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Loans

12 Months Ended

Dec. 31, 2019

4. Loans

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

(in thousands)	December 31 2019		December 31 2018
Commercial construction	$	104,809	$	82,715
Commercial secured by real estate		1,169,975		1,183,093
Equipment lease financing		481		1,740
Commercial other		389,683		377,198
Real estate construction		63,350		57,160
Real estate mortgage		733,003		722,417
Home equity		111,894		106,299
Consumer direct		148,051		144,289
Consumer indirect		527,418		533,727
Total loans	$	3,248,664	$	3,208,638

CTBI has segregated and evaluates its loan portfolio through nine portfolio segments. CTBI serves customers in small and mid-sized communities in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. Therefore, CTBI’s exposure to credit risk is significantly affected by changes in these communities.

Commercial construction loans are for the purpose of erecting or rehabilitating buildings or other structures for commercial purposes, including any infrastructure necessary for development. Included in this category are improved property, land development, and tract development loans. The terms of these loans are generally short-term with permanent financing upon completion.

Commercial real estate loans include loans secured by nonfarm, nonresidential properties, 1-4 family/multi-family properties, farmland, and other commercial real estate. These loans are originated based on the borrower’s ability to service the debt and secondarily based on the fair value of the underlying collateral.

Equipment lease financing loans are fixed or variable leases for commercial purposes.

Commercial other loans consist of commercial check loans, agricultural loans, receivable financing, floorplans, loans to financial institutions, loans for purchasing or carrying securities, and other commercial purpose loans. Commercial loans are underwritten based on the borrower’s ability to service debt from the business’s underlying cash flows. As a general practice, we obtain collateral such as real estate, equipment, or other assets, although such loans may be uncollateralized but guaranteed.

Real estate construction loans are typically for owner-occupied properties. The terms of these loans are generally short-term with permanent financing upon completion.

Residential real estate loans are a mixture of fixed rate and adjustable rate first and second lien residential mortgage loans. As a policy, CTBI holds adjustable rate loans and sells the majority of its fixed rate first lien mortgage loans into the secondary market. Changes in interest rates or market conditions may impact a borrower’s ability to meet contractual principal and interest payments. Residential real estate loans are secured by real property.

Home equity lines are revolving adjustable rate credit lines secured by real property.

Consumer direct loans are a mixture of fixed rate and adjustable rate products comprised of unsecured loans, consumer revolving credit lines, deposit secured loans, and all other consumer purpose loans.

Consumer indirect loans are fixed rate loans secured by automobiles, trucks, vans, and recreational vehicles originated at the selling dealership underwritten and purchased by CTBI’s indirect lending department. Both new and used products are financed. Only dealers who have executed dealer agreements with CTBI participate in the indirect lending program.

Not included in the loan balances above were loans held for sale in the amount of $1.2 million at December 31, 2019 and $2.5 million at December 31, 2018.

Refer to note 1 above for further information regarding our nonaccrual policy. Nonaccrual loans segregated by class of loans were as follows:

(in thousands)	December 31 2019		December 31 2018
Commercial:
Commercial construction	$	230	$	639
Commercial secured by real estate		3,759		4,537
Commercial other		3,839		797

Residential:
Real estate construction		634		22
Real estate mortgage		4,821		5,395
Home equity		716		477
Total nonaccrual loans	$	13,999	$	11,867

The following tables present CTBI’s loan portfolio aging analysis, segregated by class, as of December 31, 2019 and 2018:

	December 31, 2019
(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans		90+ and Accruing*
Commercial:
Commercial construction	$	118	$	0	$	467	$	585	$	104,224	$	104,809	$	237
Commercial secured by real estate		2,734		5,969		12,366		21,069		1,148,906		1,169,975		8,820
Equipment lease financing		0		0		0		0		481		481		0
Commercial other		880		284		6,267		7,431		382,252		389,683		2,586
Residential:
Real estate construction		117		52		634		803		62,547		63,350		0
Real estate mortgage		774		5,376		10,320		16,470		716,533		733,003		7,088
Home equity		1,084		412		736		2,232		109,662		111,894		344
Consumer:
Consumer direct		945		230		97		1,272		146,779		148,051		97
Consumer indirect		4,037		909		447		5,393		522,025		527,418		448
Total	$	10,689	$	13,232	$	31,334	$	55,255	$	3,193,409	$	3,248,664	$	19,620

	December 31, 2018
(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans		90+ and Accruing*
Commercial:
Commercial construction	$	87	$	58	$	698	$	843	$	81,872	$	82,715	$	58
Commercial secured by real estate		6,287		1,204		8,776		16,267		1,166,826		1,183,093		4,632
Equipment lease financing		0		0		0		0		1,740		1,740		0
Commercial other		1,057		94		1,067		2,218		374,980		377,198		581
Residential:
Real estate construction		144		438		28		610		56,550		57,160		6
Real estate mortgage		1,272		5,645		7,607		14,524		707,893		722,417		4,095
Home equity		898		365		441		1,704		104,595		106,299		246
Consumer:
Consumer direct		918		191		74		1,183		143,106		144,289		74
Consumer indirect		4,715		975		507		6,197		527,530		533,727		506
Total	$	15,378	$	8,970	$	19,198	$	43,546	$	3,165,092	$	3,208,638	$	10,198

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

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

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

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

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

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

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

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

Credit Quality Indicators:

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

➢

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

➢

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

➢

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

➢

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

➢

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

The following tables present the credit risk profile of CTBI’s commercial loan portfolio based on rating category and payment activity, segregated by class of loans, as of December 31, 2019 and 2018:

