0000350852us-gaap:FairValueInputsLevel2Memberus-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMemberus-gaap:FairValueMeasurementsRecurringMember2022-06-30FinancialAssetNotPastDueMemberctbi:DealerFloorplansMember2023-06-30
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 20222023
 Or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _____________ to _____________

Commission file number 001-31220

COMMUNITY TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)

Kentucky61-0979818
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
  
346 North Mayo Trail
P.O. Box 2947
Pikeville, Kentucky
41502
(Address of principal executive offices)(Zip code)

(606606)) 432-1414
(Registrant’s telephone number)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Common Stock
(Title of class)

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

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

Yes  ☑
No

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

Yes  ☑
No

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ☐
   No ☑

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

Common stock – 17,901,37317,991,419 shares outstanding at July 31, 20222023

CAUTIONARY STATEMENT
REGARDING FORWARD LOOKING STATEMENTS

Certain of the statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Community Trust Bancorp, Inc.’s (“CTBI”) actual results may differ materially from those included in the forward-looking statements. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may increase,” “may fluctuate,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” and “could.” These forward-looking statements involve risks and uncertainties including, but not limited to, economic conditions, portfolio growth, the credit performance of the portfolios, including bankruptcies, and seasonal factors; changes in general economic conditions including the performance of financial markets, prevailing inflation and interest rates, realized gains from sales of investments, gains from asset sales, and losses on commercial lending activities; the effects of the COVID-19 pandemic on our business operations and credit quality and on general economic and financial market conditions, as well as our ability to respond to the related challenges; our participation in the Paycheck Protection Program administered by the Small Business Administration;epidemics, pandemics, or other infectious disease outbreaks; results of various investment activities; the effects of competitors’ pricing policies, changes in laws and regulations, competition, and demographic changes on target market populations’ savings and financial planning needs; industry changes in information technology systems on which we are highly dependent; failure of acquisitions to produce revenue enhancements or cost savings at levels or within the time frames originally anticipated or unforeseen integration difficulties; and the resolution of legal  proceedings and related matters. In addition, the banking industry in general is subject to various monetary, operational, and fiscal policies and regulations, which include, but are not limited to, those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau, and state regulators, whose policies, regulations, and enforcement actions could affect CTBI’s results.  These statements are representative only on the date hereof, and CTBI undertakes no obligation to update any forward-looking statements made.

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

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

The accompanying condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Registrant’s annual report on Form 10-K.  Accordingly, the reader of the Form 10-Q should refer to the Registrant’s Form 10-K for the year ended December 31, 20212022 for further information in this regard.

1
Community Trust Bancorp, Inc.
Condensed Consolidated Balance Sheets

(dollars in thousands) 
(unaudited)
June 30
2022
  
December 31
2021
  
(unaudited)
June 30
2023
  
December 31
2022
 
Assets:            
Cash and due from banks $75,373  $46,558  $48,915  $51,306 
Interest bearing deposits  136,293   265,198   57,630   77,380 
Federal funds sold
  2,000   0
   3,000   0 
Cash and cash equivalents  213,666   311,756   109,545   128,686 
                
Certificates of deposit in other banks  245   245   245   245 
Debt securities available-for-sale at fair value (amortized cost of $1,534,312 and $1,461,829, respectively)
  1,402,127   1,455,429 
Debt securities available-for-sale at fair value (amortized cost of $1,362,748 and $1,430,605, respectively)
  1,201,253   1,256,226 
Equity securities at fair value  2,128   2,253   2,545   2,166 
Loans held for sale  936   2,632   238   109 
                
Loans  3,558,443   3,408,813   3,929,695   3,709,290 
Allowance for credit losses  (42,344)  (41,756)  (48,018)  (45,981)
Net loans  3,516,099   3,367,057   3,881,677   3,663,309 
                
Premises and equipment, net  40,704   40,479   42,911   42,633 
Right-of-use assets  12,005   12,148 
Operating right-of-use assets  13,476
   13,809
 
Finance right-of-use assets  3,202   3,262 
Federal Home Loan Bank stock  8,139   8,139   6,545   6,676 
Federal Reserve Bank stock  4,887   4,887   4,887   4,887 
Goodwill  65,490   65,490   65,490   65,490 
Bank owned life insurance  91,974   91,097   93,775   92,746 
Mortgage servicing rights  8,220   6,774   8,230   8,468 
Other real estate owned  1,954   3,486   2,047   3,671 
Deferred tax asset
  31,851   0   34,591   39,878 
Accrued interest receivable  15,801   15,415   20,257   19,592 
Other assets  31,124   30,970   29,884   28,463 
Total assets $5,447,350  $5,418,257  $5,520,798  $5,380,316 
                
Liabilities and shareholders’ equity:                
Deposits:                
Noninterest bearing $1,408,148  $1,331,103  $1,361,078  $1,394,915 
Interest bearing  3,064,780   3,013,189   3,155,582   3,031,228 
Total deposits  4,472,928   4,344,292   4,516,660   4,426,143 
                
Repurchase agreements  238,733   271,088   229,020   215,431 
Federal funds purchased  500   500   500   500 
Advances from Federal Home Loan Bank  365   375   345   355 
Long-term debt  57,841   57,841   64,350   57,841 
Deferred tax liability  0   546 
Operating lease liability  11,069   11,583   13,843   14,160 
Finance lease liability  1,410   1,422   3,474   3,468 
Accrued interest payable  1,863   1,016   5,624   2,237 
Other liabilities  30,591   31,392   26,857   32,134 
Total liabilities  4,815,300   4,720,055   4,860,673   4,752,269 
                
Shareholders’ equity:                
Preferred stock, 300,000 shares authorized and unissued
  0   0   -   - 
Common stock, $5.00 par value, shares authorized 25,000,000; shares issued and outstanding 2022 – 17,895,181; 2021 – 17,843,081
  89,475   89,215 
Common stock, $5.00 par value, shares authorized 25,000,000; shares issued and outstanding 2023 – 17,983,700; 2022 – 17,918,280
  89,918   89,591 
Capital surplus  228,020   227,085   229,943   229,012 
Retained earnings  412,484   386,750   461,578   438,596 
Accumulated other comprehensive loss, net of tax  (97,929)  (4,848)  (121,314)  (129,152)
Total shareholders’ equity  632,050   698,202   660,125   628,047 
                
Total liabilities and shareholders’ equity $5,447,350  $5,418,257  $5,520,798  $5,380,316 

See notes to condensed consolidated financial statements.

