EDGAR 10-K Filing

Company CIK: 350852
Filing Year: 2022
Filename: 350852_10-K_2022_0001140361-22-006937.json

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ITEM 1. BUSINESS
Item 1.
Business
Community Trust Bancorp, Inc. (“CTBI”) is a bank holding company registered with the Board of Governors of the Federal Reserve System pursuant to Section 5(a) of the Bank Holding Company Act of 1956, as amended. CTBI was incorporated August 12, 1980, under the laws of the Commonwealth of Kentucky for the purpose of becoming a bank holding company. Currently, CTBI owns all the capital stock of one commercial bank and one trust company, serving small and mid-sized communities in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. The commercial bank is Community Trust Bank, Inc., Pikeville, Kentucky (“CTB”) and the trust company is Community Trust and Investment Company, Lexington, Kentucky.
At December 31, 2021, CTBI had total consolidated assets of $5.4 billion and total consolidated deposits, including repurchase agreements, of $4.6 billion. Total shareholders’ equity at December 31, 2021 was $698.2 million. Trust assets under management at December 31, 2021 were $3.6 billion, including CTB’s investment portfolio totaling $1.5 billion.
Through our subsidiaries, CTBI engages in a wide range of commercial and personal banking and trust and wealth management activities, which include accepting time and demand deposits; making secured and unsecured loans to corporations, individuals, and others; providing cash management services to corporate and individual customers; issuing letters of credit; renting safe deposit boxes; and providing funds transfer services. The lending activities of CTB include making commercial, construction, mortgage, and personal loans. Lines of credit, revolving lines of credit, term loans, and other specialized loans, including asset-based financing, are also available. Our corporate subsidiaries act as trustees of personal trusts, as executors of estates, as trustees for employee benefit trusts, as paying agents for bond and stock issues, as investment agent, as depositories for securities, and as providers of full service brokerage and insurance services.
CTBI has supported numerous community organizations through financing projects for affordable housing, economic development, and revitalization of distressed and underserved areas. CTB’s community development lending totaled over $32 million for the year 2021. Also during 2021, CTBI made contributions totaling over $344 thousand to aid low and moderate income families and communities, encourage economic development, and provide relief to those impacted by natural disasters throughout our footprint and beyond. Our employees served over 1,100 hours throughout the year with organizations that provide affordable housing and other services to low and moderate income families, encourage economic development for small businesses and farms, and respond to natural disasters.
COMPETITION
CTBI’s subsidiaries face substantial competition for deposit, credit, trust, wealth management, and brokerage relationships in the communities we serve. Competing providers include state banks, national banks, thrifts, trust companies, insurance companies, mortgage banking operations, credit unions, finance companies, brokerage companies, and other financial and non-financial companies which may offer products functionally equivalent to those offered by our subsidiaries. As financial services become increasingly dependent on technology, permitting transactions to be conducted by telephone, mobile banking, and the internet, non-bank institutions are able to attract funds and provide lending and other financial services without offices located in our market areas. Many of our nonbank competitors have fewer regulatory constraints, broader geographic service areas, greater capital, and, in some cases, lower cost structures. In addition, competition for quality customers has intensified as a result of changes in regulation, consolidation among financial service providers, and advances in technology and product delivery systems. Many of these providers offer services within and outside the market areas served by our subsidiaries. We strive to offer competitively priced products along with quality customer service to build customer relationships in the communities we serve.
The United States and global markets, as well as general economic conditions, have been volatile. Larger financial institutions could strengthen their competitive position as a result of ongoing consolidation within the financial services industry.
Banking legislation in Kentucky places no limits on the number of banks or bank holding companies that a bank holding company may acquire. Interstate acquisitions are allowed where reciprocity exists between the laws of Kentucky and the home state of the bank or bank holding company to be acquired. Bank holding companies continue to be limited to control of less than 15% of deposits held by federally insured depository institutions in Kentucky (exclusive of inter-bank and foreign deposits). Competition for deposits may be increasing as a consequence of Federal Deposit Insurance Corporation (“FDIC”) assessments shifting from deposits to an asset based formula, as larger banks may move away from non-deposit funding sources.
No material portion of our business is seasonal. We are not dependent upon any one customer or a few customers, and the loss of any one or a few customers would not have a material adverse effect on us. See note 18 to the consolidated financial statements contained herein for additional information regarding concentrations of credit.
We do not engage in any operations in foreign countries.
HUMAN CAPITAL
We recognize the long-term value of a highly skilled, dedicated workforce, with an average tenure of over 10 years, and are committed to providing our employees with opportunities for personal and professional growth, whether it is by providing reimbursement of educational expenses, encouraging attendance at seminars and in-house training programs, or sponsoring memberships in local civic organizations.
Our employees recognize the long-term benefit of working with our organization as evidenced by the 18% of our employees who have more than 20 years of service. Our employees participate in numerous coaching, training, and educational programs, including required periodic training on topics such as ethics, privacy regulations, anti-money laundering, and UDAAP (Unfair, Deceptive, or Abusive Acts or Practices). Additionally, CTBI makes online training available to employees. Employees also have the opportunity to utilize programs that provide skill development online with over 8,000 varied courses, including topics in banking, finance, computers, customer service, sales, management, and personal skills such as time management, project management, and communication skills.
In addition to classes provided by our training department, employees also have the opportunity to work on their skill development through attending secondary education courses. These are funded through our Educational Assistance Program.
As of December 31, 2021, CTBI and our subsidiaries had 974 full-time equivalent employees. Females comprise 74% of our workforce, and 58% of our managerial positions (supervisor or above) are held by females. This includes 65% of our branch managers, 35% of our market presidents, and 29% of our senior vice presidents. At the time of this filing, our Board of Directors is 20% female.
CTBI offers our employees competitive compensation, as well as a highly competitive benefits package. A retirement plan, an employee stock ownership plan, group life insurance, major medical insurance, a cafeteria plan, education reimbursement, and management and employee incentive compensation plans are available to all eligible personnel.
Employees are also offered the opportunity to complete periodic employee satisfaction surveys anonymously.
We actively support our employees with a wellness program. Since beginning the program in 2004, participating employees have experienced improvements in preventing cardiovascular disease, cancer, and diabetes. Many of our employees have experienced decreases in elevated medical risk factors, including alcohol consumption, tobacco usage, physical inactivity, high stress, high cholesterol, and high blood pressure.
During the recent COVID-19 pandemic, CTBI has taken many steps to protect the safety of our employees by adjusting branch operations and decreasing lobby usage as needed, encouraging drive-thru and ATM use along with internet banking, having employees work remotely or work split-shifts when necessary, implementing social distancing guidelines, and consolidating operations. Management has also put a policy in place to continue to pay employees when they are required to be quarantined due to a positive COVID-19 test or exposure to COVID-19.
SUPERVISION AND REGULATION
General
As a registered bank holding company, we are restricted to those activities permissible under the Bank Holding Company Act of 1956, as amended, and are subject to actions of the Board of Governors of the Federal Reserve System thereunder. We are required to file an annual report with the Federal Reserve Board and are subject to an annual examination by the Board.
Community Trust Bank, Inc. is a state-chartered bank subject to state and federal banking laws and regulations and periodic examination by the Kentucky Department of Financial Institutions and the restrictions, including dividend restrictions, thereunder. CTB is also a member of the Federal Reserve System and is subject to certain restrictions imposed by and to examination and supervision under the Federal Reserve Act. Community Trust and Investment Company is also regulated by the Kentucky Department of Financial Institutions and the Federal Reserve.
Deposits of CTB are insured up to applicable limits by the FDIC, which subjects banks to regulation and examination under the provisions of the Federal Deposit Insurance Act.
The operations of CTBI and our subsidiaries are also affected by other banking legislation and policies and practices of various regulatory authorities. Such legislation and policies include statutory maximum rates on some loans, reserve requirements, domestic monetary and fiscal policy, and limitations on the kinds of services that may be offered.
CTBI’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on our website at www.ctbi.com as soon as reasonably practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission. CTBI’s Code of Business Conduct and Ethics and other corporate governance documents are also available on our website. Copies of our annual report will be made available free of charge upon written request to:
Community Trust Bancorp, Inc.
Mark A. Gooch
President and CEO
P.O. Box 2947
Pikeville, KY 41502-2947
The Securities and Exchange Commission (“SEC”) maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding CTBI and other issuers that file electronically with the SEC.
Capital Requirements
Insured depository institutions are required to meet certain capital level requirements. On October 29, 2019, federal banking regulators adopted a final rule to simplify the regulatory capital requirements for eligible community banks and holding companies that opt-in to the community bank leverage ratio framework (the “CBLR framework”), as required by Section 201 of the Economic Growth, Relief and Consumer Protection Act of 2018. Under the final rule, which became effective as of January 1, 2020, community banks and holding companies (which includes CTB and CTBI) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, were eligible to opt-in to the CBLR framework. The community bank leverage ratio is the ratio of a banking organization’s Tier 1 capital to its average total consolidated assets, both as reported on the banking organization’s applicable regulatory filings.
In April 2020, as directed by Section 4012 of the CARES Act, the regulatory agencies introduced temporary changes to the CBLR. These changes, which subsequently were adopted as a final rule, temporarily reduced the CBLR requirement to 8% through the end of calendar year 2020. Beginning in calendar year 2021, the CBLR requirement increased to 8.5% for the calendar year before returning to 9% in calendar year 2022. Management has elected to use the CBLR framework for CTBI and CTB. Under either framework, CTBI and CTB would be considered well-capitalized under the applicable guidelines. CTBI’s CBLR ratio as of December 31, 2021 was 13.00%. CTB’s CBLR ratio as of December 31, 2021 was 12.42%.

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ITEM 1A. RISK FACTORS
Item 1A.
Risk Factors
An investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that management believes affect us are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference herein. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This report is qualified in its entirety by these risk factors. See also, “Cautionary Statement Regarding Forward-Looking Statements.” If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment.
Economic Environment Risks
Economic Risk
CTBI may continue to be adversely affected by economic and market conditions.
Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent upon the business environment in the markets where we operate, in the states of Kentucky, West Virginia, and Tennessee and in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors. Currently, the pandemic known as COVID-19 is causing worldwide concern and economic disruption. Economic pressure on consumers and uncertainty regarding economic improvement may result in continued changes in consumer and business spending, borrowing, and savings habits. Such conditions could adversely affect the credit quality of our loans and our business, financial condition, and results of operations.
Economy of Our Markets
Our business may continue to be adversely affected by ongoing weaknesses in the local economies on which we depend.
Our loan portfolio is concentrated primarily in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. Our profits depend on providing products and services to clients in these local regions. Unemployment rates in our rural markets remain high compared to the national average. Increases in unemployment, decreases in real estate values, or increases in interest rates could weaken the local economies in which we operate. These economic indicators typically affect certain industries, such as real estate and financial services, more significantly. High levels of unemployment and depressed real estate asset values in certain of the markets we serve would likely prolong the economic recovery period in our market area. Also, our growth within certain of our markets may be adversely affected by inconsistent access to high speed internet, and the lack of population and business growth in such markets in recent years. Weakness in our market area could depress our earnings and consequently our financial condition because:
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Clients may not want, need, or qualify for our products and services;
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Borrowers may not be able to repay their loans;
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The value of the collateral securing our loans to borrowers may decline; and
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The quality of our loan portfolio may decline.
Climate Change Risk
Our business may be adversely impacted by climate change and related initiatives.
Climate change and other emissions-related laws, regulations, and agreements have been proposed and, in some cases adopted, on the international, federal, state, and local levels. These final and proposed initiatives take the form of restrictions, caps, taxes, or other controls on emissions. Our markets include areas where the coal industry was historically a significant part of the local economy. The importance of the coal industry to such areas has, however, continued to decline substantially and the economies of our markets have become more diversified. Nevertheless, to the extent that existing or new climate change laws, regulations, or agreements further impact production, purchase, or use of coal, the economies of certain areas within our markets, the demand for financing, the value of collateral securing our coal-related loans, and our financial condition and results of operations may be adversely affected.
We, like all businesses, as well as our market areas, borrowers, and customers, may be adversely impacted to the extent that weather-related events cause damage or disruption to properties or businesses.
Operational Risks
Interest Rate Risk
Changes in interest rates could adversely affect our earnings and financial condition.
Our earnings and financial condition are dependent to a large degree upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest-rate spreads, meaning the difference between the interest rates earned on loans and investments and the interest rates paid on deposits and borrowings, could adversely affect our earnings and financial condition. Interest rates are highly sensitive to many factors, including:
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The rate of inflation;
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The rate of economic growth;
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Employment levels;
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Monetary policies; and
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Instability in domestic and foreign financial markets.
Changes in market interest rates will also affect the level of voluntary prepayments on our loans and the receipt of payments on our mortgage-backed securities resulting in the receipt of proceeds that may be reinvested at a lower rate than the loan or mortgage-backed security being prepaid.
We originate residential loans for sale and for our portfolio. The origination of loans for sale is designed to meet client financing needs and earn fee income. The origination of loans for sale is highly dependent upon the local real estate market and the level and trend of interest rates. Increasing interest rates may reduce the origination of loans for sale and consequently the fee income we earn. While our commercial banking, construction, and income property loan portfolios remain a significant portion of our activities, high interest rates may reduce our mortgage-banking activities and thereby our income. In contrast, decreasing interest rates have the effect of causing clients to refinance mortgage loans faster than anticipated. This causes the value of assets related to the servicing rights on loans sold to be lower than originally anticipated. If this happens, we may need to write down our servicing assets faster, which would accelerate our expense and lower our earnings.
We consider interest rate risk one of our most significant market risks. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of our net interest revenue is largely dependent upon the effective management of interest rate risk. We employ a variety of measurement techniques to identify and manage our interest rate risk, including the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain financial assets and liabilities. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain, and as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.
Credit Risk
Our earnings and reputation may be adversely affected if we fail to effectively manage our credit risk.
Originating and underwriting loans are integral to the success of our business. This business requires us to take “credit risk,” which is the risk of losing principal and interest income because borrowers fail to repay loans. Collateral values and the ability of borrowers to repay their loans may be affected at any time by factors such as:
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The length and severity of downturns in the local economies in which we operate or the national economy;
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The length and severity of downturns in one or more of the business sectors in which our customers operate, particularly the automobile, hotel/motel, and residential development industries; or
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A rapid increase in interest rates.
Our loan portfolio includes loans with a higher risk of loss.
We originate commercial real estate residential loans, commercial real estate nonresidential loans, hotel/motel loans, other commercial loans, consumer loans, and residential mortgage loans, primarily within our market area. Commercial real estate residential, commercial real estate nonresidential, hotel/motel, and other commercial loans tend to involve larger loan balances to a single borrower or groups of related borrowers and are most susceptible to a risk of loss during a downturn in the business cycle. These loans also have historically had a greater credit risk than other loans for the following reasons:
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Commercial Real Estate Residential. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. As of December 31, 2021, commercial real estate residential loans comprised approximately 10% of our total loan portfolio.
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Commercial Real Estate Nonresidential. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. As of December 31, 2021, commercial real estate nonresidential loans comprised approximately 22% of our total loan portfolio.
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Hotel/Motel. The hotel and motel industry is highly susceptible to changes in the domestic and global economic environments, which has caused the industry to experience substantial volatility due to the recent global pandemic. As of December 31, 2021, hotel/motel loans comprised approximately 8% of our total loan portfolio.
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Other Commercial Loans. Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid, or fluctuate in value based on the success of the business. As of December 31, 2021, other commercial loans comprised approximately 12% of our total loan portfolio. SBA Paycheck Protection Program loans, as discussed below in the COVID-19 Risks section, comprise approximately 12% of our other commercial loan portfolio and 1% of our total loan portfolio.
Consumer loans may carry a higher degree of repayment risk than residential mortgage loans, particularly when the consumer loan is unsecured. Repayment of a consumer loan typically depends on the borrower’s financial stability, and it is more likely to be affected adversely by job loss, illness, or personal bankruptcy. In addition, federal and state bankruptcy, insolvency, and other laws may limit the amount we can recover when a consumer client defaults. As of December 31, 2021, consumer loans comprised approximately 23% of our total loan portfolio. As of December 31, 2021, approximately 80% of our consumer loans and 18% of our total loan portfolio were consumer indirect loans. Consumer indirect loans are fixed rate loans secured by new and used automobiles, trucks, vans, and recreational vehicles originated at selling dealerships which are purchased by us following our review and approval of such loans. These loans generally have a greater risk of loss in the event of default than, for example, one-to-four family residential mortgage loans due to the rapid depreciation of vehicles securing the loans. We face the risk that the collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. We also assume the risk that the dealership administering the lending process complies with applicable consumer protection law and regulations.
A significant part of our lending business is focused on small to medium-sized business which may be impacted more severely during periods of economic weakness.
A significant portion of our commercial loan portfolio is tied to small to medium-sized businesses in our markets. During periods of economic weakness, small to medium-sized businesses may be impacted more severely than larger businesses. As a result, the ability of smaller businesses to repay their loans may deteriorate, particularly if economic challenges persist over a period of time, and such deterioration would adversely impact our results of operations and financial condition.
A large percentage of our loan portfolio is secured by real estate, in particular commercial real estate. Weakness in the real estate market or other segments of our loan portfolio would lead to additional losses, which could have a material adverse effect on our business, financial condition, and results of operations.
As of December 31, 2021, approximately 65% of our loan portfolio was secured by real estate, with approximately 40% of the portfolio consisting of commercial real estate. High levels of commercial and consumer delinquencies or declines in real estate market values could require increased net charge-offs and increases in the allowance for credit losses, which could have a material adverse effect on our business, financial condition, and results of operations and prospects.
Competition
Strong competition within our market area may reduce our ability to attract and retain deposits and originate loans.
We face competition both in originating loans and in attracting deposits. Competition in the financial services industry is intense. We compete for clients by offering excellent service and competitive rates on our loans and deposit products. The type of institutions we compete with include commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms. Competition arises from institutions located within and outside our market areas. As financial services become increasingly dependent on technology, permitting transactions to be conducted by telephone, mobile banking, and the internet, non-bank institutions are able to attract funds and provide lending and other financial services without offices located in our market areas. As a result of their size and ability to achieve economies of scale, certain of our competitors offer a broader range of products and services than we offer. With the increased consolidation in the financial industry, larger financial institutions may strengthen their competitive positions. In addition, to stay competitive in our markets we may need to adjust the interest rates on our products to match the rates offered by our competitors, which could adversely affect our net interest margin. As a result, our profitability depends upon our continued ability to successfully compete in our market areas while achieving our investment objectives.
Technology and other changes are allowing consumers to complete financial transactions through alternative methods to those which historically involved banks. For example, consumers can now hold funds that would have been held as bank deposits in mutual funds, brokerage accounts, general purpose reloadable prepaid cards, or cyber currency. In addition, consumers can complete transactions, such as paying bills or transferring funds, directly without utilizing the services of a bank. The process of eliminating banks as intermediaries (known as disintermediation) could result in the loss of fee income, as well as the loss of deposits and the income that might be generated from those deposits. The related revenue reduction could adversely affect our financial condition, cash flows, and results of operations.
Operational Risk
An extended disruption of vital infrastructure or a security breach could negatively impact our business, results of operations, and financial condition.
Our operations depend upon, among other things, our infrastructure, including equipment and facilities. Extended disruption of vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking or viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of our control could have a material adverse impact on the financial services industry as a whole and on our business, results of operations, cash flows, and financial condition in particular. Our business recovery plan may not work as intended or may not prevent significant interruption of our operations. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in the loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have an adverse effect on our financial condition and results of operation.
Our information technology systems and networks may experience interruptions, delays, or cessations of service or produce errors due to regular maintenance efforts, such as systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time-consuming, disruptive, and resource intensive. Such disruptions could damage our reputation and otherwise adversely impact our business and results of operations.
Third party vendors provide key components of our business infrastructure, such as processing, internet connections, and network access. While CTBI has selected these third party vendors carefully through our vendor management process, we do not control their actions and generally are not able to obtain satisfactory indemnification provisions in our third party vendor written contracts. Any problems caused by third parties or arising from their services, such as disruption in service, negligence in the performance of services or a breach of customer data security with regard to the third parties’ systems, could adversely affect our ability to deliver services, negatively impact our business reputation, cause a loss of customers, or result in increased expenses, regulatory fines and sanctions, or litigation.
Claims and litigation may arise pertaining to fiduciary responsibility.
Customers may, from time to time, make a claim and take legal action pertaining to our performance of fiduciary responsibilities. Whether customer claims and legal action related to our performance of fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant financial liability, adversely affect the market perception of us and our products and services, and impact customer demand for those products and services. Any such financial liability or reputational damage could have an adverse effect on our business, financial condition, and results of operations.
Significant legal actions could subject us to uninsured liabilities.
From time to time, we may be subject to claims related to our operations. These claims and legal actions, including supervisory actions by our regulators, could involve significant amounts. We maintain insurance coverage in amounts and with deductibles we believe are appropriate for our operations. However, our insurance coverage may not cover all claims against us and related costs, and further insurance coverage may not continue to be available at a reasonable cost. As a result, CTBI could be exposed to uninsured liabilities, which could adversely affect CTBI’s business, financial condition, or results of operations.
Technology Risk
CTBI continually encounters technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
Cyber Risk
A breach in the security of our systems could disrupt our business, result in the disclosure of confidential information, damage our reputation, and create significant financial and legal exposure for us.
Our businesses are dependent on our ability and the ability of our third party service providers to process, record, and monitor a large number of transactions. If the financial, accounting, data processing, or other operating systems and facilities fail to operate properly, become disabled, experience security breaches, or have other significant shortcomings, our results of operations could be materially adversely affected.
Although we and our third party service providers devote significant resources to maintain and upgrade our systems and processes that are designed to protect the security of computer systems, software, networks, and other technology assets and the confidentiality, integrity, and availability of information belonging to us and our customers, there is no assurance that our security systems and those of our third party service providers will provide absolute security. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks, and other means. Despite our efforts and those of our third party service providers to ensure the integrity of these systems, it is possible that we or our third party service providers may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, especially because techniques used change frequently or are not recognized until launched, and because security attacks can originate from a wide variety of sources.
A successful breach of the security of our systems or those of our third party service providers could cause serious negative consequences to us, including significant disruption of our operations, misappropriation of our confidential information or the confidential information of our customers, or damage to our computers or operating systems, and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss in confidence in our security measures, customer dissatisfaction, litigation exposure, and harm to our reputation, all of which could have a material adverse effect on us. While we maintain insurance coverage that should, subject to policy terms and conditions, cover certain aspects of our cyber risks, this insurance coverage may be insufficient to cover all losses we could experience resulting from a cyber-security breach. Moreover, the cost of insurance sufficient to cover substantially all, or a reasonable portion, of losses related to cyber security breaches is expected to increase and such increases are likely to be material.
Banking customers and employees have been, and will likely continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, account information, or other personal information, or to introduce viruses or other malware to bank information systems or customers’ computers. Though we endeavor to lessen the success of such threats through the use of authentication technology and employee education, such cyber-attacks remain a serious issue. Publicity concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications as a means of conducting banking and other commercial transactions.
We could incur increased costs or reductions in revenue or suffer reputational damage in the event of misuse of information.
Our operations rely on the secure processing, transmission, and storage of confidential information in our computer systems and networks regarding our customers and their accounts. To provide these products and services, we use information systems and infrastructure that we and third party service providers operate. As a financial institution, we also are subject to and examined for compliance with an array of data protection laws, regulations, and guidance, as well as to our own internal privacy and information security policies and programs.
Information security risks for financial institutions like us have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, and other external parties. Our technologies and systems may become the target of cyber-attacks or other attacks that could result in the misuse or destruction of our or our customers’ confidential, proprietary, or other information or that could result in disruptions to the business operations of us or our customers or other third parties. Also, our customers, in order to access some of our products and services, may use personal computers, smart mobile phones, tablet PCs, and other devices that are beyond our controls and security systems. Further, a breach or attack affecting one of our third-party service providers or partners could impact us through no fault of our own. In addition, because the methods and techniques employed by perpetrators of fraud and others to attack systems and applications change frequently and often are not fully recognized or understood until after they have been launched, we and our third-party service providers and partners may be unable to anticipate certain attack methods in order to implement effective preventative measures.
While we have policies and procedures designed to prevent or limit the effect of the possible security breach of our information systems, if unauthorized persons were somehow to get access to confidential or proprietary information in our possession or to our proprietary information, it could result in litigation and regulatory investigations, significant legal and financial exposure, damage to our reputation, or a loss of confidence in the security of our systems that could materially adversely affect our results of operation.
Counterparty Risk
The soundness of other financial institutions could adversely affect CTBI.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional counterparties. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan due us. There is no assurance that any such losses would not materially and adversely affect our businesses, financial condition, or results of operations.
Acquisition Risks
Acquisition Risk
We may have difficulty in the future continuing to grow through acquisitions.
We may experience difficulty in making acquisitions on acceptable terms due to the decreasing number of suitable acquisition targets, competition for attractive acquisitions, regulatory impediments, and certain limitations on interstate acquisitions.
Any future acquisitions or mergers by CTBI or our banking subsidiary are subject to approval by the appropriate federal and state banking regulators. The banking regulators evaluate a number of criteria in making their approval decisions, such as:
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Safety and soundness guidelines;
•
Compliance with all laws including the USA PATRIOT Act, the International Money Laundering Abatement and Anti-Terrorist Financing Act, the Sarbanes-Oxley Act and the related rules and regulations promulgated under such Act or the Exchange Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, and all other applicable fair lending and consumer protection laws and other laws relating to discriminatory business practices; and
•
Anti-competitive concerns with the proposed transaction.
If the banking regulators or a commenter on our regulatory application raise concerns about any of these criteria at the time a regulatory application is filed, the banking regulators may deny, delay, or condition their approval of a proposed transaction. We have grown, and, subject to regulatory approval, intend to continue to grow, through acquisitions of banks and other financial institutions. After these acquisitions, we may experience adverse changes in results of operations of acquired entities, unforeseen liabilities, asset quality problems of acquired entities, loss of key personnel, loss of clients because of change of identity, difficulties in integrating data processing and operational procedures, and deterioration in local economic conditions. These various acquisition risks can be heightened in larger transactions.
Integration Risk
We may not be able to achieve the expected integration and cost savings from our bank acquisition activities.
We have a long history of acquiring financial institutions and, subject to regulatory approval, we expect this acquisition activity to resume in the future. Difficulties may arise in the integration of the business and operations of the financial institutions that agree to merge with and into CTBI and, as a result, we may not be able to achieve the cost savings and synergies that we expect will result from the merger activities. Achieving cost savings is dependent on consolidating certain operational and functional areas, eliminating duplicative positions and terminating certain agreements for outside services. Additional operational savings are dependent upon the integration of the banking businesses of the acquired financial institution with that of CTBI, including the conversion of the acquired entity’s core operating systems, data systems, and products to those of CTBI and the standardization of business practices. Complications or difficulties in the conversion of the core operating systems, data systems, and products of these other banks to those of CTBI may result in the loss of clients, damage to our reputation within the financial services industry, operational problems, one-time costs currently not anticipated by us, and/or reduced cost savings resulting from the merger activities.
Market and Liquidity Risks
Market Risk
Community Trust Bancorp, Inc.’s stock price is volatile.
