of the adoption of 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 provided 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.


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 adopted CECL effective January 1, 2020 and chose the option to delay the estimated impact on regulatory capital using the relief options described above.


         Simplifying the Test for Goodwill Impairment – In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment. These amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements from any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.  An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.  The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods with those fiscal years, to be implemented on a prospective basis. CTBI adopted ASU 2017-04 with no impact on our consolidated financial statements.


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

Removals


The following disclosure requirements were removed from Topic 820:

The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy
The policy for timing of transfers between levels
The valuation processes for Level 3 fair value measurements

Modifications


The following disclosure requirements were modified in Topic 820:

For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and
The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

Additions


The following disclosure requirements were added to Topic 820:

The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and
The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.  For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.


In addition, the amendments eliminate “at a minimum” from the phrase “an entity shall disclose at a minimum” to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements.


CTBI adopted ASU 2018-13 effective January 1, 2020 with minimal changes 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).


This ASU was effective beginning January 1, 2020 with no significant impact to our consolidated financial statements.

        Simplifying the Accounting for Income Taxes – In December 2019, the FASB issued ASU 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 ReportingIn 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 at 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 requirement was $78.0 million at December 31, 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, 2020, CTBI had cash accounts which exceeded federally insured limits, and therefore were not subject to FDIC insurance, with $280.7 million in deposits with the Federal Reserve, $21.3 million in deposits with US Bank, $0.4 million in deposits with Fifth Third Bank, and $3.3 million in deposits with the Federal Home Loan Bank.


3.  Securities


Debt 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, 2020 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 
(in thousands) 
Amortized
Cost
  Fair Value 
Due in one year or less $77,420  $77,424 
Due after one through five years  18,480   19,005 
Due after five through ten years  96,870   98,417 
Due after ten years  89,024   94,363 
U.S. government sponsored agency mortgage-backed securities  640,537   651,807 
Other debt securities  56,443   56,245 
Total debt securities $978,774  $997,261 


In 2020, we had a net securities gain of $1.8 million.  There was a net gain of $1.3 million realized on sales and calls of AFS securities, consisting of a pre-tax gain of $1.5 million and a pre-tax loss of $0.2 million, and an unrealized gain of $0.5 million from the fair market value adjustment of equity securities.  There was a net gain of $0.8 million realized in 2019 and a net loss of $0.1 million realized in 2018.

Equity Securities at Fair Value


CTBI made the election permitted by ASC 321-10-35-2 to record its Visa Class B shares at fair value.  Equity securities at fair value as of December 31, 2020 were $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.


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.


CTBI evaluates its investment portfolio on a quarterly basis for impairment.  The analysis performed as of December 31, 2020 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, 2020 was 16.2% compared to 42.8% as of December 31, 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 

U.S. Treasury and Government Agencies


The unrealized losses in U.S. Treasury and government agencies were caused by interest rate 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 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.

State and Political Subdivisions


The unrealized losses in securities of state and political subdivisions were caused by interest rate 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 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.

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 changes.  CTBI expects to recover the amortized cost basis over the term of the securities.  CTBI does not intend to sell the investments and it is not more likely than not we will be required to sell the investments before recovery of their amortized cost.

Other Debt Securities


The unrealized losses in other debt securities were caused by interest rate 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 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.


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
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. 2016-13Financial 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 10 portfolio 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.


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.  Additionally, any hotel/motel construction loans would be included in this segment as CTBI’s construction loans are primarily completed as one loan going from construction to permanent financing.  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 residential loans are 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, 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.



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.  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 agricultural loans, receivable financing, 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 equipment, or other assets, although such loans may be uncollateralized but guaranteed.


CTBI 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.