2
Community Trust Bancorp, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income (Loss)
(unaudited)

 Three Months Ended  Six Months Ended 
 
Three Months Ended
June 30
  
Six Months Ended
June 30
  
June 30
  
June 30
 
(in thousands except per share data) 2022  2021  2022  2021  2023  2022  2023  2022 
Interest income:                        
Interest and fees on loans, including loans held for sale $39,234  $39,684  $77,401  $80,373  $55,822  $39,234  $107,769  $77,401 
Interest and dividends on securities                                
Taxable  4,944   3,148   9,328   5,723   6,811   4,944   13,569   9,328 
Tax exempt  752   795   1,524   1,534   669   752   1,351   1,524 
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock  134   123   248   247   172   134   346   248 
Interest on Federal Reserve Bank deposits  273   116   355   192   1,289   273   2,639   355 
Other, including interest on federal funds sold  15   9   23   17   64   15   148   23 
Total interest income  45,352   43,875   88,879   88,086   64,827   45,352   125,822   88,879 
                                
Interest expense:                                
Interest on deposits  3,847   3,228   6,801   6,615   18,462   3,847   32,853   6,801 
Interest on repurchase agreements and federal funds purchased  336   366   590   670   2,190   336   3,806   590 
Interest on advances from Federal Home Loan Bank  1   0   1   0   7   1   50   1 
Interest on long-term debt  378   274   665   552   1,089   378   2,118   665 
Total interest expense  4,562   3,868   8,057   7,837   21,748   4,562   38,827   8,057 
                                
Net interest income  40,790   40,007   80,822   80,249   43,079   40,790   86,995   80,822 
Provision for credit losses (recovery)
  77   (4,257)  952   (6,756)
Net interest income after provision for credit losses (recovery)
  40,713   44,264   79,870   87,005 
Provision for credit losses
  2,009   77   3,125   952 
Net interest income after provision for credit losses
  41,070   40,713   83,870   79,870 
                                
Noninterest income:                                
Deposit related fees
  7,263
   6,358
   14,009
   12,380
   7,513
   7,263
   14,800
   14,009
 
Gains on sales of loans, net  519   1,907   1,116   4,340   115   519   236   1,116 
Trust and wealth management income  3,198   3,349   6,446   6,300   3,351   3,198   6,430   6,446 
Loan related fees  1,415   1,004   3,477   3,274   1,197   1,415   2,042   3,477 
Bank owned life insurance  702   581   1,393   1,154   735   702   1,593   1,393 
Brokerage revenue  459   554   1,049   1,011   388   459   736   1,049 
Securities gains (losses)
  (225)  280   (126)  112   165   (225)  383   (126)
Other noninterest income  1,170   1,488   2,102   2,527   1,292   1,170   2,218   2,102 
Total noninterest income  14,501   15,521   29,466   31,098   14,756   14,501   28,438   29,466 
                                
Noninterest expense:                                
Officer salaries and employee benefits  4,239   5,379   8,121   9,117   3,574   4,239   7,726   8,121 
Other salaries and employee benefits  14,295   13,581   27,951   26,676   14,731   14,295   29,487   27,951 
Occupancy, net  2,120   2,018   4,365   4,213   2,181   2,120   4,483   4,365 
Equipment  636   650   1,245   1,283   714   636   1,440   1,245 
Data processing  2,095   1,870   4,296   4,029   2,383   2,095   4,686   4,296 
Bank franchise tax  416   365   831   725   419   416   838   831 
Legal fees  348   287   649   639   381   348   649   649 
Professional fees  536   466   1,102   1,007   531   536   1,079   1,102 
Advertising and marketing  659   710   1,411   1,432   704   659   1,524   1,411 
FDIC insurance  358   323   713   649   610   358   1,216   713 
Other real estate owned provision and expense  43   488   396   806   61   43   180   396 
Repossession expense  131   12   231   211   98   131   329   231 
Amortization of limited partnership investments  747   838   1,480   1,675   598   747   1,195   1,480 
Other noninterest expense  3,355   2,511   6,546   5,346   4,040   3,355   8,083   6,546 
Total noninterest expense  29,978   29,498   59,337   57,808   31,025   29,978   62,915   59,337 
                                
Income before income taxes  25,236   30,287   49,999   60,295   24,801   25,236   49,393   49,999 
Income taxes  4,965   6,356   10,000   12,746   5,397   4,965   10,676   10,000 
Net income  20,271   23,931   39,999   47,549   19,404   20,271   38,717   39,999 
                                
Other comprehensive income (loss):                                
Unrealized holding gains (losses) on debt securities available-for-sale:                                
Unrealized holding gains (losses) arising during the period  (47,222)  6,075   (125,786)  (7,381)  (11,828)  (47,222)  12,888   (125,786)
Less: Reclassification adjustments for realized gains (losses) included in net income  (1)  0   (1)  60 
Less: Reclassification adjustments for realized gains included in net income  0   (1)  4   (1)
Tax expense (benefit)  (12,277)  1,579   (32,704)  (1,935)  (2,951)  (12,277)  5,046   (32,704)
Other comprehensive income (loss), net of tax  (34,944)  4,496   (93,081)  (5,506)  (8,877)  (34,944)  7,838   (93,081)
Comprehensive income (loss)
 $(14,673) $28,427  $(53,082) $42,043  $10,527  $(14,673) $46,555  $(53,082)
                                
Basic earnings per share $1.14  $1.35  $2.24  $2.67  $1.09  $1.14  $2.17  $2.24 
Diluted earnings per share $1.14  $1.34  $2.24  $2.67  $1.08  $1.14  $2.16  $2.24 
                                
Weighted average shares outstanding-basic  17,835   17,784   17,827   17,779   17,884   17,835   17,877   17,827 
Weighted average shares outstanding-diluted  17,843   17,800   17,838   17,794   17,890   17,843   17,885   17,838 

See notes to condensed consolidated financial statements.
3
Consolidated Statements of Changes in Shareholders’ Equity
Quarterly
(unaudited)

(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, March 31, 2022
  17,884,106  $89,420  $227,589  $399,347  $(62,985) $653,371 
Net income              20,271       20,271 
Other comprehensive loss
                  (34,944)  (34,944)
Cash dividends declared ($0.40 per share)
              (7,134)      (7,134)
Issuance of common stock  6,075   30   221           251 
Issuance of restricted stock  5,000   25   (25)          0 
Stock-based compensation          235           235 
Balance,  June 30, 2022
  17,895,181  $89,475  $228,020  $412,484  $(97,929) $632,050 
(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, March 31, 2023
  17,976,345  $89,881  $229,333  $450,044  $(112,437) $656,821 
Net income              19,404       19,404 
Other comprehensive income (loss)                  (8,877)  (8,877)
Cash dividends declared ($0.44 per share)
              (7,870)      (7,870)
Issuance of common stock  8,604   43   237           280 
Vesting of restricted stock
  (1,249)  (6)  6           0 
Stock-based compensation          367           367 
Balance,  June 30, 2023
  17,983,700  $89,918  $229,943  $461,578  $(121,314) $660,125 

(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  
Common
Shares
  
Common
Stock
  
Capital
Surplus
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
  Total 
Balance, March 31, 2021
  17,826,076  $89,131  $225,861  $343,511  $3,566  $662,069 
Balance, March 31, 2022
  17,884,106  $89,420  $227,589  $399,347  $(62,985) $653,371 
Net income              23,931       23,931               20,271       20,271 
Other comprehensive income
                  4,496   4,496 
Cash dividends declared ($0.385 per share)
              (6,847)      (6,847)
Other comprehensive income (loss)                  (34,944)  (34,944)
Cash dividends declared ($0.40 per share)
              (7,134)      (7,134)
Issuance of common stock  5,403   27   215           242   6,075   30   221           251 
Issuance of restricted stock  0   0   0           0   5,000   25   (25)          0 
Stock-based compensation          192           192           235           235 
Balance, June 30, 2021
  17,831,479  $89,158  $226,268  $360,595  $8,062  $684,083 
Balance, June 30, 2022
  17,895,181  $89,475  $228,020  $412,484  $(97,929) $632,050 

See notes to condensed consolidated financial statements.

