COMMUNITY TRUST BANCORP INC /KY/ - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2020
	Or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _____________ to _____________

Commission file number 001-31220

COMMUNITY TRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)

Kentucky	61-0979818
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

346 North Mayo Trail P.O. Box 2947 Pikeville, Kentucky	41502
(Address of principal executive offices)	(Zip code)

(606) 432-1414

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock

(Title of class)

CTBI	Nasdaq Global Select Market
(Trading symbol)	(Name of exchange on which registered)

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

Yes ☑

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

Yes ☑

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐

No ☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common stock – 17,810,401 shares outstanding at October 31, 2020

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 - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

The accompanying information has not been audited by our independent registered public accountants; however, in the opinion of management such information reflects all adjustments necessary for a fair presentation of the results for the interim period. All such adjustments are of a normal and recurring nature.

The accompanying condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Registrant’s annual report on Form 10-K. Accordingly, the reader of the Form 10-Q should refer to the Registrant’s Form 10-K for the year ended December 31, 2019 for further information in this regard.

Community Trust Bancorp, Inc.

Condensed Consolidated Balance Sheets

(dollars in thousands)	(unaudited) September 30 2020			December 31 2019
Assets:
Cash and due from banks	$	58,206		$	58,680
Interest bearing deposits		199,562			206,003
Cash and cash equivalents		257,768			264,683

Certificates of deposit in other banks		245			245
Debt securities available-for-sale at fair value (amortized cost of $931,919 and $593,945, respectively)		949,089			599,844
Debt securities held-to-maturity at amortized cost (fair value of $0 and $517, respectively)		0			517
Equity securities at fair value		2,212			1,953
Loans held for sale		20,125			1,167

Loans		3,557,899			3,248,664
Allowance for credit losses*		(47,986	)		(35,096	)
Net loans		3,509,913			3,213,568

Premises and equipment, net		42,115			44,046
Right-of-use asset		13,536			14,550
Federal Home Loan Bank stock		10,123			10,474
Federal Reserve Bank stock		4,887			4,887
Goodwill		65,490			65,490
Bank owned life insurance		70,317			69,269
Mortgage servicing rights		3,109			3,263
Other real estate owned		15,586			19,480
Accrued interest receivable		14,714			14,836
Other assets		41,192			37,731
Total assets	$	5,020,421		$	4,366,003

Liabilities and shareholders’ equity:
Deposits:
Noninterest bearing	$	1,103,863		$	865,760
Interest bearing		2,790,318			2,539,812
Total deposits		3,894,181			3,405,572

Repurchase agreements		367,788			226,917
Federal funds purchased		2,400			7,906
Advances from Federal Home Loan Bank		400			415
Long-term debt		57,841			57,841
Deferred taxes		5,220			5,110
Operating lease liability		12,811			13,729
Finance lease liability		1,446			1,456
Accrued interest payable		5,179			2,839
Other liabilities		28,705			29,332
Total liabilities		4,375,971			3,751,117

Shareholders’ equity:
Preferred stock, 300,000 shares authorized and unissued		-			-
Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2020 – 17,802,012; 2019 – 17,793,165		89,010			88,966
Capital surplus		225,098			224,907
Retained earnings		317,748			296,760
Accumulated other comprehensive income, net of tax		12,594			4,253
Total shareholders’ equity		644,450			614,886

Total liabilities and shareholders’ equity	$	5,020,421		$	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 condensed consolidated financial statements.

Community Trust Bancorp, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income

(unaudited)

	Three Months Ended September 30					Nine Months Ended September 30
(in thousands except per share data)	2020		2019			2020		2019
Interest income:
Interest and fees on loans, including loans held for sale	$	39,577	$	41,781		$	121,306	$	124,009
Interest and dividends on securities
Taxable		3,220		3,086			9,133		9,338
Tax exempt		629		552			1,752		1,810
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock		129		207			407		764
Interest on Federal Reserve Bank deposits		61		1,330			645		3,641
Other, including interest on federal funds sold		10		31			50		131
Total interest income		43,626		46,987			133,293		139,693

Interest expense:
Interest on deposits		4,975		8,649			17,229		25,680
Interest on repurchase agreements and federal funds purchased		691		1,169			2,472		3,516
Interest on advances from Federal Home Loan Bank		0		0			0		39
Interest on long-term debt		280		650			1,206		1,929
Total interest expense		5,946		10,468			20,907		31,164

Net interest income		37,680		36,519			112,386		108,529
Provision for credit losses*		2,433		1,253			15,091		3,006
Net interest income after provision for credit losses		35,247		35,266			97,295		105,523

Noninterest income:
Service charges on deposit accounts		6,296		6,859			17,179		19,504
Gains on sales of loans, net		2,470		450			4,706		1,298
Trust and wealth management income		2,692		2,725			8,145		8,065
Loan related fees		1,383		622			2,300		1,635
Bank owned life insurance		602		590			1,739		1,837
Brokerage revenue		310		418			995		978
Securities gains		142		14			1,328		574
Other noninterest income		1,016		711			2,919		2,920
Total noninterest income		14,911		12,389			39,311		36,811

Noninterest expense:
Officer salaries and employee benefits		3,115		2,812			8,970		9,483
Other salaries and employee benefits		13,022		12,208			37,351		37,583
Occupancy, net		2,029		2,031			5,952		5,894
Equipment		695		776			2,102		2,264
Data processing		1,936		1,987			5,789		5,539
Bank franchise tax		1,815		1,656			5,439		5,054
Legal fees		467		555			1,440		1,409
Professional fees		534		577			1,617		1,654
Advertising and marketing		797		894			1,999		2,560
FDIC insurance		295		(280	)		736		266
Other real estate owned provision and expense		505		2,476			1,975		4,271
Repossession expense		285		334			595		823
Amortization of limited partnership investments		984		745			2,792		2,688
Other noninterest expense		2,994		3,111			8,846		9,507
Total noninterest expense		29,473		29,882			85,603		88,995

Income before income taxes		20,685		17,773			51,003		53,339
Income taxes		3,238		2,504			7,325		4,807
Net income		17,447		15,269			43,678		48,532

Other comprehensive income:
Unrealized holding gains on debt securities available-for-sale:
Unrealized holding gains arising during the period		2,107		2,538			12,340		15,184
Less: Reclassification adjustments for realized gains (losses) included in net income		24		(2	)		1,069		4
Tax expense		541		664			2,930		3,640
Other comprehensive income, net of tax		1,542		1,876			8,341		11,540
Comprehensive income	$	18,989	$	17,145		$	52,019	$	60,072

Basic earnings per share	$	0.98	$	0.86		$	2.46	$	2.74
Diluted earnings per share	$	0.98	$	0.86		$	2.46	$	2.74

Weighted average shares outstanding-basic		17,746		17,726			17,746		17,720
Weighted average shares outstanding-diluted		17,752		17,743			17,753		17,733

*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 condensed consolidated financial statements.

Consolidated Statements of Changes in Shareholders’ Equity

Quarterly

(in thousands except per share and share amounts)	Common Shares		Common Stock		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Tax		Total
Balance, June 30, 2020		17,794,598	$	88,973	$	224,688	$	307,134		$	11,052	$	631,847
Net income								17,447					17,447
Other comprehensive income, net of tax of $541											1,542		1,542
Cash dividends declared ($0.385 per share)								(6,833	)				(6,833	)
Issuance of common stock		7,414		37		195							232
Stock-based compensation						215							215
Balance, September 30, 2020		17,802,012	$	89,010	$	225,098	$	317,748		$	12,594	$	644,450

(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, June 30, 2019		17,772,309	$	88,862	$	223,833	$	278,960		$	3,053	$	594,708
Net income								15,269					15,269
Other comprehensive income, net of tax of $664											1,876		1,876
Cash dividends declared ($0.38 per share)								(6,736	)				(6,736	)
Issuance of common stock		4,942		24		183							207
Stock-based compensation						194							194
Balance, September 30, 2019		17,777,251	$	88,886	$	224,210	$	287,493		$	4,929	$	605,518

See notes to condensed consolidated financial statements.

Consolidated Statements of Changes in Shareholders’ Equity

Year-to-Date

(in thousands except per share and share amounts)	Common Shares			Common Stock			Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Tax		Total
Balance, December 31, 2019		17,793,165		$	88,966		$	224,907		$	296,760		$	4,253	$	614,886
Implementation of ASU 2016-13											(2,366	)				(2,366	)
Balance, January 1, 2020		17,793,165			88,966			224,907			294,394			4,253		612,520
Net income											43,678					43,678
Other comprehensive income, net of tax of $2,930														8,341		8,341
Cash dividends declared ($1.145 per share)											(20,324	)				(20,324	)
Issuance of common stock		36,952			185			504								689
Repurchase of common stock		(32,664	)		(164	)		(935	)							(1,099	)
Issuance of restricted stock		21,544			108			(108	)							0
Vesting of restricted stock		(16,985	)		(85	)		85								0
Stock-based compensation								645								645
Balance, September 30, 2020		17,802,012		$	89,010		$	225,098		$	317,748		$	12,594	$	644,450

(in thousands except per share and share amounts)	Common Shares			Common Stock			Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Tax			Total
Balance, December 31, 2018		17,732,853		$	88,665		$	223,161		$	258,935		$	(6,611	)	$	564,150
Implementation of ASU 2016-02											(480	)		0			(480	)
Balance, January 1, 2019		17,732,853			88,665			223,161			258,455			(6,611	)		563,670
Net income											48,532						48,532
Other comprehensive income, net of tax of $3,640														11,540			11,540
Cash dividends declared ($1.10 per share)											(19,494	)					(19,494	)
Issuance of common stock		29,725			148			533									681
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								589									589
Balance, September 30, 2019		17,777,251		$	88,886		$	224,210		$	287,493		$	4,929		$	605,518

See notes to condensed consolidated financial statements.