Our stock price has been volatile in the past, and several factors could cause the price to fluctuate substantially in the future. These factors include:
•
Actual or anticipated variations in earnings;
•
Changes in analysts’ recommendations or projections;
•
CTBI’s announcements of developments related to our businesses;
•
Operating and stock performance of other companies deemed to be peers;
•
New technology used or services offered by traditional and non-traditional competitors;
•
News reports of trends, concerns, and other issues related to the financial services industry; and
•
Additional governmental policies and enforcement of current laws.
Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to CTBI’s performance. Although investor confidence in financial institutions has strengthened, the financial crisis adversely impacted investor confidence in the financial institutions sector. General market price declines or market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.
Liquidity Risk
CTBI is subject to liquidity risk.
CTBI requires liquidity to meet our deposit and debt obligations as they come due and to fund loan demands. CTBI’s access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could reduce our access to liquidity sources include a downturn in the market, difficult credit markets, or adverse regulatory actions against CTBI. CTBI’s access to deposits may also be affected by the liquidity needs of our depositors. In particular, a substantial majority of CTBI’s liabilities are demand, savings, interest checking, and money market deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of our assets are loans, which cannot be called or sold in the same time frame. To the extent that consumer confidence in other investment vehicles, such as the stock market, increases, customers may move funds from bank deposits and products into such other investment vehicles. Although CTBI historically has been able to replace maturing deposits and advances as necessary, we might not be able to replace such funds in the future, especially if a large number of our depositors sought to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on our financial condition and results of operations.
Legal, Legislation, and Regulation Risks
Risks Related to Regulatory Policies and Oversight
The banking industry is heavily regulated, and our business may be adversely affected by legislation or changes in regulatory policies and oversight.
The earnings of banks and bank holding companies such as ours are affected by the policies of regulatory authorities, including the Federal Reserve Board, which regulates the money supply. Among the methods employed by the Federal Reserve Board are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial and savings banks in the past and are expected to continue to do so in the future.
In recent years, federal banking regulators have increased regulatory scrutiny, and additional limitations on financial institutions have been proposed or adopted by regulators and by Congress. Moreover, banking regulatory agencies have increasingly over the last few years used authority under Section 5 of the Federal Trade Commission Act to take supervisory or enforcement action with respect to alleged unfair or deceptive acts or practices by banks to address practices that may not necessarily fall within the scope of a specific banking or consumer finance law. The banking industry is highly regulated and changes in federal and state banking regulations as well as policies and administration guidelines may affect our practices, growth prospects, and earnings. In particular, there is no assurance that governmental actions designed to stabilize the economy and banking system will not adversely affect our financial position or results of operations.
From time to time, CTBI and/or our subsidiaries may be involved in information requests, reviews, investigations, and proceedings (both formal and informal) by various governmental agencies and law enforcement authorities regarding our respective businesses. Any of these matters may result in material adverse consequences to CTBI and our subsidiaries, including adverse judgements, findings, limitations on merger and acquisition activity, settlements, fines, penalties, orders, injunctions, and other actions. Such adverse consequences may be material to the financial position of CTBI or our results of operations.
In particular, consumer products and services are subject to increasing regulatory oversight and scrutiny with respect to compliance with consumer laws and regulations. We may face a greater number or wider scope of investigations, enforcement actions, and litigation in the future related to consumer practices. In addition, any required changes to our business operations resulting from these developments could result in a significant loss of revenue, require remuneration to customers, trigger fines or penalties, limit the products or services we offer, require us to increase certain prices and therefore reduce demand for our products, impose additional compliance costs on us, cause harm to our reputation, or otherwise adversely affect our consumer business.
The financial services industry has experienced leadership changes at federal banking agencies, which may impact regulations and government policy applicable to us. New appointments to the Board of Governors of the Federal Reserve could affect monetary policy and interest rates.
We are required to maintain certain minimum amounts and types of capital and may be subject to more stringent capital requirements in the future. A failure to meet applicable capital requirements could have a material adverse effect on our financial condition and results of operations.
We are subject to regulatory requirements specifying minimum amounts and types of capital that we must maintain. From time to time, banking regulators change these regulatory capital adequacy guidelines. See Item 1 above for additional information regarding current capital requirements. A failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material adverse effect on our financial condition and results of operations.
Environmental Liability Risk
We are subject to environmental liability risk associated with lending activity.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.
COVID-19-Related Risks
COVID-19 Risk
Since March 13, 2020, the United States has been operating under a state of emergency in response to the spread of COVID-19. COVID-19 and related governmental responses have affected economic and financial market conditions as well as the operations, results, and prospects of companies across many industries.
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels, all of which may become heightened concerns upon subsequent waves of infection or future developments. As a result, the demand for our products and services has been, and is expected to continue to be, significantly impacted. Furthermore, the pandemic could influence the recognition of credit losses in our loan portfolio and increase our allowance for credit losses as both businesses and consumers are negatively impacted by the economic downturn. In addition, governmental actions are meaningfully influencing the interest-rate environment, which could adversely affect our results of operations and financial condition. Our business operations have been disrupted, and may also be disrupted in the future, if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic, travel restrictions, technology limitations, and/or disruptions. Furthermore, our business operations have been, and may again in the future be, disrupted due to vendors and third party service providers being unable to work or provide services effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic.
In response to the pandemic, we provided financial hardship relief to borrowers that were negatively impacted by the pandemic and its related economic impacts. These programs included payment deferrals and forbearances for both commercial and retail borrowers. We also temporarily suspended all residential foreclosure activity. If not effective in mitigating the effect of the COVID-19 pandemic on our customers, these actions may adversely affect our business and results of operations more substantially over a longer period of time.
The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to recover from its effects, the length of which is unknown and during which time the U.S. may experience a recession. As a result, our business may be materially and adversely affected during this recovery. Moreover, the effects of the COVID-19 pandemic may heighten many of the other risks described in this Section 1A. entitled “Risk Factors” and any subsequent Quarterly Report on Form 10-Q or Current Report on Form 8-K, including, but not limited to, risks of credit deterioration, interest rate changes, rating agency actions, governmental actions, market volatility, theft, fraud, security breaches, and technology interruptions.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B.
Unresolved Staff Comments
None.

---

ITEM 2. PROPERTIES
Item 2.
Properties
Our main office, which is owned by Community Trust Bank, Inc., is located at 346 North Mayo Trail, Pikeville, Kentucky 41501. Following is a schedule of properties owned and leased by CTBI and our subsidiaries as of December 31, 2021:
Location
Owned
Leased
Total
Banking locations:
Community Trust Bank, Inc.
*
Pikeville Market (lease land at 3 owned locations)
10 locations in Pike County, Kentucky
Floyd/Knott/Johnson Market (lease land at 1 owned location)
2 locations in Floyd County, Kentucky, 1 location in Knott County, Kentucky, and 1 location in Johnson County, Kentucky
Tug Valley Market (lease land at 1 owned location)
1 location in Pike County, Kentucky, 1 location in Mingo County, West Virginia
Whitesburg Market (lease land at 1 owned location)
5 locations in Letcher County, Kentucky
Hazard Market (lease land at 2 owned locations)
3 locations in Perry County, Kentucky
*
Lexington Market (lease land at 3 owned locations)
6 locations in Fayette County, Kentucky
Winchester Market
2 locations in Clark County, Kentucky
Richmond Market (lease land at 1 owned location)
3 locations in Madison County, Kentucky
Mt. Sterling Market
2 locations in Montgomery County, Kentucky
Versailles Market (lease land at 2 owned locations)
1 location in Woodford County, Kentucky, 2 locations in Franklin County, Kentucky, and 2 locations in Scott County, Kentucky
*
Danville Market (lease land at 1 owned location)
2 locations in Boyle County, Kentucky and 1 location in Mercer County, Kentucky
*
Ashland Market (lease land at 1 owned location)
4 locations in Boyd County, Kentucky and 1 location in Greenup County, Kentucky
Flemingsburg Market
3 locations in Fleming County, Kentucky
Advantage Valley Market
2 locations in Lincoln County, West Virginia, 1 location in Wayne County, West Virginia, and 1 location in Cabell County, West Virginia
Summersville Market
1 location in Nicholas County, West Virginia
Middlesboro Market (lease land at 1 owned location)
3 locations in Bell County, Kentucky
Williamsburg Market
2 locations in Whitley County, Kentucky and 3 locations in Laurel County, Kentucky
Campbellsville Market (lease land at 2 owned locations)
2 locations in Taylor County, Kentucky, 2 locations in Pulaski County, Kentucky, 1 location in Adair County, Kentucky, 1 location in Green County, Kentucky, 1 location in Russell County, Kentucky, and 1 location in Marion County, Kentucky
Mt. Vernon Market
2 locations in Rockcastle County, Kentucky
*
LaFollette Market
2 locations in Campbell County, Tennessee and 1 location in Anderson County, Tennessee
Total banking locations
Operational locations:
Community Trust Bank, Inc.
Pikeville (Pike County, Kentucky) (lease land at 1 owned location)
Total operational locations
Total locations
*Community Trust and Investment Company has leased offices in the main office locations in these markets.
Versailles Main location is in progress and expected to open in April 2022, and a new Georgetown location is expected to open in the fourth quarter 2022. See notes 7 and 15 to the consolidated financial statements contained herein for the year ended December 31, 2021, for additional information relating to lease commitments and amounts invested in premises and equipment.

---

ITEM 3. LEGAL PROCEEDINGS
Item 3.
Legal Proceedings
CTBI and subsidiaries, and from time to time, our officers, are named defendants in legal actions arising from ordinary business activities. Management, after consultation with legal counsel, believes any pending actions are without merit or that the ultimate liability, if any, will not materially affect our consolidated financial position or results of operations.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4.
Mine Safety Disclosures
Not applicable.
Information about our Executive Officers
Set forth below are the executive officers of CTBI, their positions with CTBI, and the year in which they first became an executive officer.
Name and Age (1)
Positions and Offices
Currently Held
Date First Became
Executive Officer
Principal Occupation
Mark A. Gooch; 63
Vice Chairman, President, and Chief Executive Officer
(2)
Vice Chairman, President, and CEO of Community Trust Bancorp, Inc.
Larry W. Jones; 75
Executive Vice President
Executive Vice President/ Central Kentucky Region President of Community Trust Bank, Inc.
James B. Draughn; 62
Executive Vice President
Executive Vice President/Operations of Community Trust Bank, Inc.
Kevin J. Stumbo; 61
Executive Vice President, Chief Financial Officer, and Treasurer
Executive Vice President/ Chief Financial Officer of Community Trust Bank, Inc.
Ricky D. Sparkman; 59
Executive Vice President
Executive Vice President/ South Central Region President of Community Trust Bank, Inc.
Richard W. Newsom; 67
Executive Vice President
(3)
Executive Vice President/ President of Community Trust Bank, Inc.
James J. Gartner; 80
Executive Vice President
Executive Vice President/ Chief Credit Officer of Community Trust Bank, Inc.
Steven E. Jameson; 65
Executive Vice President
(4)
Executive Vice President/ Chief Internal Audit & Risk Officer
D. Andrew Jones; 59
Executive Vice President
Executive Vice President/ Northeastern Region President of Community Trust Bank, Inc.
Andy D. Waters; 56
Executive Vice President
President and CEO of Community Trust and Investment Company
C. Wayne Hancock; 47
Executive Vice President and Secretary
(5)
Executive Vice President/ Senior Staff Attorney
David Tackett; 56
Executive Vice President
(6)
Executive Vice President/ Eastern Region President of Community Trust Bank, Inc.
(1)
The ages listed for CTBI’s executive officers are as of February 28, 2022.
(2)
Mr. Gooch became President of Community Trust Bancorp, Inc. on July 27, 2021 and assumed the additional positions of Vice Chairman and Chief Executive Officer of CTBI effective February 7, 2022, upon the retirement of Jean R. Hale. Mr. Gooch retained his previous position as Chief Executive Officer of Community Trust Bank, Inc. and assumed the additional roles of Chairman of Community Trust Bank, Inc. and Chairman of Community Trust and Investment Company also effective with Ms. Hale’s retirement on February 7, 2022.
(3)
Mr. Newsom became President of Community Trust Bank, Inc. on February 7, 2022. He previously served as President of the Eastern Region of Community Trust Bank, Inc.
(4)
Mr. Jameson is a non-voting member of the Executive Committee.
(5)
Mr. Hancock became Secretary of Community Trust Bancorp, Inc. on February 7, 2022.
(6)
Mr. Tackett became Executive Vice President of Community Trust Bancorp, Inc. and President of the Eastern Region of Community Trust Bank, Inc. on February 7, 2022. He previously held the position of President of the Floyd, Knott, and Johnson Market of Community Trust Bank, Inc.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5.
Market for the Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities
Our common stock is listed on The NASDAQ Global Select Market under the symbol CTBI. As of January 31, 2022, there were approximately 7,900 holders of record of our outstanding common shares.
Dividends
The annual dividend paid to our stockholders was increased from $1.53 per share to $1.57 per share during 2021. We have adopted a conservative policy of cash dividends by generally maintaining an average annual cash dividend ratio of approximately 45%, with periodic stock dividends. The current year cash dividend ratio was 31.8%; however, the 10 year average dividend payout ratio has been 44.31%. Dividends are typically paid on a quarterly basis. Future dividends are subject to the discretion of CTBI’s Board of Directors, cash needs, general business conditions, dividends from our subsidiaries, and applicable governmental regulations and policies. For information concerning restrictions on dividends from the subsidiary bank to CTBI, see note 20 to the consolidated financial statements contained herein for the year ended December 31, 2021.
Stock Repurchases
CTBI did not acquire any shares of stock through the stock repurchase program during the year 2021. CTBI repurchased 32,664 shares of its common stock during 2020, leaving 1,034,706 shares remaining under CTBI's current repurchase authorization. For further information, see the Stock Repurchase Program section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Securities Authorized for Issuance Under Equity Compensation Plans
For information concerning securities authorized for issuance under CTBI’s equity compensation plans, see Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
Common Stock Performance
The following graph shows the cumulative total return experienced by CTBI’s shareholders during the last five years compared to the NASDAQ Stock Market (U.S.) and the NASDAQ Bank Stock Index. The graph assumes the investment of $100 on December 31, 2016 in CTBI’s common stock and in each index and the reinvestment of all dividends paid during the five-year period.
Comparison of 5 Year Cumulative Total Return
among Community Trust Bancorp, Inc., NASDAQ Stock Market (U.S.),
and NASDAQ Bank Stocks
Fiscal Year Ending December 31 ($)
Community Trust Bancorp, Inc.
100.00
97.58
84.92
103.17
85.34
104.06
NASDAQ Stock Market (U.S.)
100.00
121.38
114.78
150.55
182.57
229.84
NASDAQ Bank Stocks
100.00
118.39
98.98
135.78
118.40
162.58

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6.
[Reserved]

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Community Trust Bancorp, Inc., our operations, and our present business environment. The MD&A is provided as a supplement to-and should be read in conjunction with-our consolidated financial statements and the accompanying notes thereto contained in Item 8 of this annual report. The MD&A includes the following sections:
❖
Our Business
❖
Financial Goals and Performance
❖
Results of Operations and Financial Condition
❖
Liquidity and Market Risk
❖
Interest Rate Risk
❖
Capital Resources
❖
Impact of Inflation, Changing Prices, and Economic Conditions
❖
Stock Repurchase Program
❖
Critical Accounting Policies and Estimates
Our Business
Community Trust Bancorp, Inc. (“CTBI”) is a bank holding company headquartered in Pikeville, Kentucky. Currently, we own one commercial bank, Community Trust Bank, Inc. (“CTB”) and one trust company, Community Trust and Investment Company. Through our subsidiaries, we have seventy-nine banking locations in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee, four trust offices across Kentucky, and one trust office in northeastern Tennessee. At December 31, 2021, we had total consolidated assets of $5.4 billion and total consolidated deposits, including repurchase agreements, of $4.6 billion. Total shareholders’ equity at December 31, 2021 was $698.2 million. Trust assets under management at December 31, 2021 were $3.6 billion, including CTB’s investment portfolio totaling $1.5 billion.
Through our subsidiaries, CTBI engages in a wide range of commercial and personal banking and trust and wealth management activities, which include accepting time and demand deposits; making secured and unsecured loans to corporations, individuals, and others; providing cash management services to corporate and individual customers; issuing letters of credit; renting safe deposit boxes; and providing funds transfer services. The lending activities of CTB include making commercial, construction, mortgage, and personal loans. Lease-financing, lines of credit, revolving lines of credit, term loans, and other specialized loans, including asset-based financing, are also available. Our corporate subsidiaries act as trustees of personal trusts, as executors of estates, as trustees for employee benefit trusts, as paying agents for bond and stock issues, as investment agent, as depositories for securities, and as providers of full service brokerage, and insurance services. For further information, see Item 1 of this annual report.
Financial Goals and Performance
The following table shows the primary measurements used by management to assess annual performance. The goals in the table below should not be viewed as a forecast of our performance for 2022. Rather, the goals represent a range of target performance for 2022. There is no assurance that any or all of these goals will be achieved. See “Cautionary Statement Regarding Forward Looking Statements.”
2021 Goals
2021 Performance
2022 Goals
Basic earnings per share
$3.76 - $3.92
$4.94
$4.15 - $4.31
Net income
$67.1 - $69.8 million
$87.9 million
$74.1 - $77.1 million
ROAA
1.30% - 1.35%
1.63%
1.35% - 1.40%
ROAE
9.88% - 10.28%
12.88%
10.18% - 10.59%
Revenues
$209.6 - $218.1 million
$223.5 million
$216.0 - $224.8 million
Noninterest revenue as % of total revenue
24.00% - 26.00%
27.05%
24.00% - 26.00%
Assets
$5.04 - $5.35 billion
$5.42 billion
$5.42 - $5.75 billion
Loans
$3.48 - $3.63 billion
$3.41 billion
$3.41 - $3.55 billion
Deposits, including repurchase agreements
$4.30 - $4.47 billion
$4.62 billion
$4.63 - $4.82 billion
Shareholders’ equity
$682.6 - $710.5 million
$698.2 million
$ 733.5 - $763.4 million
Results of Operations and Financial Condition
We reported earnings of $87.9 million, or $4.94 per basic share, for the year ended December 31, 2021 compared to $59.5 million, or $3.35 per basic share, for the year ended December 31, 2020. We experienced a $12.1 million increase in net interest income, a $5.9 million increase in noninterest income, and a $22.4 million decrease in provision for credit losses during the year. Our effective income tax rate increased for the year as a result of the Kentucky enacted legislation requiring financial institutions to transition from a bank franchise tax to the Kentucky corporate income tax beginning in 2021. Our effective income tax rate for the year 2021 was 21% compared to 15% for the year 2020.
2021 Highlights
❖
Net interest income for the year ended December 31, 2021 increased $12.1 million, or 8.0%, from December 31, 2020 with a 12 basis point decrease in our net interest margin and a $553.8 million increase in average earning assets.
❖
CTBI experienced a recovery of provision for credit losses of $6.4 million for the year ended December 31, 2021 compared to a provision for credit losses of $16.0 million for the year ended December 31, 2020.
❖
Our loan portfolio decreased $145.4 million, or 4.1%, from December 31, 2020. Loans excluding PPP loans increased $59.9 million during the year.
❖
CTBI experienced a net recovery of loan losses of $0.1 million for the year ended December 31, 2021 compared to net charge-offs of $6.2 million, or 0.18% of average loans annualized, for the year ended December 31, 2020.
❖
Asset quality remained strong during the year 2021, as nonperforming loans at $16.6 million decreased $10.0 million, or 37.4%, from December 31, 2020. Nonperforming assets at $20.1 million decreased $14.2 million, or 41.3%, from December 31, 2020.
❖
Deposits, including repurchase agreements, increased $243.4 million, or 5.6%, from December 31, 2020.
❖
Noninterest income for the year ended December 31, 2021 at $60.5 million increased $5.9 million, or 10.8%, compared to the year ended December 31, 2020.
❖
Noninterest expense for the year ended December 31, 2021 remained relatively flat to the year ended December 31, 2020.
COVID-19
We have worked diligently with our customers as we all continue to battle COVID-19. At December 31, 2021, there was one customer with a CARES Act deferral outstanding in the amount of $1.4 million. The CARES Act loan deferrals and modifications have been executed consistent with the guidelines of the CARES Act. Pursuant to the CARES Act, these loan deferrals are not included in our nonperforming loans.
At December 31, 2021, we had closed 6,312 Paycheck Protection Program loans totaling $401.3 million, including 3,352 loans totaling $124.3 million stemming from the Consolidated Appropriations Act 2021 (second round). Through December 31, 2021, we have had 5,543 of our PPP loans totaling $351.8 million forgiven by the SBA, including 2,608 loans totaling $76.1 million from the second round.
Income Statement Review
(dollars in thousands)
Change 2021 vs. 2020
Year Ended December 31
Amount
Percent
Net interest income
$
163,079
$
150,991
$
12,088
8.0
%
Provision for credit losses
(6,386
)
16,047
(22,433
)
(139.8
)
Noninterest income
60,463
54,560
5,903
10.8
Noninterest expense
119,285
119,239
0.0
Income taxes
22,704
10,761
11,943
111.0
Net income
$
87,939
$
59,504
$
28,435
47.8
%
Average earning assets
$
5,115,961
$
4,562,172
$
553,789
12.1
%
Yield on average earnings assets, tax equivalent*
3.50
%
3.88
%
(0.38
)%
(9.8
)%
Cost of interest bearing funds
0.45
%
0.82
%
(0.37
)%
(45.1
)%
Net interest margin, tax equivalent*
3.21
%
3.33
%
(0.12
)%
(3.6
)%
*Yield on average earning assets and net interest margin are computed on a taxable equivalent basis using a 24.95% tax rate.
Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates
(in thousands)
Average
Balances
Interest
Average
Rate
Average
Balances
Interest
Average
Rate
Earning assets:
Loans (1)(2)(3)
$
3,455,742
$
159,893
4.63
%
$
3,453,529
$
160,348
4.64
%
Loans held for sale
8,737
4.34
15,426
3.71
Securities:
U.S. Treasury and agencies
970,754
9,958
1.03
651,911
10,021
1.54
Tax exempt state and political subdivisions (3)
138,158
3,921
2.84
93,368
3,012
3.23
Other securities
218,202
4,023
1.84
81,884
1,918
2.34
Federal Reserve Bank and Federal Home Loan Bank stock
14,005
3.47
15,349
3.47
Federal funds sold
0.00
0.00
Interest bearing deposits
308,200
0.12
248,599
0.29
Other investments
0.00
1.22
Investment in unconsolidated subsidiaries
1,845
1.84
1,847
2.49
Total earning assets
5,115,961
$
179,066
3.50
%
4,562,172
$
177,168
3.88
%
Allowance for credit losses*
(44,157
)
(45,040
)
5,071,804
4,517,132
Nonearning assets:
Cash and due from banks
60,160
55,550
Premises and equipment, net
53,441
56,835
Other assets
201,836
208,643
Total assets
$
5,387,241
$
4,838,160
Interest bearing liabilities:
Deposits:
Savings and demand deposits
$
1,925,263
$
4,505
0.23
%
$
1,682,773
$
5,732
0.34
%
Time deposits
1,057,347
8,248
0.78
1,075,672
15,445
1.44
Repurchase agreements and federal funds purchased
334,520
1,254
0.37
293,158
2,788
0.95
Advances from Federal Home Loan Bank
0.00
0.00
Long-term debt
57,841
1,028
1.78
57,841
1,431
2.47
Finance lease liability
1,433
3.84
1,450
3.72
Total interest bearing liabilities
3,376,788
$
15,090
0.45
%
3,111,367
$
25,450
0.82
%
Noninterest bearing liabilities:
Demand deposits
1,276,367
1,030,911
Other liabilities
51,389
59,904
Total liabilities
4,704,544
4,202,182
Shareholders’ equity
682,697
635,978
Total liabilities and shareholders’ equity
$
5,387,241
$
4,838,160
Net interest income, tax equivalent
$
163,976
$
151,718
Less tax equivalent interest income
Net interest income
$
163,079
$
150,991
Net interest spread
3.05
%
3.06
%
Benefit of interest free funding
0.16
0.27
Net interest margin
3.21
%
3.33
%
(1) Interest includes fees on loans of $1,763 and $1,725 in 2021 and 2020, respectively.
(2) Loan balances include deferred loan origination costs and principal balances on nonaccrual loans.
(3) Tax exempt income on securities and loans is reported on a fully taxable equivalent basis using a 24.95% rate.
Net Interest Differential
The following table illustrates the approximate effect of volume and rate changes on net interest differentials between 2021 and 2020.
Total
Change
Change Due to
(in thousands)
2021/2020
Volume
Rate
Interest income:
Loans
$
(455
)
$
$
(558
)
Loans held for sale
(194
)
(218
)
U.S. Treasury and agencies
(63
)
3,931
(3,994
)
Tax exempt state and political subdivisions
1,306
(397
)
Other securities
2,105
2,590
(485
)
Federal Reserve Bank and Federal Home Loan Bank stock
(46
)
(47
)
Federal funds sold
Interest bearing deposits
(343
)
(485
)
Other investments
(3
)
(3
)
Investment in unconsolidated subsidiaries
(12
)
(12
)
Total interest income
1,898
7,807
(5,909
)
Interest expense:
Savings and demand deposits
(1,227
)
(1,971
)
Time deposits
(7,197
)
(267
)
(6,930
)
Repurchase agreements and federal funds purchased
(1,534
)
(1,882
)
Advances from Federal Home Loan Bank
Long-term debt
(403
)
(403
)
Finance lease liability
(1
)
Total interest expense
(10,360
)
(11,184
)
Net interest income
$
12,258
$
6,983
$
5,275
For purposes of the above table, changes which are due to both rate and volume are allocated based on a percentage basis, using the absolute values of rate and volume variance as a basis for percentages. Income is stated at a fully taxable equivalent basis, using a 24.95% tax rate.
Net Interest Income
(dollars in thousands)
Year Ended December 31
Percent
Change
Components of net interest income
Income on earning assets
$
178,169
$
176,441
1.0
%
Expense on interest bearing liabilities
15,090
25,450
(40.7
)
Net interest income
$
163,079
$
150,991
8.0
%
Average yield and rates paid
Earning assets yield
3.50
%
3.88
%
(9.8
)%
Rate paid on interest bearing liabilities
0.45
0.82
(45.1
)
Gross interest margin
3.05
%
3.06
%
(0.3
)%
Net interest margin
3.21
%
3.33
%
(3.6
)%
Average balances
Investment securities
$
1,327,114
$
827,163
60.4
%
Loans
$
3,455,742
$
3,453,529
0.1
%
Earning assets
$
5,115,961
$
4,562,172
12.1
%
Interest-bearing liabilities
$
3,376,788
$
3,111,367
8.5
%
Net interest income for the year ended December 31, 2021 of $163.1 million increased $12.1 million, or 8.0%, from prior year. Average earning assets for the year 2021 increased $553.8 million over prior year. Our yield on average earning assets for the year 2021 decreased 38 basis points from prior year, as we continue to find limited high yield investment opportunities for our excess liquidity, while our cost of interest bearing funds decreased 37 basis points during the same time period. Our net interest margin for the year 2021 declined 12 basis points from 2020 to 3.21%. We experienced pressure on our net interest margin throughout the year driven by reductions in rates by the Federal Reserve during the first half of 2020 in response to the COVID-19 pandemic. Average loans to deposits, including repurchase agreements, for the year ended December 31, 2021 were 75.3% compared to 84.7% for the year ended December 31, 2020.