4
Consolidated Statements of Changes in Shareholders’ Equity
Year-to-Date
(unaudited)

(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  
Common
Shares
  
Common
Stock
  
Capital
Surplus
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss), Net of Tax
  Total 
Balance, January 1, 2022
  17,843,081  $89,215  $227,085  $386,750  $(4,848) $698,202 
Balance, January 1, 2023  17,918,280  $89,591  $229,012  $438,596  $(129,152) $628,047 
Net income              39,999       39,999               38,717       38,717 
Other comprehensive loss
                  (93,081)  (93,081)
Cash dividends declared ($0.80 per share)
              (14,265)      (14,265)
Other comprehensive income (loss)                  7,838   7,838 
Cash dividends declared ($0.88 per share)
              (15,735)      (15,735)
Issuance of common stock  38,566   193   306           499   34,722   174   384           558 
Issuance of restricted stock  40,438   202   (202)          0   52,865   264   (264)          0 
Vesting of restricted stock  (26,904)  (135)  135           0   (21,377)  (107)  107           0 
Forfeiture of restricted stock
  (790)  (4)  4           0 
Stock-based compensation          696           696           700           700 
Balance, June 30, 2022
  17,895,181  $89,475  $228,020  $412,484  $(97,929) $632,050 
Balance, June 30, 2023
  17,983,700  $89,918  $229,943  $461,578  $(121,314) $660,125 

(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  
Common
Shares
  
Common
Stock
  
Capital
Surplus
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
  Total 
Balance, January 1, 2021  17,810,401  $89,052  $225,507  $326,738  $13,568  $654,865 
Balance, January 1, 2022  17,843,081  $89,215  $227,085  $386,750  $(4,848) $698,202 
Net income              47,549       47,549               39,999       39,999 
Other comprehensive loss
                  (5,506)  (5,506)
Cash dividends declared ($0.77 per share)
              (13,692)      (13,692)
Other comprehensive income (loss)                  (93,081)  (93,081)
Cash dividends declared ($0.80 per share)
              (14,265)      (14,265)
Issuance of common stock  29,566   148   332           480   38,566   193   306           499 
Issuance of restricted stock  9,193   46   (46)          0   40,438   202   (202)          0 
Vesting of restricted stock  (17,681)  (88)  88           0   (26,904)  (135)  135           0 
Stock-based compensation          387           387           696           696 
Balance, June 30, 2021
  17,831,479  $89,158  $226,268  $360,595  $8,062  $684,083 
Balance, June 30, 2022
  17,895,181  $89,475  $228,020  $412,484  $(97,929) $632,050 

See notes to condensed consolidated financial statements.

5
Community Trust Bancorp, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)

 
Six Months Ended
June 30
 
(in thousands) 2022  2021 
Cash flows from operating activities:      
Net income $39,999  $47,549 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  2,560   2,533 
Deferred taxes  306   (643)
Stock-based compensation  742   423 
Provision for credit losses (recovery)
  952   (6,756)
Write-downs of other real estate owned and other repossessed assets  269   504 
Gains on sale of mortgage loans held for sale  (1,116)  (4,340)
Securities (gains)/losses
  1   (60)
Fair value adjustment in equity securities  125   (52)
Gains on sale of assets, net  (43)  (227)
Proceeds from sale of mortgage loans held for sale  49,301   196,989 
Funding of mortgage loans held for sale  (46,489)  (174,303)
Amortization of securities premiums and discounts, net  3,341   3,824 
Change in cash surrender value of bank owned life insurance  (878)  (682)
Payment of operating lease liabilities  (894)  (855)
Mortgage servicing rights:        
Fair value adjustments  (994)  (421)
New servicing assets created  (452)  (1,410)
Changes in:        
Accrued interest receivable  (386)  351 
Other assets  (154)  1,047 
Accrued interest payable  847   375 
Other liabilities  (855)  6,098 
Net cash provided by operating activities  46,182   69,944 
         
Cash flows from investing activities:        
Securities available-for-sale (AFS):        
Purchase of AFS securities  (178,054)  (559,810)
Proceeds from sales of AFS securities  0   1,080 
Proceeds from prepayments, calls, and maturities of AFS securities  102,230   187,189 
Change in loans, net  (149,504)  106,337 
Purchase of premises and equipment  (2,262)  (612)
Proceeds from sale and retirement of premises and equipment  0   812 
Proceeds from sale of stock by Federal Home Loan Bank
  0   1,020 
Proceeds from sale of other real estate owned and repossessed assets  888   1,128 
Additional investment in other real estate owned and repossessed assets  (73)  0 
Proceeds from settlement of bank owned life insurance
  1   0 
Net cash used in investing activities  (226,774)  (262,856)
         
Cash flows from financing activities:        
Change in deposits, net  128,636   307,620 
Change in repurchase agreements and federal funds purchased, net  (32,355)  14,706 
Proceeds from Federal Home Loan Bank advances  20,000   0 
Payments on advances from Federal Home Loan Bank  (20,010)  (10)
Payment of finance lease liabilities  (12)  (8)
Issuance of common stock  499   480 
Dividends paid  (14,256)  (13,691)
Net cash provided by financing activities  82,502   309,097 
Net increase (decrease) in cash and cash equivalents  (98,090)  116,185 
Cash and cash equivalents at beginning of period  311,756   338,235 
Cash and cash equivalents at end of period $213,666  $454,420 
         
Supplemental disclosures:        
Income taxes paid
 $8,710  $11,030 
Interest paid  7,210   7,462 
Non-cash activities:        
Loans to facilitate the sale of other real estate owned and repossessed assets  935   475 
Common stock dividends accrued, paid in subsequent quarter  257   239 
Real estate acquired in settlement of loans  444   251 
 Six Months Ended
 
  June 30 
(in thousands) 2023  2022 
Cash flows from operating activities:      
Net income $38,717  $39,999 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  2,561   2,560 
Deferred taxes  242   306 
Stock-based compensation  788   742 
Provision for credit losses
  3,125   952 
Write-downs of other real estate owned and other repossessed assets  106   269 
Gains on sale of mortgage loans held for sale  (236)  (1,116)
Securities (gains)/losses  (4)  1 
Fair value adjustments in equity securities  (379)  125 
Gains on sale of assets, net  (325)  (43)
Proceeds from sale of mortgage loans held for sale  9,098   49,301 
Funding of mortgage loans held for sale  (8,991)  (46,489)
Amortization of securities premiums and discounts, net  1,454   3,341 
Change in cash surrender value of bank owned life insurance  (1,029)  (878)
Changes in lease liabilities  (678)  (894)
Mortgage servicing rights:        
Fair value adjustments  334   (994)
New servicing assets created  (96)  (452)
Changes in:        
Accrued interest receivable  (665)  (386)
Other assets  (1,421)  (154)
Accrued interest payable  3,387   847 
Other liabilities  (5,364)  (855)
Net cash provided by operating activities  40,624   46,182 
         
Cash flows from investing activities:        
Securities available-for-sale (AFS):        
Purchase of AFS securities  (8,820)  (178,054)
Proceeds from sales of AFS securities  18,561   0 
Proceeds from prepayments, calls, and maturities of AFS securities  56,666   102,230 
Change in loans, net  (220,647)  (149,504)
Purchase of premises and equipment  (2,081)  (2,262)
Proceeds from sale and retirement of premises and equipment
  296   0 
Proceeds from sale of stock by Federal Home Loan Bank
  131   0 
Proceeds from sale of other real estate owned and repossessed assets  739   888 
Additional investment in other real estate owned and repossessed assets
  (40)  (73)
Proceeds from settlement of bank owned life insurance
  0   1 
Net cash used in investing activities  (155,195)  (226,774)
         
Cash flows from financing activities:        
Change in deposits, net  90,517   128,636 
Change in repurchase agreements and federal funds purchased, net  13,589   (32,355)
Proceeds from Federal Home Loan Bank advances  100,000   20,000 
Payments on advances from Federal Home Loan Bank  (100,010)  (20,010)
Payment of finance lease liabilities  0   (12)
Proceeds from long-term debt/other borrowings  6,563   0 
Repayment of long-term debt/other borrowings
  (54)  0 
Issuance of common stock  558   499 
Dividends paid  (15,733)  (14,256)
Net cash provided by financing activities  95,430   82,502 
Net decrease in cash and cash equivalents  (19,141)  (98,090)
Cash and cash equivalents at beginning of period  128,686   311,756 
Cash and cash equivalents at end of period $109,545  $213,666 
         
Supplemental disclosures:     
 

Income taxes paid
 $12,308  $8,710 
Interest paid  35,440   7,210 
Non-cash activities:        
Loans to facilitate the sale of other real estate owned and repossessed assets  1,022   935 
Common stock dividends accrued, paid in subsequent quarter  281   257 
Real estate acquired in settlement of loans  175   444 
Right-of-use assets obtained in exchange for new operating lease liabilities  364   405 

See notes to condensed consolidated financial statements.