Community Trust Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended September 30
(in thousands)	2020			2019
Cash flows from operating activities:
Net income	$	43,678		$	48,532
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,063			4,132
Deferred taxes		(2,034	)		(2,586	)
Stock-based compensation		708			645
Provision for credit losses*		15,091			3,006
Write-downs of other real estate owned		1,021			3,353
Gains on sale of mortgage loans held for sale		(4,706	)		(1,298	)
Securities gains, net		(1,069	)		(4	)
Change in fair market value of equity securities		(259	)		(570	)
Gain on debt repurchase		0			(219	)
Gains (losses) on sale of assets, net		(120	)		359
Proceeds from sale of mortgage loans held for sale		224,796			65,893
Funding of mortgage loans held for sale		(239,048	)		(64,077	)
Amortization of securities premiums and discounts, net		4,049			3,720
Change in cash surrender value of bank owned life insurance		(1,048	)		(1,227	)
Payment of operating lease liabilities		(1,269	)		(1,255	)
Mortgage servicing rights:
Fair value adjustments		1,325			1,149
New servicing assets created		(1,171	)		(446	)
Changes in:
Accrued interest receivable		122			1,163
Other assets		(3,461	)		6,259
Accrued interest payable		2,340			3,755
Other liabilities		(818	)		(8,194	)
Net cash provided by operating activities		42,190			62,090

Cash flows from investing activities:
Certificates of deposit in other banks:
Maturity of certificates of deposit		0			3,675
Securities available-for-sale (AFS):
Purchase of AFS securities		(645,652	)		(194,884	)
Proceeds from the sales of AFS securities		82,314			25,734
Proceeds from prepayments and maturities of AFS securities		222,385			124,384
Securities held-to-maturity (HTM):
Proceeds from maturities of HTM securities		517			132
Change in loans, net		(314,299	)		(9,319	)
Purchase of premises and equipment		(766	)		(1,825	)
Proceeds from sale and retirement of premises and equipment		0			46
Redemption of stock by Federal Home Loan Bank		351			3,919
Proceeds from sale of other real estate and repossessed assets		2,814			2,797
Additional investment in bank owned life insurance		0			(1,241	)
Proceeds from settlement of bank owned life insurance		0			615
Net cash used in investing activities		(652,336	)		(45,967	)

Cash flows from financing activities:
Change in deposits, net		488,609			83,605
Change in repurchase agreements and federal funds purchased, net		135,365			763
Proceeds from Federal Home Loan Bank advances		25,000			30,000
Payments on advances from Federal Home Loan Bank		(25,015	)		(30,015	)
Payment of finance lease liabilities		(10	)		(11	)
Repurchase of long-term debt		0			(1,281	)
Issuance of common stock		689			681
Repurchase of common stock		(1,099	)		0
Dividends paid		(20,308	)		(19,494	)
Net cash provided by financing activities		603,231			64,248
Net increase (decrease) in cash and cash equivalents		(6,915	)		80,371
Cash and cash equivalents at beginning of period		264,683			141,450
Cash and cash equivalents at end of period	$	257,768		$	221,821

Supplemental disclosures:
Income taxes paid	$	13,100		$	8,784
Interest paid		18,567			27,408
Non-cash activities:
Loans to facilitate the sale of other real estate owned		2,279			2,820
Common stock dividends accrued, paid in subsequent quarter		236			220
Real estate acquired in settlement of loans		2,100			1,889

*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 condensed consolidated financial statements.

Community Trust Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1 - Summary of Significant Accounting Policies

In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (which consist of normal recurring adjustments) necessary, to present fairly the condensed consolidated financial position as of September 30, 2020, the results of operations, other comprehensive income, and changes in shareholders’ equity, for the three and nine months ended September 30, 2020 and 2019. and cash flows for the nine months ended September 30,2020 and 2019. In accordance with accounting principles generally accepted in the United States of America for interim financial information, these statements do not include certain information and footnote disclosures required by accounting principles generally accepted in the United States of America for complete annual financial statements. The results of operations for the three and nine months ended September 30,2020 and 2019 and cash flows for the nine months ended September 30, 2020 and 2019 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited consolidated financial statements of Community Trust Bancorp, Inc. (“CTBI”) for that period. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2019, included in our annual report on Form 10-K.

Principles of Consolidation – The unaudited condensed consolidated financial statements include the accounts of CTBI and its separate and distinct, wholly owned subsidiaries Community Trust Bank, Inc. (“CTB”) and Community Trust and Investment Company (“CTIC”). All significant intercompany transactions have been eliminated in consolidation.

Reclassifications – Certain reclassifications considered to be immaterial have been made in the prior year condensed consolidated financial statements to conform to current year classifications. These reclassifications had no effect on net income.

New Accounting Standards –

➢ 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. Please 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 one 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 with be individually evaluated: has a criticized risk rating, is in nonaccrual status, is a troubled debt restructuring (“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 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 Measurement. ASU No. 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820 as follows:

Removals

The following disclosure requirements were removed from Topic 820:

•

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

•

The policy for timing of transfers between levels

•

The valuation processes for Level 3 fair value measurements

Modifications

The following disclosure requirements were modified in Topic 820:

•

For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and

•

The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

Additions

The following disclosure requirements were added to Topic 820:

•

The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and

•

The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

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

CTBI 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 Reporting – In April 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) —Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In response to concerns about structural risks of interbank offered rates, and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The amendments in this ASU provide optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects) of reference rate reform on financial reporting and provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This ASU applies only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this ASU are elective and are effective upon issuance for all entities. The adoption of this ASU is not expected to have material impact on our consolidated financial statements.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our consolidated financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements.

We believe the application of accounting policies and the estimates required therein are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.

We have identified the following critical accounting policies:

Investments – Management determines the classification of securities at purchase. We classify debt securities into held-to-maturity, trading, or available-for-sale categories. Held-to-maturity securities are those which we have the positive intent and ability to hold to maturity and are reported at amortized cost. In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 320, Investments – Debt Securities, investments in debt securities that are not classified as held-to-maturity shall be classified in one of the following categories and measured at fair value in the statement of financial position:

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

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

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

Gains or losses on disposition of debt securities are computed by specific identification for those securities. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings.

With the implementation of 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 September 30, 2020, CTBI held no securities designated as held-to-maturity.

CTBI accounts for equity securities in accordance with 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 loan and lease losses, and unamortized deferred fees or costs. Income is recorded on the level yield basis. Interest accrual is discontinued when management believes, after considering economic and business conditions, collateral value, and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. Any loan greater than 90 days past due must be well secured and in the process of collection to continue accruing interest. Cash payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured. Loans are not reclassified as accruing until principal and interest payments remain current for a period of time, generally six months, and future payments appear reasonably certain. 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. CTBI elected to adopt these provisions of the CARES Act.

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 – 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. 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.

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.

Income Taxes – Income tax expense is based on the taxes due on the consolidated tax return plus deferred taxes based on the expected future tax benefits and consequences of temporary differences between carrying amounts and tax bases of assets and liabilities, using enacted tax rates. Any interest and penalties incurred in connection with income taxes are recorded as a component of income tax expense in the consolidated financial statements. During the nine months ended September 30, 2020 and 2019, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes.

Note 2 – Stock-Based Compensation

There was no compensation expense related to stock option grants for the three months ended September 30, 2020. CTBI’s compensation expense related to stock option grants was $2 thousand for the nine months ended September 30, 2020 and $8 thousand and $29 thousand, respectively, for the three and nine months ended September 30, 2019. As of September 30, 2020, there was no unrecognized compensation expense related to unvested stock option awards, as all stock option awards have fully vested. There were no stock options granted in the first nine months of 2020 or 2019.

Restricted stock expense for the three and nine months ended September 30, 2020 was $236 thousand and $706 thousand, respectively, including $21 thousand and $63 thousand in dividends paid for each period. Restricted stock expense for the three and nine months ended September 30, 2019 was $205 thousand and $616 thousand, respectively, including $19 thousand and $56 thousand in dividends paid for each period. As of September 30, 2020, there was a total of $1.7 million of unrecognized compensation expense related to restricted stock grants that will be recognized as expense as the awards vest over a weighted average period of 2.7 years. No shares of restricted stock were granted during the three months ended September 30, 2020 and 2019. There were 21,544 and 27,921 shares of restricted stock granted during the nine months ended September 30, 2020 and 2019, respectively. The restricted stock was issued pursuant to the terms of CTBI’s 2015 Stock Ownership Incentive Plan. The restrictions on the restricted stock will lapse ratably over four years, except for a 2,500 management retention restricted stock award granted in January 2020 which will vest at the end of five years, subject to such management employee’s continued employment. However, in the event of certain participant employee termination events occurring within 24 months of a change in control of CTBI or the death of the participant, the restrictions will lapse, and in the event of the participant’s disability, the restrictions will lapse on a pro rata basis. The Compensation Committee will have discretion to review and revise restrictions applicable to a participant’s restricted stock in the event of the participant’s retirement.

Note 3 – Securities

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 September 30, 2020, CTBI had no held-to-maturity securities.

The amortized cost and fair value of debt securities at September 30, 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	$	85,095	$	535	$	(249	)	$	85,381
State and political subdivisions		124,997		6,334		(26	)		131,305
U.S. government sponsored agency mortgage-backed securities		665,331		11,783		(240	)		676,874
Other debt securities		56,496		0		(967	)		55,529
Total available-for-sale securities	$	931,919	$	18,652	$	(1,482	)	$	949,089

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 September 30, 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	$	10,746	$	10,775
Due after one through five years		17,907		18,451
Due after five through ten years		93,860		95,061
Due after ten years		87,579		92,399
U.S. government sponsored agency mortgage-backed securities		665,331		676,874
Other debt securities		56,496		55,529
Total debt securities	$	931,919	$	949,089

During the three months ended September 30, 2020, we had a net securities gain of $142 thousand, consisting of a pre-tax gain of $23 thousand realized on sales and calls of AFS securities and an unrealized gain of $119 thousand from the fair market value adjustment of equity securities. During the three months ended September 30, 2019, we had a net securities gain of $14 thousand, consisting of a pre-tax loss of $2 thousand realized on calls of AFS securities and an unrealized gain of $16 thousand from the fair market value adjustment of equity securities.

During the nine months ended September 30, 2020, we had a net securities gain of $1.3 million, consisting of a pre-tax gain of $1.0 million realized on sales and calls of AFS securities and an unrealized gain of $0.3 million from the fair market value adjustment of equity securities. During the nine months ended September 30, 2019, we had a net securities gain of $574 thousand, consisting of a pre-tax gain of $4 thousand realized on sales and calls of AFS securities and an unrealized gain of $570 thousand from the fair market value adjustment of equity securities.

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 September 30, 2020 were $2.2 million, as a result of a $0.1 million increase in the fair market value in the third quarter 2020. The fair market value of equity securities increased $16 thousand in the third quarter 2019. No equity securities were sold during the three or nine months ended September 30, 2020 and 2019.

The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $348.4 million at September 30, 2020 and $239.1 million at December 31, 2019.

The amortized cost of securities sold under agreements to repurchase amounted to $383.2 million at September 30,2020 and $261.5 million at December 31, 2019.

CTBI evaluates its investment portfolio on a quarterly basis for impairment. The analysis performed as of September 30, 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 September 30,2020 was 21.8% 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 September 30, 2020 that are not deemed to have credit losses. As stated above, CTBI had no HTM securities as of September 30, 2020.

Available-for-Sale

(in thousands)	Amortized Cost		Gross Unrealized Losses			Fair Value
Less Than 12 Months
U.S. Treasury and government agencies	$	5,870	$	(8	)	$	5,862
State and political subdivisions		2,670		(26	)		2,644
U.S. government sponsored agency mortgage-backed securities		68,751		(182	)		68,569
Other debt securities		30,170		(322	)		29,848
Total <12 months impaired AFS securities		107,461		(538	)		106,923

12 Months or More
U.S. Treasury and government agencies		60,681		(241	)		60,440
State and political subdivisions		0		0			0
U.S. government sponsored agency mortgage-backed securities		14,300		(58	)		14,242
Other debt securities		26,326		(645	)		25,681
Total ≥12 months impaired AFS securities		101,307		(944	)		100,363

Total
U.S. Treasury and government agencies		66,551		(249	)		66,302
State and political subdivisions		2,670		(26	)		2,644
U.S. government sponsored agency mortgage-backed securities		83,051		(240	)		82,811
Other debt securities		56,496		(967	)		55,529
Total impaired AFS securities	$	208,768	$	(1,482	)	$	207,286

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 increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than par which will equal amortized cost at maturity. CTBI does not 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 increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than par which will equal amortized cost at maturity. CTBI does not 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 increases. 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 increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than par which will equal amortized cost at maturity. CTBI does not 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.