The PPP loan portfolio had an annualized yield for the year ended December 31, 2021 of 8.04% compared to 3.05% for the year ended December 31, 2020. Interest income recognized on PPP loans of $14.3 million increased $8.7 million year over year. Interest income on the portfolio was $1.8 million during the year, down $0.1 million from prior year, while the amortization of net loan origination fees from current outstanding loans and recognition of net fee income from paid and forgiven loans was $12.5 million, up $8.8 million from prior year. These fees are amortized over the life of the loan with any unamortized balance fully recognized at the time of loan forgiveness. The impact of the PPP loan portfolio to the net interest margin was 18 basis points for the year ended December 31, 2021 while the margin was negatively impacted by one basis point for the year ended December 31, 2020.
Provision for Credit Losses
We experienced a recovery of provision for credit losses for the year 2021 of $6.4 million compared to provision for credit losses of $16.0 million for the year 2020.
The reduction to our allowance for credit losses during the year was the result of positive credit metrics, the lack of pandemic related losses provided for in 2020, and an improvement in the industry outlook for certain industries included in our concentrations of credit.
Noninterest Income
(dollars in thousands)
Year Ended December 31
Percent
Change
Deposit service charges
$
26,529
$
23,461
13.1
%
Trust revenue
12,644
10,931
15.7
Gains on sales of loans
6,820
7,226
(5.6
)
Loan related fees
5,578
4,041
38.0
Bank owned life insurance revenue
2,844
2,306
23.3
Brokerage revenue
1,962
1,483
32.3
Other
4,086
5,112
(20.1
)
Total noninterest income
$
60,463
$
54,560
10.8
%
Noninterest income for the year ended December 31, 2021 of $60.5 million was a $5.9 million, or 10.8% increase from the year ended December 31, 2020. The year over year increase in noninterest income was driven by increases in deposit service charges ($3.1 million), trust revenue ($1.7 million), loan related fees ($1.5 million), brokerage revenue ($0.5 million), bank owned life insurance revenue ($0.5 million), and net gains on other real estate owned ($0.4 million), partially offset by decreases in securities gains ($1.9 million), net gains on loans ($0.4 million), and other real estate owned rental income ($0.2 million). Deposit service charges were primarily impacted year over year by an increase in debit card income. Loan related fees were primarily impacted by the change in the fair market value of mortgage servicing rights. Gains on sales of loans were impacted year over year by the slowdown in the industry-wide refinancing boom.
Noninterest Expense
(dollars in thousands)
Year Ended December 31
Percent
Change
Salaries
$
47,061
$
46,448
1.3
%
Employee benefits
27,053
19,979
35.4
Net occupancy and equipment
10,854
10,649
1.9
Data processing
8,039
7,941
1.2
Legal and professional fees
3,199
3,725
(14.1
)
Advertising and marketing
2,928
2,980
(1.8
)
Taxes other than property and payroll
1,750
7,344
(76.2
)
Net other real estate owned expense
1,401
2,655
(47.2
)
Other
17,000
17,518
(3.0
)
Total noninterest expense
$
119,285
$
119,239
0.0
%
Noninterest expense for the year ended December 31, 2021 of $119.3 million remained relatively flat to prior year, as a $7.7 million increase in personnel expense was offset by decreases in taxes other than property and payroll ($5.6 million), net other real estate owned expense ($1.3 million), and legal and professional fees ($0.5 million). The increase in personnel expense year over year was primarily due to incentive accruals. We experienced a $5.8 million decline in franchise taxes included in taxes other than property and payroll year over year and a corresponding increase in income taxes, as a result of the Kentucky enacted legislation requiring financial institutions to transition from a bank franchise tax to the Kentucky corporate income tax beginning in 2021.
* Please refer to our annual report on Form 10-K for the year ended December 31, 2020 for more detailed income discussion related to the year 2019.
Balance Sheet Review
CTBI’s total assets at $5.4 billion increased $279.1 million, or 5.4%, from December 31, 2020. Loans outstanding at December 31, 2021 were $3.4 billion, decreasing $145.4 million, or 4.1%, year over year. Loans excluding PPP loans increased $59.9 million, with a $69.2 million increase in the commercial loan portfolio, a $4.4 million increase in the consumer direct loan portfolio, and a $0.8 million increase in the indirect loan portfolio, offset partially by a $14.5 million in the residential loan portfolio. Loans held for sale at $2.6 million at December 31, 2021 decreased $20.6 million over prior year. CTBI’s investment portfolio increased $457.9 million, or 45.8%, from December 31, 2020. Deposits in other banks decreased $18.8 million from December 31, 2020. Deposits, including repurchase agreements, at $4.6 billion increased $243.4 million, or 5.6%, from December 31, 2020.
Shareholders’ equity at December 31, 2021 was $698.2 million, a 6.6% increase from the $654.9 million at December 31, 2020. CTBI’s annualized dividend yield to shareholders as of December 31, 2021 was 3.67%.
Loans
(dollars in thousands)
December 31, 2021
Loan Category
Balance
Variance
from Prior
Year
Net (Charge-
Offs)/
Recoveries
Nonperforming
ACL
Commercial:
Hotel/motel
$
257,062
(1.4
)%
$
$
1,075
$
5,080
Commercial real estate residential
335,233
16.4
3,986
Commercial real estate nonresidential
757,893
2.0
4,193
8,884
Dealer floorplans
69,452
0.5
1,436
Commercial other
290,478
3.8
(255
)
4,422
Commercial unsecured SBA PPP
47,335
(81.3
)
Total commercial
1,757,453
(7.2
)
(214
)
6,543
23,808
Residential:
Real estate mortgage
767,185
(2.2
)
(198
)
8,740
7,637
Home equity
106,667
2.8
(17
)
1,092
Total residential
873,852
(1.6
)
(215
)
9,832
8,503
Consumer:
Consumer direct
156,683
2.9
(168
)
1,951
Consumer indirect
620,825
0.1
7,494
Total consumer
777,508
0.7
9,445
Total loans
$
3,408,813
(4.1
)%
$
$
16,625
$
41,756
Total Deposits and Repurchase Agreements
(dollars in thousands)
Percent
Change
Non-interest bearing deposits
$
1,331,103
$
1,140,925
16.7
%
Interest bearing deposits
Interest checking
97,064
78,308
24.0
Money market savings
1,206,401
1,228,742
(1.8
)
Savings accounts
632,645
527,436
19.9
Time deposits
1,077,079
1,040,671
3.5
Repurchase agreements
271,088
355,862
(23.8
)
Total interest bearing deposits and repurchase agreements
3,284,277
3,231,019
1.6
Total deposits and repurchase agreements
$
4,615,380
$
4,371,944
5.6
%
Average Deposits and Other Borrowed Funds
(in thousands)
Deposits:
Noninterest bearing deposits
$
1,276,367
$
1,030,911
Interest bearing deposits
94,762
75,183
Money market accounts
1,238,009
1,136,088
Savings accounts
592,492
471,502
Certificates of deposit of $100,000 or more
562,525
539,049
Certificates of deposit < $100,000 and other time deposits
494,822
536,623
Total deposits
4,258,977
3,789,356
Other borrowed funds:
Repurchase agreements and federal funds purchased
334,520
293,158
Advances from Federal Home Loan Bank
Long-term debt
59,274
59,291
Total other borrowed funds
394,178
352,922
Total deposits and other borrowed funds
$
4,653,155
$
4,142,278
The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2021 occurred at May 31, 2021, with a month-end balance of $373.8 million. The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2020 occurred at November 30, 2020, with a month-end balance of $374.8 million.
Asset Quality
CTBI’s total nonperforming loans, not including troubled debt restructurings, were $16.6 million, or 0.49% of total loans, at December 31, 2021 compared to $26.6 million, or 0.75% of total loans, at December 31, 2020. Accruing loans 90+ days past due decreased $11.2 million from December 31, 2020. Nonaccrual loans increased $1.2 million from December 31, 2020. Accruing loans 30-89 days past due at $10.9 million was a decrease of $1.6 million from December 31, 2020. Our loan portfolio management processes focus on the immediate identification, management, and resolution of problem loans to maximize recovery and minimize loss. Our loan portfolio risk management processes include weekly delinquent loan review meetings at the market levels and monthly delinquent loan review meetings involving senior corporate management to review all nonaccrual loans and loans 30 days or more past due. Any activity regarding a criticized/classified loan (i.e. problem loan) must be approved by CTB’s Watch List Asset Committee (i.e. Problem Loan Committee). CTB’s Watch List Asset Committee also meets on a quarterly basis and reviews every criticized/classified loan of $100,000 or greater. CTB’s Loan Portfolio Risk Management Committee also meets quarterly focusing on the overall asset quality and risk metrics of the loan portfolio. We also have a Loan Review Department that reviews every market within CTB annually and performs extensive testing of the loan portfolio to assure the accuracy of loan grades and classifications for delinquency, troubled debt restructuring, nonaccrual status, and adequate loan loss reserves. The Loan Review Department has annually reviewed on average 96% of the outstanding commercial loan portfolio for the past three years. The average annual review percentage of the consumer and residential loan portfolio for the past three years was 86% based on the loan production during the number of months included in the review scope. The review scope is generally four to six months of production. CTBI generally does not offer high risk loans such as option ARM products, high loan to value ratio mortgages, interest-only loans, loans with initial teaser rates, or loans with negative amortizations, and therefore, CTBI would have no significant exposure to these products.
For further information regarding nonperforming loans, see note 4 to the consolidated financial statements contained herein.
Our reserve coverage (allowance for credit losses to nonperforming loans) at December 31, 2021 was 251.2% compared to 180.7% at December 31, 2020. Nonaccrual loans to total loans at December 31, 2021 and December 31, 2020 were 0.3%. Our allowance for credit losses to nonaccrual loans at December 31, 2021 was 391.3% compared to 508.5% at December 31, 2020. Our credit loss reserve as a percentage of total loans outstanding at December 31, 2021 was 1.22%, a decrease from the 1.35% at December 31, 2020.
Our level of foreclosed properties at $3.5 million at December 31, 2021 was a decrease of $4.2 million from the $7.7 million at December 31, 2020. Sales of foreclosed properties for the year ended December 31, 2021 totaled $4.5 million while new foreclosed properties totaled $1.2 million. At December 31, 2021, the book value of properties under contracts to sell was $0.3 million; however, the closings had not occurred at year-end. Nonperforming assets to loans and foreclosed properties at December 31, 2021 were 0.6% compared to 1.0% at December 31, 2020.
When foreclosed properties are acquired, appraisals are obtained and the properties are booked at the current market value less expected sales costs. Additionally, periodic updated appraisals are obtained on unsold foreclosed properties. When an updated appraisal reflects a fair market value below the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected sales costs. Charges to earnings in 2021 to reflect the decrease in current market values of foreclosed properties totaled $0.9 million, compared to $1.5 million during the year ended December 31, 2020. Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months. Approximately 92% of our other real estate owned (“OREO”) properties and approximately 99% of the book value of our OREO properties have appraisals dated within the past 18 months.
The appraisal aging analysis of foreclosed properties, as well as the holding period, at December 31, 2021 is shown below:
(dollars in thousands)
Appraisal Aging Analysis
Holding Period Analysis
Days Since Last
Appraisal
Number of
Properties
Current Book
Value
Holding Period
Current Book
Value
Up to 3 months
$
Less than one year
$
3 to 6 months
1 year
1,414
6 to 9 months
2 years
9 to 12 months
3 years
12 to 18 months
1,897
4 years
18 to 24 months
5 years
Total
$
3,486
6 years
7 years
8 years
9 years
Total
$
3,486
Regulatory approval is required and has been obtained to hold foreclosed properties beyond the initial period of 5 years. Additionally, CTBI is required to dispose of any foreclosed property that has not been sold within 10 years. As of December 31, 2021, one foreclosed property with a total book value of $27 thousand had been held by us for at least nine years.
We experienced a net recovery of loan losses of $0.1 million for the year ended December 31, 2021, compared to net charge-offs of $6.2 million, or 0.18% of average loans annualized, for the year ended December 31, 2020.
Liquidity and Market Risk
The objective of CTBI’s Asset/Liability management function is to maintain consistent growth in net interest income within our policy limits. This objective is accomplished through management of our consolidated balance sheet composition, liquidity, and interest rate risk exposures arising from changing economic conditions, interest rates, and customer preferences. The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand or deposit withdrawals. This is accomplished by maintaining liquid assets in the form of cash and cash equivalents and investment securities, sufficient unused borrowing capacity, and growth in core deposits. As of December 31, 2021, we had approximately $311.8 million in cash and cash equivalents and approximately $1.5 billion in securities valued at estimated fair value designated as available-for-sale and available to meet liquidity needs on a continuing basis compared to $338.2 million and $997.3 million at December 31, 2020. Additional asset-driven liquidity is provided by the remainder of the securities portfolio and the repayment of loans. In addition to core deposit funding, we also have a variety of other short-term and long-term funding sources available. We also rely on Federal Home Loan Bank advances for both liquidity and management of our asset/liability position. Federal Home Loan Bank advances were $0.4 million at December 31, 2021 and at December 31, 2020. As of December 31, 2021, we had a $484.4 million available borrowing position with the Federal Home Loan Bank compared to $477.2 million at December 31, 2020. We generally rely upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash for our investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, use of short-term borrowing facilities such as repurchase agreements and federal funds purchased, and issuance of long-term debt. At December 31, 2021 and at December 31, 2020, we had $75 million in lines of credit with various correspondent banks available to meet any future cash needs. Our primary investing activities include purchases of securities and loan originations. We do not rely on any one source of liquidity and manage availability in response to changing consolidated balance sheet needs. Included in our cash and cash equivalents at December 31, 2021 were deposits with the Federal Reserve of $262.4 million compared to $280.7 million at December 31, 2020. Additionally, we project cash flows from our investment portfolio to generate additional liquidity over the next 90 days.
The investment portfolio consists of investment grade short-term issues suitable for bank investments. The majority of the investment portfolio is in U.S. government and government sponsored agency issuances. At December 31, 2021, available-for-sale (“AFS”) securities comprised all of the total investment portfolio, and the AFS portfolio was approximately 208% of equity capital. Sixty-five percent of the pledge eligible portfolio was pledged.
Contractual Commitments
Our significant contractual obligations and commitments as of December 31, 2021 include debt, lease, and purchase obligations. As disclosed in the notes to the consolidated financial statements, we have certain obligations and commitments to make future payments under contracts.
As of December 31, 2021, our outstanding balance on long-term debt was $57.8 million. The interest payments on long-term debt due in 1 year or less is $1.2 million and interest payments on long-term debt due in more than 1 year is $31.2 million. The interest on $57.8 million in long-term debt is calculated based on the three-month LIBOR plus 1.59% until its maturity of June 1, 2037. The three-month LIBOR rate is projected using the most likely rate forecast from assumptions incorporated in the interest rate risk model and is determined two business days prior to the interest payment date. Interest on long-term debt assume the liability will not be prepaid and interest is calculated to maturity. These assumptions are uncertain, and as a result, the actual payments will differ from the projection due to changes in economic conditions. Refer to note 10 to the consolidated financial statements contained herein for additional information regarding long-term debt.
On March 5, 2021, LIBOR’s administrator, ICE Benchmarks Administration, announced that LIBOR will no longer be provided (i) for the one-week and two-month U.S. dollar settings after December 31, 2021 and (ii) for the remaining U.S. dollar settings after June 30, 2023. The U.S. federal banking agencies issued supervisory guidance encouraging banks to stop entering into new contracts that use LIBOR as a reference rate after December 31, 2021. We have analyzed our financial exposure related to the discontinuation of LIBOR and consider our exposure to be insignificant.
As of December 31, 2021, our remaining contractual commitment for operating leases due in one year or less is $1.8 million and operating leases due in more than one year is $14.7 million. Refer to note 15 to the consolidated financial statements contained herein for additional information regarding leases.
Commitments to extend credit and standby letters of credit do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon. As of December 31, 2021, the commitments due in 1 year or less for other commitments is $616.7 million and commitments due in more than one year is $126.2 million. Refer to note 17 to the consolidated financial statements contained herein for additional information regarding other commitments.
Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. As of December 31, 2021, the value of our non-cancellable unconditional purchase obligations was $6.9 million.
These contractual obligations impact our liquidity and capital resource needs. We believe our liquidity sources as mentioned in the liquidity discussion are adequate to meet our future cash requirements.
Investment Maturities
Estimated Maturity at December 31, 2021
Within 1 Year
1-5 Years
5-10 Years
After 10 Years
Total Fair Value
Amortized
Cost
(in thousands)
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
U.S. Treasury, government agencies, and government sponsored agency mortgage-backed securities
$
0.00
%
$
133,917
1.07
%
$
268,576
1.40
%
$
624,086
1.12
%
$
1,026,579
1.19
%
$
1,033,073
State and political subdivisions
6,379
3.14
10,467
3.49
91,186
2.34
226,171
2.43
334,203
2.45
334,218
Asset-backed securities
0.00
0.00
27,297
1.60
67,350
1.22
94,647
1.33
94,538
Total
$
6,379
3.14
%
$
144,384
1.24
%
$
387,059
1.63
%
$
917,607
1.45
%
$
1,455,429
1.49
%
$
1,461,829
The calculations of the weighted average yields for each maturity category are based upon yield weighted by the respective costs of the securities. The weighted average rates on state and political subdivisions are computed on a taxable equivalent basis using a 24.95% tax rate.
Loan Maturities
The following table shows the amounts of loans (excluding residential mortgages of 1-4 family residences, consumer loans, and lease financing) which, based on the remaining scheduled repayments of principal are due in the periods indicated. Also, the amounts are classified according to sensitivity to changes in interest rates (fixed, variable).
Maturity at December 31, 2021
(in thousands)
Within
one year
After one
but within
five years
After
five years
Total
Commercial secured by real estate and commercial other
$
241,929
$
212,776
$
1,165,270
$
1,619,975
Commercial and real estate construction
60,015
21,695
158,798
240,508
$
301,944
$
234,471
$
1,324,068
$
1,860,483
Rate sensitivity:
Predetermined rate
$
50,846
$
134,848
$
53,750
$
239,444
Adjustable rate
251,098
99,623
1,270,318
1,621,039
$
301,944
$
234,471
$
1,324,068
$
1,860,483
Deposit Maturities
Maturities and/or repricing of time deposits of $100,000 or more outstanding at December 31, 2021 are summarized as follows:
(in thousands)
Certificates of
Deposit
Other Time
Deposits
Total
Three months or less
$
96,512
$
10,767
$
107,279
Over three through six months
99,482
10,790
110,272
Over six through twelve months
302,359
17,617
319,976
Over twelve through sixty months
91,500
25,298
116,798
$
589,853
$
64,472
$
654,325
Interest Rate Risk
We consider interest rate risk one of our most significant market risks. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of our net interest revenue is largely dependent upon the effective management of interest rate risk. We employ a variety of measurement techniques to identify and manage our interest rate risk, including the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain, and as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.
CTBI’s Asset/Liability Management Committee (ALCO), which includes executive and senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk within Board-approved policy limits. Our current exposure to interest rate risks is determined by measuring the anticipated change in net interest income spread evenly over the twelve-month period.
The following table shows our estimated earnings sensitivity profile as of December 31, 2021:
Change in Interest Rates
(basis points)
Percentage Change in Net Interest Income
(12 Months)
+400
11.23%
+300
7.61%
+200
4.56%
+100
2.01%
(0.66)%
The following table shows our estimated earnings sensitivity profile as of December 31, 2020:
Change in Interest Rates
(basis points)
Percentage Change in Net Interest Income
(12 Months)
+400
11.96%
+300
8.02%
+200
4.76%
+100
2.15%
(0.63)%
The simulation model used the yield curve spread evenly over a twelve-month period. The measurement at December 31, 2021 estimates that our net interest income in an up-rate environment would increase by 11.23% at a 400 basis point change, increase by 7.61% at a 300 basis point change, increase by 4.56% at a 200 basis point change, and increase by 2.01% at a 100 basis point change. In a down-rate environment, net interest income would decrease 0.66% at a 25 basis point change over one year. We actively manage our balance sheet and limit our exposure to long-term fixed rate financial instruments, including loans. In order to reduce the exposure to interest rate fluctuations and to manage liquidity, we have developed sale procedures for several types of interest-sensitive assets. Primarily all long-term, fixed rate single family residential mortgage loans underwritten according to Federal Home Loan Mortgage Corporation guidelines are sold for cash upon origination or originated under terms where they could be sold. Periodically, additional assets such as commercial loans are also sold. In 2021 and 2020, proceeds of $307.8 million and $347.0 million, respectively, were realized on the sale of fixed rate residential mortgages. We focus our efforts on consistent net interest revenue and net interest margin growth through each of the retail and wholesale business lines. We do not currently engage in trading activities.
The preceding analysis was prepared using a rate ramp analysis which attempts to spread changes evenly over a specified time period as opposed to a rate shock which measures the impact of an immediate change. Had these measurements been prepared using the rate shock method, the results would vary.
Our static repricing gap as of December 31, 2021 is presented below. In the 12 month cumulative repricing gap, rate sensitive liabilities (“RSL”) exceeded rate sensitive assets (“RSA”) by $732.1 million.
(dollars in thousands)
1-3 Months
4-6 Months
7-9 Months
10-12 Months
2-3
Years
4-5
Years
> 5
Years
Assets
$
1,781,777
$
239,693
$
210,282
$
183,387
$
1,000,518
$
819,681
$
1,182,919
Liabilities and
equity
2,408,729
179,467
178,149
380,895
140,708
54,689
2,075,620
Periodic repricing gap
(626,952
)
60,226
32,133
(197,508
)
859,810
764,992
(892,701
)
Cumulative gap
(626,952
)
(566,726
)
(534,593
)
(732,101
)
127,709
892,701
RSA/RSL
0.74
x
1.34
x
1.18
x
0.48
x
7.11
x
14.99
x
0.57
x
Cumulative gap to total assets
(11.57
)%
(10.46
)%
(9.87
)%
(13.51
)%
2.36
%
16.48
%
0.00
%
Capital Resources
We continue to grow our shareholders’ equity while also providing an annual dividend yield for the year 2021 of 3.67% to shareholders. Shareholders’ equity increased 6.6% from December 31, 2020 to $698.2 million at December 31, 2021. Our primary source of capital growth is the retention of earnings. Cash dividends were $1.57 per share for 2021 compared to $1.53 per share for 2020. We retained 68.2% of our earnings in 2021 compared to 54.3% in 2020.
Insured depository institutions are required to meet certain capital level requirements. On October 29, 2019, federal banking regulators adopted a final rule to simplify the regulatory capital requirements for eligible community banks and holding companies that opt-in to the community bank leverage ratio framework (the “CBLR framework”), as required by Section 201 of the Economic Growth, Relief and Consumer Protection Act of 2018. Under the final rule, which became effective as of January 1, 2020, community banks and holding companies (which includes CTB and CTBI) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, were eligible to opt-in to the CBLR framework. The community bank leverage ratio is the ratio of a banking organization’s Tier 1 capital to its average total consolidated assets, both as reported on the banking organization’s applicable regulatory filings. Accordingly, a qualifying community banking organization that has a community bank leverage ratio greater than 9% will be considered to have met: (i) the risk-based and leverage capital requirements of the generally applicable capital rules; (ii) the capital ratio requirements in order to be considered well-capitalized under the prompt corrective action framework; and (iii) any other applicable capital or leverage requirements.
In April 2020, as directed by Section 4012 of the CARES Act, the regulatory agencies introduced temporary changes to the CBLR. These changes, which subsequently were adopted as a final rule, temporarily reduced the CBLR requirement to 8% through the end of calendar year 2020. Beginning in calendar year 2021, the CBLR requirement increased to 8.5% for the calendar year before returning to 9% in calendar year 2022. The final rule also provides for a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement. Management elected to use the CBLR framework for CTBI and CTB. CTBI’s CBLR ratio as of December 31, 2021 was 13.00%. CTB’s CBLR ratio as of December 31, 2021 was 12.42%. Under either framework, CTBI and CTB would be considered well-capitalized under the applicable guidelines.
As of December 31, 2021, we are not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material adverse impact on our liquidity, capital resources, or operations.
Impact of Inflation, Changing Prices, and Economic Conditions
The majority of our assets and liabilities are monetary in nature. Therefore, CTBI differs greatly from most commercial and industrial companies that have significant investment in nonmonetary assets, such as fixed assets and inventories. However, inflation does have an important impact on the growth of assets in the banking industry and on the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other expenses, which tend to rise during periods of general inflation.
We believe one of the most significant impacts on financial and operating results is our ability to react to changes in interest rates. We seek to maintain an essentially balanced position between interest rate sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations.
We are all finding ourselves living and operating in unprecedented times as the COVID-19 pandemic is causing personal and financial hardship to our customers, employees, and communities. During these challenging times, we have instituted programs to support our customers with loan modifications, forbearance, and fee waivers and participated in programs created by the government stimulus programs like the Paycheck Protection Program, focused on helping small businesses keep their employees and meet their expenses as they were unable to operate due to mandated closures. We instituted programs supporting our employees focused on healthcare, childcare, and remote and split schedule work, as well as work space changes that allow for proper social distancing to keep our employees safe as we continue to operate as a critical part of the economy. We continue to support our communities through donations to non-profit organizations as they strive to continue their commitments of serving those in need. We also continue to manage our company for the long term and our strong capital position and culture of building communities built on trust will facilitate our ability to manage through these challenging times. We will continue to serve our constituents while we all meet the challenges of living with COVID-19.
Stock Repurchase Program
CTBI’s stock repurchase program began in December 1998 with the authorization to acquire up to 500,000 shares and was increased by an additional 1,000,000 shares in each of July 2000, May 2003, and March 2020. As of December 31, 2021, a total of 2,465,294 shares have been repurchased through this program, leaving 1,034,706 shares remaining under our current repurchase authorization. The following table shows Board authorizations and repurchases made through the stock repurchase program for the years 1998 through 2021:
Board
Repurchases*
Shares Available for
Authorizations
Average Price ($)
# of Shares
Repurchase
500,000
-
14.45
144,669
1,000,000
10.25
763,470
13.35
489,440
17.71
396,316
1,000,000
19.62
259,235
23.14
60,500
-
-
28.56
216,150
25.53
102,850
2009-2019
-
1,000,000
33.64
32,664
-
Total
3,500,000
16.17
2,465,294
1,034,706
*Repurchased shares and average prices have been restated to reflect stock dividends that have occurred; however, board authorized shares have not been adjusted.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our consolidated financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements.
We believe the application of accounting policies and the estimates required therein are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.
Our accounting policies are described in note 1 to the consolidated financial statements contained herein. We have identified the following critical accounting policies:
Allowance for Credit Losses - CTBI accounts for the allowance for credit losses (“ACL”) and the reserve for unfunded commitments in accordance with Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and its related subsequent amendments, commonly known as CECL.
We disaggregate our portfolio loans into portfolio segments for purposes of determining the ACL. Our loan portfolio segments include commercial, residential mortgage, and consumer. We further disaggregate our portfolio segments into classes for purposes of monitoring and assessing credit quality based on certain risk characteristics. For an analysis of CTBI’s ACL by portfolio segment and credit quality information by class, refer to note 4 to the consolidated financial statements contained herein.