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Community Trust Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1 - Summary of Significant Accounting Policies


In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (which consist of normal recurring adjustments) necessary, to present fairly the condensed consolidated financial position as of June 30, 2022,2023, the results of operations, other comprehensive income (loss), and changes in shareholders’ equity for the three and six months ended June 30, 20222023 and 2021,2022 and the cash flows for the six months ended June 30, 20222023 and 2021.2022.  In accordance with accounting principles generally accepted in the United States of America for interim financial information, these statements do not include certain information and footnote disclosures required by accounting principles generally accepted in the United States of America for complete annual financial statements.  The results of operations, other comprehensive income (loss), and changes in shareholders’ equity for the three and six months ended June 30, 20222023 and 20212022 and the cash flows for the six months ended June 30, 20222023 and 20212022 are not necessarily indicative of the results to be expected for the full year.  The condensed consolidated balance sheet as of December 31, 20212022 has been derived from the audited consolidated financial statements of Community Trust Bancorp, Inc. (“CTBI”) for that period.  For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2021,2022, included in our annual report on Form 10-K.


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


New Accounting Standards –


➢       Facilitation of the Effects of Reference Rate Reform on Financial Reporting – In April 2020,December 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, No. 2022-06, Reference Rate Reform (Topic 848)—: Deferral of the Sunset Date of Topic 848, which extends the period of time preparers can utilize the reference rate reform relief guidance.  The amendments in ASU No. 2022-06 are effective for all entities upon issuance.  In 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.  In response, which provides optional guidance to concerns about structural risksease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.  The objective of interbank offered rates, and, particularly, the riskguidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of cessation ofwhen 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. would cease being published.  The amendments in this ASU No. 2020-04 provide optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting and provide optional expedients and exceptions for applying generally accepted accounting principles (“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 entityIn 2021, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023. To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may elect to applytake place, ASU 2020-04 for contract modifications asNo. 2022-06 defers the sunset date of January 1, 2020, or prospectivelyTopic 848 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.December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.  At this time, we do not anticipate any material adverse impact to our business operation or financial results during the period of transition.

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➢       Troubled Debt Restructurings and Vintage Disclosures – In February 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.  The amendments in this ASU eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.  Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan.   Additionally, for public business entities, the amendments in this ASU require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, in the vintage disclosures required by paragraph 326-20-50-6.  The amendments in the ASU are for fiscal periods beginning after December 22, 2022, including interim periods within those fiscal years.  The changes can be early adopted, separately by topic. We dohave been implemented and did not anticipatehave a significant impact to our consolidated financial statements.

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➢       Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions – In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement Topic 820: Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.  The FASB issued this ASU to (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820.  The amendments in this ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.  The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction.  The amendments in this ASU also require the following disclosures for equity securities subject to contractual sale restrictions: (1) the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet; (2) the nature and remaining duration of the restriction(s); and (3) the circumstances that could cause a lapse in the restriction(s).  For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years.  Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. We do not anticipate a significant impact to our consolidated financial statements.


➢         FASB Improves the Accounting for Investments in Tax Credit Structures–The FASB issued, ASU No. 2023-02,Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, which is intended to improve the accounting and disclosures for investments in tax credit structures. This ASU is a consensus of the FASB’s Emerging Issues Task Force (EITF).  This ASU allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. This ASU responds to stakeholder feedback that the proportional amortization method provides investors and other allocators of capital with a better understanding of the returns from investments that are made primarily for the purpose of receiving income tax credits and other income tax benefits.  Reporting entities were previously permitted to apply the proportional amortization method only to qualifying tax equity investments in low-income housing tax credit (“LIHTC”) structures. In recent years, stakeholders asked the FASB to extend the application of the proportional amortization method to qualifying tax equity investments that generate tax credits through other programs, which resulted in the EITF addressing this issue.  For public business entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period; however, we do not plan to early adopt. We do not anticipate a significant impact to our consolidated financial statements.

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Significant Accounting Policies –


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 our consolidated financial statements.


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


We have identified the following significant accounting policies:


➢        Investments – Management determines the classification of securities at purchase.  We classify debt securities into held-to-maturity, trading, or available-for-sale categories.  Held-to-maturity (“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 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 (“AFS”) securities.

8

We do not have any securities that are classified as trading securities.  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.



For AFS debt securities in an unrealized loss position, we evaluate the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors.  Any impairment that is not credit-related is recognized in accumulated other comprehensive income, net of tax.  Credit-related impairment is recognized as an allowance for credit losses (“ACL”) for AFS debt securities on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings.  Accrued interest receivable on AFS debt securities is excluded from the estimate of credit losses.  Both the ACL for AFS debt securities and the adjustment to net income may be reversed if conditions change.  However, if we intend to sell an impaired AFS debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis.  Because the security’s amortized cost basis is adjusted to fair value, there is no ACL for AFS debt securities in this situation.



In evaluating AFS debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, we consider the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors.  There were no credit related factors underlying unrealized losses on AFS debt securities at June 30, 2023 and December 31, 2022, therefore, no ACL for AFS securities was recorded.

9

Changes in the ACL for AFS debt securities are recorded as expense.  Losses are charged against the ACL for AFS debt securities when management believes the uncollectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.


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 June 30, 20222023 and December 31, 2021,2022, CTBI held 0no securities designated as held-to-maturity.HTM.


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 in 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 restructuringWith the implementation of a debt constitutes a TDR ifASU 2022-02 described above in the creditorNew Accountings Standards, TDRs have been eliminated while enhanced disclosure requirements have been implemented for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.

9

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 TDRs tocertain 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 TDRs was extended under the Consolidated Appropriations Act 2021 to the earlier of (i) 60 days after the end of 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.when a borrower is experiencing financial difficulty.


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.


➢        Allowance for Credit Losses – CTBI accounts for the allowance for credit losses under ASC 326. 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.

10

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 ASU2019-04 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 1 basis point and is considered immaterial. The primary difference is for indirect lending premiums.


We maintain an allowance for credit losses (“ACL”)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 has a criticized risk rating and meets one of the following criteria: (i) has a criticized risk rating, (ii) is in nonaccrual status, (iii)(ii) the borrower is a TDR,experiencing financial difficulty with significant payment delay, or (iv)(iii) 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 classifiedthat are categorized as criticized, TDR, or nonaccrual,individually evaluated based on the criteria listed above, 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.

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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(five 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.