Residential real estate loans are a mixture of fixed rate and adjustable rate first and second lien residential mortgage 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 $23.3 million at December 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 residential 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 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, 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 Note 1 to 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:

 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 still accruing as well):

 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, 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 
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.  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 this 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


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 and based on last credit decision or year of origination:

 Term Loans Amortized Cost Basis by Origination Year 
(in thousands)
 2020  2019  2018  2017  2016  Prior  
Revolving
Loans
  Total 
Hotel/motel                        
Risk rating:                        
Pass $11,507  $70,504  $27,453  $39,651  $6,357  $22,372  $0  $177,844 
Watch  23,951   2,506   3,366   2,102   16,740   7,422       56,087 
OAEM  0   1,993   9,576   0   0   0   0   11,569 
Substandard  0   0   0   1,113   8,840   5,246   0   15,199 
Doubtful  0   0   0   0   0   0   0   0 
Total hotel/motel $35,458  $75,003  $40,395  $42,866  $31,937  $35,040  $0  $260,699 
                                 
Commercial real estate residential                                
Risk rating:                                
Pass $85,403  $39,238  $29,179  $17,390  $21,272  $46,419  $10,470  $249,371 
Watch  1,714   2,214   2,438   2,962   4,520   5,306   182   19,336 
OAEM  1,921   1,361   323   142   129   0   0   3,876 
Substandard  4,301   606   1,991   4,076   1,108   3,263   0   15,345 
Doubtful  0   0   0   0   0   0   0   0 
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:

 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 


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 began, 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 at December 31, 2019 was $2.4 million.


In accordance with ASC 326-20-30-2, if a loan does not share risk characteristics with other pooled loans in determining the allowance for credit losses, the loan 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 and 2018.

 December 31, 2019 
(in thousands) 
Recorded
Balance
  
Unpaid
Contractual
Principal
Balance
  
Specific
Allowance
  
Average
Investment
in
Impaired
Loans
  
*Interest
Income
Recognized
 
Loans without a specific valuation allowance:               
Commercial construction $2,836  $2,837  $0  $3,234  $170 
Commercial secured by real estate  40,346   41,557   0   36,976   1,601 
Commercial other  7,829   9,489   0   9,889   460 
Real estate mortgage  2,309   2,309   0   2,385   85 
                     
Loans with a specific valuation allowance:                    
Commercial construction  174   174   99   215   11 
Commercial secured by real estate  1,033   2,176   227   1,678   15 
Commercial other  3,244   3,244   886   1,323   29 
                     
Totals:                    
Commercial construction  3,010   3,011   99   3,449   181 
Commercial secured by real estate  41,379   43,733   227   38,654   1,616 
Commercial other  11,073   12,733   886   11,212   489 
Real estate mortgage  2,309   2,309   0   2,385   85 
Total $57,771  $61,786  $1,212  $55,700  $2,371 

 December 31, 2018 
(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 $4,100  $4,100  $0  $3,923  $171 
Commercial secured by real estate  29,645   31,409   0   30,250   1,412 
Commercial other  8,285   9,982   0   8,774   530 
Real estate construction  0   0   0   106   0 
Real estate mortgage  1,882   1,882   0   1,666   41 
                     
Loans with a specific valuation allowance:                    
Commercial construction  127   127   50   42   0 
Commercial secured by real estate  1,854   2,983   605   2,051   1 
Commercial other  473   473   146   285   16 
                     
Totals:                    
Commercial construction  4,227   4,227   50   3,965   171 
Commercial secured by real estate  31,499   34,392   605   32,301   1,413 
Commercial other  8,758   10,455   146   9,059   546 
Real estate construction  0   0   0   106   0 
Real estate mortgage  1,882   1,882   0   1,666   41 
Total $46,366  $50,956  $801  $47,097  $2,171 



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, 2020 and 2019:

 
Year Ended
December 31, 2020
 
  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  12   637   53   690 
Total commercial loans  43   13,739   2,644   16,383 
                 
Real estate mortgage  4   1,496   0   1,496 
Total residential loans  4   1,496   0   1,496 
                 
Total troubled debt restructurings  47  $15,235  $2,644  $17,879 

 
Year Ended
December 31, 2020
 
  Post-Modification Outstanding Balance 
(in thousands)