CTBI maintains the ACL to absorb the amount of credit losses that are expected to be incurred over the remaining contractual terms of the related loans. Contractual terms are adjusted for expected prepayments but are not extended for expected extensions, renewals or modifications except in circumstances where CTBI reasonably expects to execute a troubled debt restructuring (“TDR”) with the borrower or where certain extension or renewal options are embedded in the original contract and not unconditionally cancellable by CTBI. Accrued interest receivable on loans is presented in the consolidated financial statements as a component of other assets. When accrued interest is deemed to be uncollectible (typically when a loan is placed on nonaccrual status), interest income is reversed. 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 the amortized cost of the loan. For additional information on CTBI’s accounting policies related to nonaccrual loans, refer to note 1 to the consolidated financial statements contained herein.
Credit losses are charged and recoveries are credited to the ACL. The ACL is maintained at a level CTBI considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectability of loans, including historical credit loss experience, current and forecasted market and economic conditions, and consideration of various qualitative factors that, in management’s judgment, deserve consideration in estimating expected credit losses. Provisions for credit losses are recorded for the amounts necessary to adjust the ACL to CTBI’s current estimate of expected credit losses on portfolio loans. CTBI’s strategy for credit risk management includes a combination of conservative exposure limits significantly below legal lending limits and conservative underwriting, documentation, and collection standards. The strategy also emphasizes diversification on a geographic, industry, and customer level, regular credit examinations, and quarterly management reviews of large credit exposures and loans experiencing deterioration of credit quality.
CTBI’s methodology for determining the ACL requires significant management judgment and includes an estimate of expected credit losses on a collective basis for groups of loans with similar risk characteristics and specific allowances for loans which are individually evaluated.
Larger commercial loans with balances exceeding $1 million that exhibit probable or observed credit weaknesses, (i) have a criticized risk rating, (ii) are on nonaccrual status, (iii) are classified as TDRs, or (iv) are 90 days or more past due, are individually evaluated for an ACL. CTBI considers the current value of collateral, credit quality of any guarantees, the guarantor’s liquidity and willingness to cooperate, the loan structure and other factors when determining the amount of the ACL. Other factors may include the borrower’s susceptibility to risks presented by the forecasted macroeconomic environment, the industry and geographic region of the borrower, size and financial condition of the borrower, cash flow and leverage of the borrower, and our evaluation of the borrower’s management. Significant management judgment is required when evaluating which of these factors are most relevant in individual circumstances, and when estimating the amount of expected credit losses based on those factors. When loans are individually evaluated, allowances are determined based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral and other sources of cash flow, as well as an evaluation of legal options available to CTBI. Allowances for individually evaluated loans that are collateral-dependent are typically measured based on the fair value of the underlying collateral, less expected costs to sell where applicable. For collateral-dependent financial assets, the credit loss expected may be zero if the fair value less costs to sell exceeds the amortized cost of the loan. Loans shall not be included in both collective assessments and individual assessments. Individually evaluated loans that are not collateral-dependent are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. Specific allowances on individually evaluated commercial loans, including TDRs, are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience. Regardless of an initial measurement method, once it is determined that foreclosure is probable, the allowance for credit losses is measured based on the fair value of the collateral as of the measurement date. As a practical expedient, the fair value of the collateral may be used for a loan when determining the allowance for credit losses for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty. The fair value shall be adjusted for selling costs when foreclosure is probable.
Expected credit losses are estimated on a collective basis for loans that are not individually evaluated. These include commercial loans that do not meet the criteria for individual evaluation as well as homogeneous loans in the residential mortgage and consumer portfolio segments. For collectively evaluated commercial loans, CTBI uses a static pool methodology based on our risk rating system. See note 4 to the consolidated financial statements contained herein for information on CTBI’s risk rating system. Other homogenous loans such as the residential mortgage and consumer portfolio segments derive their ACL from vintage modeling. Vintage modeling was chosen primarily because these loans have fixed amortization schedules, and it allows CTBI to track loans from origination to completion, including repayments and prepayments, and captures net charge-offs by the different vintages providing historical loss rates. These are the two primary models utilized for ACL determination although there are additional models for specific processes in addition. CTBI’s expected credit loss models were developed based on historical credit loss experience and observations of migration patterns for various credit risk characteristics (such as internal credit risk grades, external credit ratings or scores, delinquency status, etc.) over time, with those observations evaluated in the context of concurrent macroeconomic conditions. CTBI developed our models from historical observations capturing a full economic cycle when possible.
CTBI’s expected credit loss models consider historical credit loss experience, current market and economic conditions, and forecasted changes in market and economic conditions if such forecasts are considered reasonable and supportable. Generally, CTBI considers our forecasts to be reasonable and supportable for a period of up to one year from the estimation date. For periods beyond the reasonable and supportable forecast period, expected credit losses are estimated by reverting to historical loss information. CTBI evaluates the length of our reasonable and supportable forecast period, our reversion period, and reversion methodology at least annually, or more often if warranted by economic conditions or other circumstances.
Other qualitative factors are used by CTBI in determining the ACL. These considerations inherently require significant management judgment to determine the appropriate factors to be considered and the extent of their impact on the ACL estimate. Qualitative factors are used to capture characteristics in the portfolio that impact expected credit losses but that are not fully captured within CTBI’s expected credit loss models. These include adjustments for changes in policies or procedures in underwriting, monitoring or collections, lending and risk management personnel, and results of internal audit and quality control reviews. These may also include adjustments, when deemed necessary, for specific idiosyncratic risks such as geopolitical events, natural disasters and their effects on regional borrowers, and changes in product structures. Qualitative factors may also be used to address the impacts of unforeseen events on key inputs and assumptions within CTBI’s expected credit loss models, such as the reasonable and supportable forecast period, changes to historical loss information, or changes to the reversion period or methodology. When evaluating the adequacy of allowances, consideration is also given to regional geographic concentrations and the closely associated effect that changing economic conditions may have on CTBI’s customers.
Overall, the collective evaluation process requires significant management judgment when determining the estimation methodology and inputs into the models, as well as in evaluating the reasonableness of the modeled results and the appropriateness of qualitative adjustments. CTBI’s forecasts of market and economic conditions and the internal risk grades assigned to loans in the commercial portfolio segment are examples of inputs to the expected credit loss models that require significant management judgment. These inputs have the potential to drive significant variability in the resulting ACL.
The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated expected credit losses related to unfunded credit facilities and is included in other liabilities in the consolidated balance sheets. The determination of the adequacy of the reserve is based upon expected credit losses over the remaining contractual life of the commitments, taking into consideration the current funded balance and estimated exposure over the reasonable and supportable forecast period. This process takes into consideration the same risk elements that are analyzed in the determination of the adequacy of CTBI’s ACL, as previously discussed. Net adjustments to the reserve for unfunded commitments are included in other noninterest expense in the consolidated statements of income.
Goodwill - Business combinations entered into by CTBI typically include the recognition of goodwill. U.S. generally accepted accounting principles (“GAAP”) require goodwill to be tested for impairment on an annual basis, which for CTBI is October 1, and more frequently if events or circumstances indicate that there may be impairment. Refer to note 1 to the consolidated financial statements contained herein for a discussion on the methodology used by CTBI to assess goodwill for impairment.
Impairment exists when a reporting unit’s carrying amount of goodwill exceeds its implied fair value. In testing goodwill for impairment, U.S. GAAP permits CTBI to first assess qualitative factors to determine whether it is more likely than not that its fair value is less than its carrying amount. In this qualitative assessment, CTBI evaluates events and circumstances which may include, but are not limited to, the general economic environment, banking industry and market conditions, the overall financial performance of CTBI, and the performance of CTBI’s common stock, to determine if it is not more likely than not that the fair value is less than its carrying amount. If the quantitative impairment test is required or the decision to bypass the qualitative assessment is elected, CTBI performs the goodwill impairment test by comparing its fair value with its carrying amount, including goodwill. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill recorded. A recognized impairment loss cannot be reversed in future periods even if the fair value of the reporting unit subsequently recovers.
The fair value of CTBI is the price that would be received to sell the company as a whole in an orderly transaction between market participants at the measurement date. The determination of the fair value is a subjective process that involves the use of estimates and judgments, particularly related to cash flows, the appropriate discount rates and an applicable control premium. CTBI employs an income-based approach, utilizing forecasted cash flows and the estimated cost of equity as the discount rate. Significant management judgment is necessary in the preparation of the forecasted cash flows surrounding expectations for earnings projections, growth and credit loss expectations, and actual results may differ from forecasted results.
Income Taxes - Income tax liabilities or assets are established for the amount of taxes payable or refundable for the current year. Deferred tax liabilities (“DTLs”) and assets (“DTAs”) are also established for the future tax consequences of events that have been recognized in CTBI’s financial statements or tax returns. A DTL or DTA is recognized for the estimated future tax effects attributable to temporary differences and deductions that can be carried forward (used) in future years. The valuation of current and deferred income tax liabilities and assets is considered critical, as it requires management to make estimates based on provisions of the enacted tax laws. The assessment of tax liabilities and assets involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and federal and state tax codes.
Fair Value Measurements - As a financial services company, the carrying value of certain financial assets and liabilities is impacted by the application of fair value measurements, either directly or indirectly. In certain cases, an asset or liability is measured and reported at fair value on a recurring basis, such as available-for-sale investment securities. In other cases, management must rely on estimates or judgments to determine if an asset or liability not measured at fair value warrants an impairment write-down or whether a valuation reserve should be established. Given the inherent volatility, the use of fair value measurements may have a significant impact on the carrying value of assets or liabilities or result in material changes to the consolidated financial statements from period to period. Detailed information regarding fair value measurements can be found in note 16 to the consolidated financial statements contained herein.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
CTBI currently does not engage in any hedging activity or any derivative activity which management considers material. Analysis of CTBI’s interest rate sensitivity can be found in the Interest Rate Risk section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8.
Financial Statements and Supplementary Data
Community Trust Bancorp, Inc.
Consolidated Balance Sheets
(dollars in thousands)
December 31
Assets:
Cash and due from banks
$
46,558
$
54,250
Interest bearing deposits
265,198
283,985
Cash and cash equivalents
311,756
338,235
Certificates of deposit in other banks
Debt securities available-for-sale at fair value (amortized cost of $1,461,829 and $978,774, respectively)
1,455,429
997,261
Equity securities at fair value
2,253
2,471
Loans held for sale
2,632
23,259
Loans
3,408,813
3,554,211
Allowance for credit losses
(41,756
)
(48,022
)
Net loans
3,367,057
3,506,189
Premises and equipment, net
40,479
42,001
Right-of-use assets
12,148
13,215
Federal Home Loan Bank stock
8,139
10,048
Federal Reserve Bank stock
4,887
4,887
Goodwill
65,490
65,490
Bank owned life insurance
91,097
72,373
Mortgage servicing rights
6,774
4,068
Other real estate owned
3,486
7,694
Accrued interest receivable
15,415
15,818
Other assets
30,970
35,887
Total assets
$
5,418,257
$
5,139,141
Liabilities and shareholders’ equity:
Deposits:
Noninterest bearing
$
1,331,103
$
1,140,925
Interest bearing
3,013,189
2,875,157
Total deposits
4,344,292
4,016,082
Repurchase agreements
271,088
355,862
Federal funds purchased
Advances from Federal Home Loan Bank
Long-term debt
57,841
57,841
Deferred tax liability
4,687
Operating lease liability
11,583
12,531
Finance lease liability
1,422
1,441
Accrued interest payable
1,016
1,243
Other liabilities
31,392
33,694
Total liabilities
4,720,055
4,484,276
Commitments and contingencies (notes 17 and 19)
Shareholders’ equity:
Preferred stock, 300,000 shares authorized and unissued
-
-
Common stock, $5.00 par value, shares authorized 25,000,000; shares outstanding 2021 - 17,843,081; 2020 - 17,810,401
89,215
89,052
Capital surplus
227,085
225,507
Retained earnings
386,750
326,738
Accumulated other comprehensive income (loss), net of tax
(4,848
)
13,568
Total shareholders’ equity
698,202
654,865
Total liabilities and shareholders’ equity
$
5,418,257
$
5,139,141
Consolidated Statements of Income and Comprehensive Income
(in thousands except per share data)
Year Ended December 31
Interest income:
Interest and fees on loans, including loans held for sale
$
160,198
$
160,826
$
164,991
Interest and dividends on securities:
Taxable
13,981
11,939
12,516
Tax exempt
3,098
2,380
2,354
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock
Interest on Federal Reserve Bank deposits
4,434
Other, including interest on federal funds sold
Total interest income
178,169
176,441
185,398
Interest expense:
Interest on deposits
12,753
21,177
33,371
Interest on repurchase agreements and federal funds purchased
1,254
2,788
4,631
Interest on advances from Federal Home Loan Bank
Interest on long-term debt
1,083
1,485
2,472
Total interest expense
15,090
25,450
40,513
Net interest income
163,079
150,991
144,885
Provision for credit losses (recovery)
(6,386
)
16,047
4,819
Net interest income after provision for credit losses (recovery)
169,465
134,944
140,066
Noninterest income:
Service charges on deposit accounts
26,529
23,461
26,359
Gains on sales of loans, net
6,820
7,226
1,880
Trust and wealth management income
12,644
10,931
10,804
Loan related fees
5,578
4,041
2,742
Bank owned life insurance
2,844
2,306
2,397
Brokerage revenue
1,962
1,483
1,367
Securities gains (losses)
(158
)
1,769
Other noninterest income
4,244
3,343
3,852
Total noninterest income
60,463
54,560
50,184
Noninterest expense:
Officer salaries and employee benefits
19,713
15,257
12,614
Other salaries and employee benefits
54,401
51,170
50,413
Occupancy, net
8,306
7,912
7,845
Equipment
2,548
2,737
3,000
Data processing
8,039
7,941
7,417
Bank franchise tax
1,705
7,299
6,771
Legal fees
1,160
1,634
1,968
Professional fees
2,039
2,091
2,188
Advertising and marketing
2,928
2,980
3,283
FDIC insurance
1,381
1,056
Other real estate owned provision and expense
1,401
2,655
5,490
Repossession expense
1,042
Amortization of limited partnership investments
3,352
3,759
3,422
Other noninterest expense
11,968
12,031
12,539
Total noninterest expense
119,285
119,239
118,258
Income before income taxes
110,643
70,265
71,992
Income taxes
22,704
10,761
7,452
Net income
$
87,939
$
59,504
$
64,540
Other comprehensive income (loss):
Unrealized holding gains (losses) on debt securities available-for-sale:
Unrealized holding gains (losses) arising during the period
(24,827
)
13,839
14,270
Less: Reclassification adjustments for realized gains included in net income
1,251
Tax expense (benefit)
(6,471
)
3,273
3,403
Other comprehensive income (loss), net of tax
(18,416
)
9,315
10,864
Comprehensive income
$
69,523
$
68,819
$
75,404
Basic earnings per share
$
4.94
$
3.35
$
3.64
Diluted earnings per share
$
4.94
$
3.35
$
3.64
Weighted average shares outstanding-basic
17,786
17,748
17,724
Weighted average shares outstanding-diluted
17,804
17,756
17,740
See notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders’ Equity
(in thousands except per share and share amounts)
Common
Shares
Common
Stock
Capital
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
Total
Balance, December 31, 2018
17,732,853
$
88,665
$
223,161
$
258,935
$
(6,611
)
$
564,150
Implementation of ASU 2016-02
(480 )
(480 )
Balance, January 1, 2019
17,732,853
88,665
223,161
258,455
(6,611 )
563,670
Net income
64,540
64,540
Other comprehensive income (loss)
10,864
10,864
Cash dividends declared ($1.48 per share)
(26,235
)
(26,235
)
Issuance of common stock
45,639
1,036
1,264
Issuance of restricted stock
27,921
(140
)
Vesting of restricted stock
(12,660
)
(64
)
Forfeiture of restricted stock
(588
)
(3
)
Stock-based compensation
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
59,504
59,504
Other comprehensive income (loss)
9,315
9,315
Cash dividends declared ($1.53 per share)
(27,160
)
(27,160
)
Issuance of common stock
45,341
Repurchase of common stock
(32,664 )
(163 )
(936 )
(1,099 )
Issuance of restricted stock
21,544
(108
)
Vesting of restricted stock
(16,985
)
(85
)
Stock-based compensation
Balance, December 31, 2020
17,810,401
$
89,052
$
225,507
$
326,738
$
13,568
$
654,865
Net income
87,939
87,939
Other comprehensive income (loss)
(18,416
)
(18,416
)
Cash dividends declared ($1.57 per share)
(27,927
)
(27,927
)
Issuance of common stock
41,168
Issuance of restricted stock
9,193
(46
)
Vesting of restricted stock
(17,681 )
(88 )
Stock-based compensation
Balance, December 31, 2021
17,843,081
$
89,215
$
227,085
$
386,750
$
(4,848
)
$
698,202
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31
Cash flows from operating activities:
Net income
$
87,939
$
59,504
$
64,540
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
5,033
5,346
5,515
Deferred taxes
2,330
(2,909
)
(1,412
)
Stock-based compensation
Provision for credit losses (recovery)
(6,386
)
16,047
4,819
Write-downs of other real estate owned and other repossessed assets
1,454
4,295
Gains on sale of loans held for sale
(6,820
)
(7,226
)
(1,880
)
Securities gains
(60
)
(1,251
)
(3
)
Fair value adjustment in equity securities
(518
)
(780
)
Gain on debt repurchase
(219
)
(Gains) losses on sale of assets, net
(165
)
Proceeds from sale of mortgage loans held for sale
307,843
347,048
94,507
Funding of mortgage loans held for sale
(280,396
)
(361,913
)
(91,333
)
Amortization of securities premiums and discounts, net
8,010
5,907
5,042
Change in cash surrender value of bank owned life insurance
(1,873
)
(1,371
)
(1,567
)
Payment of operating lease liabilities
(1,693
)
(1,682
)
(1,663
)
Mortgage servicing rights:
Fair value adjustments
(428
)
1,064
New servicing assets created
(2,278
)
(1,869
)
(631
)
Changes in:
Accrued interest receivable
(982
)
(404
)
Other assets
4,918
1,845
4,941
Accrued interest payable
(227
)
(1,596
)
(63
)
Other liabilities
(2,387
)
4,147
(2,440
)
Net cash provided by operating activities
115,695
62,379
83,458
Cash flows from investing activities:
Certificates of deposit in other banks:
Purchase of certificates of deposit
(245
)
Maturity of certificates of deposit
3,675
Securities available-for-sale (AFS):
Purchase of AFS securities
(797,445
)
(857,167
)
(196,727
)
Proceeds from sales of AFS securities
1,080
186,194
25,734
Proceeds from prepayments, calls, and maturities of AFS securities
305,361
281,487
174,125
Securities held-to-maturity (HTM):
Proceeds from prepayments and maturities of HTM securities
Change in loans, net
146,050
(306,523
)
(46,162
)
Purchase of premises and equipment
(2,373
)
(1,482
)
(2,570
)
Proceeds from sale and retirement of premises and equipment
Redemption of stock by Federal Home Loan Bank
1,909
4,239
Proceeds from sale of other real estate owned and repossessed assets
2,819
4,754
3,641
Additional investment in bank owned life insurance
(17,181
)
(1,733
)
(1,241
)
Proceeds from settlement of bank owned life insurance
Net cash used in investing activities
(358,620
)
(693,526
)
(34,491
)
Cash flows from financing activities:
Change in deposits, net
328,210
610,510
99,622
Change in repurchase agreements and federal funds purchased, net
(84,774
)
121,539
Advances from Federal Home Loan Bank
25,000
30,000
Payments on advances from Federal Home Loan Bank
(20
)
(25,020
)
(30,021
)
Payment of finance lease liabilities
(19
)
(15
)
(14
)
Repurchase of long-term debt
(1,281
)
Issuance of common stock
1,264
Repurchase of stock
(1,099
)
Dividends paid
(27,916
)
(27,142
)
(26,235
)
Net cash provided by financing activities
216,446
704,699
74,266
Net increase (decrease) in cash and cash equivalents
(26,479
)
73,552
123,233
Cash and cash equivalents at beginning of year
338,235
264,683
141,450
Cash and cash equivalents at end of year
$
311,756
$
338,235
$
264,683
Supplemental disclosures:
Income taxes paid
$
19,485
$
13,275
$
9,988
Interest paid
15,316
27,047
40,576
Non-cash activities:
Loans to facilitate the sale of other real estate owned and repossessed assets
1,733
9,632
2,879
Common stock dividends accrued, paid in subsequent quarter
Real estate and assets acquired in settlement of loans
1,200
4,446
3,384
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
1. Accounting Policies
Basis of Presentation - The consolidated financial statements include Community Trust Bancorp, Inc. (“CTBI”) and our subsidiaries, including our principal subsidiary, Community Trust Bank, Inc. (“CTB”). Intercompany transactions and accounts have been eliminated in consolidation.
Nature of Operations - Substantially all assets, liabilities, revenues, and expenses are related to banking operations, including lending, investing of funds, obtaining of deposits, trust and wealth management operations, full service brokerage operations, and other financing activities. All of our business offices and the majority of our business are located in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee.
Use of Estimates - In preparing the consolidated financial statements, management must make certain estimates and assumptions. These estimates and assumptions affect the amounts reported for assets, liabilities, revenues, and expenses, as well as affecting the disclosures provided. Future results could differ from the current estimates. Such estimates include, but are not limited to, the allowance for credit losses, goodwill, the valuation of deferred tax assets, and the valuation of financial instruments.
The accompanying financial statements have been prepared using values and information currently available to CTBI.
Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for credit losses, and capital.
Cash and Cash Equivalents - CTBI considers all liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents include cash on hand, amounts due from banks, interest bearing deposits in other financial institutions, and federal funds sold. Generally, federal funds are sold for one-day periods.
Certificates of Deposit in Other Banks - Certificates of deposit in other banks generally mature within 18 months and are carried at cost.
Investments - Management determines the classification of securities at purchase. We classify debt securities into held-to-maturity, trading, or available-for-sale categories. Held-to-maturity (“HTM”) 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 (“FASB”) 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 HTM securities) shall be classified as available-for-sale securities.
We do not have any securities that are classified as trading securities. Available-for-sale (“AFS”) 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.
An allowance is recognized for credit losses relative to AFS securities rather than as a reduction in the cost basis of the security. Subsequent improvements in credit quality or reductions in estimated credit losses are 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.
HTM securities are subject to an allowance for lifetime expected credit losses, determined by adjusting historical loss information for current conditions and reasonable and supportable forecasts. The forward-looking evaluation of lifetime expected losses will be performed on a pooled basis for debt securities that share similar risk characteristics. These allowances for expected losses must be made by the holder of the HTM debt security when the security is purchased. At December 31, 2021, CTBI held no securities designated as held-to-maturity.
CTBI accounts for equity securities in accordance with ASC 321, Investments - Equity Securities.
ASC 321 requires equity investments (except those accounted for under the equity method and those that result in the consolidation of the investee) to be measured at fair value, with changes in fair values recognized in net income.
Equity securities with a readily determinable fair value are required to be measured at fair value, with changes in fair value recognized through net income. Equity securities without a readily determinable fair value are carried at cost, less any impairment, if any, plus or minus changes resulting from observable price changes for identical or similar investments. As permitted by ASC 321-10-35-2, CTBI can make an irrevocable election to subsequently measure an equity security without a readily determinable fair value, and all identical or similar investments of the same issuer, including future purchases of identical or similar investments of the same issuer, at fair value. CTBI has made this election for our Visa Class B equity securities. The fair value of these securities was determined by a third party service provider using Level 3 inputs as defined in ASC 820, Fair Value Measurement, and changes in fair value are recognized in income.
Loans - Loans with the ability and the intent to be held until maturity and/or payoff are reported at the carrying value of unpaid principal reduced by unearned interest, an allowance for credit losses, and unamortized deferred fees or costs and premiums. Income is recorded on the level yield basis. Interest accrual is discontinued when management believes, after considering economic and business conditions, collateral value, and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. Any loan greater than 90 days past due must be well secured and in the process of collection to continue accruing interest. Cash payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured. Loans are not reclassified as accruing until principal and interest payments remain current for a period of time, generally six months, and future payments appear reasonably certain. A restructuring of a debt constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) included an election for banking institutions to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The ability to exclude COVID-19-related modifications as troubled debt restructurings was extended under the Consolidated Appropriations Act 2021 to the earlier of (i) 60 days after the COVID-19 national emergency and (ii) January 1, 2022. CTBI elected to adopt these provisions of the CARES Act, as extended by the Consolidated Appropriations Act 2021.
Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized over the estimated life of the related loans, or commitments as a yield adjustment.
Leases - CTBI accounts for leases under ASC 842, recording a right-of-use asset and a lease liability for all leases with terms longer than 12 months. The right-of-use asset represents the right to use the asset under lease for the lease term, and the lease liability represents the contractual obligation to make lease payments. The right-of-use asset is tested for impairment whenever events or changes in circumstances indicate the carrying value might not be recoverable. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. A lease is treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor does not convey risks and rewards or control, an operating lease results. Right-of-use assets and lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate on a collateralized basis, over a similar term at the lease commencement date. Right-of-use assets are further adjusted for prepaid rent, lease incentives, and initial direct costs, if any.
Allowance for Credit Losses - CTBI accounts for the allowance for credit losses under ASC 326, commonly known as CECL. CTBI measures expected credit losses of financial assets on a collective (pool) basis using loss-rate methods when the financial assets share similar risk characteristics. Loans that do not share risk characteristics are evaluated on an individual basis. Regardless of an initial measurement method, once it is determined that foreclosure is probable, the allowance for credit losses is measured based on the fair value of the collateral as of the measurement date. As a practical expedient, the fair value of the collateral may be used for a loan when determining the allowance for credit losses for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty. The fair value shall be adjusted for selling costs when foreclosure is probable. For collateral-dependent financial assets, the credit loss expected may be zero if the fair value less costs to sell exceed the amortized cost of the loan. Loans shall not be included in both collective assessments and individual assessments.
In the event that collection of principal becomes uncertain, CTBI has policies in place to reverse accrued interest in a timely manner. Therefore, CTBI elected Accounting Standards Update (“ASU”) 2019-04 which allows that accrued interest would continue to be presented separately and not part of the amortized cost of the loan. The methodology used by CTBI is developed using the current loan balance, which is then compared to amortized cost balances to analyze the impact. The difference in amortized cost basis versus consideration of loan balances impacts the allowance for credit losses calculation by one basis point and is considered immaterial. The primary difference is for indirect lending premiums.
We maintain an allowance for credit losses (“ACL”) at a level that is appropriate to cover estimated credit losses on individually evaluated loans, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. Credit losses are charged and recoveries are credited to the ACL.
We utilize an internal risk grading system for commercial credits. Those credits that meet the following criteria are subject to individual evaluation: the loan has an outstanding bank share balance of $1 million or greater and meets one of the following criteria: (i) has a criticized risk rating, (ii) is in nonaccrual status, (iii) is a troubled debt restructuring (“TDR”), or (iv) is 90 days or more past due. The borrower’s cash flow, adequacy of collateral coverage, and other options available to CTBI, including legal remedies, are evaluated. We evaluate the collectability of both principal and interest when assessing the need for loss provision. Historical loss rates are analyzed and applied to other commercial loan segments not subject to individual evaluation.
Homogenous loans, such as consumer installment, residential mortgages, and home equity lines are not individually risk graded. The associated ACL for these loans is measured in pools with similar risk characteristics under ASC 326.