Note 4 – Loans

Major classifications of loans, net of unearned income, deferred loan origination costs and fees, and net premiums on acquired loans, are summarized as follows:

(in thousands)	September 30 2020
Hotel/motel	$	259,017
Commercial real estate residential		284,428
Commercial real estate nonresidential		742,436
Dealer floorplans		63,393
Commercial other		279,808
Commercial unsecured SBA PPP		270,271
Commercial loans		1,899,353

Real estate mortgage		783,818
Home equity lines		105,454
Residential loans		889,272

Consumer direct		153,666
Consumer indirect		615,608
Consumer loans		769,274

Loans and lease financing	$	3,557,899

(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 September 30, 2020 reflect the implementation of ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, while the December 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.

CTBI has segregated and evaluates its loan portfolio through nine 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.

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 SEC reporting 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 commercial check loans, 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 $20.1 million at September 30, 2020 and $1.2 million at December 31, 2019.

The following tables present the balance in the allowance for credit losses (“ACL”) for the period ended September 30, 2020 and the balance in the allowance for loan and lease losses (“ALLL”) and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2019 and September 30, 2019:

	Three Months Ended September 30, 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	$	6,132		$	3,439		$	11,408		$	1,585		$	4,703		$	7,336		$	856		$	1,932		$	9,243		$	46,634
Provision charged to expense		(81	)		1,224			475			(172	)		112			524			56			42			253			2,433
Losses charged off		(42	)		(50	)		(761	)		0			(318	)		(97	)		(4	)		(150	)		(846	)		(2,268	)
Recoveries		0			5			32			0			101			23			1			95			930			1,187
Ending balance	$	6,009		$	4,618		$	11,154		$	1,413		$	4,598		$	7,786		$	909		$	1,919		$	9,580		$	47,986

	Nine Months Ended September 30, 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		2,510			2,035			3,408			(183	)		1,749			1,511			88			715			3,258			15,091
Losses charged off		(42	)		(148	)		(937	)		(26	)		(2,669	)		(276	)		(4	)		(780	)		(3,610	)		(8,492	)
Recoveries		0			13			49			0			353			54			3			313			2,466			3,251
Ending balance	$	6,009		$	4,618		$	11,154		$	1,413		$	4,598		$	7,786		$	909		$	1,919		$	9,580		$	47,986

	Three Months Ended September 30, 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
Beginning balance	$	799		$	15,098		$	7		$	4,889		$	358		$	4,187		$	933		$	1,767		$	6,960		$	34,998
Provision charged to expense		299			(742	)		(2	)		1,436			(28	)		705			32			104			(551	)		1,253
Losses charged off		(1	)		(21	)		0			(638	)		0			(384	)		(40	)		(218	)		(1,014	)		(2,316	)
Recoveries		3			40			0			75			0			10			2			82			664			876
Ending balance	$	1,100		$	14,375		$	5		$	5,762		$	330		$	4,518		$	927		$	1,735		$	6,059		$	34,811

Ending balance:
Individually evaluated for impairment	$	99		$	398		$	0		$	175		$	0		$	0		$	0		$	0		$	0		$	672
Collectively evaluated for impairment	$	1,001		$	13,977		$	5		$	5,587		$	330		$	4,518		$	927		$	1,735		$	6,059		$	34,139

Loans
Ending balance:
Individually evaluated for impairment	$	2,974		$	39,986		$	0		$	11,037		$	0		$	2,318		$	0		$	0		$	0		$	56,315
Collectively evaluated for impairment	$	90,560		$	1,134,778		$	651		$	377,495		$	62,859		$	720,314		$	110,663		$	149,500		$	511,650		$	3,158,470

	Nine Months Ended September 30, 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
Beginning balance	$	862		$	14,531		$	12		$	4,993		$	512		$	4,433		$	841		$	1,883		$	7,841		$	35,908
Provision charged to expense		301			79			(7	)		2,055			(181	)		726			181			385			(533	)		3,006
Losses charged off		(72	)		(401	)		0			(1,703	)		(1	)		(684	)		(99	)		(795	)		(3,413	)		(7,168	)
Recoveries		9			166			0			417			0			43			4			262			2,164			3,065
Ending balance	$	1,100		$	14,375		$	5		$	5,762		$	330		$	4,518		$	927		$	1,735		$	6,059		$	34,811

Ending balance:
Individually evaluated for impairment	$	99		$	398		$	0		$	175		$	0		$	0		$	0		$	0		$	0		$	672
Collectively evaluated for impairment	$	1,001		$	13,977		$	5		$	5,587		$	330		$	4,518		$	927		$	1,735		$	6,059		$	34,139

Loans
Ending balance:
Individually evaluated for impairment	$	2,974		$	39,986		$	0		$	11,037		$	0		$	2,318		$	0		$	0		$	0		$	56,315
Collectively evaluated for impairment	$	90,560		$	1,134,778		$	651		$	377,495		$	62,859		$	720,314		$	110,663		$	149,500		$	511,650		$	3,158,470

	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.

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.

The allowance for credit losses (ACL) increased by $1.4 million during the quarter ended September 30, 2020. During the calculation of the allowance for credit losses (ACL) in the Current Expected Credit Loss (CECL) model, management noted that the qualitative factors for current delinquency trends and the levels of nonperforming loans were driving a reduction in the overall calculation of CTBI’s ACL. Management remains concerned that these factors may have been artificially influenced by the current economic environment resulting from the COVID-19 pandemic and the number of loans that have received payment deferrals. Given this uncertainty, management elected to increase the qualitative factors in CTBI’s allowance model by adding a new factor for a significant specific event to offset this reduction and, in fact, increased the ACL by three basis points quarter over quarter. As a result, allocations to the allowance for credit losses for the quarter ended September 30, 2020 totaled $2.4 million, an increase of $2.5 million from prior quarter and $1.2 million from prior year same quarter.

Refer to Note 1 to the condensed consolidated financial statements for further information regarding our nonaccrual policy. Nonaccrual loans segregated by class of loans and loans 90 days past due and still accruing segregated by class of loans were as follows:

	September 30, 2020
(in thousands)	Nonaccrual Loans with No ACL		Nonaccrual Loan with ACL		90+ and Still Accruing		Total Nonperforming Loans

Hotel/motel	$	0	$	90	$	0	$	90
Commercial real estate residential		0		1,439		4,591		6,030
Commercial real estate nonresidential		0		1,911		8,583		10,494
Commercial other		0		2,029		270		2,299
Total commercial loans		0		5,469		13,444		18,913

Real estate mortgage		0		5,615		3,726		9,341
Home equity lines		0		610		375		985
Total residential loans		0		6,225		4,101		10,326

Consumer direct		0		186		40		226
Consumer indirect		0		0		404		404
Total consumer loans		0		186		444		630

Loans and lease financing	$	0	$	11,880	$	17,989	$	29,869

(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 September 30, 2020 and December 31, 2019:

	September 30, 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	$	90	$	90	$	258,927	$	259,017
Commercial real estate residential		1,194		498		5,593		7,285		277,143		284,428
Commercial real estate nonresidential		1,178		1,198		9,912		12,288		730,148		742,436
Dealer floorplans		0		0		0		0		63,393		63,393
Commercial other		658		228		1,767		2,653		277,155		279,808
Commercial unsecured SBA PPP		0		0		0		0		270,271		270,271
Total commercial loans		3,030		1,924		17,362		22,316		1,877,037		1,899,353

Real estate mortgage		2,299		3,029		6,336		11,664		772,154		783,818
Home equity lines		624		274		700		1,598		103,856		105,454
Total residential loans		2,923		3,303		7,036		13,262		876,010		889,272

Consumer direct		511		105		226		842		152,824		153,666
Consumer indirect		2,832		687		404		3,923		611,685		615,608
Total consumer loans		3,343		792		630		4,765		764,509		769,274

Loans and lease financing	$	9,296	$	6,019	$	25,028	$	40,343	$	3,517,556	$	3,557,899

	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.

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 was 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	$	24,777	$	71,232	$	26,681	$	42,121	$	20,735	$	28,010	$	0	$	213,556
Watch		10,427		1,993		3,325		0		2,450		2,229				20,424
OAEM		0		0		9,576		0		0		0		0		9,576
Substandard		0		0		90		1,113		8,950		5,308		0		15,461
Doubtful		0		0		0		0		0		0		0		0
Total hotel/motel	$	35,204	$	73,225	$	39,672	$	43,234	$	32,135	$	35,547	$	0	$	259,017

Commercial real estate residential
Risk rating:
Pass	$	65,218	$	43,078	$	31,568	$	18,810	$	24,246	$	51,616	$	10,976	$	245,512
Watch		1,004		2,799		2,452		2,985		4,524		5,444		279		19,487
OAEM		277		1,269		608		950		240		58		0		3,402
Substandard		4,202		597		2,229		4,077		1,119		3,353		450		16,027
Doubtful		0		0		0		0		0		0		0		0
Total commercial real estate residential	$	70,701	$	47,743	$	36,857	$	26,822	$	30,129	$	60,471	$	11,705	$	284,428

Commercial real estate nonresidential
Risk rating:
Pass	$	90,288	$	105,737	$	83,581	$	85,451	$	105,975	$	175,249	$	24,042	$	670,323
Watch		3,653		3,437		7,965		4,753		3,541		11,972		976		36,297
OAEM		0		0		69		1		0		3,306		20		3,396
Substandard		7,831		6,714		1,568		2,858		1,508		11,696		216		32,391
Doubtful		0		0		0		0		0		29		0		29
Total commercial real estate nonresidential	$	101,772	$	115,888	$	93,183	$	93,063	$	111,024	$	202,252	$	25,254	$	742,436

Dealer floorplans
Risk rating:
Pass	$	0	$	0	$	0	$	0	$	0	$	0	$	63,069	$	63,069
Watch		0		0		0		0		0		0		324		324
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	$	63,393	$	63,393

Commercial other
Risk rating:
Pass	$	67,359	$	33,493	$	35,138	$	15,903	$	6,859	$	24,440	$	71,902	$	255,094
Watch		2,736		489		1,059		662		586		861		7,004		13,397
OAEM		0		0		5,093		214		444		10		0		5,761
Substandard		2,084		548		350		493		1,413		443		112		5,443
Doubtful		0		113		0		0		0		0		0		113
Total commercial other	$	72,179	$	34,643	$	41,640	$	17,272	$	9,302	$	25,754	$	79,018	$	279,808

Commercial unsecured SBA PPP
Risk rating:
Pass	$	270,271	$	0	$	0	$	0	$	0	$	0	$	0	$	270,271
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	$	270,271	$	0	$	0	$	0	$	0	$	0	$	0	$	270,271