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HistoricalPrior to June 30, 2023, 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, weightedrate methodologies were used by CTBI.  Weighted average life 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. Staticloans, and static pool modeling was used to determine the life of loan losses for commercial loan segments.  QualitativeHistorical loss rates for loans were adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition.  Forecasting factors including unemployment rates and industry specific forecasts for industries in which our total exposure is 5% of capital or greater were also included as factors in the ACL model.



During the quarter ended June 30, 2023, CTBI implemented third party software and the determination was made to utilize discounted cash flow loss rate methodologies for all loan segments.  Within the discount cash flow calculation, an effective yield of the instrument is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows, modeled considering probability of default (PD) and segment-specific loss given default (LGD) risk factors, are then discounted at that effective yield to produce an instrument-level net present value (NPV) of expected cash flows.  An allowance for credit loss is established for the difference between the instrument’s NPV and amortized cost basis.  Any changes in NPV between periods is recorded as provision for credit losses.  The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data and adjusted, if necessary, based on the reasonable and supportable forecast of economic conditions.  Management incorporates qualitative factors to loss estimates used to derive CTBI’s total ACL includeincluding 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.  ForecastingForecast factors including unemployment rateswere expanded to include gross domestic product, retail and food service sales, and S&P/Case-Shiller US National Home Price Index, while industry specific forecasts for industries in which our total exposure is 5% of capital or greater are also includedconcentrations was added as factors in the ACL model.a qualitative factor.  Management continually reevaluates the other subjective factors included in our ACL analysis.analysis.


➢        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.
 

➢        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 our consolidated financial statements. During the six months ended June 30, 20222023 and 2021,2022, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes.


➢Estimated Credit Losses on Off-Balance Sheet Credit Exposures Recognized as Other Liabilities – CTBI estimates expected credit losses over the contractual period in which it has exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by CTBI.  The allowance for credit losses on off-balance sheet credit exposures recognized in other liabilities, is adjusted as an expense in other non-interest expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives.  Estimating credit losses on unfunded commitments requires CTBI to consider the following categories of off-balance sheet credit exposure: unfunded commitments to extend credit, unfunded lines of credit, and standby letters of credit.  Each of these unfunded commitments is then analyzed for a probability of funding to calculate a probable funding amount.  The life of loan loss factor by related portfolio segment from the loan allowance for credit loss calculation is then applied to the probable funding amount to calculate the estimated credit losses on off-balance sheet credit exposures recognized as other liabilities.

12
Note 2 – Stock-Based Compensation


Restricted stock expense for the three and six months ended June 30, 2023 was $411 thousand and $788 thousand, respectively, including $44 thousand and $88 thousand, respectively, in dividends paid for those periods.  Restricted stock expense for the three and six months ended June 30, 2022 was $258 thousand and $742 thousand, respectively, including $24 thousand and $46 thousand, respectively, in dividends paid for those periods.  Restricted stock expense for the three and six months ended June 30, 2021 was $210 thousand and $423 thousand, respectively, including $18 thousand and $36 thousand, respectively, in dividends paid for those periods.  As of June 30, 2022,2023, there was a total of $2.2$3.7 million of unrecognized compensation expense related to restricted stock grants that will be recognized as expense as the awards vest over a weighted average period of 3.13.4 years. There were 5,000no shares of restricted stock granted during the three months ended June 30, 2022, and 02023, but there were 5,000 shares of restricted stock grantsgranted during the three months ended June 30, 2021.2022.  There were 40,43852,865 and 9,19340,438 shares of restricted stock granted during the six months ended June 30, 20222023 and 2021,2022, respectively.  The restricted stock was issued pursuant to the terms of CTBI’s 2015 Stock Ownership Incentive Plan. The restrictions on the restricted stock will lapse ratably over four years, except for the 5,000 management retention restricted stock award granted in April 2022 which will vest at the end of five years, subject to such employee’s continued employment.  However, in the event of certain participant employee termination events occurring within 24 months of a change in control of CTBI or the death of the participant, the restrictions will lapse, and in the event of the participant’s disability, the restrictions will lapse on a pro rata basis.  The Compensation Committee will have discretion to review and revise restrictions applicable to a participant’s restricted stock in the event of the participant’s retirement.There were no shares of restricted stock forfeited during the three months ended June 30, 2023, but there were 790 shares of restricted stock forfeited during the six months ended June 30, 2023.  No shares were forfeited during the three and six months ended June 30, 2022.

11

There was 0no compensation expense related to stock option grants for the three and six months ended June 30, 20222023 and 2021.2022. As of June 30, 2022,2023, there was 0no unrecognized compensation expense related to unvested stock option awards, as all stock option awards have fully vested.  There were 0no stock options granted in the first six months of 20222023 or 2021.2022.

Note 3 – Securities


Debt securities are classified into HTM and AFS 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 June 30,, 2022 2023 and December 31, 2021,2022, CTBI had 0no HTM securities.



The amortized cost and fair value of debt securities at June 30,2022 2023 are summarized as follows:

Available-for-Sale

(in thousands) 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  Fair Value  
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  Fair Value 
U.S. Treasury and government agencies $457,576  $210  $(27,509) $430,277  $400,148  $143  $(34,897) $365,394 
State and political subdivisions  328,954   132   (49,860)  279,226   314,048   2   (54,225)  259,825 
U.S. government sponsored agency mortgage-backed securities  654,315   133   (52,880)  601,568   558,964   1   (71,066)  487,899 
Asset-backed securities  93,467   0   (2,411)  91,056   89,588   0   (1,453)  88,135 
Total available-for-sale securities $1,534,312  $475  $(132,660) $1,402,127  $1,362,748  $146  $(161,641) $1,201,253 

13

The amortized cost and fair value of debt securities at December 31,2021 2022 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  $351  $(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   301   (192)  94,647 
Total available-for-sale securities $1,461,829  $11,283  $(17,683) $1,455,429 
12
(in thousands) 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  Fair Value 
U.S. Treasury and government agencies $418,579  $212  $(36,859) $381,932 
State and political subdivisions  326,746   32   (61,676)  265,102 
U.S. government sponsored agency mortgage-backed securities  593,917   1   (73,833)  520,085 
Asset-backed securities  91,363   0   (2,256)  89,107 
Total available-for-sale securities $1,430,605  $245  $(174,624) $1,256,226 



The amortized cost and fair value of debt securities at June 3030,2022, 2023 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  Available-for-Sale 
(in thousands) Amortized Cost  Fair Value  Amortized Cost  Fair Value 
Due in one year or less $44,996  $44,674  $33,089  $32,613 
Due after one through five years  236,828   224,810   336,248   305,693 
Due after five through ten years  275,428   251,091   169,173   145,760 
Due after ten years  229,278   188,928   175,686   141,153 
U.S. government sponsored agency mortgage-backed securities  654,315   601,568   558,964   487,899 
Asset-backed securities  93,467   91,056   89,588   88,135 
Total debt securities $1,534,312  $1,402,127  $1,362,748  $1,201,253 


During the three months ended June 30, 2023, we had an unrealized gain of $165 thousand from the fair value adjustment of equity securities.  During the three months ended June 30, 2022, we had a net securities loss of $225 thousand, consisting of a pre-tax loss of $1 thousand realized on calls of AFS securities and an unrealized loss of $224 thousand from the fair value adjustment of equity securities.



During the threesix months ended June 30, 2021,2023, we had a net securities gain of $383 thousand, consisting of a pre-tax gain of $4 thousand realized on sales and calls of AFS securities and an unrealized gain of $280$379 thousand from the fair value adjustment of equity securities.