When any secured commercial loan is considered uncollectable, whether past due or not, a current assessment of the value of the underlying collateral is made. If the balance of the loan exceeds the fair value of the collateral, the loan is placed on nonaccrual and the loan is charged down to the value of the collateral less estimated cost to sell. For commercial loans greater than $1 million and classified as criticized, troubled debt restructuring, or nonaccrual, a specific reserve is established if a loss is determined to be possible and then charged-off once it is probable. When the foreclosed collateral has been legally assigned to CTBI, the estimated fair value of the collateral less costs to sell is then transferred to other real estate owned or other repossessed assets, and a charge-off is taken for any remaining balance. When any unsecured commercial loan is considered uncollectable the loan is charged off no later than at 90 days past due.
All closed-end consumer loans (excluding conventional 1-4 family residential loans and installment and revolving loans secured by real estate) are charged off no later than 120 days (5 monthly payments) delinquent. If a loan is considered uncollectable, it is charged off earlier than 120 days delinquent. For conventional 1-4 family residential loans and installment and revolving loans secured by real estate, when a loan is 90 days past due, a current assessment of the value of the real estate is made. If the balance of the loan exceeds the fair value of the property, the loan is placed on nonaccrual. Foreclosure proceedings are normally initiated after 120 days. When the foreclosed property has been legally assigned to CTBI, the fair value less estimated costs to sell is transferred to other real estate owned and the remaining balance is taken as a charge-off.
Historical loss rates for loans are adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. With the implementation of ASC 326, weighted average life (“WAL”) calculations were completed as a tool to determine the life of CTBI’s various loan segments. Vintage modeling was used to determine the life of loan losses for consumer and residential real estate loans. Static pool modeling was used to determine the life of loan losses for commercial loan segments. Qualitative factors used to derive CTBI’s total ACL include delinquency trends, current economic conditions and trends, strength of supervision and administration of the loan portfolio, levels of underperforming loans, trends in loan losses, and underwriting exceptions. Forecasting factors including unemployment rates and industry specific forecasts for industries in which our total exposure is 5% of capital or greater are also included as factors in the ACL model. Management continually reevaluates the other subjective factors included in our ACL analysis.
Loans Held for Sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses, if any, are recognized by charges to income. Gains and losses on loan sales are recorded in noninterest income.
Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation and amortization. Premises and equipment are evaluated for impairment on a quarterly basis.
Depreciation and amortization are computed primarily using the straight-line method. Estimated useful lives range up to 40 years for buildings, 2 to 10 years for furniture, fixtures, and equipment, and up to the lease term for leasehold improvements.
Federal Home Loan Bank and Federal Reserve Stock - CTB is a member of the Federal Home Loan Bank (“FHLB”) system. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery par value. Both cash and stock dividends are reported as income.
CTB is also a member of its regional Federal Reserve Bank. Federal Reserve Bank stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery par value. Both cash and stock dividends are reported as income.
Troubled Debt Restructurings - Troubled
debt restructurings are certain loans that have been modified where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral of principal and/or interest payments, regardless of the period of the modification. All of the loans identified as troubled debt restructuring were modified due to financial stress of the borrower. In order to determine if a borrower is experiencing financial difficulty, an evaluation is performed to determine the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under CTBI’s internal underwriting policy.
When we modify loans and leases in a troubled debt restructuring, we evaluate any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, we evaluate troubled debt restructurings, including those that have payment defaults, for possible impairment and recognize impairment through the allowance.
Other Real Estate Owned - When foreclosed properties are acquired, appraisals are obtained and the properties are booked at the current fair market value less expected sales costs. Additionally, periodic updated appraisals are obtained on unsold foreclosed properties. When an updated appraisal reflects a fair market value below the current book value, a charge is booked to current earnings to reduce the property to its new fair market value less expected sales costs. Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months. All revenues and expenses related to the carrying of other real estate owned are recognized through the income statement.
Goodwill and Core Deposit Intangible - We evaluate total goodwill and core deposit intangible for impairment, based upon ASC 350, Intangibles-Goodwill and Other, using fair value techniques including multiples of price/equity. Goodwill and core deposit intangible are evaluated for impairment on an annual basis or as other events may warrant.
The balance of goodwill, at $65.5 million, has not changed since January 1, 2015. Our core deposit intangible has been fully amortized since December 31, 2017.
Transfers of Financial Assets - Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from CTBI-put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) CTBI does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Revenue Recognition - The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, and investment securities, as well as revenue related to our mortgage banking activities, as these activities are subject to other generally accepted accounting principles (“GAAP”) discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of noninterest income are as follows:
●
Service charges on deposit accounts represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue, or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed. Payment for such performance obligations is generally received at the time the performance obligations are satisfied.
●
Trust and wealth management income represents monthly or quarterly fees due from wealth management customers as consideration for managing the customers’ assets. Wealth management and trust services include custody of assets, investment management, escrow services, fees for trust services, and similar fiduciary activities. Revenue is recognized when our performance obligation is completed each month or quarter, which is generally the time that payment is received.
●
Brokerage revenue is either fee based and collected upon the settlement of the transaction or commission based and recognized when our performance obligation is completed each month or quarter, which is generally the time that payment is received. Other sales, such as life insurance, generate commissions from other third parties. These fees are generally collected monthly.
●
Other noninterest income primarily includes items such as letter of credit fees, gains on sale of loans held for sale and servicing fees related to mortgage and commercial loans, none of which are subject to the requirements of ASC 606.
Income Taxes - Income tax expense is based on the taxes due on the consolidated tax return plus deferred taxes based on the expected future tax benefits and consequences of temporary differences between carrying amounts and tax bases of assets and liabilities, using enacted tax rates. Any interest and penalties incurred in connection with income taxes are recorded as a component of income tax expense in the consolidated financial statements. During the years ended December 31, 2021, 2020, and 2019, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes.
Earnings Per Share (“EPS”) - Basic EPS is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding, excluding restricted shares.
Diluted EPS adjusts the number of weighted average shares of common stock outstanding by the dilutive effect of stock options, including restricted shares, as prescribed in ASC 718, Share-Based Payment.
Segments - Management analyzes the operation of CTBI assuming one operating
segment, community banking services. CTBI, through our operating subsidiaries, offers a wide range of consumer and commercial community banking services. These services include: (i) residential and commercial real estate loans; (ii) checking accounts; (iii) regular and term savings accounts and savings certificates; (iv) full service securities brokerage services; (v) consumer loans; (vi) debit cards; (vii) annuity and life insurance products; (viii) Individual Retirement Accounts and Keogh plans; (ix) commercial loans; (x) trust and wealth management services; (xi) commercial demand deposit accounts; and (xii) repurchase agreements.
Bank Owned Life Insurance - CTBI’s bank owned life insurance policies are carried at their cash surrender value. We recognize tax-free income from the periodic increases in cash surrender value of these policies and from death benefits.
Mortgage Servicing Rights - Mortgage servicing rights (“MSRs”) are carried at fair market value following the accounting guidance in ASC 860-50, Servicing Assets and Liabilities.
MSRs are valued using Level 3 inputs as defined in ASC 820, Fair Value Measurements. The fair value is determined quarterly based on an independent third-party valuation using a discounted cash flow analysis and calculated using a computer pricing model. The system used in this evaluation, Compass Point, attempts to quantify loan level idiosyncratic risk by calculating a risk derived value. As a result, each loan’s unique characteristics determine the valuation assumptions ascribed to that loan. Additionally, the computer valuation is based on key economic assumptions including the prepayment speeds of the underlying loans generated using the Andrew Davidson Prepayment Model, FHLMC/FNMA guidelines, the weighted-average life of the loan, the discount rate, the weighted-average coupon, and the weighted-average default rate, as applicable. Along with the gains received from the sale of loans, fees are received for servicing loans. These fees include late fees, which are recorded in interest income, and ancillary fees and monthly servicing fees, which are recorded in noninterest income. Costs of servicing loans are charged to expense as incurred. Changes in fair market value of the MSRs are reported as an increase or decrease to mortgage banking income.
Share-Based Compensation - CTBI has a share-based employee compensation plan, which is described more fully in note 14 below. CTBI accounts for this plan under the recognition and measurement principles of ASC 718, Share-Based Payment. Share-based compensation restricted and performance-based stock units/awards are classified as equity awards and accounted for under the treasury stock method. Compensation expense for non-vested stock units/awards is based on the fair value of the award on the measurement date, which, for CTBI, is the date of the grant and is recognized ratably over the vesting or performance period of the award. The fair value of non-vested stock units/awards is generally the market price of CTBI’s stock on the date of grant. CTBI accounts for forfeitures on an actual basis.
Comprehensive Income - Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income includes unrealized appreciation (depreciation) on AFS securities and unrealized appreciation (depreciation) on AFS securities for which a portion of an other than temporary impairment has been recognized in income.
Transfers between Fair Value Hierarchy Levels - Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs), and Level 3 (significant unobservable inputs) are recognized on the period ending date.
New Accounting Standards -
➢ Simplifying the Accounting for Income Taxes - In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing the following exceptions:
1. Exception to the incremental approach for intra period tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income);
2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment;
3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and
4. Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.
The amendments in this ASU also simplify the accounting for income taxes by doing the following:
1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax;
2. Requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction;
3. Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority;
4. Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date; and
5. Making minor codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.
For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. CTBI adopted this ASU effective January 1, 2021 with no 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. CTBI adopted this ASU effective January 1, 2021 with no 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 GAAP 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. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. We anticipate this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition. At this time, we do not anticipate any material adverse impact to our business operation or financial results during the period of transition.
➢ Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures - In February 2022, the FASB voted to issue a final ASU that will drop the TDR designation for entities that have adopted CECL and add vintage disclosures for public business entities. The effective date would be fiscal periods beginning after December 22, 2022. The changes can be early adopted, separately by topic.
2. Cash and Due from Banks and Interest Bearing Deposits
At December 31, 2021, CTBI had cash accounts which exceeded federally insured limits, and therefore were not subject to FDIC insurance, with $262.4 million in deposits with the Federal Reserve, $19.1 million in deposits with U.S. Bank, $2.2 million in deposits with Fifth Third Bank, and $2.8 million in deposits with the Federal Home Loan Bank.
3. Securities
Debt securities are classified into held-to-maturity and available-for-sale categories. HTM securities are those that CTBI has the positive intent and ability to hold to maturity and are reported at amortized cost. AFS securities are those that CTBI may decide to sell if needed for liquidity, asset-liability management, or other reasons. AFS securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax. As of December 31, 2021 and December 31, 2020, CTBI had no HTM securities.
The amortized cost and fair value of debt securities at December 31, 2021 are summarized as follows:
Available-for-Sale
(in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
U.S. Treasury and government agencies
$
299,606
$
$
(4,187
)
$
295,770
State and political subdivisions
334,218
5,524
(5,539
)
334,203
U.S. government sponsored agency mortgage-backed securities
733,467
5,107
(7,765
)
730,809
Asset-backed securities
94,538
(192
)
94,647
Total available-for-sale securities
$
1,461,829
$
11,283
$
(17,683
)
$
1,455,429
The amortized cost and fair value of debt securities at December 31, 2020 are summarized as follows:
Available-for-Sale
(in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
U.S. Treasury and government agencies
$
148,507
$
$
(197
)
$
148,793
State and political subdivisions
133,287
7,132
(3
)
140,416
U.S. government sponsored agency mortgage-backed securities
640,537
11,648
(378
)
651,807
Asset-backed securities
56,443
(208
)
56,245
Total available-for-sale securities
$
978,774
$
19,273
$
(786
)
$
997,261
The amortized cost and fair value of debt securities at December 31, 2021 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-Sale
(in thousands)
Amortized
Cost
Fair Value
Due in one year or less
$
6,324
$
6,379
Due after one through five years
110,782
109,433
Due after five through ten years
284,727
282,233
Due after ten years
231,991
231,928
U.S. government sponsored agency mortgage-backed securities
733,467
730,809
Asset-backed securities
94,538
94,647
Total debt securities
$
1,461,829
$
1,455,429
In 2021, we had a net securities loss of $158 thousand. There was a net gain of $60 thousand realized on sales and calls of AFS securities, consisting of a pre-tax gain of $62 thousand and a pre-tax loss of $2 thousand, and an unrealized loss of $218 thousand from the fair market value adjustment of equity securities. There was a net gain of $1.8 million realized in 2020 and a net gain of $783 thousand realized in 2019.
Equity Securities at Fair Value
CTBI made the election permitted by ASC 321-10-35-2 to record our Visa Class B shares at fair value. Equity securities at fair value as of December 31, 2021 were $2.3 million, as a result of a $218 thousand decrease in the fair market value in 2021. The fair market value of equity securities increased $518 thousand in 2020. No equity securities were sold during 2021 or 2020.
The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $545.6 million at December 31, 2021 and $354.5 million at December 31, 2020.
The amortized cost of securities sold under agreements to repurchase amounted to $314.1 million at December 31, 2021 and $386.6 million at December 31, 2020.
CTBI evaluates our investment portfolio on a quarterly basis for impairment. The analysis performed as of December 31, 2021 indicates that all impairment is considered temporary, market and interest rate driven, and not credit-related. The percentage of total debt securities with unrealized losses as of December 31, 2021 was 72.4% compared to 16.2% as of December 31, 2020. The following table provides the amortized cost, gross unrealized losses, and fair market value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of December 31, 2021 that are not deemed to have credit losses. As stated above, CTBI had no HTM securities as of December 31, 2021.
Available-for-Sale
(in thousands)
Amortized
Cost
Gross
Unrealized
Losses
Fair Value
Less Than 12 Months
U.S. Treasury and government agencies
$
249,990
$
(4,123
)
$
245,867
State and political subdivisions
197,592
(4,779
)
192,813
U.S. government sponsored agency mortgage-backed securities
473,831
(6,759
)
467,072
Asset-backed securities
52,229
(190
)
52,039
Total <12 months temporarily impaired AFS securities
973,642
(15,851
)
957,791
12 Months or More
U.S. Treasury and government agencies
14,505
(64
)
14,441
State and political subdivisions
19,126
(760
)
18,366
U.S. government sponsored agency mortgage-backed securities
62,330
(1,006
)
61,324
Asset-backed securities
1,368
(2
)
1,366
Total ≥12 months temporarily impaired AFS securities
97,329
(1,832
)
95,497
Total
U.S. Treasury and government agencies
264,495
(4,187
)
260,308
State and political subdivisions
216,718
(5,539
)
211,179
U.S. government sponsored agency mortgage-backed securities
536,161
(7,765
)
528,396
Asset-backed securities
53,597
(192
)
53,405
Total temporarily impaired AFS securities
$
1,070,971
$
(17,683
)
$
1,053,288
The analysis performed as of December 31, 2020 indicated that all impairment was considered temporary, market and interest rate driven, and not credit-related. The following table provides the amortized cost, gross unrealized losses, and fair market value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of December 31, 2020 that are not deemed to be other-than-temporarily impaired. As stated above, CTBI had no HTM securities as of December 31, 2020.
Available-for-Sale
(in thousands)
Amortized
Cost
Gross
Unrealized
Losses
Fair Value
Less Than 12 Months
U.S. Treasury and government agencies
$
5,604
$
(7
)
$
5,597
State and political subdivisions
(3
)
U.S. government sponsored agency mortgage-backed securities
58,463
(336
)
58,127
Asset-backed securities
22,660
(29
)
22,631
Total <12 months temporarily impaired AFS securities
87,261
(375
)
86,886
12 Months or More
U.S. Treasury and government agencies
46,163
(190
)
45,973
State and political subdivisions
U.S. government sponsored agency mortgage-backed securities
2,801
(42
)
2,759
Asset-backed securities
26,283
(179
)
26,104
Total ≥12 months temporarily impaired AFS securities
75,247
(411
)
74,836
Total
U.S. Treasury and government agencies
51,767
(197
)
51,570
State and political subdivisions
(3
)
U.S. government sponsored agency mortgage-backed securities
61,264
(378
)
60,886
Asset-backed securities
48,943
(208
)
48,735
Total temporarily impaired AFS securities
$
162,508
$
(786
)
$
161,722
U.S. Treasury and Government Agencies
The unrealized losses in U.S. Treasury and government agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than par which will equal amortized cost at maturity. CTBI does not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost.
State and Political Subdivisions
The unrealized losses in securities of state and political subdivisions were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than par which will equal amortized cost at maturity. CTBI does not intend to sell the investments before recovery of their amortized cost and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost.
U.S. Government Sponsored Agency Mortgage-Backed Securities
The unrealized losses in U.S. government sponsored agency mortgage-backed securities were caused by interest rate changes. CTBI expects to recover the amortized cost basis over the term of the securities. CTBI does not intend to sell the investments and it is not more likely than not we will be required to sell the investments before recovery of their amortized cost.
Asset-Backed Securities
The unrealized losses in asset-backed securities were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than par which will equal amortized cost at maturity. CTBI does not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost.
4. Loans
Major classifications of loans, net of unearned income, deferred loan origination costs and fees, and net premiums on acquired loans, are summarized as follows:
(in thousands)
December 31
December 31
Hotel/motel
$
257,062
$
260,699
Commercial real estate residential
335,233
287,928
Commercial real estate nonresidential
757,893
743,238
Dealer floorplans
69,452
69,087
Commercial other
290,478
279,908
Commercial unsecured SBA PPP
47,335
252,667
Commercial loans
1,757,453
1,893,527
Real estate mortgage
767,185
784,559
Home equity lines
106,667
103,770
Residential loans
873,852
888,329
Consumer direct
156,683
152,304
Consumer indirect
620,825
620,051
Consumer loans
777,508
772,355
Loans and lease financing
$
3,408,813
$
3,554,211
The loan portfolios presented above are net of unearned fees and unamortized premiums. Unearned fees included above totaled $4.0 million as of December 31, 2021 and $9.3 million as of December 31, 2020 while the unamortized premiums on the indirect lending portfolio totaled $24.1 million as of December 31, 2021 and $23.8 million as of December 31, 2020.
CTBI has segregated and evaluates our loan portfolio through ten portfolio segments with similar risk characteristics. CTBI serves customers in small and mid-sized communities in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. Therefore, CTBI’s exposure to credit risk is significantly affected by changes in these communities.
Hotel/motel
loans are a significant concentration for CTBI, representing approximately 7.5% of total loans. This industry has unique risk characteristics as it is highly susceptible to changes in the domestic and global economic environments, which can cause the industry to experience substantial volatility. Additionally, any hotel/motel construction loans would be included in this segment as CTBI’s construction loans are primarily completed as one loan going from construction to permanent financing. These loans are originated based on the borrower’s ability to service the debt and secondarily based on the fair value of the underlying collateral.
Commercial
real estate residential loans are commercial purpose construction and permanent financed loans for commercial purpose 1-4 family/multi-family properties. These loans are originated based on the borrower’s ability to service the debt and secondarily based on the fair value of the underlying collateral.
Commercial
real estate nonresidential loans are secured by nonfarm, nonresidential properties, farmland, and other commercial real estate. These loans are originated based on the borrower’s ability to service the debt and secondarily based on the fair value of the underlying collateral. Construction for commercial real estate nonresidential loans are also included in this segment as these loans are generally one loan for construction to permanent financing.
Dealer floorplans consist of loans to dealerships to finance inventory and are collateralized under a blanket security agreement and without specific liens on individual units. This risk is mitigated by the use of periodic inventory audits. These audits are performed monthly and follow up is required on any out of compliance items identified. These audits are subject to increasing frequency when fact patterns suggest more scrutiny is required.
Commercial
other loans consist of agricultural loans, receivable financing, loans to financial institutions, loans for purchasing or carrying securities, and other commercial purpose loans. Commercial loans are underwritten based on the borrower’s ability to service debt from the business’s underlying cash flows. As a general practice, we obtain collateral such as equipment, or other assets, although such loans may be uncollateralized but guaranteed.
CTBI participation in the Paycheck Protection Program (“PPP”) established by the CARES Act resulted in the creation of a new loan segment of unsecured commercial other loans that are one hundred percent guaranteed by the U.S. 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 our 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 $2.6 million at December 31, 2021 and $23.3 million at December 31, 2020.
The following tables present the balance in the allowance for credit losses (“ACL”) for the years ended December 31, 2021 and December 31, 2020.
Year Ended
December 31, 2021
(in thousands)
Beginning Balance
Provision Charged to Expense
Losses Charged Off
Recoveries
Ending Balance
ACL
Hotel/motel
$
6,356
$
(1,276
)
$
$
$
5,080
Commercial real estate residential
4,464
(488
)
(28
)
3,986
Commercial real estate nonresidential
11,086
(2,233
)
(306
)
8,884
Dealer floorplans
1,382
1,436
Commercial other
4,289
(644
)
4,422
Real estate mortgage
7,832
(266
)
7,637
Home equity
(36
)
Consumer direct
1,863
(684
)
1,951
Consumer indirect
9,906
(3,129
)
(2,361
)
3,078
7,494
Total
$
48,022
$
(6,386
)
$
(4,325
)
$
4,445
$
41,756
Year Ended
December 31, 2020
(in thousands)
Beginning Balance, Prior to Adoption of ASC 326
Impact of Adoption of ASC 326
Provision Charged to Expense
Losses Charged Off
Recoveries
Ending Balance
ACL
Hotel/motel
$
3,371
$
$
2,858
$
(43
)
$
$
6,356
Commercial real estate residential
3,439
(721
)
1,772
(182
)
4,464
Commercial real estate nonresidential
8,515
3,303
(941
)
11,086
Dealer floorplans
(214
)
(26
)
1,382
Commercial other
5,556
(391
)
2,040
(3,339
)
4,289
Real estate mortgage
4,604
1,893
1,584
(321
)
7,832
Home equity
(75
)
(4
)
Consumer direct
1,711
(40
)
(927
)
1,863
Consumer indirect
6,201
1,265
4,079
(4,670
)
3,031
9,906
Total
$
35,096
$
3,040
$
16,047
$
(10,453
)
$
4,292
$
48,022
CTBI derived our 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 our 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 our 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 our loan system.
(2) The inability within the model to estimate the value of modifications made under troubled debt restructurings. Management has manually calculated the estimated impact based on research of modified terms for troubled debt restructurings.
With the continued impact of the global COVID-19 pandemic and the fact that there is no immediate end foreseen, this has been identified as a significant specific event that could impact our customers’ ability to pay. Given this uncertainty, management continues to have a significant event qualitative factor to anticipate the continued impact of COVID-19 as further deferments are no longer available and SBA Paycheck Protection Programs have ended.
CTBI experienced a recovery of provision for credit losses for the year 2021 of $6.4 million compared to provision for credit losses of $16.0 million for the year 2020. The reduction to our allowance for credit losses during the year was the result of positive credit metrics, the lack of pandemic related losses provided for in 2020, and an improvement in the industry outlook for certain industries included in our concentrations of credit. Our reserve coverage (allowance for credit losses to nonperforming loans) at December 31, 2021 was 251.2% compared to 180.7% at December 31, 2020. Our credit loss reserve as a percentage of total loans outstanding at December 31, 2021 was at 1.22% (1.24% excluding PPP loans) compared to 1.35% at December 31, 2020 (1.45% excluding PPP loans).
Refer to note 1 to the consolidated financial statements for further information regarding our nonaccrual policy. Nonaccrual loans and loans 90 days past due and still accruing segregated by class of loans for both December 31, 2021 and December 31, 2020 were as follows:
December 31, 2021
(in thousands)
Nonaccrual Loans
with No ACL
Nonaccrual Loans
with ACL
90+ and Still
Accruing
Total
Nonperforming
Loans
Hotel/motel
$
$
1,075
$
$
1,075
Commercial real estate residential
Commercial real estate nonresidential
2,447
1,602
4,193
Commercial other
Total commercial loans
2,447
3,564
6,543
Real estate mortgage
4,081
4,659
8,740
Home equity lines
1,092
Total residential loans
4,660
5,172
9,832
Consumer direct
Consumer indirect
Total consumer loans
Loans and lease financing
$
2,447
$
8,224
$
5,954
$
16,625
December 31, 2020
(in thousands)
Nonaccrual Loans with No ACL
Nonaccrual Loans with ACL
90+ and Still Accruing
Total Nonperforming Loans
Hotel/motel
$
$
$
$
Commercial real estate residential
1,225
4,776
6,001
Commercial real estate nonresidential
1,424
7,852
9,276
Commercial other
1,136
Total commercial loans
3,516
12,897
16,413
Real estate mortgage
5,346
3,420
8,766
Home equity lines
Total residential loans
5,928
3,812
9,740
Consumer direct
Consumer indirect
Total consumer loans
Loans and lease financing
$
$
9,444
$
17,133
$
26,577
CTBI recognized $82 thousand in interest income on the above nonaccrual loans for the year ended December 31, 2021 compared to $31 thousand for the year ended December 31, 2020.
Discussion of the Nonaccrual Policy
The accrual of interest income on loans is discontinued when management believes, after considering economic and business conditions, collateral value, and collection efforts, that the borrower’s financial condition is such that the collection of interest is doubtful. Cash payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured. Any loans greater than 90 days past due must be well secured and in the process of collection to continue accruing interest. See note 1 to the consolidated financial statements for further discussion on our nonaccrual policy.
The following tables present CTBI’s loan portfolio aging analysis, segregated by class, as of December 31, 2021 and December 31, 2020 (includes loans 90 days past due and still accruing as well):
December 31, 2021
(in thousands)
30-59
Days
Past Due
60-89
Days
Past Due
90+ Days
Past Due
Total
Past Due
Current
Total
Loans
Hotel/motel
$
$
$
$
$
257,062
$
257,062
Commercial real estate residential
1,235
333,998
335,233
Commercial real estate nonresidential
1,303
3,509
4,959
752,934
757,893
Dealer floorplans
69,452
69,452
Commercial other
1,225
1,508
288,970
290,478
Commercial unsecured SBA PPP
47,287
47,335
Total commercial loans
2,816
4,462
7,750
1,749,703
1,757,453
Real estate mortgage
1,171
2,707
6,859
10,737
756,448
767,185
Home equity lines
1,874
104,793
106,667
Total residential loans
1,827
3,022
7,762
12,611
861,241
873,852
Consumer direct
156,064
156,683
Consumer indirect
2,889
3,628
617,197
620,825
Total consumer loans
3,285
4,247
773,261
777,508
Loans and lease financing
$
7,928
$
4,206
$
12,474
$
24,608
$
3,384,205
$
3,408,813
December 31, 2020
(in thousands)
30-59 Days Past Due
60-89 Days Past Due
90+ Days Past Due
Total Past Due
Current
Total Loans
Hotel/motel
$
$
$
$
$
260,699
$
260,699
Commercial real estate residential
5,577
6,712
281,216
287,928
Commercial real estate nonresidential
1,199
8,703
9,902
733,336
743,238
Dealer floorplans
69,087
69,087
Commercial other
1,629
278,279
279,908
Commercial unsecured SBA PPP
252,667
252,667
Total commercial loans
2,579
15,115
18,243
1,875,284
1,893,527
Real estate mortgage
1,784
3,501
6,897
12,182
772,377
784,559
Home equity lines
1,733
102,037
103,770
Total residential loans
2,293
3,806
7,816
13,915
874,414
888,329
Consumer direct
151,487
152,304
Consumer indirect
2,960
4,286
615,765
620,051
Total consumer loans
3,619
1,060
5,103
767,252
772,355
Loans and lease financing
$
8,491
$
5,415
$
23,355
$
37,261
$
3,516,950
$
3,554,211
The risk characteristics of CTBI’s material portfolio segments are as follows:
Hotel/motel loans are a significant concentration for CTBI, representing approximately 7.5% 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.