Commercial loans
Risk rating:
Pass	$	517,913	$	253,540	$	176,968	$	162,285	$	157,815	$	279,315	$	169,989	$	1,717,825
Watch		17,820		8,718		14,801		8,400		11,101		20,506		8,583		89,929
OAEM		277		1,269		15,346		1,165		684		3,374		20		22,135
Substandard		14,117		7,859		4,237		8,541		12,990		20,800		778		69,322
Doubtful		0		113		0		0		0		29		0		142
Total commercial loans	$	550,127	$	271,499	$	211,352	$	180,391	$	182,590	$	324,024	$	179,370	$	1,899,353

(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	$	7	$	12,246	$	92,216	$	104,469
Nonperforming		0		0		0		0		0		620		365		985
Total home equity lines	$	0	$	0	$	0	$	0	$	7	$	12,866	$	92,581	$	105,454

Mortgage loans
Performing	$	157,390	$	132,799	$	63,904	$	68,011	$	55,417	$	296,956	$	0	$	774,477
Nonperforming		0		394		761		591		408		7,187		0		9,341
Total mortgage loans	$	157,390	$	133,193	$	64,665	$	68,602	$	55,825	$	304,143	$	0	$	783,818

Residential loans
Performing	$	157,390	$	132,799	$	63,904	$	68,011	$	55,424	$	309,202	$	92,216	$	878,946
Nonperforming		0		394		761		591		408		7,807		365		10,326
Total residential loans	$	157,390	$	133,193	$	64,665	$	68,602	$	55,832	$	317,009	$	92,581	$	889,272

Consumer direct loans
Performing	$	60,171	$	39,064	$	21,959	$	10,881	$	7,498	$	13,867	$	0	$	153,440
Nonperforming		9		0		7		25		0		185		0		226
Total consumer direct loans	$	60,180	$	39,064	$	21,966	$	10,906	$	7,498	$	14,052	$	0	$	153,666

Consumer indirect loans
Performing	$	251,162	$	149,460	$	114,362	$	59,549	$	28,989	$	11,682	$	0	$	615,204
Nonperforming		52		165		110		51		10		16		0		404
Total consumer indirect loans	$	251,214	$	149,625	$	114,472	$	59,600	$	28,999	$	11,698	$	0	$	615,608

Consumer loans
Performing	$	311,333	$	188,524	$	136,321	$	70,430	$	36,487	$	25,549	$	0	$	768,644
Nonperforming		61		165		117		76		10		201		0		630
Total consumer loans	$	311,394	$	188,689	$	136,438	$	70,506	$	36,497	$	25,750	$	0	$	769,274

(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 are in process totaled $2.6 million and $2.4 million at September 30, 2020 and December 31, 2019, respectively.

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:

	September 30, 2020
(in thousands)	Number of Loans		Recorded Investment		Specific Reserve
Hotel/motel		4	$	24,357	$	250
Commercial real estate residential		4		7,932		0
Commercial real estate nonresidential		11		22,383		200
Commercial other		2		6,087		350
Total collateral dependent loans		21	$	60,759	$	800

The hotel/motel, commercial real estate residential, and commercial real estate nonresidential segments are all collateralized with real estate. The two loans listed in the commercial other segment are 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 and the remaining $1.0 million collateralized by underground coal mining equipment and junior real estate liens.

	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

	September 30, 2019
(in thousands)	Recorded Balance		Unpaid Contractual Principal Balance		Specific Allowance
Loans without a specific valuation allowance:
Commercial construction	$	2,800	$	2,800	$	0
Commercial secured by real estate		38,620		40,134		0
Commercial other		10,690		12,384		0
Real estate mortgage		2,318		2,318		0

Loans with a specific valuation allowance:
Commercial construction		174		174		99
Commercial secured by real estate		1,366		2,863		398
Commercial other		347		347		175

Totals:
Commercial construction		2,974		2,974		99
Commercial secured by real estate		39,986		42,997		398
Commercial other		11,037		12,731		175
Real estate mortgage		2,318		2,318		0
Total	$	56,315	$	61,020	$	672

	Three Months Ended				Nine Months Ended
	September 30, 2019				September 30, 2019
(in thousands)	Average Investment in Impaired Loans		*Interest Income Recognized		Average Investment in Impaired Loans		*Interest Income Recognized
Loans without a specific valuation allowance:
Commercial construction	$	2,959	$	37	$	3,344	$	132
Commercial secured by real estate		39,217		442		35,762		1,192
Commercial other		10,863		92		10,425		380
Real estate mortgage		2,323		23		2,408		64

Loans with a specific valuation allowance:
Commercial construction		174		3		229		9
Commercial secured by real estate		1,397		0		1,892		15
Commercial other		358		6		680		29

Totals:
Commercial construction		3,133		40		3,573		141
Commercial secured by real estate		40,614		442		37,654		1,207
Commercial other		11,221		98		11,105		409
Real estate mortgage		2,323		23		2,408		64
Total	$	57,291	$	603	$	54,740	$	1,821

During the third quarter of 2020, certain loans were modified in troubled debt restructurings, where economic concessions were granted to borrowers consisting of reductions in the interest rates, payment extensions, forgiveness of principal, and forbearances. Presented below, segregated by class of loans, are troubled debt restructurings that occurred during the three and nine months ended September 30, 2020 and 2019 and the year ended December 31, 2019:

	Three Months Ended September 30, 2020
	Pre-Modification Outstanding Balance
(in thousands)	Number of Loans		Term Modification		Combination		Total Modification
Commercial real estate residential		1	$	101	$	0	$	101
Commercial real estate nonresidential		3		4,421		0		4,421
Commercial other		1		52		0		52
Total commercial loans		5		4,574		0		4,574

Real estate mortgage		1		283		0		283
Total residential loans		1		283		0		283

Total troubled debt restructurings		6	$	4,857	$	0	$	4,857

	Three Months Ended September 30, 2020
	Post-Modification Outstanding Balance
(in thousands)	Number of Loans		Term Modification		Combination		Total Modification
Commercial real estate residential		1	$	101	$	0	$	101
Commercial real estate nonresidential		3		4,479		0		4,479
Commercial other		1		52		0		52
Total commercial loans		5		4,632		0		4,632

Real estate mortgage		1		282		0		282
Total residential loans		1		282		0		282

Total troubled debt restructurings		6	$	4,914	$	0	$	4,914

	Nine Months Ended September 30, 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		15		7,185		510		7,695
Commercial other		10		631		25		656
Total commercial loans		37		12,510		2,344		14,854

Real estate mortgage		3		1,216		0		1,216
Total residential loans		3		1,216		0		1,216

Total troubled debt restructurings		40	$	13,726	$	2,344	$	16,070

	Nine Months Ended September 30, 2020
	Post-Modification Outstanding Balance
(in thousands)	Number of Loans		Term Modification		Combination		Total Modification
Commercial real estate residential		12	$	4,696	$	1,809	$	6,505
Commercial real estate nonresidential		15		7,234		510		7,744
Commercial other		10		565		25		590
Total commercial loans		37		12,495		2,344		14,839

Real estate mortgage		3		1,203		0		1,203
Total residential loans		3		1,203		0		1,203

Total troubled debt restructurings		40	$	13,698	$	2,344	$	16,042

	Year Ended December 31, 2019
(in thousands)	Number of Loans		Term Modification		Rate Modification		Combination		Post- Modification Outstanding Balance
Commercial:
Commercial secured by real estate		17	$	6,105	$	0	$	679	$	6,784
Commercial other		17		1,565		0		264		1,829
Residential:
Real estate mortgage		1		463		0		0		463
Total troubled debt restructurings		35	$	8,133	$	0	$	943	$	9,076

	Three Months Ended September 30, 2019
(in thousands)	Number of Loans		Term Modification		Rate Modification		Combination		Post- Modification Outstanding Balance
Commercial:
Commercial secured by real estate		3	$	270	$	0	$	0	$	270
Commercial other		2		32		0		0		32
Total troubled debt restructurings		5	$	302	$	0	$	0	$	302

	Nine Months Ended September 30, 2019
(in thousands)	Number of Loans		Term Modification		Rate Modification		Combination		Post- Modification Outstanding Balance
Commercial:
Commercial secured by real estate		13	$	4,784	$	0	$	679	$	5,463
Commercial other		13		1,292		0		140		1,432
Residential:
Real estate mortgage		2		463		0		243		706
Total troubled debt restructurings		28	$	6,539	$	0	$	1,062	$	7,601

No charge-offs have resulted from modifications for any of the presented periods. We had commitments to extend additional credit in the amount of $84 thousand and $82 thousand at September 30, 2020 and December 31, 2019, respectively, on loans that were considered troubled debt restructurings.

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

(in thousands)	Three Months Ended September 30, 2020				Nine Months Ended September 30, 2020
	Number of Loans		Recorded Balance		Number of Loans		Recorded Balance
Commercial:
Commercial real estate residential		0	$	0		0	$	0
Commercial other		0		0		3		368
Total defaulted restructured loans		0	$	0		3	$	368

(in thousands)	Three Months Ended September 30, 2019				Nine Months Ended September 30, 2019
	Number of Loans		Recorded Balance		Number of Loans		Recorded Balance
Commercial:
Commercial real estate residential		1	$	30		1	$	30
Commercial other		1		34		1		34
Total defaulted restructured loans		2	$	64		2	$	64

Note 5 – Other Real Estate Owned

Activity for other real estate owned was as follows:

	Three Months Ended September 30						Nine Months Ended September 30
(in thousands)	2020			2019			2020			2019
Beginning balance of other real estate owned	$	17,675		$	22,536		$	19,480		$	27,273
New assets acquired		238			647			2,100			1,889
Fair value adjustments		(257	)		(2,173	)		(1,021	)		(3,311	)
Sale of assets		(2,070	)		(1,177	)		(4,973	)		(6,018	)
Ending balance of other real estate owned	$	15,586		$	19,833		$	15,586		$	19,833

Carrying costs and fair value adjustments associated with foreclosed properties for the three months ended September 30, 2020 and 2019 were $0.5 million and $2.5 million, respectively. Carrying costs and fair value adjustments associated with foreclosed properties for the nine months ended September 30, 2020 and 2019 were $2.0 million and $4.3 million, respectively. See Note 1 for a description of our accounting policies relative to foreclosed properties and other real estate owned.

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

(in thousands)	September 30 2020		December 31 2019
1-4 family	$	2,191	$	3,630
Construction/land development/other		9,359		10,211
Multifamily		88		88
Non-farm/non-residential		3,948		5,551
Total foreclosed properties	$	15,586	$	19,480

Note 6 – Repurchase Agreements

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

We monitor collateral levels on a continuous basis and maintain records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and we segregate the security from its general assets in accordance with regulations governing custodial holdings of securities. The primary risk with our repurchase agreements is market risk associated with the securities securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. The carrying value of investment securities available-for-sale pledged as collateral under repurchase agreements totaled $392.7 million and $264.9 million at September 30, 2020 and December 31, 2019, respectively.