During the six months ended June 30, 2022, we had a net securities loss of $126 thousand, consisting of a pre-tax loss of $1 thousand realized on calls of AFS securities and an unrealized loss of $125 thousand from the fair value adjustment of equity securities.  During the six months ended June 30, 2021, we had a net securities gain of $112 thousand, consisting of a pre-tax gain of $60 thousand realized on sales and calls of AFS securities and an unrealized gain of $52 thousand from the fair value adjustment of equity securities.


Equity Securities at Fair Value


CTBI made the election permitted by ASC 321-10-35-2 to record its Visa Class B shares at fair value.  Equity securities at fair value as of June 30,2022 2023 were $2.12.5 million, as a result of a $224165 thousand decreaseincrease in the fair value in the second quarter 2022.2023.  The fair value of equity securities increaseddecreased $280224 thousand in the second quarter 2021.2022.  NaNNo equity securities were sold during the six months ended June 30, 202330,2022 and 20212022.


The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $528.5744.4 million at June 30, 202330,2022 and $545.6725.0 million at December 31, 2021.2022.


The amortized cost of securities sold under agreements to repurchase amounted to $316.6342.9 million at June 30, 202330,2022 and $314.1316.9 million at December 31, 2021.2022.

1314

CTBI evaluates its investment portfolio on a quarterly basis for impairment.  The analysis performed as of June 30, 202330,2022 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 June 30, 202330,2022 was 93.2%98.7%, compared to 72.4%97.4% as of December 31, 2021.2022.  The following table provides the amortized cost, gross unrealized losses, and fair value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of June 30, 202330,2022 that are not deemed to have credit losses.  As stated above, CTBI had no HTM securities as of June 30, 202330,2022.

Available-for-Sale

(in thousands) 
Amortized
Cost
  
Gross
Unrealized
Losses
  Fair Value  
Amortized
Cost
  
Gross
Unrealized
Losses
  Fair Value 
Less Than 12 Months                  
U.S. Treasury and government agencies $382,012  $(23,320) $358,692  $7,188  $(10) $7,178 
State and political subdivisions  204,981   (28,227)  176,754   34,386   (1,493)  32,893 
U.S. government sponsored agency mortgage-backed securities  449,017   (37,182)  411,835   51,640   (1,806)  49,834 
Asset-backed securities  48,039   (1,401)  46,638   0   0  0 
Total <12 months temporarily impaired AFS securities  1,084,049   (90,130)  993,919   93,214   (3,309)  89,905 
                        
12 Months or More                        
U.S. Treasury and government agencies  44,913   (4,189)  40,724   380,143   (34,887)  345,256 
State and political subdivisions  99,653   (21,633)  78,020   277,291   (52,732)  224,559 
U.S. government sponsored agency mortgage-backed securities  165,619   (15,698)  149,921   507,278   (69,260)  438,018 
Asset-backed securities  45,428   (1,010)  44,418   89,588   (1,453)  88,135 
Total ≥12 months temporarily impaired AFS securities  355,613   (42,530)  313,083   1,254,300   (158,332)  1,095,968 
                        
Total                        
U.S. Treasury and government agencies  426,925   (27,509)  399,416   387,331   (34,897)  352,434 
State and political subdivisions  304,634   (49,860)  254,774   311,677   (54,225)  257,452 
U.S. government sponsored agency mortgage-backed securities  614,636   (52,880)  561,756   558,918   (71,066)  487,852 
Asset-backed securities  93,467   (2,411)  91,056   89,588   (1,453)  88,135 
Total temporarily impaired AFS securities $1,439,662  $(132,660) $1,307,002  $1,347,514  $(161,641) $1,185,873 

1415

The analysis performed as of December 31, 20212022 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 value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of December 31, 20212022 that are not deemed to be other-than-temporarily impaired.  As stated above, CTBI had no HTM securities as of December 31, 2021.2022.

Available-for-Sale

(in thousands) 
Amortized
Cost
  
Gross
Unrealized
Losses
  Fair Value  
Amortized
Cost
  
Gross
Unrealized
Losses
  Fair Value 
Less Than 12 Months                  
U.S. Treasury and government agencies $249,990  $(4,123) $245,867  $144,305  $(6,953) $137,352 
State and political subdivisions  197,592   (4,779)  192,813   94,277   (6,257)  88,020 
U.S. government sponsored agency mortgage-backed securities  473,831   (6,759)  467,072   139,314   (6,883)  132,431 
Asset-backed securities  52,229   (190)  52,039   38,882   (1,231)  37,651 
Total <12 months temporarily impaired AFS securities  973,642   (15,851)  957,791   416,778   (21,324)  395,454 
                        
12 Months or More                        
U.S. Treasury and government agencies  14,505   (64)  14,441   249,424   (29,906)  219,518 
State and political subdivisions  19,126   (760)  18,366   225,019   (55,419)  169,600 
U.S. government sponsored agency mortgage-backed securities  62,330   (1,006)  61,324   454,357   (66,950)  387,407 
Asset-backed securities  1,368   (2)  1,366   52,480   (1,025)  51,455 
Total ≥12 months temporarily impaired AFS securities  97,329   (1,832)  95,497   981,280   (153,300)  827,980 
                        
Total                        
U.S. Treasury and government agencies  264,495   (4,187)  260,308   393,729   (36,859)  356,870 
State and political subdivisions  216,718   (5,539)  211,179   319,296   (61,676)  257,620 
U.S. government sponsored agency mortgage-backed securities  536,161   (7,765)  528,396   593,671   (73,833)  519,838 
Asset-backed securities  53,597   (192)  53,405   91,362   (2,256)  89,106 
Total temporarily impaired AFS securities $1,070,971  $(17,683) $1,053,288  $1,398,058  $(174,624) $1,223,434 

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 that we will be required to sell the investments before recovery of their amortized cost.

1516
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.

Note 4 – Loans


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

(in thousands) 
June 30
2022
  
December 31
2021
  
June 30
2023
  
December 31
2022
 
Hotel/motel $280,956  $257,062  $372,981  $343,640 
Commercial real estate residential  354,668   335,233   393,309   372,914 
Commercial real estate nonresidential  758,227   757,893   787,598   762,349 
Dealer floorplans  71,785   69,452   76,903   77,533 
Commercial other  324,091   290,478   319,838   312,422 
Commercial unsecured SBA PPP  7,788   47,335 
Commercial loans  1,797,515   1,757,453   1,950,629   1,868,858 
                
Real estate mortgage  793,249   767,185   883,104   824,996 
Home equity lines  110,828   106,667   132,033   120,540 
Residential loans  904,077   873,852   1,015,137   945,536 
                
Consumer direct  159,791   156,683   157,848   157,504 
Consumer indirect  697,060   620,825   806,081   737,392 
Consumer loans  856,851   777,508   963,929   894,896 
                
Loans and lease financing $3,558,443  $3,408,813  $3,929,695  $3,709,290 


The loan portfolios presented above are net of unearned fees and unamortized premiums.  Unearned fees included above totaled $1.31.0 million as of June 30, 20222023 and $4.0 million as of December 31, 20212022, while the unamortized premiums on the indirect lending portfolio totaled $27.130.9 million as of June 30, 20222023 and $24.128.5 million as of December 31, 20212022.


CTBI has segregated and evaluates itsour loan portfolio through 10nine 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 7.9%9.5% 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.

1617

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’s 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 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 itsour 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 primarily fixed rate consumer 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 $0.9$0.2 million at JuneJune 30, 20222023 and $2.6$0.1 million at December 31, 2021.

