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Loans

9 Months Ended

Sep. 30, 2020

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