(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

December 31, 2018
Pass	$	74,222	$	1,038,309	$	1,740	$	327,431	$	1,441,702
Watch		3,070		71,834		0		28,986		103,890
OAEM		1,594		19,734		0		5,735		27,063
Substandard		3,829		53,125		0		14,970		71,924
Doubtful		0		91		0		76		167
Total	$	82,715	$	1,183,093	$	1,740	$	377,198	$	1,644,746

The following tables present the credit risk profile of CTBI’s residential real estate and consumer loan portfolios based on performing or nonperforming status, segregated by class, as of December 31, 2019 and 2018:

(in thousands)	Real Estate Construction		Real Estate Mortgage		Home Equity		Consumer Direct		Consumer Indirect		Total
December 31, 2019
Performing	$	62,716	$	721,094	$	110,834	$	147,954	$	526,970	$	1,569,568
Nonperforming (1)		634		11,909		1,060		97		448		14,148
Total	$	63,350	$	733,003	$	111,894	$	148,051	$	527,418	$	1,583,716

December 31, 2018
Performing	$	57,132	$	712,927	$	105,576	$	144,215	$	533,221	$	1,553,071
Nonperforming (1)		28		9,490		723		74		506		10,821
Total	$	57,160	$	722,417	$	106,299	$	144,289	$	533,727	$	1,563,892

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

The total of consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings are in process totaled $2.4 million at December 31, 2019 compared to $3.3 million at December 31, 2018.

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable CTBI will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection.

The following table presents impaired loans, the average investment in impaired loans, and interest income recognized on impaired loans for the years ended December 31, 2019, 2018, and 2017:

	December 31, 2019
(in thousands)	Recorded Balance		Unpaid Contractual Principal Balance		Specific Allowance		Average Investment in Impaired Loans		*Interest Income Recognized
Loans without a specific valuation allowance:
Commercial construction	$	2,836	$	2,837	$	0	$	3,234	$	170
Commercial secured by real estate		40,346		41,557		0		36,976		1,601
Commercial other		7,829		9,489		0		9,889		460
Real estate mortgage		2,309		2,309		0		2,385		85

Loans with a specific valuation allowance:
Commercial construction		174		174		99		215		11
Commercial secured by real estate		1,033		2,176		227		1,678		15
Commercial other		3,244		3,244		886		1,323		29

Totals:
Commercial construction		3,010		3,011		99		3,449		181
Commercial secured by real estate		41,379		43,733		227		38,654		1,616
Commercial other		11,073		12,733		886		11,212		489
Real estate mortgage		2,309		2,309		0		2,385		85
Total	$	57,771	$	61,786	$	1,212	$	55,700	$	2,371

	December 31, 2018
(in thousands)	Recorded Balance		Unpaid Contractual Principal Balance		Specific Allowance		Average Investment in Impaired Loans		*Interest Income Recognized
Loans without a specific valuation allowance:
Commercial construction	$	4,100	$	4,100	$	0	$	3,923	$	171
Commercial secured by real estate		29,645		31,409		0		30,250		1,412
Commercial other		8,285		9,982		0		8,774		530
Real estate construction		0		0		0		106		0
Real estate mortgage		1,882		1,882		0		1,666		41

Loans with a specific valuation allowance:
Commercial construction		127		127		50		42		0
Commercial secured by real estate		1,854		2,983		605		2,051		1
Commercial other		473		473		146		285		16

Totals:
Commercial construction		4,227		4,227		50		3,965		171
Commercial secured by real estate		31,499		34,392		605		32,301		1,413
Commercial other		8,758		10,455		146		9,059		546
Real estate construction		0		0		0		106		0
Real estate mortgage		1,882		1,882		0		1,666		41
Total	$	46,366	$	50,956	$	801	$	47,097	$	2,171

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

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

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

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

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

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

Certain loans have been modified in troubled debt restructurings, where economic concessions were granted to borrowers consisting of reductions in the interest rates, payment extensions, forgiveness of principal, and forbearances. Presented below, segregated by class of loans, are troubled debt restructurings that occurred during the years ended December 31, 2019 and 2018:

	Year Ended December 31, 2019
(in thousands)	Number of Loans		Term Modification		Rate Modification		Combination		Post- Modification Outstanding Balance
Commercial:
Commercial construction		0	$	0	$	0	$	0	$	0
Commercial secured by real estate		17		6,105		0		679		6,784
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

	Year Ended December 31, 2018
(in thousands)	Number of Loans		Term Modification		Rate Modification		Combination		Post- Modification Outstanding Balance
Commercial:
Commercial construction		5	$	2,182	$	0	$	15	$	2,197
Commercial secured by real estate		24		4,004		0		1,383		5,387
Commercial other		8		465		0		0		465
Residential:
Real estate mortgage		3		264		0		704		968
Total troubled debt restructurings		40	$	6,915	$	0	$	2,102	$	9,017

No charge-offs have resulted from modifications for any of the presented periods. We had commitments to extend additional credit in the amount of $82 thousand and $45 thousand, respectively, at December 31, 2019 and 2018, 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.

(in thousands)	Year Ended December 31, 2019
	Number of Loans		Recorded Balance
Commercial:
Commercial construction		0	$	0
Commercial secured by real estate		1		30
Commercial other		1		34

Residential:
Real estate mortgage		1		463
Total defaulted restructured loans		3	$	527

(in thousands)	Year Ended December 31, 2018
	Number of Loans		Recorded Balance
Commercial:
Commercial construction		2	$	148
Commercial secured by real estate		1		17
Commercial other		1		84
Total defaulted restructured loans		4	$	249