17

The following tables present the balance in the ACL for the periods ended June 30, 2022, December 31, 2021, and June 30, 2021:


 		 
Three Months Ended
June 30, 2022
 
(in thousands) Beginning Balance  Provision Charged to Expense  
Losses
Charged Off
  Recoveries  Ending Balance 
ACL               
Hotel/motel $4,711  $133  $0  $0  $4,844 
Commercial real estate residential  4,070   124   0   6   4,200 
Commercial real estate nonresidential  9,169   (223)  0   22   8,968 
Dealer floorplans  1,519   (42)  0   0   1,477 
Commercial other  4,844   (285)  (187)  101   4,473 
Real estate mortgage  7,662   586   (84)  15   8,179 
Home equity  819   71   (5)  2   887 
Consumer direct  1,787   (65)  (175)  74   1,621 
Consumer indirect  7,728   (222)  (377)  566   7,695 
Total $42,309  $77  $(828) $786  $42,344 

  
Six Months Ended
June 30, 2022
 
(in thousands) Beginning Balance  Provision Charged to Expense  
Losses
Charged Off
  Recoveries  Ending Balance 
ACL               
Hotel/motel $5,080  $(20) $(216) $0  $4,844 
Commercial real estate residential  3,986   234   (31)  11   4,200 
Commercial real estate nonresidential  8,884   (49)  0   133   8,968 
Dealer floorplans  1,436   41   0   0   1,477 
Commercial other  4,422   193   (344)  202   4,473 
Real estate mortgage  7,637   683   (177)  36   8,179 
Home equity  866   38   (24)  7   887 
Consumer direct  1,951   (245)  (345)  260   1,621 
Consumer indirect  7,494   77   (1,011)  1,135   7,695 
Total $41,756  $952  $(2,148) $1,784  $42,344 

  
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) $0  $0  $5,080 
Commercial real estate residential  4,464   (488)  (28)  38   3,986 
Commercial real estate
nonresidential
  11,086   (2,233)  (306)  337   8,884 
Dealer floorplans  1,382   54   0   0   1,436 
Commercial other  4,289   388   (644)  389   4,422 
Real estate mortgage  7,832   3   (266)  68   7,637 
Home equity  844   39   (36)  19   866 
Consumer direct  1,863   256   (684)  516   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 

18
  
Three Months Ended
June 30, 2021
 
(in thousands) Beginning Balance  Provision Charged to Expense  
Losses
Charged Off
  Recoveries  Ending Balance 
ACL               
Hotel/motel $6,664  $(990) $0  $0  $5,674 
Commercial real estate residential  4,641   (845)  0   0   3,796 
Commercial real estate nonresidential  10,813   (1,798)  0   293   9,308 
Dealer floorplans  1,318   (57)  0   0   1,261 
Commercial other  4,571   43   (118)  78   4,574 
Real estate mortgage  7,143   745   (186)  6   7,708 
Home equity  750   (68)  (14)  5   673 
Consumer direct  1,811   (185)  (154)  163   1,635 
Consumer indirect  7,635   (1,102)  (476)  1,009   7,066 
Total $45,346  $(4,257) $(948) $1,554  $41,695 

  
Six Months Ended
June 30, 2021
 
(in thousands) Beginning Balance  Provision Charged to Expense  
Losses
Charged Off
  Recoveries  Ending Balance 
ACL               
Hotel/motel $6,356  $(682) $0  $0  $5,674 
Commercial real estate residential  4,464   (646)  (24)  2   3,796 
Commercial real estate nonresidential  11,086   (1,933)  (151)  306   9,308 
Dealer floorplans  1,382   (121)  0   0   1,261 
Commercial other  4,289   312   (230)  203   4,574 
Real estate mortgage  7,832   55   (194)  15   7,708 
Home equity  844   (161)  (19)  9   673 
Consumer direct  1,863   (199)  (308)  279   1,635 
Consumer indirect  9,906   (3,381)  (1,492)  2,033   7,066 
Total $48,022  $(6,756) $(2,418) $2,847  $41,695 
2022.



For periods ended June 30, 2022 and December 31, 2022, CTBI derived itsour 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 arewere 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 12twelve months representsrepresented a reasonable and supportable forecast period and revertsreverted back to a historical loss rate immediately.  CTBI leveragesleveraged economic projections from a reputable and independent third party to form its loss driver forecasts over the 12 monthtwelve-month forecast period.  Other internal and external indicators of economic forecasts arewere also considered by CTBI when developing the forecast metrics.


CTBI also hashad an inherent model risk allocation included in itsour ACL calculation to allow for certain known model limitations as well as other potential risks not quantified elsewhere.  Management has identifiedOne limitation was the following known model limitations and made adjustments through this portion of the calculation for them:

(1) The inability to completely identify revolving linesline of credit within the commercial other segment.Management had to make assumptions regarding commercial renewals as those renewals are not tracked well by its loan system.

(2) The inability within the model to estimate the value of modifications made under TDRs.  Management has manually calculated the estimated impact based on research of modified terms for TDRs.

18

During the quarter ended June 30, 2023, CTBI implemented third party software for its ACL calculations.  During the implementation process, discounted cash flow modeling was chosen for all loan segments.  The primary reasons that contributed to this decision were:  Discounted cash flow (“DCF”) models allow for the effective incorporation of a reasonable and supportable forecast in a directionally consistent and objective manner; the analysis aligns well with other calculations outside of the ACL estimation which will mitigate model risk in other areas; and peer data is available for certain inputs if first -party data is not available or meaningful.  This change in modeling resulted in a shift in our reserve estimates as of June 30, 2023 as presented below:

 (in thousands) 
ACL Software
June 30, 2023
  
CTBI Internal
ACL Model
June 30, 2023
  Change in Allocation 
          
Hotel/motel
 
$
5,192
  
$
6,038
  
$
(846
)
Commercial real estate residential
  
3,749
   
4,669
   
(920
)
Commercial real estate nonresidential
  
7,797
   
8,794
   
(997
)
Dealer floorplans
  
1,157
   
1,719
   
(562
)
Commercial other
  
6,176
   
4,547
   
1,629
 
Commercial loans reserve allocation
  
24,071
   
25,767
   
(1,696
)
             
Real estate mortgage
  
7,884
   
8,443
   
(559
)
Home equity lines
  
1,108
   
1,065
   
43
 
Residential loans reserve allocation
  
8,992
   
9,508
   
(516
)
             
Consumer direct
  
2,563
   
1,673
   
890
 
Consumer indirect
  
12,392
   
10,959
   
1,433
 
Consumer loans reserve allocation
  
14,955
   
12,632
   
2,323
 
             
Loans and lease financing allowance for credit loss 
$
48,018
   
47,907
  $111 


This change in reserve estimates  is related to life of loan and how it functions in a cash flow methodology versus the loss rate methodology previously used as consumer loans generally have longer lives than commercial loans.  Although commercial loans may estimate more probability of default/loss given default compared to consumer loans, their shorter exposures will yield lower reserves.  Additionally, there was a change in how some of the qualitative factors were applied using the new software with a switch from a geographical approach to a loan segment approach.