The remaining contractual maturity of the securities sold under agreements to repurchase by class of collateral pledged included in the accompanying consolidated balance sheets as of September 30, 2020 and December 31, 2019 is presented in the following tables:

	September 30, 2020
	Remaining Contractual Maturity of the Agreements
(in thousands)	Overnight and Continuous		Up to 30 days		30-90 days		Greater Than 90 days		Total
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and government agencies	$	13,457	$	7,031	$	0	$	29,445	$	49,933
State and political subdivisions		55,477		1,519		3,863		7,158		68,017
U.S. government sponsored agency mortgage-backed securities		39,250		22,450		96,137		92,001		249,838
Total	$	108,184	$	31,000	$	100,000	$	128,604	$	367,788

	December 31, 2019
	Remaining Contractual Maturity of the Agreements
(in thousands)	Overnight and Continuous		Up to 30 days		30-90 days		Greater Than 90 days		Total
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and government agencies	$	15,001	$	0	$	3,479	$	58,953	$	77,433
State and political subdivisions		51,193		0		1,768		11,165		64,126
U.S. government sponsored agency mortgage-backed securities		35,480		0		1,996		47,882		85,358
Total	$	101,674	$	0	$	7,243	$	118,000	$	226,917

Note 7 – Fair Market Value of Financial Assets and Liabilities

Fair Value Measurements

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

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

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

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

Recurring Measurements

The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 and indicate the level within the fair value hierarchy of the valuation techniques.

			Fair Value Measurements at September 30, 2020 Using
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets measured – recurring basis
Available-for-sale securities:
U.S. Treasury and government agencies	$	85,381	$	3,100	$	82,281	$	0
State and political subdivisions		131,305		0		131,305		0
U.S. government sponsored agency mortgage-backed securities		676,874		0		676,874		0
Other debt securities		55,529		0		55,529		0
Equity securities at fair value		2,212		0		0		2,212
Mortgage servicing rights		3,109		0		0		3,109

			Fair Value Measurements at December 31, 2019 Using
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets measured – recurring basis
Available-for-sale securities:
U.S. Treasury and government agencies	$	171,150	$	54,263	$	116,887	$	0
State and political subdivisions		102,307		0		102,307		0
U.S. government sponsored agency mortgage-backed securities		295,245		0		295,245		0
Other debt securities		31,142		0		31,142		0
Equity securities at fair value		1,953		0		0		1,953
Mortgage servicing rights		3,263		0		0		3,263

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. These valuation methodologies were applied to all of CTBI’s financial assets carried at fair value. CTBI had no liabilities measured and recorded at fair value as of September 30, 2020 and December 31, 2019. There have been no significant changes in the valuation techniques during the quarter ended September 30, 2020. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available-for-Sale Securities

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

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

In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements are estimated on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States.

Equity Securities at Fair Value

As of September 30, 2020 and December 31, 2019, the only securities owned by CTBI that were valued using Level 3 criteria are Visa Class B Stock (included in equity securities at fair value). Fair value for Visa Class B Stock is determined by an independent third party utilizing assumptions about factors such as quarterly common stock dividend payments, the conversion of the securities to the relevant Class A Stock shares subject to the prevailing conversion rate and conversion date. We have reviewed the assumptions, processes, and conclusions of the third party provider. We have determined these assumptions, processes, and conclusions to be reasonable and appropriate in determining the fair value of this asset. See the table below for inputs and valuation techniques used for Level 3 equity securities.

Mortgage Servicing Rights

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

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

Level 3 Reconciliation

Following is a reconciliation of the beginning and ending balances of recurring fair value measurements, for the periods indicated, using significant unobservable (Level 3) inputs:

(in thousands)	Three Months Ended September 30, 2020					Three Months Ended September 30, 2019
	Equity Securities at Fair Value		Mortgage Servicing Rights			Equity Securities at Fair Value		Mortgage Servicing Rights
Beginning balance	$	2,094	$	2,518		$	1,727	$	3,119
Total unrealized gains (losses) Included in net income		118		286			16		(325	)
Issues		0		611			0		139
Settlements		0		(306	)		0		(29	)
Ending balance	$	2,212	$	3,109		$	1,743	$	2,904

Total gains (losses) for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date	$	119	$	286		$	16	$	(325	)

(in thousands)	Nine Months Ended September 30, 2020					Nine Months Ended September 30, 2019
	Equity Securities at Fair Value		Mortgage Servicing Rights			Equity Securities at Fair Value		Mortgage Servicing Rights
Beginning balance	$	1,953	$	3,263		$	1,173	$	3,607
Total unrealized gains (losses) Included in net income		259		(680	)		570		(907	)
Issues		0		1,171			0		446
Settlements		0		(645	)		0		(242	)
Ending balance	$	2,212	$	3,109		$	1,743	$	2,904

Total gains (losses) for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date	$	259	$	(680	)	$	570	$	(907	)

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

Noninterest Income
	Three Months Ended September 30					Nine Months Ended September 30
(in thousands)	2020		2019			2020			2019
Total gains (losses)	$	99	$	(338	)	$	(1,066	)	$	(579	)

Nonrecurring Measurements

The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a nonrecurring basis as of September 30, 2020 and December 31, 2019 and indicate the level within the fair value hierarchy of the valuation techniques.

			Fair Value Measurements at September 30, 2020 Using
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets measured – nonrecurring basis
Collateral dependent loans	$	2,423	$	0	$	0	$	2,423
Other real estate owned		2,461		0		0		2,461

			Fair Value Measurements at December 31, 2019 Using
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets measured – nonrecurring basis
Impaired loans (collateral dependent)	$	3,217	$	0	$	0	$	3,217
Other real estate owned		12,593		0		0		12,593

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

Collateral Dependent Loans

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

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

Loans considered collateral dependent are loans 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 in accordance with ASC 326-20-35-5. Quarter-to-date fair value adjustments on collateral dependent loans disclosed above were $0.4 million, $0.4 million, and $(0.1) million for the quarters ended September 30, 2020, December 31, 2019, and September 30, 2019, respectively. Year-to-date adjustments were $1.7 million, $0.7 million, and $0.3 million for the nine months ended September 30, 2020, the year ended December 31, 2019, and the nine months ended September 30, 2019, respectively.

Other Real Estate Owned

In accordance with the provisions of ASC 360, Property, Plant, and Equipment, other real estate owned (“OREO”) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of OREO is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy. Long-lived assets are subject to nonrecurring fair value adjustments to reflect subsequent partial write-downs that are based on the observable market price or current appraised value of the collateral. Quarter-to-date fair value adjustments on other real estate owned disclosed above were $0.2 million, $0.7 million, and $2.2 million for the quarters ended September 30, 2020, December 31, 2019, and September 30, 2019, respectively. Year-to-date adjustments were $0.6 million for the nine months ended September 30, 2020, $3.2 million for the year ended December 31, 2019, and $2.5 million for the nine months ended September 30, 2019.

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

Unobservable (Level 3) Inputs

The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at September 30, 2020 and December 31, 2019.

(in thousands)	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at September 30, 2020	Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Equity securities at fair value	$2,212	Discount cash flows, computer pricing model	Discount rate	8.0% - 12.0% (10.0%)
			Conversion date	Dec 2022 – Dec 2026 (Dec 2024)

Mortgage servicing rights	$3,109	Discount cash flows, computer pricing model	Constant prepayment rate	0.0%% - 31.8% (19.7%)
			Probability of default	0.0% - 100.0% (1.6%)
			Discount rate	10.0% - 11.5% (10.1%)

Collateral dependent loans	$2,423	Market comparable properties	Marketability discount	(0.01)% - 31.5% (16.2%)

Other real estate owned	$2,461	Market comparable properties	Comparability adjustments	10.0% - 31.4% (16.8%)

(in thousands)	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at December 31, 2019	Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Equity securities at fair value	$1,953	Discount cash flows, computer pricing model	Discount rate	8.0% - 12.0% (10.0%)
			Conversion date	Dec 2022 – Dec 2026 (Dec 2024)

Mortgage servicing rights	$3,263	Discount cash flows, computer pricing model	Constant prepayment rate	0.0% - 24.3% (11.7%)
			Probability of default	0.0% - 100.0% (2.7%)
			Discount rate	10.0% - 11.5% (10.1%)

Impaired loans (collateral-dependent)	$3,217	Market comparable properties	Marketability discount	7.0% - 99.0% (46.0%)

Other real estate owned	$12,593	Market comparable properties	Comparability adjustments	6.0% - 29.8% (11.3%)

Uncertainty of Fair Value Measurements

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

Equity Securities at Fair Value

Fair market value for equity securities is derived based on unobservable inputs, such as the discount rate, quarterly dividend payments payable to the Visa Class B common stock and the prevailing conversion rate at the conversion date. The most recent conversion rate of 1.6228 and the most recent dividend rate of 0.4868 were used to derive the fair value estimate. Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for discount rate is accompanied by a directionally opposite change in the fair value estimate.

Mortgage Servicing Rights

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

Fair Value of Financial Instruments

The following table presents estimated fair value of CTBI’s financial instruments as of September 30, 2020 and indicates the level within the fair value hierarchy of the valuation techniques. In accordance with the adoption of ASU 2016-01, the fair values as of September 30, 2020 were measured using an exit price notion.

			Fair Value Measurements at September 30, 2020 Using
(in thousands)	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	257,768	$	257,768	$	0	$	0
Certificates of deposit in other banks		245		0		245		0
Debt securities available-for-sale		949,089		3,100		945,989		0
Equity securities at fair value		2,212		0		0		2,212
Loans held for sale		20,125		20,581		0		0
Loans, net		3,509,913		0		0		3,641,439
Federal Home Loan Bank stock		10,123		0		10,123		0
Federal Reserve Bank stock		4,887		0		4,887		0
Accrued interest receivable		14,714		0		14,714		0
Mortgage servicing rights		3,109		0		0		3,109

Financial liabilities:
Deposits	$	3,894,181	$	1,103,863	$	2,824,616	$	0
Repurchase agreements		367,788		0		0		367,533
Federal funds purchased		2,400		0		2,400		0
Advances from Federal Home Loan Bank		400		0		440		0
Long-term debt		57,841		0		0		39,603
Accrued interest payable		5,179		0		5,179		0

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

The following table presents estimated fair value of CTBI’s financial instruments as of December 31, 2019 and indicates the level within the fair value hierarchy of the valuation techniques.

			Fair Value Measurements at December 31, 2019 Using
(in thousands)	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	264,683	$	264,683	$	0	$	0
Certificates of deposit in other banks		245		0		245		0
Debt securities available-for-sale		599,844		54,263		545,581		0
Debt securities held-to-maturity		517		0		517		0
Equity securities at fair value		1,953		0		0		1,953
Loans held for sale		1,167		1,191		0		0
Loans, net		3,213,568		0		0		3,283,876
Federal Home Loan Bank stock		10,474		0		10,474		0
Federal Reserve Bank stock		4,887		0		4,887		0
Accrued interest receivable		14,836		0		14,836		0
Mortgage servicing rights		3,263		0		0		3,263

Financial liabilities:
Deposits	$	3,405,572	$	865,760	$	2,560,271	$	0
Repurchase agreements		226,917		0		0		226,921
Federal funds purchased		7,906		0		7,906		0
Advances from Federal Home Loan Bank		415		0		446		0
Long-term debt		57,841		0		0		49,382
Accrued interest payable		2,839		0		2,839		0

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

Note 8 – Revenue Recognition

CTBI’s primary source of revenue is interest income generated from loans and investment securities. Interest income is recognized according to the terms of the financial instrument agreement over the life of the loan or investment security unless it is determined that the counterparty is unable to continue making interest payments. Interest income also includes prepaid interest fees from commercial customers, which approximates the interest foregone on the balance of the loan prepaid.