Dealer floorplans are segmented separately as they are a unique product with unique risk factors. CTBI maintains strict processing procedures over our floorplan product with any exceptions requested by a loan officer approved by the appropriate loan committee and the floorplan manager.
Commercial other loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from our 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 100% SBA guaranteed. These loans, which are subject to forgiveness, have maturities of either two or three to five years, depending on when the loans were made. These loans currently have no allowance for credit losses.
With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, CTBI generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences. Residential construction loans are handled through the home mortgage area of the bank. The repayment ability of the borrower and the maximum loan-to-value ratio are calculated using the normal mortgage lending criteria. Draws are processed based on percentage of completion stages including normal inspection procedures. Such loans generally convert to term loans after the completion of construction.
Consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Our determination of a borrower’s ability to repay these loans is primarily dependent on the personal income and credit rating of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
The indirect lending area of the bank generally deals with purchasing/funding consumer contracts with new and used automobile dealers. The dealers generate consumer loan applications which are forwarded to the indirect loan processing area for approval or denial. Loan approvals or denials are based on the creditworthiness and repayment ability of the borrower, and on the collateral value. The dealers may have limited recourse agreements with CTB.
Credit Quality Indicators
CTBI categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. CTBI also considers the fair value of the underlying collateral and the strength and willingness of the guarantor(s). CTBI analyzes commercial loans individually by classifying the loans as to credit risk. Loans classified as loss, doubtful, substandard, or special mention are reviewed quarterly by CTBI for further deterioration or improvement to determine if appropriately classified and valued if deemed impaired. All other commercial loan reviews are completed every 12 to 18 months. In addition, during the renewal process of any loan, as well as if a loan becomes past due or if other information becomes available, CTBI will evaluate the loan grade. CTBI uses the following definitions for risk ratings:
➢
Pass grades include investment grade, low risk, moderate risk, and acceptable risk loans. The loans range from loans that have no chance of resulting in a loss to loans that have a limited chance of resulting in a loss. Customers in this grade have excellent to fair credit ratings. The cash flows are adequate to meet required debt repayments.
➢
Watch graded loans are loans that warrant extra management attention but are not currently criticized. Loans on the watch list may be potential troubled credits or may warrant “watch” status for a reason not directly related to the asset quality of the credit. The watch grade is a management tool to identify credits which may be candidates for future classification or may temporarily warrant extra management monitoring.
➢
Other assets especially mentioned (OAEM) reflects loans that are currently protected but are potentially weak. These loans constitute an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an unwarranted risk in light of circumstances surrounding a specific asset. Loans in this grade display potential weaknesses which may, if unchecked or uncorrected, inadequately protect CTBI’s credit position at some future date. The loans may be adversely affected by economic or market conditions.
➢
Substandard grading indicates that the loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. These loans have a well-defined weakness or weaknesses that jeopardize the orderly liquidation of the debt with the distinct possibility that CTBI will sustain some loss if the deficiencies are not corrected.
➢
Doubtful graded loans have the weaknesses inherent in the substandard grading with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The probability of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to CTBI’s advantage or strengthen the asset(s), its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.
The following tables present the credit risk profile of CTBI’s commercial loan portfolio based on rating category and payment activity, segregated by class of loans and based on last credit decision or year of origination:
Term Loans Amortized Cost Basis by Origination Year
(in thousands)
December 31
Prior
Revolving
Loans
Total
Hotel/motel
Risk rating:
Pass
$
42,056
$
11,231
$
53,713
$
18,752
$
32,765
$
20,087
$
$
178,604
Watch
9,234
14,021
8,813
8,780
2,678
30,502
74,028
OAEM
Substandard
3,355
1,075
4,430
Doubtful
Total hotel/motel
$
51,290
$
25,252
$
62,526
$
30,887
$
36,518
$
50,589
$
$
257,062
Commercial real estate residential
Risk rating:
Pass
$
142,364
$
54,380
$
22,320
$
19,826
$
11,919
$
45,791
$
9,544
$
306,144
Watch
2,643
2,359
1,962
2,119
6,949
16,742
OAEM
Substandard
4,822
1,990
1,835
2,468
12,331
Doubtful
Total commercial real estate residential
$
149,829
$
58,729
$
24,902
$
23,780
$
13,085
$
55,208
$
9,700
$
335,233
Commercial real estate nonresidential
Risk rating:
Pass
$
214,563
$
99,131
$
82,386
$
57,397
$
55,422
$
168,533
$
22,389
$
699,821
Watch
5,130
2,865
3,981
2,802
3,655
11,828
31,028
OAEM
Substandard
5,201
5,098
3,764
2,016
9,659
26,538
Doubtful
Total commercial real estate nonresidential
$
224,894
$
107,094
$
90,131
$
60,799
$
61,093
$
190,506
$
23,376
$
757,893
Dealer floorplans
Risk rating:
Pass
$
$
$
$
$
$
$
69,105
$
69,105
Watch
OAEM
Substandard
Doubtful
Total dealer floorplans
$
$
$
$
$
$
$
69,452
$
69,452
Commercial other
Risk rating:
Pass
$
72,650
$
43,838
$
16,495
$
29,858
$
9,105
$
13,346
$
75,119
$
260,411
Watch
7,196
1,967
1,582
1,071
11,792
24,539
OAEM
1,146
Substandard
1,600
1,589
4,382
Doubtful
Total commercial other
$
81,446
$
47,394
$
18,492
$
31,024
$
9,736
$
14,869
$
87,517
$
290,478
Commercial unsecured SBA PPP
Risk rating:
Pass
$
46,227
$
1,108
$
$
$
$
$
$
47,335
Watch
OAEM
Substandard
Doubtful
Total commercial unsecured SBA PPP
$
46,227
$
1,108
$
$
$
$
$
$
47,335
Commercial loans
Risk rating:
Pass
$
517,860
$
209,688
$
174,914
$
125,833
$
109,211
$
247,757
$
176,157
$
1,561,420
Watch
24,203
21,212
16,338
14,300
7,219
50,350
13,062
146,684
OAEM
1,360
Substandard
11,623
8,677
4,531
5,974
3,974
12,578
47,681
Doubtful
Total commercial loans
$
553,686
$
239,577
$
196,051
$
146,490
$
120,432
$
311,172
$
190,045
$
1,757,453
Term Loans Amortized Cost Basis by Origination Year
(in thousands)
December 31
Prior
Revolving Loans
Total
Hotel/motel
Risk rating:
Pass
$
11,507
$
70,504
$
27,453
$
39,651
$
6,357
$
22,372
$
$
177,844
Watch
23,951
2,506
3,366
2,102
16,740
7,422
56,087
OAEM
1,993
9,576
11,569
Substandard
1,113
8,840
5,246
15,199
Doubtful
Total hotel/motel
$
35,458
$
75,003
$
40,395
$
42,866
$
31,937
$
35,040
$
$
260,699
Commercial real estate residential
Risk rating:
Pass
$
85,403
$
39,238
$
29,179
$
17,390
$
21,272
$
46,419
$
10,470
$
249,371
Watch
1,714
2,214
2,438
2,962
4,520
5,306
19,336
OAEM
1,921
1,361
3,876
Substandard
4,301
1,991
4,076
1,108
3,263
15,345
Doubtful
Total commercial real estate residential
$
93,339
$
43,419
$
33,931
$
24,570
$
27,029
$
54,988
$
10,652
$
287,928
Commercial real estate nonresidential
Risk rating:
Pass
$
125,205
$
97,204
$
77,685
$
80,416
$
100,740
$
165,839
$
25,524
$
672,613
Watch
5,133
3,175
5,075
6,366
3,020
11,046
34,416
OAEM
3,382
4,452
Substandard
7,254
6,152
3,471
2,462
1,358
10,817
31,729
Doubtful
Total commercial real estate nonresidential
$
137,592
$
107,418
$
86,299
$
89,244
$
105,118
$
191,112
$
26,455
$
743,238
Dealer floorplans
Risk rating:
Pass
$
$
$
$
$
$
$
68,610
$
68,610
Watch
OAEM
Substandard
Doubtful
Total dealer floorplans
$
$
$
$
$
$
$
69,087
$
69,087
Commercial other
Risk rating:
Pass
$
75,014
$
26,385
$
33,825
$
13,975
$
6,225
$
22,733
$
78,547
$
256,704
Watch
2,888
1,130
7,030
13,040
OAEM
5,056
5,753
Substandard
2,136
4,411
Doubtful
Total commercial other
$
80,063
$
27,319
$
40,329
$
15,171
$
7,516
$
23,739
$
85,771
$
279,908
Commercial unsecured SBA PPP
Risk rating:
Pass
$
252,667
$
$
$
$
$
$
$
252,667
Watch
OAEM
Substandard
Doubtful
Total commercial unsecured SBA PPP
$
252,667
$
$
$
$
$
$
$
252,667
Commercial loans
Risk rating:
Pass
$
549,796
$
233,331
$
168,142
$
151,432
$
134,594
$
257,363
$
183,151
$
1,677,809
Watch
33,686
8,273
12,009
11,985
24,744
24,369
8,290
123,356
OAEM
1,946
4,241
15,023
3,382
25,650
Substandard
13,691
7,314
5,780
8,111
11,766
19,737
66,684
Doubtful
Total commercial loans
$
599,119
$
253,159
$
200,954
$
171,851
$
171,600
$
304,879
$
191,965
$
1,893,527
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:
(in thousands)
Term Loans Amortized Cost Basis by Origination Year
December 31
Prior
Revolving
Loans
Total
Home equity lines
Performing
$
$
$
$
$
$
10,909
$
94,666
$
105,575
Nonperforming
1,092
Total home equity lines
$
$
$
$
$
$
11,429
$
95,238
$
106,667
Mortgage loans
Performing
$
195,731
$
161,471
$
75,792
$
37,188
$
42,597
$
245,666
$
$
758,445
Nonperforming
7,331
8,740
Total mortgage loans
$
195,731
$
161,534
$
76,216
$
37,552
$
43,155
$
252,997
$
$
767,185
Residential loans
Performing
$
195,731
$
161,471
$
75,792
$
37,188
$
42,597
$
256,575
$
94,666
$
864,020
Nonperforming
7,851
9,832
Total residential loans
$
195,731
$
161,534
$
76,216
$
37,552
$
43,155
$
264,426
$
95,238
$
873,852
Consumer direct loans
Performing
$
71,626
$
39,312
$
18,492
$
10,468
$
4,490
$
12,251
$
$
156,639
Nonperforming
Total consumer direct loans
$
71,626
$
39,316
$
18,495
$
10,502
$
4,493
$
12,251
$
$
156,683
Consumer indirect loans
Performing
$
263,127
$
190,145
$
80,793
$
54,437
$
23,449
$
8,668
$
$
620,619
Nonperforming
Total consumer indirect loans
$
263,151
$
190,280
$
80,813
$
54,437
$
23,472
$
8,672
$
$
620,825
Consumer loans
Performing
$
334,753
$
229,457
$
99,285
$
64,905
$
27,939
$
20,919
$
$
777,258
Nonperforming
Total consumer loans
$
334,777
$
229,596
$
99,308
$
64,939
$
27,965
$
20,923
$
$
777,508
(in thousands)
Term Loans Amortized Cost Basis by Origination Year
December 31
Prior
Revolving Loans
Total
Home equity lines
Performing
$
$
$
$
$
$
12,049
$
90,724
$
102,796
Nonperforming
Total home equity lines
$
$
$
$
$
$
12,634
$
91,113
$
103,770
Mortgage loans
Performing
$
214,629
$
119,301
$
56,812
$
60,915
$
48,253
$
275,883
$
$
775,793
Nonperforming
7,361
8,766
Total mortgage loans
$
214,629
$
119,737
$
57,115
$
61,229
$
48,605
$
283,244
$
$
784,559
Residential loans
Performing
$
214,629
$
119,301
$
56,812
$
60,915
$
48,276
$
287,932
$
90,724
$
878,589
Nonperforming
7,946
9,740
Total residential loans
$
214,629
$
119,737
$
57,115
$
61,229
$
48,628
$
295,878
$
91,113
$
888,329
Consumer direct loans
Performing
$
72,677
$
32,993
$
18,461
$
9,157
$
6,581
$
12,364
$
$
152,233
Nonperforming
Total consumer direct loans
$
72,684
$
33,050
$
18,461
$
9,164
$
6,581
$
12,364
$
$
152,304
Consumer indirect loans
Performing
$
301,494
$
135,123
$
100,482
$
50,665
$
23,777
$
8,157
$
$
619,698
Nonperforming
Total consumer indirect loans
$
301,521
$
135,238
$
100,600
$
50,717
$
23,807
$
8,168
$
$
620,051
Consumer loans
Performing
$
374,171
$
168,116
$
118,943
$
59,822
$
30,358
$
20,521
$
$
771,931
Nonperforming
Total consumer loans
$
374,205
$
168,288
$
119,061
$
59,881
$
30,388
$
20,532
$
$
772,355
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 have resumed with restricted parameters was $2.3 million at December 31, 2021. The total of consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings began, but had been suspended, at December 31, 2020 was $2.9 million.
In accordance with ASC 326-20-30-2, if a loan does not share risk characteristics with other pooled loans in determining the allowance for credit losses, the loan shall be evaluated for expected credit losses on an individual basis. Of the loans that CTBI has individually evaluated, the loans listed below by segment are those that are collateral dependent:
December 31, 2021
(in thousands)
Number of
Loans
Recorded
Investment
Specific
Reserve
Hotel/motel
$
9,462
$
Commercial real estate residential
7,255
Commercial real estate nonresidential
19,943
Commercial other
1,113
Total collateral dependent loans
$
37,773
$
1,150
December 31, 2020
(in thousands)
Number of
Loans
Recorded
Investment
Specific
Reserve
Hotel/motel
$
26,194
$
Commercial real estate residential
7,833
Commercial real estate nonresidential
24,497
Commercial other
5,050
Total collateral dependent loans
$
63,574
$
The hotel/motel, commercial real estate residential, and commercial real estate nonresidential segments are all collateralized with real estate. The one loan listed in the commercial other segment at December 31, 2021 is collateralized by various chattel, including surface mining equipment, preparation plant equipment, and a first mortgage on a preparation plant, real estate, and improvements.
Certain loans have been modified in troubled debt restructurings, where economic concessions were granted to borrowers consisting of reductions in the interest rates, payment extensions, forgiveness of principal, and forbearances. Presented below, segregated by class of loans, are troubled debt restructurings that occurred during the years ended December 31, 2021 and 2020:
Year Ended
December 31, 2021
Pre-Modification Outstanding Balance
(in thousands)
Number of Loans
Term Modification
Combination
Other
Total Modification
Commercial real estate residential
$
$
$
$
Commercial real estate nonresidential
4,179
2,988
7,167
Hotel/motel
Commercial other
Total commercial loans
4,984
2,988
7,972
Real estate mortgage
Total residential loans
Total troubled debt restructurings
$
5,262
$
3,265
$
$
8,789
Year Ended
December 31, 2021
Post-Modification Outstanding Balance
(in thousands)
Number of Loans
Term Modification
Combination
Other
Total Modification
Commercial real estate residential
$
$
$
$
Commercial real estate nonresidential
4,282
3,000
7,282
Hotel/motel
Commercial other
Total commercial loans
5,046
3,000
8,046
Real estate mortgage
Total residential loans
Total troubled debt restructurings
$
5,325
$
3,277
$
$
8,864
Year Ended
December 31, 2020
Pre-Modification Outstanding Balance
(in thousands)
Number of
Loans
Term
Modification
Combination
Total
Modification
Commercial real estate residential
$
4,924
$
1,809
$
6,733
Commercial real estate nonresidential
7,961
8,743
Hotel/motel
1,113
1,113
Commercial other
Total commercial loans
14,752
2,644
17,396
Real estate mortgage
1,496
1,496
Total residential loans
1,496
1,496
Total troubled debt restructurings
$
16,248
$
2,644
$
18,892
Year Ended
December 31, 2020
Post-Modification Outstanding Balance
(in thousands)
Number of
Loans
Term
Modification
Combination
Total
Modification
Commercial real estate residential
$
4,928
$
1,809
$
6,737
Commercial real estate nonresidential
8,014
8,796
Hotel/motel
1,113
1,113
Commercial other
Total commercial loans
14,750
2,642
17,392
Real estate mortgage
1,479
1,479
Total residential loans
1,479
1,479
Total troubled debt restructurings
$
16,229
$
2,642
$
18,871
No charge-offs have resulted from modifications for any of the presented periods. We had commitments to extend additional credit in the amount of $52 thousand and $85 thousand at December 31, 2021 and 2020, 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 a loan modified in a troubled debt restructuring subsequently defaults, CTBI evaluates the loan for possible further impairment. The allowance for loan losses may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. Presented below, segregated by class of loans, are loans that were modified as troubled debt restructurings within the past twelve months which have subsequently defaulted. CTBI considers a loan in default when it is 90 days or more past due or transferred to nonaccrual.
(in thousands)
Year Ended
December 31, 2021
Year Ended
December 31, 2020
Number of Loans
Recorded Balance
Number of Loans
Recorded Balance
Commercial:
Hotel/motel
$
1,113
$
Commercial other
Residential:
Real estate mortgage
Total defaulted restructured loans
$
1,388
$
5. Mortgage Banking and Servicing Rights
Mortgage banking activities primarily include residential mortgage originations and servicing. As discussed in note 1 above, mortgage servicing rights (“MSRs”) are carried at fair market value. The fair value is determined quarterly based on an independent third-party valuation using a discounted cash flow analysis and calculated using a computer pricing model. The system used in this evaluation, Compass Point, attempts to quantify loan level idiosyncratic risk by calculating a risk derived value. As a result, each loan’s unique characteristics determine the valuation assumptions ascribed to that loan. Additionally, the computer valuation is based on key economic assumptions including the prepayment speeds of the underlying loans generated using the Andrew Davidson Prepayment Model, FHLMC/FNMA guidelines, the weighted average life of the loan, the discount rate, the weighted average coupon, and the weighted-average default rate, as applicable. Along with the gains received from the sale of loans, fees are received for servicing loans. These fees include late fees, which are recorded in interest income, and ancillary fees and monthly servicing fees, which are recorded in noninterest income. Costs of servicing loans are charged to expense as incurred. Changes in fair market value of the MSRs are reported as an increase or decrease to mortgage banking income.
The following table presents the components of mortgage banking income:
(in thousands)
Year Ended December 31
Net gain on sale of mortgage loans held for sale
$
6,820
$
7,226
$
1,746
Net loan servicing income (expense):
Servicing fees
2,058
1,515
1,297
Late fees
Ancillary fees
1,310
Fair value adjustments
(1,064
)
(975
)
Net loan servicing income
3,401
1,813
Mortgage banking income
$
10,221
$
9,039
$
2,330
Mortgage loans serviced for others are not included in the accompanying balance sheets. Loans serviced for the benefit of others (primarily FHLMC) totaled $807 million, $650 million, and $486 million at December 31, 2021, 2020, and 2019, respectively. Servicing loans for others generally consist of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and processing foreclosures. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $2.6 million, $2.0 million, and $1.4 million at December 31, 2021, 2020, and 2019, respectively.
Activity for capitalized mortgage servicing rights using the fair value method is as follows:
(in thousands)
Fair value of MSRs, beginning of year
$
4,068
$
3,263
$
3,607
New servicing assets created
2,278
1,869
Change in fair value during the year due to:
Time decay (1)
(259
)
(135
)
(167
)
Payoffs (2)
(587
)
(766
)
(293
)
Changes in valuation inputs or assumptions (3)
1,274
(163
)
(515
)
Fair value of MSRs, end of year
$
6,774
$
4,068
$
3,263
(1)
Represents decrease in value due to regularly scheduled loan principal payments and partial loan paydowns.
(2)
Represents decrease in value due to loans that paid off during the period.
(3)
Represents change in value resulting from market-driven changes in interest rates.
The fair values of capitalized mortgage servicing rights were $6.8 million, $4.1 million, and $3.3 million at December 31, 2021, 2020, and 2019, respectively. Fair values for the years ended December 31, 2021, 2020, and 2019 were determined by third-party valuations with a resulting 10.1% average discount rate over the last three years and weighted average default rates of 1.39%, 1.67%, and 2.69%, respectively. Prepayment speeds generated using the Andrew Davidson Prepayment Model averaged 10.0%, 15.7%, and 11.7% at December 31, 2021, 2020, and 2019, respectively. MSR values are very sensitive to movement in interest rates as expected future net servicing income depends on the projected balance of the underlying loans, which can be greatly impacted by the level of prepayments. CTBI does not currently hedge against changes in the fair value of our MSR portfolio.
6. Related Party Transactions
In the ordinary course of business, CTB has made extensions of credit and had transactions with certain directors and executive officers of CTBI or our subsidiaries, including their associates (as defined by the Securities and Exchange Commission). We believe such extensions of credit and transactions were made on substantially the same terms, including interest rate and collateral, as those prevailing at the same time for comparable transactions with other persons.
Activity for related party extensions of credit during 2021 and 2020 is as follows:
(in thousands)
Related party extensions of credit, beginning of year
$
38,061
$
37,816
New loans and advances on lines of credit
10,952
2,193
Repayments
(3,055
)
(1,948
)
Increase (decrease) due to changes in related parties
(936
)
Related party extensions of credit, end of year
$
45,022
$
38,061
The aggregate balances of related party deposits at December 31, 2021 and 2020 were $24.9 million and $23.4 million, respectively.
A director of CTBI is a shareholder in a law firm that provided services to CTBI and our subsidiaries during the years 2021, 2020, and 2019. Approximately $0.4 million in legal fees and $0.1 million in expenses, $0.5 million total, were paid during 2021. Approximately $0.8 million in legal fees and $0.1 million in expenses paid on behalf of CTBI, $0.9 million total, were paid to this law firm during 2020. A refund was issued for several years of adjustments reducing the total paid in 2020 to $0.6 million. Approximately $1.1 million in legal fees and $0.1 million in expenses, $1.2 million total, were paid during 2019.
7. Premises and Equipment
Premises and equipment are summarized as follows:
(in thousands)
December 31
Land and buildings
$
80,015
$
80,959
Leasehold improvements
4,829
4,805
Furniture, fixtures, and equipment
40,835
40,615
Construction in progress
1,475
Total premises and equipment
127,154
126,877
Less accumulated depreciation and amortization
(86,675
)
(84,876
)
Premises and equipment, net
$
40,479
$
42,001
Depreciation and amortization of premises and equipment for 2021, 2020, and 2019 was $3.2 million, $3.5 million, and $3.8 million, respectively.
8. Other Real Estate Owned
Activity for other real estate owned was as follows:
(in thousands)
Beginning balance of other real estate owned
$
7,694
$
19,480
New assets acquired
1,166
4,446
Fair value adjustments
(857
)
(1,454
)
Sale of assets
(4,517
)
(14,778
)
Ending balance of other real estate owned
$
3,486
$
7,694
Carrying costs and fair value adjustments associated with foreclosed properties were $1.4 million, $2.7 million, and $5.5 million for 2021, 2020, and 2019, respectively. See note 1 for a description of our accounting policies relative to foreclosed properties and other real estate owned.
The major classifications of foreclosed properties are shown in the following table:
(in thousands)
December 31
1-4 family
$
1,130
$
1,888
Construction/land development/other
1,069
Multifamily
Non-farm/non-residential
1,788
4,649
Total foreclosed properties
$
3,486
$
7,694
9. Deposits
Major classifications of deposits are categorized as follows:
(in thousands)
December 31
Noninterest bearing deposits
$
1,331,103
$
1,140,925
Interest bearing demand deposits
97,064
78,308
Money market deposits
1,206,401
1,228,742
Savings
632,645
527,436
Certificates of deposit and other time deposits of $100,000 or more
654,325
606,223
Certificates of deposit and other time deposits less than $100,000
422,754
434,448
Total deposits
$
4,344,292
$
4,016,082
Certificates of deposit and other time deposits of $250,000 or more at December 31, 2021 and 2020 were $261.0 million and $234.9 million, respectively.
Maturities of certificates of deposits and other time deposits are presented below:
Maturities by Period at December 31, 2021
(in thousands)
Total
Within 1 Year
2 Years
3 Years
4 Years
5 Years
After 5 Years
Certificates of deposit and other time deposits of $100,000 or more
$
654,325
$
537,527
$
45,408
$
38,308
$
18,075
$
15,007
$
Certificates of deposit and other time deposits less than $100,000
422,754
343,984
36,055
20,955
10,553
10,953
Total maturities
$
1,077,079
$
881,511
$
81,463
$
59,263
$
28,628
$
25,960
$
10. Borrowings
Short-term debt is categorized as follows:
(in thousands)
December 31
Repurchase agreements
$
271,088
$
355,862
Federal funds purchased
Total short-term debt
$
271,588
$
356,362
All federal funds purchased mature and reprice daily. See note 11 for information regarding the maturities of our repurchase agreements. The average rates paid for federal funds purchased and repurchase agreements on December 31, 2021 were 0.05% and 0.37%, respectively.
The maximum balance for repurchase agreements at any month-end during 2021 occurred at May 31,2021, with a month-end balance of $371.3 million. The average balance of repurchase agreements for the year was $333.4 million.
Long-term debt is categorized as follows:
(in thousands)
December 31
Junior subordinated debentures, 1.76%, due 6/1/37
$
57,841
$
57,841
On March 30, 2007, CTBI issued $61.3 million in junior subordinated debentures to a newly formed unconsolidated Delaware statutory trust subsidiary which in turn issued $59.5 million of capital securities in a private placement to institutional investors. The debentures, which mature in 30 years but are redeemable at par at CTBI’s option after five years, were issued at a rate of 6.52% until June 1, 2012, and thereafter at a floating rate based on the three-month LIBOR plus 1.59%. The underlying capital securities were issued at the equivalent rates and terms. The proceeds of the debentures were used to fund the redemption on April 2, 2007 of all CTBI’s outstanding 9.0% and 8.25% junior subordinated debentures in the total amount of $61.3 million. In May 2017, CTBI was able to purchase $2.0 million of the junior subordinated debentures in the open market at a purchase price of $1.4 million, resulting in a gain of $0.6 million. In August 2019, an additional $1.5 million was purchased in the open market at a price of $1.3 million, resulting in a gain of $0.2 million. The junior subordinated debentures will be retained by CTBI until maturity, and CTBI will continue to report the junior subordinated debentures at the net amount outstanding of $57.8 million.
On November 29, 2021, the coupon rate was set at 1.76% for the March 1, 2022 distribution date, which was based on the three-month LIBOR rate as of November 29, 2021 of 0.17% plus 1.59%.
11. Repurchase Agreements
We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and provide additional funding to our balance sheet. Repurchase agreements are transactions whereby we offer to sell to a counterparty an undivided interest in an eligible security at an agreed upon purchase price, and which obligates CTBI to repurchase the security on an agreed upon date at an agreed upon repurchase price plus interest at an agreed upon rate. Securities sold under agreements to repurchase are recorded at the amount of cash received in connection with the transaction and are reflected in the accompanying consolidated balance sheets.
We monitor collateral levels on a continuous basis and maintain records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and we segregate the security from its general assets in accordance with regulations governing custodial holdings of securities. The primary risk with our repurchase agreements is market risk associated with the securities securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. The carrying value of investment securities available-for-sale pledged as collateral under repurchase agreements totaled $317.1 million and $397.4 million at December 31, 2021 and December 31, 2020, respectively.
