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Section 1: 10-Q (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 March 31, 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
The The Nasdaq Stock Market LLC 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 
No

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

Yes 
No





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer 
Accelerated Filer 
Non-accelerated Filer 
     
Smaller Reporting Company
Emerging Growth Company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.       

Indicate by check mark whether the registrant 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 – 17,794,598 shares outstanding at April 30, 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; 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.

1

Community Trust Bancorp, Inc.
Condensed Consolidated Balance Sheets

(dollars in thousands)
 
(unaudited)
March 31
2020
   
December 31
2019
 
Assets:
           
Cash and due from banks
 
$
67,728
   
$
58,680
 
Interest bearing deposits
   
124,974
     
206,003
 
Federal funds sold
   
0
     
0
 
Cash and cash equivalents
   
192,702
     
264,683
 
                 
Certificates of deposit in other banks
   
245
     
245
 
Debt securities available-for-sale at fair value (amortized cost of $625,914 and $593,945, respectively)
   
633,479
     
599,844
 
Debt securities held-to-maturity at amortized cost (fair value of $0 and $517, respectively)
   
0
     
517
 
Equity securities at fair value
   
1,721
     
1,953
 
Loans held for sale
   
1,403
     
1,167
 
                 
Loans
   
3,287,541
     
3,248,664
 
Allowance for credit losses*
   
(49,445
)
   
(35,096
)
Net loans
   
3,238,096
     
3,213,568
 
                 
Premises and equipment, net
   
43,568
     
44,046
 
Right-of-use asset
   
14,210
     
14,550
 
Federal Home Loan Bank stock
   
11,354
     
10,474
 
Federal Reserve Bank stock
   
4,887
     
4,887
 
Goodwill
   
65,490
     
65,490
 
Bank owned life insurance
   
69,609
     
69,269
 
Mortgage servicing rights
   
2,481
     
3,263
 
Other real estate owned
   
19,816
     
19,480
 
Accrued interest receivable
   
14,680
     
14,836
 
Other assets
   
38,904
     
37,731
 
Total assets
 
$
4,352,645
   
$
4,366,003
 
                 
Liabilities and shareholders’ equity:
               
Deposits:
               
Noninterest bearing
 
$
860,844
   
$
865,760
 
Interest bearing
   
2,534,264
     
2,539,812
 
Total deposits
   
3,395,108
     
3,405,572
 
                 
Repurchase agreements
   
236,908
     
226,917
 
Federal funds purchased
   
4,907
     
7,906
 
Advances from Federal Home Loan Bank
   
411
     
415
 
Long-term debt
   
57,841
     
57,841
 
Deferred taxes
   
2,719
     
5,110
 
Operating lease liability
   
13,400
     
13,729
 
Finance lease liability
   
1,453
     
1,456
 
Accrued interest payable
   
3,447
     
2,839
 
Other liabilities
   
23,529
     
29,332
 
Total liabilities
   
3,739,723
     
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 – 17,787,274; 2019 – 17,793,165
   
88,936
     
88,966
 
Capital surplus
   
224,277
     
224,907
 
Retained earnings
   
294,223
     
296,760
 
Accumulated other comprehensive income, net of tax
   
5,486
     
4,253
 
Total shareholders’ equity
   
612,922
     
614,886
 
                 
Total liabilities and shareholders’ equity
 
$
4,352,645
   
$
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.

2

Community Trust Bancorp, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(unaudited)

 
Three Months Ended
 
   
March 31
 
(in thousands except per share data)
 
2020
   
2019
 
Interest income:
           
Interest and fees on loans, including loans held for sale
 
$
40,465
   
$
40,910
 
Interest and dividends on securities
               
Taxable
   
3,046
     
3,163
 
Tax exempt
   
527
     
678
 
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock
   
140
     
296
 
Interest on Federal Reserve Bank deposits
   
496
     
786
 
Other, including interest on federal funds sold
   
25
     
56
 
Total interest income
   
44,699
     
45,889
 
                 
Interest expense:
               