CTBI’s additional source of income, also referred to as noninterest income, includes service charges on deposit accounts, gains on sales of loans, trust and wealth management income, loan related fees, brokerage revenue, and other miscellaneous income and is largely based on contracts with customers. In these cases, CTBI recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. CTBI considers a customer to be any party to which we will provide goods or services that are an output of CTBI’s ordinary activities in exchange for consideration. There is little seasonality with regards to revenue from contracts with customers and all inter-company revenue is eliminated when CTBI’s financial statements are consolidated.

Generally, CTBI enters into contracts with customers that are short-term in nature where the performance obligations are fulfilled and payment is processed at the same time. Such examples include revenue related to merchant fees, interchange fees, and investment services income. In addition, revenue generated from existing customer relationships such as deposit accounts are also considered short-term in nature, because the relationship may be terminated at any time and payment is processed at the time performance obligations are fulfilled. As a result, CTBI does not have contract assets, contract liabilities, or related receivable accounts for contracts with customers. In cases where collectability is a concern, CTBI does not record revenue.

Generally, the pricing of transactions between CTBI and each customer is either (i) established within a legally enforceable contract between the two parties, as is the case with loan sales, or (ii) disclosed to the customer at a specific point in time, as is the case when a deposit account is opened or before a new loan is underwritten. Fees are usually fixed at a specific amount or as a percentage of a transaction amount. No judgment or estimates by management are required to record revenue related to these transactions and pricing is clearly identified within these contracts.

CTBI primarily operates in Kentucky and contiguous areas. Therefore, all significant operating decisions are based upon analysis of CTBI as one operating segment.

We disaggregate our revenue from contracts with customers by contract-type and timing of revenue recognition, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Noninterest income not generated from customers during CTBI’s ordinary activities primarily relates to mortgage servicing rights, gains/losses on the sale of investment securities, gains/losses on the sale of other real estate owned, gains/losses on the sale of property, plant and equipment, and income from bank owned life insurance.

For more information related to our components of noninterest income, see the Condensed Consolidated Statements of Income and Comprehensive Income above.

Note 9 – Earnings Per Share

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

	Three Months Ended September 30				Nine Months Ended September 30
(in thousands except per share data)	2020		2019		2020		2019
Numerator:
Net income	$	17,447	$	15,269	$	43,678	$	48,532

Denominator:
Basic earnings per share:
Weighted average shares		17,746		17,726		17,746		17,720
Diluted earnings per share:
Effect of dilutive stock options and restricted stock grants		6		17		7		13
Adjusted weighted average shares		17,752		17,743		17,753		17,733

Earnings per share:
Basic earnings per share	$	0.98	$	0.86	$	2.46	$	2.74
Diluted earnings per share		0.98		0.86		2.46		2.74

Options to purchase 20,000 common shares at a weighted average price of $32.27 were excluded from the diluted calculations above for the three and nine months ended September 30, 2020, because the exercise prices on the options were greater than the average market price for the period. There were no options to purchase common shares that were excluded from the diluted calculations above for the three and nine months ended September 30, 2019. In addition to in-the-money stock options, unvested restricted stock grants were also used in the calculation of diluted earnings per share based on the treasury method.

Note 10 – Accumulated Other Comprehensive Income

Unrealized gains on AFS securities

Amounts reclassified from accumulated other comprehensive income (AOCI) and the affected line items in the statements of income during the three and nine months ended September 30, 2020 and 2019 were:

	Amounts Reclassified from AOCI
(in thousands)	Three Months Ended September 30					Nine Months Ended September 30
	2020		2019			2020		2019
Affected line item in the statements of income
Securities gains	$	24	$	(2	)	$	1,069	$	4
Tax expense		6		(1	)		278		1
Total reclassifications out of AOCI	$	18	$	(1	)	$	791	$	3

Note 11 – COVID-19 and CARES Act Loan Activities

We continue working through the COVID-19 pandemic. Through September 30, 2020, we have approved 3,274 CARES Act loan deferrals totaling $716 million, consisting of 829 commercial loan deferrals totaling $621 million, 500 residential loan deferrals totaling $60 million, and 1,945 consumer loan deferrals totaling $36 million, in addition to 73 serviced loan deferrals, pursuant to Freddie Mac guidelines, totaling $9.2 million. We also had 189 customers who had previously received CARES Act loan deferrals that have requested payment deferral for a second time. Those deferrals total $211 million. Five customers have requested payment deferral for a third time. Those deferrals total $1 million. These loan deferrals and modifications have been executed consistent with the guidelines of the CARES Act. Pursuant to the CARES Act, these loan deferrals are not included in our nonperforming loans disclosed below. The following table provides additional details regarding the types of deferrals received and the repayment status of those loans.

CARES Act Loan Deferral Status

	Deferrals
	One Time				Two Times				Three Times				Resumed Payments
(dollars in thousands)	Number		Amount		Number		Amount		Number		Amount		Number		Amount
Commercial		829	$	620,509		125	$	203,431		4	$	1,365		617	$	435,296
Mortgage		500		59,660		59		7,026		1		27		290		37,778
Consumer		1,945		35,629		5		81		0		0		1,646		31,171
		3,274	$	715,798		189	$	210,538		5	$	1,392		2,553	$	504,245

Also, we have continued participating in the Paycheck Protection Program (PPP) stemming from the CARES Act passed by Congress as a stimulus response to the potential economic impacts of COVID-19. As of September 30, 2020, we have closed 2,962 PPP loans totaling $277.0 million. Of these, 2,817 are under $350 thousand, 132 are between $350 thousand and $2.0 million, and 13 are over $2.0 million. The PPP program expired on August 8, 2020, and no additional loans may be made under the program. Loan forgiveness began in August 2020. In October 2020, the U.S. Small Business Administration (SBA) released an updated loan forgiveness application for PPP loans of $50,000 or less. We currently have 2,031 PPP loans totaling $37.7 million that fall within this category. Our customers have begun the loan forgiveness application process; however, the timing regarding SBA forgiveness remains a significant unknown.

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

Results of Operations

Overview

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

❖	Our Business

❖	Results of Operations and Financial Condition

❖

Dividends

❖	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, Inc. (“CTIC”). 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 September 30, 2020, we had total consolidated assets of $5.0 billion and total consolidated deposits, including repurchase agreements, of $4.3 billion. Total shareholders’ equity at September 30, 2020 was $644.5 million. Trust assets under management, which are excluded from CTBI’s total consolidated assets, at September 30, 2020, were $2.5 billion. Trust assets under management include CTB’s investment portfolio totaling $0.9 billion.

Through its subsidiaries, CTBI engages in a wide range of commercial and personal banking and trust and wealth management activities, which include accepting time and demand deposits; making secured and unsecured loans to corporations, individuals and others; providing cash management services to corporate and individual customers; issuing letters of credit; renting safe deposit boxes; and providing funds transfer services. The lending activities of CTB include making commercial, construction, mortgage, and personal loans. Lease-financing, lines of credit, revolving lines of credit, term loans, and other specialized loans, including asset-based financing, are also available. Our corporate subsidiaries act as trustees of personal trusts, as executors of estates, as trustees for employee benefit trusts, as paying agents for bond and stock issues, as investment agent, as depositories for securities, and as providers of full service brokerage and insurance services. For further information, see Item 1 of our annual report on Form 10-K for the year ended December 31, 2019.

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 rising unemployment and negatively impacted consumer and business spending. 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 are likely 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 September 30, 2020, we have closed 2,962 PPP loans totaling $277.0 million. Of these, 2,817 are under $350 thousand, 132 are between $350 thousand and $2.0 million, and 13 are over $2.0 million. The PPP program expired on August 8, 2020, and no additional loans may be made under the program. Loan forgiveness began in August 2020. In October 2020, the U.S. Small Business Administration (SBA) released an updated loan forgiveness application for PPP loans of $50,000 or less. We currently have 2,031 PPP loans totaling $37.7 million that fall within this category. We have begun the application process; however, the timing regarding SBA forgiveness remains a significant unknown.

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 will 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 December 31, 2020 to do so, unless otherwise extended by the Federal Reserve and the Department of the Treasury.

Loan Modifications and Troubled Debt Restructurings

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, 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, and 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. 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 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. 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 make changes to the community bank leverage ratio (“CBLR”) framework and implementing 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 would include 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 establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains 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 establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains 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. CTBI elected to use the CBLR framework. Under either framework, CTBI and CTB would be considered well-capitalized under the applicable guidelines.

PPPL Facility. On April 9, 2020, in order to facilitate use of the PPPL Facility, federal banking regulators issued an interim final rule to modify the Basel III regulatory capital rules applicable to banking organizations to allow those organizations participating in the PPPL Facility to neutralize the regulatory capital effects of participating in the program. Specifically, the agencies have clarified that banking organizations, including CTBI and CTB, are permitted to assign a zero percent risk weight to covered loans pledged to the PPPL Facility for purposes of determining risk-weighted assets and the leverage ratio.

Results of Operations and Financial Condition

We reported earnings for the third quarter 2020 of $17.4 million, or $0.98 per basic share, compared to $19.7 million, or $1.11 per basic share, earned during the second quarter 2020 and $15.3 million, or $0.86 per basic share, earned during the third quarter 2019. Year-to-date earnings for the nine months ended September 30, 2020 were $43.7 million, or $2.46 per basic share, compared to $48.5 million, or $2.74 per basic share, for the nine months ended September 30, 2019.

Quarterly Highlights

❖	Net interest income for the quarter of $37.7 million was $0.8 million, or 2.0%, below prior quarter but $1.2 million, or 3.2%, above third quarter 2019.

❖

Provision for credit losses for the quarter ended September 30, 2020 increased $2.5 million from prior quarter and $1.2 million from prior year same quarter. The increase in provision resulted from management’s decision to increase the qualitative factors in our allowance model due to uncertainty caused by the CARES Act deferrals.

❖	Our loan portfolio increased $19.1 million, an annualized 2.2%, during the quarter and $309.2 million, or an annualized 12.7%, from December 31, 2019.

❖	Net loan charge-offs for the quarter ended September 30, 2020 decreased to $1.1 million, or 0.12% of average loans annualized, compared to $2.8 million, or 0.32%, experienced for the second quarter 2020 and $1.4 million, or 0.18%, for the third quarter 2019.

❖	Nonperforming loans at $29.9 million decreased $6.3 million from June 30, 2020 and $3.8 million from December 31, 2019. Nonperforming assets at $45.5 million decreased $8.4 million from June 30, 2020 and $7.6 million from December 31, 2019.

❖	Deposits, including repurchase agreements, decreased $6.3 million, an annualized 0.6%, during the quarter but increased $629.5 million, or an annualized 23.1%, from December 31, 2019.

❖	Noninterest income for the quarter ended September 30, 2020 of $14.9 million was a $2.0 million, or 15.8%, increase from prior quarter and a $2.5 million, or 20.3%, increase from prior year same quarter.