The remaining contractual maturity of the securities sold under agreements to repurchase by class of collateral pledged included in the accompanying consolidated balance sheets as of December 31, 2021 and December 31, 2020 is presented in the following tables:
December 31, 2021
Remaining Contractual Maturity of the Agreements
(in thousands)
Overnight and Continuous
Up to 30 days
30-90 days
Greater Than 90 days
Total
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and government agencies
$
3,176
$
$
5,400
$
10,040
$
18,632
State and political subdivisions
83,375
13,633
9,427
106,919
U.S. government sponsored agency mortgage-backed securities
24,689
85,967
34,881
145,537
Total
$
111,240
$
$
105,000
$
54,348
$
271,088
December 31, 2020
Remaining Contractual Maturity of the Agreements
(in thousands)
Overnight and Continuous
Up to 30 days
30-90 days
Greater Than 90 days
Total
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and government agencies
$
8,777
$
$
2,831
$
31,800
$
43,408
State and political subdivisions
54,639
1,132
21,421
77,192
U.S. government sponsored agency mortgage-backed securities
33,040
101,037
101,185
235,262
Total
$
96,456
$
$
105,000
$
154,406
$
355,862
12. Advances from Federal Home Loan Bank
Federal Home Loan Bank (“FHLB”) advances consisted of the following monthly amortizing borrowings at December 31:
(in thousands)
Monthly amortizing
$
$
Total FHLB advances
$
$
The advances from the FHLB that require monthly principal payments were due for repayment as follows:
Principal Payments Due by Period at December 31, 2021
(in thousands)
Total
Within 1 Year
2 Years
3 Years
4 Years
5 Years
After 5 Years
Outstanding advances, weighted average interest rate - 0.06%
$
$
$
$
$
$
$
At December 31, 2021, CTBI had monthly amortizing FHLB advances totaling $0.4 million at a weighted average interest rate of 0.06%.
Advances totaling $0.4 million at December 31, 2021 were collateralized by FHLB stock of $8.1 million and a blanket lien on qualifying 1-4 family first mortgage loans. As of December 31, 2021, CTBI had a $484.8 million FHLB borrowing capacity with $0.4 million in advances leaving $484.4 million available for additional advances. The advances had fixed interest rates of 0.00% and 2.00% with a weighted average rate of 0.06%. The advances are subject to restrictions or penalties in the event of prepayment.
13. Income Taxes
The components of the provision for income taxes, exclusive of tax effect of unrealized AFS securities gains and losses, are as follows:
(in thousands)
Current federal income tax expense
$
16,160
$
12,884
$
8,351
Current state income tax expense
4,214
Deferred federal income tax expense (benefit)
1,138
(2,900
)
2,030
Deferred state income tax expense (benefit)
1,192
Effect of Kentucky tax legislation benefit
(9
)
(3,442
)
Total income tax expense
$
22,704
$
10,761
$
7,452
A reconciliation of income tax expense at the statutory rate to our actual income tax expense is shown below:
(in thousands)
Computed at the statutory rate
$
23,235
21.00
%
$
14,755
21.00
%
$
15,118
21.00
%
Adjustments resulting from:
Tax-exempt interest
(690
)
(0.62
)
(547
)
(0.78
)
(563
)
(0.78
)
Housing and new markets credits
(3,939
)
(3.56
)
(4,194
)
(5.97
)
(4,471
)
(6.21
)
Bank owned life insurance
(382
)
(0.35
)
(277
)
(0.39
)
(284
)
(0.39
)
ESOP dividend deduction
(233
)
(0.21
)
(221
)
(0.32
)
(203
)
(0.28
)
Stock option exercises and restricted stock vesting
0.02
(10
)
(0.01
)
(10
)
(0.01
)
Effect of KY tax legislation
0.00
(7
)
(0.01
)
(2,719
)
(3.78
)
State income taxes
4,270
3.86
0.88
0.56
Split dollar life insurance
0.19
0.75
0.00
Other
0.19
0.16
0.24
Total
$
22,704
20.52
%
$
10,761
15.31
%
$
7,452
10.35
%
The components of the net deferred tax liability as of December 31 are as follows:
(in thousands)
Deferred tax assets:
Allowance for credit losses
$
10,418
$
11,982
Interest on nonaccrual loans
Accrued expenses
2,960
1,444
Unrealized losses on AFS securities
1,664
Allowance for other real estate owned
State net operating loss carryforward
2,308
3,975
Lease liabilities
3,245
3,468
Other
Total deferred tax assets
22,383
22,403
Deferred tax liabilities:
Depreciation and amortization
(14,604
)
(15,006
)
FHLB stock dividends
(961
)
(1,245
)
Loan fee income
(621
)
(238
)
Mortgage servicing rights
(1,690
)
(1,015
)
Unrealized gains on AFS securities
(4,807
)
Limited partnership investments
(648
)
(414
)
Right of use assets
(3,031
)
(3,297
)
Other
(1,374
)
(1,068
)
Total deferred tax liabilities
(22,929
)
(27,090
)
Beginning balance for valuation allowance for deferred tax asset
Change in valuation allowance
(210
)
Ending balance for valuation allowance for deferred tax asset
Net deferred tax liability
$
(546
)
$
(4,687
)
In 2020 and 2019, CTBI recognized a tax benefit of $9 thousand and $3.4 million, respectively, as a result of the tax legislation enacted by the Commonwealth of Kentucky. As a result of HB 458 on combined reporting, CTBI recorded a deferred tax asset for the Kentucky net operating loss carryforward. The losses are being utilized as CTBI began filing a combined Kentucky income tax return with CTB and CTIC, beginning with the 2021 tax year. The loss deduction for 2021 is $42.2 million, and the carryforward is $58.4 million and expires over varying periods through 2040.
CTBI accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. CTBI determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
With a few exceptions, CTBI is no longer subject to U.S. federal tax examinations by tax authorities for years before 2018, and state and local income tax examinations by tax authorities for years before 2017. For federal tax purposes, CTBI recognizes interest and penalties on income taxes as a component of income tax expense. CTBI files consolidated income tax returns with our subsidiaries.
14. Employee Benefits
CTBI maintains two separate retirement savings plans, a 401(k) Plan and an Employee Stock Ownership Plan (“ESOP”).
The 401(k) Plan is available to all employees (age 21 and over) who are credited with one year of service (12 consecutive month period with at least 1,000 hours). Participants in the plan have the option to contribute from 1% to 20% of their annual compensation. CTBI matches 50% of participant contributions up to 8% of gross pay. CTBI may, at our discretion, contribute an additional percentage of covered employees’ compensation. CTBI’s matching contributions were $1.1 million, $1.2 million, and $1.1 million for the three years ended December 31, 2021, 2020, and 2019, respectively. The 401(k) Plan owned 445,562, 479,489, and 424,591 shares of CTBI’s common stock at December 31, 2021, 2020, and 2019, respectively. Substantially all shares owned by the 401(k) Plan were allocated to employee accounts on those dates. The market price of the shares at the date of allocation is essentially the same as the market price at the date of purchase.
The ESOP has the same entrance requirements as the 401(k) Plan above. CTBI currently contributes 4% of covered employees’ compensation to the ESOP. The ESOP uses the contributions to acquire shares of CTBI’s common stock. CTBI’s contributions to the ESOP were $1.8 million, $1.8 million, and $1.7 million for the three years ended December 31, 2021, 2020, and 2019, respectively. The ESOP owned 774,562, 778,269, and 738,212 shares of CTBI’s common stock at December 31, 2021, 2020, and 2019, respectively. Substantially all shares owned by the ESOP were allocated to employee accounts on those dates. The market price of the shares at the date of allocation is essentially the same as the market price at the date of purchase.
Stock-Based Compensation:
As of December 31, 2021, CTBI maintained one active and one inactive incentive stock ownership plans covering key employees. The 2015 Stock Ownership Incentive Plan (“2015 Plan”) was approved by the Board of Directors and the Shareholders in 2015. The 2006 Stock Ownership Incentive Plan (“2006 Plan”) was approved by the Board of Directors and the Shareholders in 2006. The 2006 Plan was rendered inactive as of April 28, 2015. The 2015 Plan has 550,000 shares authorized, 450,659 of which were available at December 31, 2021. Shares issuable pursuant to awards which were granted under the prior plans on or before their respective expiration or termination dates will be issued from the remaining shares reserved for issuance under the prior plans. The shares of common stock reserved for issuance under the prior plans in excess of the number of shares as to which options or other benefits are awarded thereunder, and any shares as to which options or other benefits granted under the prior plans may lapse, expire, terminate, or be canceled, will not be reserved and available for issuance or reissuance under the 2015 Plan. The following table provides detail of the number of shares to be issued upon exercise of outstanding stock-based awards and remaining shares available for future issuance under all of CTBI’s equity compensation plans as of December 31, 2021:
Plan Category (shares in thousands)
Number of
Shares to Be
Issued Upon
Exercise
Weighted
Average Price
Shares
Available for
Future Issuance
Equity compensation plans approved by shareholders:
Stock options
$
32.27
(a)
Restricted stock
(c)
(b)
(a)
Performance units
(d)
(b)
(a)
Stock appreciation rights (“SARs”)
(e)
(b)
(a)
Total
(a)
Under the 2015 Plan, 550,000 shares are authorized for issuance; 103,646 have been issued as of December 31, 2021. In January of 2016, 18,069 restricted stock shares were issued under the terms of the 2015 Plan pursuant to awards granted under the 2006 Plan. Additional shares will not be issued pursuant to awards granted from prior plans.
(b)
Not applicable.
(c)
The maximum number of shares of restricted stock that may be granted is 550,000 shares, and the maximum that may be granted to a participant during any calendar year is 75,000 shares.
(d)
No performance units payable in stock had been issued as of December 31, 2021. The maximum payment that can be made pursuant to performance units granted to any one participant in any calendar year is $1,000,000.
(e)
No SARS have been issued. The maximum number of shares with respect to which SARs may be granted to a participant during any calendar year is 100,000 shares.
The following table details the shares available for future issuance under the 2015 Plan at December 31, 2021.
Plan Category
Shares Available
for Future
Issuance
Shares available at January 1, 2021
459,852
Stock option grants
Restricted stock grants
(9,193
)
Forfeitures
Shares available for future issuance at December 31,
450,659
There were no stock options granted in 2021, 2020, or 2019.
The 2015 Plan:
There was no stock option activity for the 2015 Plan for the years ended December 31, 2021, 2020, and 2019.
The following table shows restricted stock activity for the 2015 Plan for the years ended December 31, 2021, 2020, and 2019:
December 31
Grants
Weighted
Average
Fair
Value at
Grant
Grants
Weighted
Average
Fair
Value at
Grant
Grants
Weighted
Average
Fair
Value at
Grant
Outstanding at beginning of year
55,551
$
44.04
50,992
$
43.08
34,255
$
44.46
Granted
9,193
38.70
21,544
44.64
27,921
41.12
Vested
(17,681
)
44.31
(16,985
)
41.92
(10,596
)
42.39
Forfeited
-
-
(588
)
43.04
Outstanding at end of year
47,063
$
42.90
55,551
$
44.04
50,992
$
43.08
The 2006 Plan:
CTBI’s stock option activity for the 2006 Plan for the years ended December 31, 2021, 2020, and 2019 is summarized as follows:
December 31
Options
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Outstanding at beginning of year
20,000
$
32.27
20,495
$
32.04
32,571
$
32.47
Granted
Exercised
(495
)
22.81
(12,076
)
33.19
Forfeited/expired
Outstanding at end of year
20,000
$
32.27
20,000
$
32.27
20,495
$
32.04
Exercisable at end of year
20,000
$
32.27
20,000
$
32.27
$
22.81
There were no nonvested options at December 31, 2021.
The weighted average remaining contractual term in years of the options outstanding at December 31, 2021 was 3.1 years.
There were no options granted from the 2006 Plan during the years 2021, 2020, and 2019.
The following table shows the intrinsic values of options exercised, exercisable, and outstanding for the 2006 Plan for the years ended December 31, 2021, 2020, and 2019:
(in thousands)
Options exercised
$
$
$
Options exercisable
Outstanding options
There was no restricted stock activity in the 2006 Plan during the years ended December 31, 2021 and 2020. The following table shows restricted stock activity for the year ended December 31, 2019:
December 31
Grants
Weighted
Average
Fair
Value at
Grant
Outstanding at beginning of year
2,064
$
32.27
Granted
Vested
(2,064
)
32.27
Forfeited
Outstanding at end of year
$
0.00
The following table shows the unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans at December 31, 2021, 2020, and 2019 and the total grant-date fair value of shares vested, cash received from option exercises under all share-based payment arrangements, and the actual tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements for the years ended December 31, 2021, 2020, and 2019.
(in thousands)
Unrecognized compensation cost of unvested share-based compensation arrangements granted under the plan at year-end
$
1,093
$
1,512
$
1,410
Grant date fair value of shares vested for the year
Cash received from option exercises under all share-based payment arrangements for the year
Tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements for the year
The unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans at December 31, 2021 is expected to be recognized over a weighted-average period of 2.1 years.
15. Leases
CTBI has one finance lease for property but no material sublease or leasing arrangements for which it is the lessor of property or equipment. CTBI has operating leases for banking and ATM locations. These leases have remaining lease terms of 1 year to 45 years, some of which include options to extend the leases for up to 5 years. We evaluated the original lease terms for each operating lease, some of which include options to extend the leases for up to 5 years, using hindsight. These options, some of which include variable costs related to rent escalations based on recent financial indices, such as the Consumer Price Index, where CTBI estimates future rent increases, are included in the calculation of the lease liability and right-of-use asset when management determines it is reasonably certain the option will be exercised. CTBI determines this on each lease by considering all relevant contract-based, asset-based, market-based, and entity-based economic factors.
The components of lease expense for the year ended December 31, 2021 were as follows:
(in thousands)
Year Ended
December 31, 2021
Year Ended
December 31, 2020
Finance lease cost:
Amortization of right-of-use assets - finance leases
$
$
Interest on lease liabilities - finance leases
Total finance lease cost
Short-term lease cost
Operating lease cost
1,760
1,769
Sublease income
Total lease cost
$
1,795
$
1,913
Supplemental cash flow information related to CTBI’s operating and finance leases for the year ended December 31, 2021 was as follows:
(in thousands)
Year Ended
December 31, 2021
Year Ended
December 31, 2020
Finance lease - operating cash flows
$
$
Finance lease - financing cash flows
$
$
Operating lease - operating cash flows (fixed payments)
$
1,693
$
1,682
Operating lease - operating cash flows (liability reduction)
$
$
1,198
New right-of-use assets - operating leases
$
$
Weighted average lease term - financing leases
24.02 years
25.02 years
Weighted average lease term - operating leases
13.39 years
13.46 years
Weighted average discount rate - financing leases
3.70
%
3.70
%
Weighted average discount rate - operating leases
3.11
%
3.43
%
Maturities of lease liabilities as of December 31, 2021 are as follows:
(in thousands)
Operating Leases
Finance Leases
$
1,723
$
1,634
1,313
1,121
1,078
Thereafter
7,459
1,830
Total lease payments
14,328
2,212
Less imputed interest
(2,745
)
(790
)
Total
$
11,583
$
1,422
Maturities of lease liabilities as of December 31, 2020 are as follows:
(in thousands)
Operating Leases
Finance Leases
$
1,717
$
1,703
1,626
1,313
1,121
Thereafter
8,528
1,913
Total lease payments
16,008
2,288
Less imputed interest
(3,477
)
(847
)
Total
$
12,531
$
1,441
16. Fair Market Value of Financial Assets and Liabilities
Fair Value Measurements
ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. In this standard, the FASB clarifies the principle that fair value should be based on the exit price when pricing the asset or liability. In support of this principle, ASC 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:
Level 1 Inputs - Quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in determining an exit price for the assets or liabilities.
Recurring Measurements
The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis as of December 31, 2021 and December 31, 2020 and indicate the level within the fair value hierarchy of the valuation techniques.
(in thousands)
Fair Value Measurements at
December 31, 2021 Using
Fair Value
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets measured - recurring basis
Available-for-sale securities:
U.S. Treasury and government agencies
$
295,770
$
242,214
$
53,556
$
State and political subdivisions
334,203
334,203
U.S. government sponsored agency mortgage-backed securities
730,809
730,809
Asset-backed securities
94,647
94,647
Equity securities at fair value
2,253
2,253
Mortgage servicing rights
6,774
6,774
(in thousands)
Fair Value Measurements at
December 31, 2020 Using
Fair Value
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets measured - recurring basis
Available-for-sale securities:
U.S. Treasury and government agencies
$
148,793
$
74,991
$
73,802
$
State and political subdivisions
140,416
140,416
U.S. government sponsored agency mortgage-backed securities
651,807
651,807
Asset-backed securities
56,245
56,245
Equity securities at fair value
2,471
2,471
Mortgage servicing rights
4,068
4,068
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. These valuation methodologies were applied to all of CTBI’s financial assets carried at fair value. CTBI had no liabilities measured and recorded at fair value as of December 31, 2021 and December 31, 2020. There have been no significant changes in the valuation techniques during the year ended December 31, 2021. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Available-for-Sale Securities
Securities classified as available-for-sale are reported at fair value on a recurring basis. U.S. Treasury and government agencies are classified as Level 1 of the valuation hierarchy where quoted market prices are available in the active market on which the individual securities are traded.
If quoted market prices are not available, CTBI obtains fair value measurements from an independent pricing service, such as Interactive Data, which utilizes pricing models to determine fair value measurement. CTBI reviews the pricing quarterly to verify the reasonableness of the pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other factors. U.S. Treasury and government agencies, state and political subdivisions, U.S. government sponsored agency mortgage-backed securities, and asset-backed securities are classified as Level 2 inputs.
In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements are estimated on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States.
Equity Securities at Fair Value
As of December 31, 2021 and December 31, 2020, the only securities owned by CTBI that were valued using Level 3 criteria are Visa Class B Stock (included in equity securities at fair value). Fair value for Visa Class B Stock is determined by the independent third party utilizing assumptions about factors such as quarterly common stock dividend payments, the conversion of the securities to the relevant Class A Stock shares subject to the prevailing conversion rate and conversion date. We have concluded the third party assumptions, processes, and conclusions to be reasonable and appropriate in determining the fair value of this asset. See the table below for inputs and valuation techniques used for Level 3 equity securities.
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active, open market with readily observable prices. CTBI reports mortgage servicing rights at fair value on a recurring basis with subsequent remeasurement of MSRs based on change in fair value.
In determining fair value, CTBI utilizes the expertise of an independent third party. Accordingly, fair value is determined by the independent third party by utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends, and industry demand. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements of mortgage servicing rights are tested for impairment on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States. We have reviewed the assumptions, processes, and conclusions of the third party provider. We have determined these assumptions, processes, and conclusions to be reasonable and appropriate in determining the fair value of this asset. See the table below for inputs and valuation techniques used for Level 3 mortgage servicing rights.
Level 3 Reconciliation
Following is a reconciliation of the beginning and ending balances of recurring fair value measurements, for the periods indicated, using significant unobservable (Level 3) inputs:
(in thousands)
Equity
Securities
at Fair
Value
Mortgage
Servicing
Rights
Equity
Securities
at Fair
Value
Mortgage
Servicing
Rights
Beginning balance
$
2,471
$
4,068
$
1,953
$
3,263
Total unrealized gains (losses)
Included in net income
(218
)
1,274
(163
)
Issues
2,278
1,869
Settlements
(846
)
(901
)
Ending balance
$
2,253
$
6,774
$
2,471
$
4,068
Total gains (losses) for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date
$
(218
)
$
1,274
$
$
(163
)
Realized and unrealized gains and losses for items reflected in the table above are included in net income in the consolidated statements of income as follows:
Noninterest Income
(in thousands)
Total gains (losses)
$
$
(546
)
Nonrecurring Measurements
The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a nonrecurring basis as of December 31, 2021 and December 31, 2020 and indicate the level within the fair value hierarchy of the valuation techniques.
(in thousands)
Fair Value Measurements at
December 31, 2021 Using
Fair Value
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets measured - nonrecurring basis
Collateral dependent loans
$
1,238
$
$
$
1,238
Other real estate owned
1,487
1,487
(in thousands)
Fair Value Measurements at
December 31, 2020 Using
Fair Value
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets measured - nonrecurring basis
Collateral dependent loans
$
1,768
$
$
$
1,768
Other real estate owned
2,395
2,395
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheet, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Collateral Dependent Loans
The estimated fair value of collateral-dependent loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent loans are classified within Level 3 of the fair value hierarchy.
CTBI considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Chief Credit Officer. Appraisals are reviewed for accuracy and consistency by the Chief Credit Officer. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the Chief Credit Officer by comparison to historical results.
Loans considered collateral-dependent are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty in accordance with ASC 326-20-35-5. Fair value adjustments on collateral-dependent loans disclosed above were $0.7 million and $0.5 million for the years ended December 31, 2021 and December 31, 2020, respectively.
Other Real Estate Owned
In accordance with the provisions of ASC 360, Property, Plant, and Equipment, other real estate owned (“OREO”) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of OREO is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy. Long-lived assets are subject to nonrecurring fair value adjustments to reflect subsequent partial write-downs that are based on the observable market price or current appraised value of the collateral. Fair value adjustments on other real estate owned disclosed above were $0.3 million and $0.7 million for the years ended December 31, 2021 and December 31, 2020, respectively.
Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months. Appraisers are selected from the list of approved appraisers maintained by management.
Unobservable (Level 3) Inputs
The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at December 31, 2021 and December 31, 2020.
(in thousands)
Quantitative Information about Level 3 Fair Value Measurements
Fair Value at
December 31,
Valuation
Technique(s)
Unobservable Input
Range
(Weighted
Average)
Equity securities at fair value
$
2,253
Discount cash flows, computer pricing model
Discount rate
8.0% - 12.0%
(10.0%)
Conversion date
Dec 2024 - Dec 2028
(Dec 2026)
Mortgage servicing rights
$
6,774
Discount cash flows, computer pricing model
Constant prepayment rate
7.0% - 26.7%
(10.0%)
Probability of default
0.0% - 75.0%
(1.4%)
Discount rate
10.0% - 11.5%
(10.1%)
Collateral-dependent loans
$
1,238
Market comparable properties
Marketability discount
20.0% - 62.0%
(41.0%)
Other real estate owned
$
1,487
Market comparable properties
Comparability adjustments
10.0% - 45.5%
(15.1%)
(in thousands)
Quantitative Information about Level 3 Fair Value Measurements
Fair Value at
December 31,
Valuation
Technique(s)
Unobservable Input
Range
(Weighted
Average)
Equity securities at fair value
$
2,471
Discount cash flows, computer pricing model
Discount rate
8.0% - 12.0%
(10.0%)
Conversion date
Dec 2022 - Dec 2026
(Dec 2024)
Mortgage servicing rights
$
4,068
Discount cash flows, computer pricing model
Constant prepayment rate
0.0% - 32.8%
(15.7%)
Probability of default
0.0% - 100.0%
(1.7%)
Discount rate
10.0% - 11.5%
(10.1%)
Collateral-dependent loans
$
1,768
Market comparable properties
Marketability discount
17.5% - 31.5%
(24.5%)
Other real estate owned
$
2,395
Market comparable properties
Comparability adjustments
(9.1%) - 64.3% (12.8%)
Uncertainty of Fair Value Measurements
The following is a discussion of the uncertainty of fair value measurements, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement, and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.
Equity Securities at Fair Value
Fair market value for equity securities is derived based on unobservable inputs, such as the discount rate, quarterly dividends payable to the Visa Class B common stock, and the prevailing conversion rate at the conversion date. The most recent conversion rate of 1.6181 and the most recent dividend rate of 0.6068 were used to derive the fair value estimate. Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for discount rate is accompanied by a directionally opposite change in the fair value estimate.
Mortgage Servicing Rights
Fair market value for mortgage servicing rights is derived based on unobservable inputs, such as prepayment speeds of the underlying loans generated using the Andrew Davidson Prepayment Model, FHLMC/FNMA guidelines, the weighted average life of the loan, the discount rate, the weighted average coupon, and the weighted average default rate. Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for prepayment speeds is accompanied by a directionally opposite change in the assumption for interest rates.
Fair Value of Financial Instruments
The following table presents estimated fair value of CTBI’s financial instruments as of December 31, 2021 and indicates the level within the fair value hierarchy of the valuation techniques. In accordance with the adoption of ASU 2016-01, the fair values as of December 31, 2021 were measured using an exit price notion.
(in thousands)
Fair Value Measurements
at December 31, 2021 Using
Carrying
Amount
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Financial assets:
Cash and cash equivalents
$
311,756
$
311,756
$
$
Certificates of deposit in other banks
Debt securities available-for-sale
1,455,429
242,214
1,213,215
Equity securities at fair value
2,253
2,253
Loans held for sale
2,632
2,693
Loans, net
3,367,057
3,480,803
Federal Home Loan Bank stock
8,139
8,139
Federal Reserve Bank stock
4,887
4,887
Accrued interest receivable
15,415
15,415
Mortgage servicing rights
6,774
6,774
Financial liabilities:
Deposits
$
4,344,292
$
1,331,103
$
3,043,339
$
Repurchase agreements
271,088
271,186
Federal funds purchased
Advances from Federal Home Loan Bank
Long-term debt
57,841
45,854
Accrued interest payable
1,016
1,016
Unrecognized financial instruments:
Letters of credit
$
$
$
$
Commitments to extend credit
Forward sale commitments
The following table presents estimated fair value of CTBI’s financial instruments as of December 31, 2020 and indicates the level within the fair value hierarchy of the valuation techniques.
(in thousands)
Fair Value Measurements
at December 31, 2020 Using
Carrying
Amount
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Financial assets:
Cash and cash equivalents
$
338,235
$
338,235
$
$
Certificates of deposit in other banks
Debt securities available-for-sale
997,261
74,991
922,270
Equity securities at fair value
2,471
2,471
Loans held for sale
23,259
23,884
Loans, net
3,506,189
3,658,554
Federal Home Loan Bank stock
10,048
10,048
Federal Reserve Bank stock
4,887
4,887
Accrued interest receivable
15,818
15,818
Mortgage servicing rights
4,068
4,068
Financial liabilities:
Deposits
$
4,016,082
$
1,140,925
$
2,913,217
$
Repurchase agreements
355,862
355,918
Federal funds purchased
Advances from Federal Home Loan Bank
Long-term debt
57,841
40,081
Accrued interest payable
1,243
1,243
Unrecognized financial instruments:
Letters of credit
$
$
$
$
Commitments to extend credit
Forward sale commitments
17. Off-Balance Sheet Transactions and Guarantees
CTBI is a party to transactions with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include standby letters of credit and commitments to extend credit in the form of unused lines of credit. CTBI uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
At December 31, CTBI had the following off-balance sheet financial instruments, whose approximate contract amounts represent additional credit risk to CTBI:
(in thousands)
Standby letters of credit
$
32,676
$
32,126
Commitments to extend credit
710,225
623,920
Total off-balance sheet financial instruments
$
742,901
$
656,046
Standby letters of credit represent conditional commitments to guarantee the performance of a third party. The credit risk involved is essentially the same as the risk involved in making loans. At December 31, 2021, we maintained a credit loss reserve recorded in other liabilities of approximately $0.4 million relating to these financial standby letters of credit. The reserve coverage calculation was determined using essentially the same methodology as used for the allowance for credit losses. Approximately 67% of the total standby letters of credit are secured, with $17.8 million of the total $32.7 million secured by cash. Collateral for the remaining secured standby letters of credit varies but is comprised primarily of accounts receivable, inventory, property, equipment, and income-producing properties.