Interest on deposits
   
6,942
     
8,075
 
Interest on repurchase agreements and federal funds purchased
   
1,004
     
1,156
 
Interest on advances from Federal Home Loan Bank
   
0
     
39
 
Interest on long-term debt
   
509
     
636
 
Total interest expense
   
8,455
     
9,906
 
                 
Net interest income
   
36,244
     
35,983
 
Provision for credit losses*
   
12,707
     
190
 
Net interest income after provision for credit losses
   
23,537
     
35,793
 
                 
Noninterest income:
               
Service charges on deposit accounts
   
5,916
     
6,120
 
Gains on sales of loans, net
   
483
     
330
 
Trust and wealth management income
   
2,884
     
2,575
 
Loan related fees
   
95
     
573
 
Bank owned life insurance
   
573
     
558
 
Brokerage revenue
   
372
     
261
 
Securities gains
   
249
     
356
 
Other noninterest income
   
949
     
1,397
 
Total noninterest income
   
11,521
     
12,170
 
                 
Noninterest expense:
               
Officer salaries and employee benefits
   
2,751
     
3,374
 
Other salaries and employee benefits
   
12,280
     
12,585
 
Occupancy, net
   
1,985
     
2,051
 
Equipment
   
721
     
739
 
Data processing
   
1,978
     
1,763
 
Bank franchise tax
   
1,812
     
1,715
 
Legal fees
   
477
     
430
 
Professional fees
   
569
     
531
 
Advertising and marketing
   
634
     
792
 
FDIC insurance
   
147
     
177
 
Other real estate owned provision and expense
   
869
     
771
 
Repossession expense
   
135
     
377
 
Amortization of limited partnership investments
   
888
     
777
 
Other noninterest expense
   
2,975
     
3,001
 
Total noninterest expense
   
28,221
     
29,083
 
                 
Income before income taxes
   
6,837
     
18,880
 
Income taxes
   
258
     
3,941
 
Net income
   
6,579
     
14,939
 
                 
Other comprehensive income:
               
Unrealized holding gains on securities available-for-sale:
               
Unrealized holding gains arising during the period
   
2,147
     
6,124
 
Less: Reclassification adjustments for realized gains included in net income
   
481
     
1
 
Tax expense
   
433
     
1,286
 
Other comprehensive income, net of tax
   
1,233
     
4,837
 
Comprehensive income
 
$
7,812
   
$
19,776
 
                 
Basic earnings per share
 
$
0.37
   
$
0.84
 
Diluted earnings per share
 
$
0.37
   
$
0.84
 
                 
Weighted average shares outstanding-basic
   
17,752
     
17,712
 
Weighted average shares outstanding-diluted
   
17,763
     
17,723
 

*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.

3

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, 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
                           
14,939
             
14,939
 
Other comprehensive income, net of tax of $1,286
                                   
4,837
     
4,837
 
Cash dividends declared ($0.36 per share)
                           
(6,378
)
           
(6,378
)
Issuance of common stock
   
19,065
     
95
     
163
                     
258
 
Vesting of restricted stock
   
(12,186
)
   
(61
)
   
61
                     
0
 
Issuance of restricted stock
   
27,921
     
140
     
(140
)
                   
0
 
Forfeiture of restricted stock
   
(59
)
   
0
     
0
                     
0
 
Stock-based compensation
                   
181
                     
181
 
Balance, March 31, 2019
   
17,767,594
   
$
88,839
   
$
223,426
   
$
267,016
   
$
(1,774
)
 
$
577,507
 

(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
                           
6,579
             
6,579
 
Other comprehensive income, net of tax of $433
                                   
1,233
     
1,233
 
Cash dividends declared ($0.38 per share)
                           
(6,750
)
           
(6,750
)
Issuance of common stock
   
21,953
     
110
     
122
                     
232
 
Repurchase of common stock
   
(32,664
)
   
(164
)
   
(935
)
                   
(1,099
)
Issuance of restricted stock
   
21,544
     
108
     
(108
)
                   
0
 
Vesting of restricted stock
   
(16,724
)
   
(84
)
   
84
                     
0
 
Stock-based compensation
                   
207
                     
207
 
Balance, March 31, 2020
   
17,787,274
   
$
88,936
   
$
224,277
   
$
294,223
   
$
5,486
   
$
612,922
 

See notes to condensed consolidated financial statements.