❖	Noninterest expense for the quarter ended September 30, 2020 of $29.5 million increased $1.6 million, or 5.6%, from prior quarter, but decreased $0.4 million, or 1.4%, from prior year same quarter.

We continue working through the COVID-19 pandemic. Through September 30, 2020, we have approved 3,274 CARES Act loan deferrals totaling $716 million, consisting of 829 commercial loan deferrals totaling $621 million, 500 residential loan deferrals totaling $60 million, and 1,945 consumer loan deferrals totaling $36 million, in addition to 73 serviced loan deferrals, pursuant to Freddie Mac guidelines, totaling $9.2 million. We also had 189 customers who had previously received CARES Act loan deferrals that have requested payment deferral for a second time. Those deferrals total $211 million. Five customers have requested payment deferral for a third time. Those deferrals total $1 million. These loan deferrals and modifications have been executed consistent with the guidelines of the CARES Act. Pursuant to the CARES Act, these loan deferrals are not included in our nonperforming loans disclosed below. Please see below for further detail regarding the types of deferrals received and the repayment status of those loans.

CARES Act Loan Deferral Status

	Deferrals
	One Time				Two Times				Three Times				Resumed Payments
(dollars in thousands)	Number		Amount		Number		Amount		Number		Amount		Number		Amount
Commercial		829	$	620,509		125	$	203,431		4	$	1,365		617	$	435,296
Mortgage		500		59,660		59		7,026		1		27		290		37,778
Consumer		1,945		35,629		5		81		0		0		1,646		31,171
		3,274	$	715,798		189	$	210,538		5	$	1,392		2,553	$	504,245

Income Statement Review

(dollars in thousands)							Change 2020 vs. 2019
Nine Months Ended September 30	2020			2019			Amount			Percent
Net interest income	$	112,386		$	108,529		$	3,857			3.6	%
Provision for credit losses		15,091			3,006			12,085			402.1	%
Noninterest income		39,311			36,811			2,500			6.8
Noninterest expense		85,603			88,995			(3,392	)		(3.8	)
Income taxes		7,325			4,807			2,518			52.4
Net income	$	43,678		$	48,532		$	(4,854	)		(10.0	)%

Average earning assets	$	4,475,200		$	4,032,753		$	442,447			11.0	%

Yield on average earning assets, tax equivalent*		3.99	%		4.65	%		(0.66	)%		(14.1	)%
Cost of interest bearing funds		0.91	%		1.46	%		(0.55	)%		(37.6	)%
Net interest margin, tax equivalent*		3.37	%		3.62	%		(0.25	)%		(6.8	)%

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

Net Interest Income

Net interest income for the quarter of $37.7 million was a decrease of $0.8 million, or 2.0%, from second quarter 2020 but an increase of $1.2 million, or 3.2%, from third quarter 2019. Our net interest margin at 3.16% decreased 25 basis points from prior quarter and 43 basis points from prior year same quarter, while our average earning assets increased $209.2 million and $707.5 million, respectively, during those same periods. Our yield on average earning assets decreased 32 basis points from prior quarter and 95 basis points from prior year same quarter, and our cost of funds decreased 12 basis points from prior quarter and 72 basis points from prior year same quarter. We continue to experience pressure on our net interest margin 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 (14 basis points) and also by an adjustment for recognition of fee income on our Small Business Administration Paycheck Protection Program loans (11 basis points).

Our ratio of average loans to deposits, including repurchase agreements, was 82.8% for the quarter ended September 30, 2020 compared to 84.5% for the quarter ended June 30, 2020 and 88.1% for the quarter ended September 30, 2019. Year-to-date net interest income for the nine months ended September 30, 2020 was $112.4 million compared to $108.5 million for the nine months ended September 30, 2019. Average earning assets for the nine months ended September 30, 2020 increased $442.4 million compared to the first nine months of 2019, while our yield on average earning assets decreased 66 basis points and our cost of interest bearing funds decreased 55 basis points.

Provision for Credit Losses

The provision for credit losses that was added to the allowance for the third quarter 2020 was $2.4 million compared to a credit of $49 thousand for the quarter ended June 30, 2020 and the provision for loan losses of $1.3 million for the quarter ended September 30, 2019. Year-to-date provision for credit losses were $15.1 million compared to the provision for loan losses of $3.0 million at September 30, 2019. This provision represented a charge against current earnings in order to maintain the allowance at an appropriate level determined using the accounting estimates described in the Critical Accounting Policies and Estimates section. During the calculation of the allowance for credit losses (ACL) in the Current Expected Credit Loss (CECL) model as of September 30, 2020, 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 remains concerned that these factors may have been artificially influenced by the current economic environment resulting from the COVID-19 pandemic and the number of loans that have received payment deferrals. Given this uncertainty, management elected to increase the qualitative factors in our allowance model to offset this reduction and, in fact, increase the ACL by three basis points quarter over quarter. Our reserve coverage (allowance for credit losses to nonperforming loans) at September 30, 2020 was 160.7% compared to 129.0% at June 30, 2020 and allowance for loan and lease losses to nonperforming loans of 110.8% at September 30, 2019. Our credit loss reserve as a percentage of total loans outstanding at September 30, 2020 increased to 1.35% from the 1.32% at June 30, 2020 and was above the allowance for loan loss reserve (using the incurred loss model) of 1.08% at September 30, 2019.

Noninterest Income

Noninterest income for the quarter ended September 30, 2020 of $14.9 million was a $2.0 million, or 15.8%, increase from prior quarter and a $2.5 million, or 20.3%, increase from prior year same quarter. The increase in noninterest income from prior quarter was primarily the result of increases in deposit service charges ($1.3 million), gains on sales of loans ($0.7 million), and loan related fees ($0.6 million), partially offset by a decline in securities gains ($0.8 million). The increase from prior year same quarter resulted from increases in gains on sales of loans ($2.0 million) and loan related fees ($0.8 million), partially offset by a decline in deposit service charges ($0.6 million). The increase in gains on sales of loans is the result of the increased loan volume discussed in the Balance Sheet Review section below. The increase in loan related fees is due to fluctuation in the fair value of our mortgage servicing rights. The variance in deposit related fees is the result of a 30-day waiver of overdraft charges as a result of the COVID-19 pandemic which resulted in a $0.7 million loss in revenue in April, in addition to a general decline in overdraft fees due to reduced activity during the pandemic. Although overdraft fees have remained below normal, we have started to see improvement during the third quarter 2020. Year-to-date noninterest income for the nine months ended September 30, 2020 at $39.3 million increased $2.5 million, or 6.8%, compared to the nine months ended September 30, 2019.

Noninterest Expense

Noninterest expense for the quarter ended September 30, 2020 of $29.5 million increased $1.6 million, or 5.6%, from prior quarter, but decreased $0.4 million, or 1.4%, from prior year same quarter. The increase from prior quarter was primarily due to a $1.0 million increase in personnel expense and a $0.2 million increase in charitable contributions. The increase in personnel expense included a $0.8 million increase in the cost of group medical and life insurance and a $0.1 million increase in salaries. Year over year quarterly increases in personnel expense ($1.1 million) and FDIC insurance ($0.6 million) were offset by a $2.0 million decline in net other real estate owned expense. The decline in net other real estate owned was the result of $3.3 million in fair market value adjustments year over year, partially offset by a $0.3 million increase in carrying costs. Noninterest expense for the nine months ended September 30, 2020 was $3.4 million below the nine months ended September 30, 2019 as net other real estate owned expense decreased $2.3 million and personnel expense decreased $0.7 million year over year, with decreases of $1.3 million in bonuses and incentives and $0.4 million in the cost of group medical and life insurance, offset partially by an increase of $0.9 million in salaries. The accruals for incentive payments are lower than prior year based on our current projected earnings for the year.

Balance Sheet Review

CTBI’s total assets at $5.0 billion decreased $2.4 million, or 0.2% annualized, from June 30, 2020 and $654.4 million, or 20.0% annualized, from December 31, 2019. Loans outstanding at September 30, 2020 were $3.6 billion, an increase of $19.1 million, an annualized 2.2%, from June 30, 2020 and $309.2 million, or 12.7% annualized, from December 31, 2019. We experienced increases during the quarter of $19.3 million in the indirect consumer loan portfolio, $6.4 million in the direct consumer loan portfolio, and $0.1 million in the residential loan portfolio, partially offset by a decrease of $6.7 million in the commercial loan portfolio. The historically low mortgage loan rates have created a significant refinancing boom. In the quarter ended September 30, 2020, we closed and delivered 670 secondary market mortgage loans for a total of $118.3 million compared to 160 loans totaling $20.9 million in the third quarter 2019. Correspondingly, our total mortgage servicing portfolio increased by $74.7 million during the quarter to $561.0 million. CTBI’s investment portfolio increased $208.7 million, or an annualized 111.8%, from June 30, 2020 and $348.7 million, or 77.6% annualized, from December 31, 2019. Deposits in other banks decreased $215.3 million from prior quarter and $6.4 million from December 31, 2019. The decline in deposits in other banks is due to management’s decision to redeploy Federal Reserve funds into AFS securities during the quarter. Deposits, including repurchase agreements, at $4.3 billion decreased $6.3 million, or an annualized 0.6%, from June 30, 2020 but increased $629.5 million, or 23.1% annualized, from December 31, 2019.

Shareholders’ equity at September 30, 2020 was $644.5 million, a $12.6 million increase from the $631.8 million at June 30, 2020, and a $29.6 million increase from the $614.9 million at December 31, 2019. Our tangible common equity/tangible assets ratio at September 30, 2020 was 11.68%.

Loans

(in thousands)	September 30, 2020
Loan Category	Balance		Variance from Prior Year-End			YTD Net Charge- Offs			Nonperforming		ACL
Commercial:
Hotel/motel	$	259,017		15.1	%	$	(42	)	$	90	$	6,009
Commercial real estate residential		284,428		5.5			(135	)		6,030		4,618
Commercial real estate nonresidential		742,436		(4.8	)		(888	)		10,494		11,154
Dealer floorplans		63,393		(24.4	)		(26	)		0		1,413
Commercial other		279,808		(8.6	)		(2,316	)		2,299		4,598
Commercial unsecured SBA PPP		270,271		100.0			0			0		0
Total commercial		1,899,353		14.1			(3,407	)		18,913		27,792

Residential:
Real estate mortgage		783,818		(1.6	)		(222	)		9,341		7,786
Home equity		105,454		(5.8	)		(1	)		985		909
Total residential		889,272		(2.1	)		(223	)		10,326		8,695

Consumer:
Consumer direct		153,666		3.8			(467	)		226		1,919
Consumer indirect		615,608		16.7			(1,144	)		404		9,580
Total consumer		769,274		13.9			(1,611	)		630		11,499

Total loans	$	3,557,899		9.5	%	$	(5,241	)	$	29,869	$	47,986

Asset Quality

CTBI’s total nonperforming loans, not including performing troubled debt restructurings, were $29.9 million, or 0.84% of total loans, at September 30, 2020 compared to $36.2 million, or 1.02% of total loans, at June 30, 2020 and $33.6 million, or 1.03% of total loans, at December 31, 2019. Accruing loans 90+ days past due decreased $3.8 million from prior quarter and $1.6 million from December 31, 2019. Nonaccrual loans decreased $2.5 million during the quarter and $2.1 million from December 31, 2019. Accruing loans 30-89 days past due at $13.3 million decreased $0.3 million from prior quarter and $9.6 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. 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.