Commitments to extend credit are agreements to originate loans to customers as long as there is no violation of any condition of the contract. At December 31, 2021, a credit loss reserve recorded in other liabilities of $0.4 million was maintained relating to these commitments. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate, and residential real estate. A portion of the commitments is to extend credit at fixed rates. Fixed rate loan commitments at December 31, 2021 of $61.3 million had interest rates ranging predominantly from 3.63% to 6.00% and terms predominantly one year or less. These credit commitments were based on prevailing rates, terms, and conditions applicable to other loans being made at December 31, 2021.
Included in our commitments to extend credit are mortgage loans in the process of origination which are intended for sale to investors in the secondary market. These forward sale commitments are on an individual loan basis that CTBI originates as part of our mortgage banking activities. CTBI commits to sell the loans at specified prices in a future period, typically within 60 days. These commitments are acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale since CTBI is exposed to interest rate risk during the period between issuing a loan commitment and the sale of the loan into the secondary market. Total mortgage loans in the process of origination amounted to $3.6 million and $19.0 million at December 31, 2021 and 2020, respectively, and mortgage loans held for sale amounted to $2.6 million and $23.3 million for the years ended December 31, 2021 and 2020, respectively.
18. Concentrations of Credit Risk
CTBI’s banking activities include granting commercial, residential, and consumer loans to customers primarily located in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. CTBI is continuing to manage all components of our portfolio mix in a manner to reduce risk from changes in economic conditions. Concentrations of credit, as defined for regulatory purposes, are reviewed quarterly by management to ensure that internally established limits based on Tier 1 Capital plus the allowance for credit losses are not exceeded. At December 31, 2021 and 2020, our concentrations of hospitality industry credits were 44% of Tier 1 Capital plus the allowance for credit losses. Lessors of residential buildings and dwellings were 41% and 37%, respectively. Lessors of non-residential buildings credits were 35% and 39%, respectively. These percentages are within our internally established limits regarding concentrations of credit.
19. Commitments and Contingencies
CTBI and our subsidiaries, and from time to time, our officers, are named defendants in legal actions arising from ordinary business activities. Management, after consultation with legal counsel, believes any pending actions at December 31, 2021 are without merit or that the ultimate liability, if any, will not materially affect our consolidated financial position or results of operations.
20. Regulatory Matters
CTBI’s principal source of funds is dividends received from our banking subsidiary, CTB. Regulations limit the amount of dividends that may be paid by CTB without prior approval. During 2022, approximately $91.0 million plus any 2022 net profits can be paid by CTB without prior regulatory approval.
CTBI and CTB are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a material adverse effect on CTBI’s financial statements. Under regulatory capital adequacy guidelines, CTBI and CTB must meet specific capital guidelines that involve quantitative measures of CTBI’s and CTB’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Additionally, CTB must meet specific capital guidelines to be considered well capitalized per the regulatory framework for prompt corrective action. CTBI’s and CTB’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
CTBI and CTB must maintain certain minimum capital ratios as set forth in the table below for capital adequacy purposes. On October 29, 2019, federal banking regulators adopted a final rule to simplify the regulatory capital requirements for eligible community banks and holding companies that opt-in to the community bank leverage ratio framework (the “CBLR framework”), as required by Section 201 of the Economic Growth, Relief and Consumer Protection Act of 2018. Under the final rule, which became effective as of January 1, 2020, community banks and holding companies (which includes CTB and CTBI) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, were eligible to opt-in to the CBLR framework. The community bank leverage ratio is the ratio of a banking organization’s Tier 1 capital to its average total consolidated assets, both as reported on the banking organization’s applicable regulatory filings. Accordingly, a qualifying community banking organization that has a community bank leverage ratio greater than 9% will be considered to have met: (i) the risk-based and leverage capital requirements of the generally applicable capital rules; (ii) the capital ratio requirements in order to be considered well-capitalized under the prompt corrective action framework; and (iii) any other applicable capital or leverage requirements.
In April 2020, as directed by Section 4012 of the CARES Act, the regulatory agencies introduced temporary changes to the CBLR. These changes, which subsequently were adopted as a final rule, temporarily reduced the CBLR requirement to 8% through the end of calendar year 2020. Beginning in calendar year 2021, the CBLR requirement was increased to 8.5% for the calendar year before returning to 9% in calendar year 2022. The final rule also provides for a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement. Management elected to use the CBLR framework for CTBI and CTB. Before electing to use the CBLR framework, CTBI and CTB were required to maintain a capital conservation buffer above certain minimum risk-based capital ratios for capital adequacy purposes in order to avoid certain restrictions on capital distributions and other payments including dividends, share repurchases, and certain compensation. The capital conservation buffer was 2.5%, and CTBI and CTB both exceeded the capital conservation buffer requirement at that time. CTBI’s and CTB’s CBLR ratios as of December 31, 2021 are disclosed below. Under either framework, CTBI and CTB would be considered well-capitalized under the applicable guidelines.
Consolidated Capital Ratios
Actual
For Capital Adequacy
Purposes
(in thousands)
Amount
Ratio
Amount
Ratio
As of December 31, 2021:
CBLR
$
696,828
13.00
%
$
428,795
8.50
%
As of December 31, 2020:
CBLR
$
636,672
12.70
%
$
401,158
8.00
%
Community Trust Bank, Inc.’s Capital Ratios
Actual
For Capital Adequacy
Purposes
(in thousands)
Amount
Ratio
Amount
Ratio
As of December 31, 2021:
CBLR
$
662,125
12.42
%
$
426,527
8.50
%
As of December 31, 2020:
CBLR
$
605,606
12.13
%
$
399,303
8.00
%
21. Parent Company Financial Statements
Condensed Balance Sheets
(in thousands)
December 31
Assets:
Cash on deposit
$
3,263
$
1,505
Investment in and advances to subsidiaries
749,002
707,943
Goodwill
4,973
4,973
Premises and equipment, net
Deferred tax asset
4,649
Other assets
5,427
Total assets
$
763,669
$
719,211
Liabilities and shareholders’ equity:
Long-term debt
$
61,341
$
61,341
Other liabilities
4,126
3,005
Total liabilities
65,467
64,346
Shareholders’ equity
698,202
654,865
Total liabilities and shareholders’ equity
$
763,669
$
719,211
Condensed Statements of Income and Comprehensive Income
(in thousands)
Year Ended December 31
Income:
Dividends from subsidiaries
$
33,319
$
29,593
$
30,152
Other income
Total income
33,801
30,069
30,909
Expenses:
Interest expense
1,090
1,519
2,520
Depreciation expense
Other expenses
5,878
3,302
3,273
Total expenses
7,038
4,933
5,937
Income before income taxes and equity in undistributed income of subsidiaries
26,763
25,136
24,972
Income tax benefit
(1,700
)
(576
)
(4,947
)
Income before equity in undistributed income of subsidiaries
28,463
25,712
29,919
Equity in undistributed income of subsidiaries
59,476
33,792
34,621
Net income
$
87,939
$
59,504
$
64,540
Other comprehensive income (loss):
Unrealized holding gains (losses) on debt securities available-for-sale:
Unrealized holding gains (losses) arising during the period
(24,827
)
13,839
14,270
Less: Reclassification adjustments for realized gains included in net income
1,251
Tax expense (benefit)
(6,471
)
3,273
3,403
Other comprehensive income (loss), net of tax
(18,416
)
9,315
10,864
Comprehensive income
$
69,523
$
68,819
$
75,404
Condensed Statements of Cash Flows
(in thousands)
Year Ended December 31
Cash flows from operating activities:
Net income
$
87,939
$
59,504
$
64,540
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Equity in undistributed earnings of subsidiaries
(59,476
)
(33,792
)
(34,621
)
Deferred taxes
3,759
(4,907
)
Stock-based compensation
Gain on debt repurchase
(219
)
Changes in:
Other assets
(5,403
)
(115
)
Other liabilities
1,037
(318
)
Net cash provided by operating activities
28,775
26,786
26,480
Cash flows from investing activities:
Payment for investment in subsidiary
(1,281
)
Net sales (purchases) of premises and equipment
(66
)
(55
)
(78
)
Net cash used in investing activities
(66
)
(55
)
(1,359
)
Cash flows from financing activities:
Issuance of common stock
1,264
Repurchase of common stock
(1,099
)
Dividends paid
(27,916
)
(27,142
)
(26,235
)
Net cash used in financing activities
(26,951
)
(27,315
)
(24,971
)
Net increase (decrease) in cash and cash equivalents
1,758
(584
)
Cash and cash equivalents at beginning of year
1,505
2,089
1,939
Cash and cash equivalents at end of year
$
3,263
$
1,505
$
2,089
22. Revenue Recognition
CTBI’s primary source of revenue is interest income generated from loans and investment securities. Interest income is recognized according to the terms of the financial instrument agreement over the life of the loan or investment security unless it is determined that the counterparty is unable to continue making interest payments. Interest income also includes prepaid interest fees from commercial customers, which approximates the interest foregone on the balance of the loan prepaid.
CTBI’s additional source of income, also referred to as noninterest income, includes service charges on deposit accounts, gains on sales of loans, trust and wealth management income, loan related fees, brokerage revenue, and other miscellaneous income and is largely based on contracts with customers. In these cases, CTBI recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. CTBI considers a customer to be any party to which we will provide goods or services that are an output of CTBI’s ordinary activities in exchange for consideration. There is little seasonality with regards to revenue from contracts with customers and all inter-company revenue is eliminated when CTBI’s financial statements are consolidated.
Generally, CTBI enters into contracts with customers that are short-term in nature where the performance obligations are fulfilled and payment is processed at the same time. Such examples include revenue related to merchant fees, interchange fees, and investment services income. In addition, revenue generated from existing customer relationships such as deposit accounts are also considered short-term in nature, because the relationship may be terminated at any time and payment is processed at the time performance obligations are fulfilled. As a result, CTBI does not have contract assets, contract liabilities, or related receivable accounts for contracts with customers. In cases where collectability is a concern, CTBI does not record revenue.
Generally, the pricing of transactions between CTBI and each customer is either (i) established within a legally enforceable contract between the two parties, as is the case with loan sales, or (ii) disclosed to the customer at a specific point in time, as is the case when a deposit account is opened or before a new loan is underwritten. Fees are usually fixed at a specific amount or as a percentage of a transaction amount. No judgment or estimates by management are required to record revenue related to these transactions and pricing is clearly identified within these contracts.
CTBI primarily operates in Kentucky and contiguous areas. Therefore, all significant operating decisions are based upon analysis of CTBI as one operating segment.
We disaggregate our revenue from contracts with customers by contract-type and timing of revenue recognition, as we believe it best depicts how the nature, amount, timing, and uncertainty of our revenue and cash flows are affected by economic factors. Noninterest income not generated from customers during CTBI’s ordinary activities primarily relates to mortgage servicing rights, gains/losses on the sale of investment securities, gains/losses on the sale of other real estate owned, gains/losses on the sale of property, plant and equipment, and income from bank owned life insurance.
For more information related to our components of noninterest income, see the Consolidated Statements of Income and Comprehensive Income above.
23. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Year Ended December 31
(in thousands except per share data)
Numerator:
Net income
$
87,939
$
59,504
$
64,540
Denominator:
Basic earnings per share:
Weighted average shares
17,786
17,748
17,724
Diluted earnings per share:
Dilutive effect of equity grants
Adjusted weighted average shares
17,804
17,756
17,740
Earnings per share:
Basic earnings per share
$
4.94
$
3.35
$
3.64
Diluted earnings per share
4.94
3.35
3.64
There were no options to purchase common shares that were excluded from the diluted calculations above for the years ended December 31, 2021, 2020, and 2019. In addition to in-the-money stock options, unvested restricted stock grants were also used in the calculation of diluted earnings per share based on the treasury method.
24. Accumulated Other Comprehensive Income
Unrealized gains (losses) on AFS securities
Amounts reclassified from accumulated other comprehensive income (“AOCI”) and the affected line items in the statements of income during the years ended December 31, 2021, 2020, and 2019 were:
Amounts Reclassified from AOCI
Year Ended December 31
(in thousands)
Affected line item in the statements of income
Securities gains
$
$
1,251
$
Tax expense
Total reclassifications out of AOCI
$
$
$
25. COVID-19 and CARES Act Loan Activities
CTBI has been and continues to be committed to serving the needs of our customers in an ever changing environment. COVID-19 has caused major concerns for the communities we serve and our entire country. With this in mind, Community Trust Bank, Inc. instituted multiple relief actions in an effort to assist our customers during this very difficult time. CTBI’s management team activated our Pandemic Response Team, with representation from all areas of our company, to continually discuss the current situation, safety, and needs of our customers and employees. We have worked diligently with our customers as we all continue to battle COVID-19. Included in the relief actions the bank implemented over the past two years were waivers of overdraft/returned item fees and telephone transfer fees for a period of 30 days ending April 22, 2020, suspension of residential foreclosure actions through December 31, 2021, and several loan assistance programs designed to assist those customers experiencing, or likely to experience, financial difficulties directly related to COVID-19 causing loss of individual income and/or household income.
Throughout 2020 and 2021, loan deferrals and modifications were executed consistent with the guidelines of the CARES Act. At December 31, 2021, there was only one customer with a CARES Act deferral outstanding in the amount of $1.4 million. Pursuant to the CARES Act, these loan deferrals are not included in our nonperforming loans.
We have also participated in the Paycheck Protection Program (“PPP”) stemming from the CARES Act passed by Congress as a stimulus response to the potential economic impacts of COVID-19. At December 31, 2021, we had closed 6,312 PPP loans totaling $401.3 million, including 3,352 loans totaling $124.3 million stemming from the Consolidated Appropriations Act 2021 (second round), which extended the PPP. Through December 31, 2021, we have had 5,543 of our PPP loans totaling $351.8 million forgiven by the SBA, including 2,608 loans totaling $76.1 million from the second round. See
below for additional information related to our PPP loans for the year ended December 31, 2021.
(dollars in thousands)
Average
Balance
Interest
Average
Effective
Rate
PPP loans
$
175,305
$
14,295
8.04
%
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders, Board of Directors, and Audit Committee
Community Trust Bancorp, Inc.
Pikeville, Kentucky
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Community Trust Bancorp, Inc. (Company) as of December 31, 2021 and 2020, the related consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2022, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Adoption of New Accounting Standard
As discussed in Note 1 and Note 4 to the consolidated financial statements, the Company has changed its method of accounting for credit losses in 2020, due to the adoption of Accounting Standards Codification Topic 326, Financial Instruments--Credit Losses.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the U.S. Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included procedures to assess the risks of material misstatement, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Credit Losses
The Company’s loan portfolio totaled $3.4 billion as of December 31, 2021, and the associated allowance for credit losses was $41.8 million. As more fully described in Notes 1 and 4 to the consolidated financial statements, the Company estimates the allowance for credit losses (ACL) at a level that is appropriate to cover estimated credit losses on individually evaluated loans, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. The determination of the ACL requires significant judgment reflecting the Company’s best estimate of expected credit losses. Expected credit losses are measured on a collective (pool) basis using a combination of loss-rate methods when the financial assets share similar risk characteristics. Loans that do not share similar risk characteristics are evaluated on an individual basis. Historical loss rates reflecting estimated life of loan losses are analyzed and applied to their respective loan segments comprised of loans not subject to individual evaluation. Historical loss rates are adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition, as well as for certain known model limitations. Forecast factors are developed based on information obtained from external sources, as well as consideration of other internal information, and are included in the ACL model for a reasonable and supportable 12-month forecast period, with loss factors immediately reverting back to historic loss rates. Management continually reevaluates the other subjective and forecast factors included in its ACL analysis.
We identified the valuation of the ACL as a critical audit matter. The primary reason for our determination that the ACL is a critical audit matter is that auditing the estimated ACL involved significant judgment and complex review. Auditing the ACL involved a high degree of subjectivity in evaluating management’s estimates, such as evaluating management’s model selections, segmentation, weighted average life calculations, assessment of economic conditions and other environmental factors, assessment of forecast factors, evaluating the adequacy of specific allowances associated with individually evaluated loans and assessing the appropriateness of loan grades.
Our audit procedures related to the estimated ACL included the following procedures, among others.
•
Obtaining an understanding of the Company’s process for establishing the ACL, including the qualitative and forecast factor adjustments of the ACL and any limitations of the model
•
Testing the design and operating effectiveness of internal controls, including those related to technology, over the ACL calculation including data completeness and accuracy, verification of historical net loss data and calculated net loss rates, the establishment of qualitative and forecast adjustments, grading and risk classification of loans by segment, including internal independent loan review functions, establishment of reserves on individually evaluated loans and management’s review controls over the ACL
•
Testing of completeness and accuracy of the information utilized in the calculation of the ACL, including reports used in management review controls over the ACL
•
Assessing the relevance and reliability of assumptions and data
•
Testing clerical and computational accuracy of the formulas within the calculation
•
Evaluating the inherent limitations of the models selected by the Company and need for and level of qualitative factor adjustments
•
Evaluating how historical losses for each segment are analyzed using a model that is appropriate for the related loan segment, and applied to their respective outstanding balances
•
Evaluating segmentation of the loan portfolio for reasonableness based on risk characteristics of the pooled loans
•
Evaluating the qualitative factor adjustments, including assessing the basis for the adjustments and the reasonableness of the significant assumptions
•
Evaluating the forecast adjustments, including assessing the information sources, basis for the adjustments, and the reasonableness of the significant assumptions
•
Evaluating management’s risk ratings of loans through utilizing internal professionals to assist us in evaluating the appropriateness of loan grades
•
Evaluating specific reserves on individually analyzed loans
•
Evaluating overall reasonableness of estimated reserve by considering past performance of the Company’s loan portfolio, trends in credit quality of the loan portfolio and trends in the credit quality of peer institutions and comparing the trends to the Company’s ACL trends for directional consistency compared to previous years
/s/ BKD, LLP
We have served as Community Trust Bancorp, Inc.’s auditor since 2006.
Louisville, Kentucky
February 28, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders, Board of Directors, and Audit Committee
Community Trust Bancorp, Inc.
Pikeville, Kentucky
Opinion on the Internal Control over Financial Reporting
We have audited Community Trust Bancorp, Inc.’s (Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company and our report dated February 28, 2022, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management report on internal control. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BKD, LLP
Louisville, Kentucky
February 28, 2022

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A.
Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
CTBI’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31, 2021, an evaluation was carried out by CTBI’s management, with the participation of our Chief Executive Officer and our Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, management concluded that disclosure controls and procedures as of December 31, 2021 were effective in ensuring material information required to be disclosed in this annual report on Form 10-K was recorded, processed, summarized, and reported on a timely basis.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Management has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the control criteria in the 2013 COSO Framework issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. Based on such evaluation, we have concluded that CTBI’s internal control over financial reporting is effective as of December 31, 2021.
There were no changes in CTBI’s internal control over financial reporting that occurred during the year ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, CTBI’s internal control over financial reporting.
MANAGEMENT REPORT ON INTERNAL CONTROL
We, as management of Community Trust Bancorp, Inc. and its subsidiaries (“CTBI”), are responsible for establishing and maintaining adequate internal control over financial reporting. Pursuant to the rules and regulations of the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Because of the inherent limitations, any system of internal control over financial reporting, no matter how well designed, may not prevent or detect misstatements due to the possibility that a control can be circumvented or overridden or that misstatements due to error or fraud may occur that are not detected. Also, projections of the effectiveness to future periods are subject to the risk that the internal controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures included in such controls may deteriorate.
Management has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the control criteria in the 2013 COSO Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, we have concluded that CTBI’s internal control over financial reporting is effective as of December 31, 2021.
The effectiveness of CTBI’s internal control over financial reporting as of December 31, 2021 has been audited by BKD, LLP, an independent registered public accounting firm that audited CTBI’s consolidated financial statements included in this annual report.
February 28, 2022
/s/ Mark A. Gooch
Mark A. Gooch
Vice Chairman, President, and Chief Executive Officer
/s/ Kevin J. Stumbo
Kevin J. Stumbo
Executive Vice President, Chief Financial Officer,
and Treasurer

---

ITEM 9B. OTHER INFORMATION
Item 9B.
Other Information
None.
PART III

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10.
Directors, Executive Officers, and Corporate Governance
The information required by this item (other than disclosure of our executive officers, which is included in Part I, Item 1 of this report) is omitted, because CTBI is filing a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report which includes the required information. The required information contained in CTBI’s proxy statement is incorporated herein by reference.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11.
Executive Compensation
The information required by this item is omitted because CTBI is filing a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report which includes the required information. The required information contained in CTBI’s proxy statement is incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by this item other than the information provided below is omitted, because CTBI is filing a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report which includes the required information. The required information contained in CTBI’s proxy statement is incorporated herein by reference.
Equity Compensation Plan Information
The following table provides information as of December 31, 2021, with respect to compensation plans under which common shares of CTBI are authorized for issuance to officers or employees in exchange for consideration in the form of services provided to CTBI and/or our subsidiaries. At December 31, 2021, we maintained one active and one inactive incentive stock option plans covering key employees. The 2015 Stock Ownership Incentive Plan (“2015 Plan”) was approved by the Board of Directors and the Shareholders in 2015. The 2006 Stock Ownership Incentive Plan (“2006 Plan”) was approved by the Board of Directors and the Shareholders in 2006. The 2006 Plan was rendered inactive as of April 28, 2015. The 2015 Plan has 550,000 shares authorized, 450,659 of which were available at December 31, 2021. Shares issuable pursuant to awards which were granted under the prior plans on or before their respective expiration or termination dates will be issued from the remaining shares reserved for issuance under the prior plans. The shares of common stock reserved for issuance under the prior plans in excess of the number of shares as to which options or other benefits are awarded thereunder, and any shares as to which options or other benefits granted under the prior plans may lapse, expire, terminate, or be canceled, will not be reserved and available for issuance or reissuance under the 2015 Plan.
A
B
C
Plan Category
(shares in thousands)
Number of Common
Shares to be Issued
Upon Exercise
Weighted Average Price
Number of Securities
Available for Future
Issuance Under Equity
Compensation Plans
(excluding securities
reflected in Column A)
Equity compensation plans approved by shareholders:
Stock options
$
32.27
Equity compensation plans not approved by shareholders
--
Total
Additional information regarding CTBI’s stock option plans can be found in notes 1 and 14 to the consolidated financial statements contained herein.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13.
Certain Relationships, Related Transactions, and Director Independence
The information required by this item is omitted, because CTBI is filing a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report which includes the required information. The required information contained in CTBI’s proxy statement is incorporated herein by reference.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14.
Principal Accountant Fees and Services
The information required by this item is omitted, because CTBI is filing a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report which includes the required information. The required information contained in CTBI’s proxy statement is incorporated herein by reference.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.
Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
The following financial statements of CTBI and the auditor’s report thereon are filed as part of this Form 10-K under Item 8. Financial Statements and Supplementary Data:
Consolidated Balance Sheets
Consolidated Statements of Income and Other Comprehensive Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm (BKD, LLP, Louisville, Kentucky, PCAOB ID 686)
2. Financial Statement Schedules
All required financial statement schedules for CTBI have been included in this Form 10-K in the consolidated financial statements or the related footnotes.
3. Exhibits
Exhibit No.
Description of Exhibits
3.1
Articles of Incorporation and all amendments thereto {incorporated by reference to registration statement no. 33-35138}
3.2
By-laws of CTBI as amended July 25, 1995 {incorporated by reference to registration statement no. 33-61891}
3.3
By-laws of CTBI as amended January 29, 2008 {incorporated by reference to current report on Form 8-K filed January 30, 2008}
4.1+
Description of CTBI’s Securities Registered under Section 12 of the Securities Exchange Act of 1934
10.1*
Community Trust Bancorp, Inc. Employee Stock Ownership Plan (effective January 1, 2007) {incorporated herein by reference to Form 10-K for the fiscal year ended December 31, 2006 under SEC file no. 000-111-29}
10.2*
Community Trust Bancorp, Inc. Savings and Employee Stock Ownership Plan (Amendment Number One effective January 1, 2002, Amendment Number Two effective January 1, 2004, Amendment Number Three effective March 28, 2005, and Amendment Number Four effective January 1, 2006) {incorporated herein by reference to Form 10-K for the fiscal year ended December 31, 2006 under SEC file no. 000-111-29}
10.4*
Community Trust Bancorp, Inc. 1998 Stock Option Plan {incorporated by reference to registration statement no. 333-74217}
10.5*
Community Trust Bancorp, Inc. 2006 Stock Ownership Incentive Plan {incorporated by reference to Proxy Statement dated March 24, 2006}
10.6*
Form of Severance Agreement between Community Trust Bancorp, Inc. and executive officers (currently in effect with respect to twelve executive officers) {incorporated herein by reference to Form 10-K for the fiscal year ended December 31, 2001 under SEC file no. 000-111-29}
10.7*
Senior Management Incentive Compensation Plan (2022) {incorporated herein by reference to current report on Form 8-K dated January 25, 2022}
10.8*
Restricted Stock Agreement {incorporated herein by reference to Form 10-K for the fiscal year ended December 31, 2011 under SEC file no. 000-111-29}
10.9*
Employee Incentive Compensation Plan (2022) {incorporated herein by reference to current report on Form 8-K dated January 25, 2022}
10.10*
Amendment to the Community Trust Bancorp, Inc. 2006 Stock Ownership Incentive Plan {incorporated herein by reference to current report on Form 8-K dated January 24, 2012}
10.11*
Community Trust Bancorp, Inc. 2015 Stock Ownership Incentive Plan {incorporated herein by reference to registration statement no. 333-208053}
10.20*
Community Trust Bancorp, Inc. 2020 Executive Committee Long-Term Incentive Compensation Plan {incorporated herein by reference to current report on Form 8-K dated January 28, 2020}
10.21*
Community Trust Bancorp, Inc. 2021 Executive Committee Long-Term Incentive Compensation Plan {incorporated herein by reference to current report on Form 8-K dated January 26, 2021}
10.22*
Community Trust Bancorp, Inc. 2022 Executive Committee Long-Term Incentive Compensation Plan {incorporated herein by reference to current report on Form 8-K dated January 25, 2022}
10.23*
Amendment to Community Trust Bancorp, Inc. 2022 Executive Committee Long-Term Incentive Compensation Plan {incorporated herein by reference to current report on Form 8-K dated February 3, 2022}
21+
Subsidiaries of the Registrant
23.1+
Consent of BKD, LLP, Independent Registered Public Accounting Firm
31.1+
Certification of Principal Executive Officer (Mark A. Gooch, Vice Chairman, President, and Chief Executive Officer)
31.2+
Certification of Principal Financial Officer (Kevin J. Stumbo, Executive Vice President, Chief Financial Officer, and Treasurer)
32.1+
Certification of Mark A. Gooch, Vice Chairman, President, and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2+
Certification of Kevin J. Stumbo, Executive Vice President, Chief Financial Officer, and Treasurer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1
Community Trust Bancorp, Inc. Dividend Reinvestment Plan, as amended December 20, 2013 {incorporated by reference to registration statement no. 333-193011}
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL
101.SCH
Inline XBRL Taxonomy Extension Schema
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
* Management contracts and compensatory plans and arrangements required to be filed as exhibits pursuant to Item 15(b) of this report.
+ Furnished with this report.
(b)
Exhibits
The response to this portion of Item 15 is submitted in (a) 3. above.
(c)
Financial Statement Schedules
None