4


Community Trust Bancorp, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)

 
Three Months Ended
March 31
 
(in thousands)
 
2020
   
2019
 
Cash flows from operating activities:
           
Net income
 
$
6,579
   
$
14,939
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
1,356
     
1,427
 
Deferred taxes
   
(2,037
)
   
2,008
 
Stock-based compensation
   
228
     
200
 
Provision for credit losses*
   
12,707
     
190
 
Write-downs of other real estate owned and other repossessed assets
   
458
     
489
 
Gains on sale of mortgage loans held for sale
   
(483
)
   
(330
)
Securities gains, net
   
(481
)
   
(1
)
Change in fair market value of equity securities
   
232
     
(355
)
Gains on sale of assets, net
   
(3
)
   
(51
)
Proceeds from sale of mortgage loans held for sale
   
23,032
     
14,927
 
Funding of mortgage loans held for sale
   
(22,785
)
   
(25,785
)
Amortization of securities premiums and discounts, net
   
1,271
     
1,112
 
Change in cash surrender value of bank owned life insurance
   
(340
)
   
(357
)
Payment of operating lease liabilities
   
(444
)
   
0
 
Mortgage servicing rights:
               
Fair value adjustments
   
926
     
(116
)
New servicing assets created
   
(144
)
   
333
 
Changes in:
               
Accrued interest receivable
   
156
     
683
 
Other assets
   
(1,173
)
   
6,399
 
Accrued interest payable
   
608
     
(1,081
)
Other liabilities
   
(5,939
)
   
(2,541
)
Net cash provided by operating activities
   
13,724
     
12,090
 
                 
Cash flows from investing activities:
               
Certificates of deposit in other banks:
               
Maturity of certificates of deposit
   
0
     
2,450
 
Securities available-for-sale (AFS):
               
Purchase of AFS securities
   
(126,748
)
   
(59,583
)
Proceeds from the sales of AFS securities
   
21,746
     
12,550
 
Proceeds from prepayments and maturities of AFS securities
   
72,243
     
46,491
 
Securities held-to-maturity (HTM):
               
Proceeds from maturities of HTM securities
   
517
     
30
 
Change in loans, net
   
(41,183
)
   
18,755
 
Purchase of premises and equipment
   
(423
)
   
(226
)
Redemption of stock by Federal Home Loan Bank
   
0
     
2,452
 
Investment in Federal Home Loan Bank stock
   
(880
)
   
0
 
Proceeds from sale of other real estate and repossessed assets
   
116
     
964
 
Net cash provided by (used in) investing activities
   
(74,612
)
   
23,883
 
                 
Cash flows from financing activities:
               
Change in deposits, net
   
(10,464
)
   
77,153
 
Change in repurchase agreements and federal funds purchased, net
   
6,992
     
5,414
 
Proceeds from Federal Home Loan Bank advances
   
25,000
     
30,000
 
Payments on advances from Federal Home Loan Bank
   
(25,004
)
   
(30,005
)
Payment of finance lease liabilities
   
(3
)
   
0
 
Issuance of common stock
   
232
     
258
 
Repurchase of common stock
   
(1,099
)
   
0
 
Dividends paid
   
(6,747
)
   
(6,383
)
Net cash provided by (used in) financing activities
   
(11,093
)
   
76,437
 
Net increase (decrease) in cash and cash equivalents
   
(71,981
)
   
112,410
 
Cash and cash equivalents at beginning of period
   
264,683
     
141,450
 
Cash and cash equivalents at end of period
 
$
192,702
   
$
253,860
 
                 
Supplemental disclosures:
               
Interest paid
 
$
7,848
   
$
8,830
 
Non-cash activities:
               
Loans to facilitate the sale of other real estate owned and repossessed assets
   
718
     
1,797
 
Common stock dividends accrued, paid in subsequent quarter
   
224
     
215
 
Real estate acquired in settlement of loans
   
1,625
     
854
 

*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.

5

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 March 31, 2020, the results of operations, other comprehensive income, changes in shareholders’ equity, and cash flows for the three months ended March 31, 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 and the cash flows for the three months ended March 31, 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 June 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 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.

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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
         
 
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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.
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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.
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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. 
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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 March 31, 2020, CTBI held no securities designated as held-to-maturity.
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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.
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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.