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

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

Our level of foreclosed properties at $15.6 million at September 30, 2020 was a $2.1 million decrease from the $17.7 million at June 30, 2020 and a $3.9 million decrease from the $19.5 million at December 31, 2019. Sales of foreclosed properties for the nine months ended September 30, 2020 totaled $5.0 million while new foreclosed properties totaled $2.1 million. At September 30, 2020, the book value of properties under contracts to sell was $3.1 million; however, the closings had not occurred at quarter-end.

When foreclosed properties are acquired, appraisals are obtained and the properties are booked at the current market value less expected sales costs. Additionally, periodic updated appraisals are obtained on unsold foreclosed properties. When an updated appraisal reflects a fair market value below the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected sales costs. Charges to earnings in the third quarter 2020 to reflect the decrease in current market values of foreclosed properties totaled $0.3 million. The decrease in market value was the result of six foreclosed properties with contracts to sell in which the contract price was below book value. There were no properties reappraised during the third quarter 2020. Charges to earnings during the quarters ended June 30, 2020 and September 30, 2019 were $0.3 million and $2.2 million, respectively. Charges to earnings for the nine months ended September 30, 2020 were $1.0 million compared to $3.3 million for the nine months ended September 30, 2019. 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 seventy-nine percent of our OREO properties have appraisals dated within the past 18 months. Management anticipates that our foreclosed properties will remain elevated as we work through current market conditions.

The appraisal aging analysis of foreclosed properties, as well as the holding period, at September 30, 2020 is shown below:

Appraisal Aging Analysis					Holding Period Analysis
Days Since Last Appraisal	Number of Properties		Current Book Value		Holding Period	Current Book Value
Up to 3 months		1	$	153	Less than one year	$	1,558
3 to 6 months		1		59	1 year		1,120
6 to 9 months		20		1,290	2 years		712
9 to 12 months		13		7,636	3 years		624
12 to 18 months		26		4,740	4 years		2,619
18 to 24 months		10		1,468	5 years		242
Over 24 months		6		240	6 years*		851
Total		77	$	15,586	7 years*		50
					8 years*		790
					9 years*		7,020
					Total	$	15,586

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

As disclosed above, CTBI is required to dispose of any foreclosed property that has not been sold within 10 years. As of September 30, 2020, four foreclosed properties with a total book value of $7.0 million had been held by us for at least nine years.

Net loan charge-offs for the quarter ended September 30, 2020 were $1.1 million, or 0.12% of average loans annualized, compared to $2.8 million, or 0.32%, experienced for the second quarter 2020 and $1.4 million, or 0.18%, for the third quarter 2019. Of the net charge-offs for the quarter, $1.0 million were in commercial loans, $0.1 million were in direct consumer loans, and $0.1 million were in residential loans, partially offset by a recovery of $(0.1) million in indirect loans. Net loan charge-offs for the nine months ended September 30, 2020 were $5.2 million, or 0.20% of average loans, compared to $4.1 million, or 0.17% of average loans, experienced for the nine months ended September 30, 2019. Of the net charge-offs for the nine months, $3.4 were in commercial loans, $1.1 million were in indirect consumer loans, $0.5 million were in direct consumer loans, and $0.2 million were in residential loans.

Dividends

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

Pay Date	Record Date	Amount Per Share
October 1, 2020	September 15, 2020	$	0.385
July 1, 2020	June 15, 2020	$	0.380
April 1, 2020	March 15, 2020	$	0.380
January 1, 2020	December 15, 2019	$	0.380
October 1, 2019	September 15, 2019	$	0.380
July 1, 2019	June 15, 2019	$	0.360

Liquidity and Market Risk

The objective of CTBI’s Asset/Liability management function is to maintain consistent growth in net interest income within our policy limits. This objective is accomplished through management of our consolidated balance sheet composition, liquidity, and interest rate risk exposures arising from changing economic conditions, interest rates, and customer preferences. The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand or deposit withdrawals. This is accomplished by maintaining liquid assets in the form of cash and cash equivalents and investment securities, sufficient unused borrowing capacity, and growth in core deposits and wholesale funding (including the use of wholesale brokered deposits). As of September 30, 2020, we had approximately $257.8 million in cash and cash equivalents and approximately $949.1 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 September 30, 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 September 30, 2020 and at December 31, 2019. As of September 30, 2020, we had a $513.2 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 September 30, 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 September 30, 2020 were deposits with the Federal Reserve of $196.5 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 September 30, 2020, available-for-sale (“AFS”) securities comprised all of the total investment portfolio, and the AFS portfolio was approximately 147% of equity capital. Eighty-eight percent of the pledge eligible portfolio was pledged.

Interest Rate Risk

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

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

Capital Resources

Shareholders’ equity at September 30, 2020 was $644.5 million, a $29.6 million increase from the $614.9 million at December 31, 2019. Cash dividends were $1.145 per share and $1.100 per share for the nine months ended September 30, 2020 and 2019, respectively. CTBI’s annualized dividend yield to shareholders as of September 30, 2020 was 5.45%. Our primary source of capital growth is the retention of earnings. We retained 53.5% of our earnings for the first nine months of 2020 compared to 59.9% for the first nine months of 2019.

Insured depository institutions are required to meet the following capital level requirements in order to qualify as “well-capitalized:” (i) a common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8%; (iii) a total capital ratio of 10%; and (iv) a Tier 1 leverage ratio of 5%. We currently satisfy the well-capitalized and the capital conservation standards required by the Federal Reserve, and based on our current capital composition and levels, we anticipate that our capital ratios, on a Basel III basis, will continue to exceed the well-capitalized minimum capital requirements and capital conservation buffer standards.

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 would include 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. As discussed in “COVID-19, the CARES Act and Related Regulatory Actions – Regulatory Capital” of this MD&A, the CBLR framework was modified in response to COVID-19. However, CTBI intends to continue with the existing layered ratio structure. Under either framework, CTBI and CTB would be considered well-capitalized under the applicable guidelines.

On March 27, 2020, pursuant to 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.

On April 9, 2020, in order to facilitate use of the PPPL Facility, federal banking regulators issued an interim final rule to modify the Basel III regulatory capital rules applicable to banking organizations to allow those organizations participating in the PPPL Facility to neutralize the regulatory capital effects of including CTBI and CTB, are permitted to assign a zero percent risk weight to covered loans pledged to the PPPL Facility for purposes of determining risk-weighted assets and the leverage ratio.

As of September 30, 2020, CTBI had a common equity Tier 1 capital ratio of 17.25%, a Tier 1 capital ratio of 18.94%, a total capital ratio of 20.19%, and a Tier 1 leverage ratio of 12.65%. Our capital conservation buffer at September 30, 2020 was 12.19%.

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

As of September 30, 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 the first nine months 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 September 30, 2020, a total of 2,465,294 shares have been repurchased through this program.

Critical Accounting Policies and Estimates

We have identified the following critical accounting policies:

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. CTBI uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. Given a 200 basis point increase to the yield curve used in the simulation model, it is estimated net interest income for CTBI would increase by 4.85 percent over one year and 7.45 percent over two years. A 25 basis point decrease in the yield curve would decrease net interest income by an estimated 0.54 percent over one year and 1.51 percent over two years. For further discussion of CTBI’s market risk, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Market Risk included in the annual report on Form 10-K for the year ended December 31, 2019.

Item 4.Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

CTBI’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. As of the end of the period covered by this report, an evaluation was carried out by CTBI’s management, with the participation of our Chief Executive Officer and the Executive Vice President, Chief Financial Officer, and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, management concluded that disclosure controls and procedures as of September 30, 2020 were effective in ensuring material information required to be disclosed in this quarterly report on Form 10-Q was recorded, processed, summarized, and reported on a timely basis.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in CTBI’s internal control over financial reporting that occurred during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, CTBI’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	None

Item 1A.	Risk Factors

CTBI is subject to a number of risk factors that may affect our business, results of operations, and financial condition, including those disclosed in CTBI’s Annual Report on Form 10-K for the year ended December 31, 2019, and the following additional risk factor:

COVID-19-Related Risk

Since March 13, 2020, the United States has been operating under a state of emergency declared by President Trump 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. Public health officials have recommended and mandated precautions to mitigate the spread of COVID-19, including prohibitions on congregating in heavily populated areas and shelter-in-place orders or similar measures. As a result, we have temporarily adjusted branch operations, decreased lobby usage, encouraged drive-thru and ATM use along with internet banking, had employees work remotely or work split-shifts when possible, implemented social distancing guidelines, and consolidated operations.

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 December 31, 2020 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 September 30, 2020, we have approved 3,274 CARES Act loan deferrals totaling $716 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 the remainder of 2020 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 sudden decrease in interest rates and any risks associated with 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 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)	None
(b)	None
(c)	Purchases of equity securities by the issuer.

The following table presents information relating to CTBI’s purchases of its equity securities during the six months ended September 30, 2020.

Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plan or programs (1)		Maximum number of shares that may be purchased under the plans or programs (1)
January 2020		0	$	--		0		67,370
February 2020		0		--		0		67,370
March 2020		32,664		33.64		32,664		1,034,706
April 2020		0		--		0		1,034,706
May 2020		0		--		0		1,034,706
June 2020		0		--		0		1,034,706
July 2020		0		--		0		1,034,706
August 2020		0		--		0		1,034,706
September 2020		0		--		0		1,034,706
Total		32,664	$	33.64		32,664		1,034,706

(1) On March 9, 2020, the Board of Directors of CTBI approved an increase to its stock repurchase program of up to an additional 1,000,000 shares of CTBI’s outstanding common stock. At the time the increase was approved, there were 67,370 shares remaining under CTBI’s existing stock repurchase program, which began in December 1998 with the authorization to acquire up to 500,000 shares and was increased by an additional 1,000,000 shares in July 2000 and May 2003. As of September 30, 2020, a total of 2,465,294 shares have been repurchased through this program.

Item 3.	Defaults Upon Senior Securities		None

Item 4.	Mine Safety Disclosure		Not applicable

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

Item 6.	Exhibits:
	(1)	Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Exhibit 31.1 Exhibit 31.2
	(2)	Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Exhibit 32.1 Exhibit 32.2
	(3)	XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL	Exhibit 101.INS
	(4)	XBRL Taxonomy Extension Schema Document	Exhibit 101.SCH
	(5)	XBRL Taxonomy Extension Calculation Linkbase	Exhibit 101.CAL
	(6)	XBRL Taxonomy Extension Definition Linkbase	Exhibit 101.DEF
	(7)	XBRL Taxonomy Extension Label Linkbase	Exhibit 101.LAB
	(8)	XBRL Taxonomy Extension Presentation Linkbase	Exhibit 101.PRE
	(9)	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)	Exhibit 104

SIGNATURES

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

	COMMUNITY TRUST BANCORP, INC.

Date: November 9, 2020	By:

	/s/ Jean R. Hale
	Jean R. Hale
	Chairman, President, and Chief Executive Officer

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