The following tables present the balance in the ACL for the periods ended June 30, 2023, December 31, 2022, and June 30, 2022:


 		 
Three Months Ended
June 30, 2023
 
(in thousands) 
Beginning
Balance
  
Provision
Charged to
Expense
  
Losses
Charged Off
  Recoveries  
Ending
Balance
 
ACL               
Hotel/motel $5,287  $(95) $0  $0  $5,192 
Commercial real estate residential  5,157   (1,384)  (28)  4   3,749 
Commercial real estate
nonresidential
  9,010   (1,393)  (9)  189   7,797 
Dealer floorplans  1,694   (537)  0   0   1,157 
Commercial other  4,782   2,387   (1,073)  80   6,176 
Real estate mortgage  7,917   10   (55)  12   7,884 
Home equity  1,044   76   (13)  1   1,108 
Consumer direct  1,746   807   (82)  92   2,563 
Consumer indirect  10,046   2,138   (693)  901   12,392 
Total $46,683  $2,009  $(1,953) $1,279  $48,018 

19
  
Six Months Ended
June 30, 2023
 
(in thousands) 
Beginning
Balance
  
Provision
Charged to
Expense
  
Losses
Charged Off
  Recoveries  
Ending
Balance
 
ACL               
Hotel/motel $5,171  $21  $0  $0  $5,192 
Commercial real estate residential  4,894   (1,198)  (28)  81   3,749 
Commercial real estate nonresidential  9,419   (1,946)  (9)  333   7,797 
Dealer floorplans  1,776   (619)  0   0   1,157 
Commercial other  5,285   1,971   (1,260)  180   6,176 
Real estate mortgage  7,932   31   (95)  16   7,884 
Home equity  1,106   12   (13)  3   1,108 
Consumer direct  1,694   912   (238)  195   2,563 
Consumer indirect  8,704   3,941   (2,075)  1,822   12,392 
Total $45,981  $3,125  $(3,718) $2,630  $48,018 

  
Year Ended
December 31, 2022
 
(in thousands) 
Beginning
Balance
  
Provision
Charged to
Expense
  
Losses
Charged Off
  Recoveries  
Ending
Balance
 
ACL               
Hotel/motel $5,080  $307  $(216) $0  $5,171 
Commercial real estate residential  3,986   951   (92)  49   4,894 
Commercial real estate
nonresidential
  8,884   (154)  (46)  735   9,419 
Dealer floorplans  1,436   340   0   0   1,776 
Commercial other  4,422   947   (1,082)  998   5,285 
Real estate mortgage  7,637   466   (223)  52   7,932 
Home equity  866   257   (37)  20   1,106 
Consumer direct  1,951   (210)  (609)  562   1,694 
Consumer indirect  7,494   2,001   (3,041)  2,250   8,704 
Total $41,756  $4,905  $(5,346) $4,666  $45,981 

  
Three Months Ended
June 30, 2022
 
(in thousands) 
Beginning
Balance
  
Provision
Charged to
Expense
  
Losses
Charged Off
  Recoveries  Ending
Balance		 
ACL               
Hotel/motel $4,711  $133  $0  $0  $4,844 
Commercial real estate residential  4,070   124   0   6   4,200 
Commercial real estate nonresidential  9,169   (223)  0   22   8,968 
Dealer floorplans  1,519   (42)  0   0   1,477 
Commercial other  4,844   (285)  (187)  101   4,473 
Real estate mortgage  7,662   586   (84)  15   8,179 
Home equity  819   71   (5)  2   887 
Consumer direct  1,787   (65)  (175)  74   1,621 
Consumer indirect  7,728   (222)  (377)  566   7,695 
Total $42,309  $77  $(828) $786  $42,344 

20
  
Six Months Ended
June 30, 2022
 
(in thousands) 
Beginning
Balance
  
Provision
Charged to
Expense
  
Losses
Charged Off
  Recoveries  
Ending
Balance
 
ACL               
Hotel/motel $5,080  $(20) $(216) $0  $4,844 
Commercial real estate residential  3,986   234   (31)  11   4,200 
Commercial real estate nonresidential  8,884   (49)  0   133   8,968 
Dealer floorplans  1,436   41   0   0   1,477 
Commercial other  4,422   193   (344)  202   4,473 
Real estate mortgage  7,637   683   (177)  36   8,179 
Home equity  866   38   (24)  7   887 
Consumer direct  1,951   (245)  (345)  260   1,621 
Consumer indirect  7,494   77   (1,011)  1,135   7,695 
Total $41,756  $952  $(2,148) $1,784  $42,344 



Using the ACL software, forecasts were expanded to include gross domestic product (GDP), retail sales and housing price index considerations.  CTBI leverages economic projections from the Federal Open Market Committee to obtain various forecasts for unemployment rate and gross domestic product, the PNC forecast for the Case-Shiller National Home Price Index, and the Wells Fargo forecast for the Advanced Retail Sales.  CTBI has elected to forecast the first four quarters of the credit loss estimate and revert to a long-run average of each considered economic factor as permitted in ASC 326-20-30-9 over four quarters.


All periods during the reasonable and supportable forecast period are utilizing a forecasted probability of default.  During the ACL software implementation, loss driver analysis was performed during which regression models were built relating default rates of the various segments to the economic factors noted above.  Historical loss data for both CTBI and segment-specific selected peers was incorporated from FFIEC call report data.  For loss given default, the Frye-Jacobs LGD estimation technique was utilized in the ACL software provided a risk curve that most approximates the asset class under consideration.  Management elected to evaluate internal prepayment experience over a trailing timeframe to determine the appropriate prepayment and curtailment rates to be used in the credit loss estimate.


CTBI continues to use management judgement for qualitative loss factors such as delinquency trends, supervision and administration, quality control exceptions, collateral values, and industry concentrations, although these factors are applied differently in the ACL software.  The software allows management to approve a “worst case” scenario or a maximum loss rate for each segment.  Qualitative dollars available for allocation then become the difference between the worst case and the ACL reserve estimate.  Each factor is then given a risk weighting that is applied to determine a basis point allocation.  The previous model only allowed for a specific basis point allocation determined by management.  In addition to these factors, management has added risk factors related to changes in the nature and volume of the portfolio and terms of loans and changes in the experience, depth, and ability of lending management.  The previous significant event factor has been expanded to reflect changes in international, national, regional and local conditions, as well as the effect of other external factors as noted below.  The previous factors for inherent model risk and levels of nonperforming loans were not incorporated into the ACL software as separate qualitative factors.   The revised qualitative loss factors are as follows:

Changes in delinquency trends by loan segment
Changes in international, national, regional, and local conditions
The effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses
The existence and effect of any concentrations of credit and changes in the levels of such concentrations
A supervision and administration allocation based on CTBI’s loan review process
Exceptions in lending policies and procedures as measured by quarterly loan portfolio exceptions reports
Changes in the nature and volume of the portfolio and terms of loans
Changes in the experience, depth, and ability of lending management

21

WithEconomic forecast factors utilized in the estimate improved quarter over quarter and the slight reduction in reserve requirements from 1.24% to 1.22% is reflective of this improvement.  Management continues to note the continued impact of the global COVID-19 pandemic, includinguncertainty, the current historically high rate of inflation, the significant rising rate environment, 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 eventand these conditions are now part of qualitative factor to anticipate the continued impact of COVID-19 as deferments have endedfactors noted above.  As in previous quarters an allocation was made for delinquency trends, industry concentrations, supervisory and the SBA Paycheck Protection Programs are largely over with no approved capacity to fund new loans.administration, loan exceptions, and collateral values.



ProvisionOur provision for credit losses for the quarter was $0.1 million, compared to provision ofincreased $0.9 million for thefrom prior quarter ended March 31, 2022 and a recovery of provision of $4.3$1.9 million for the second quarter 2021.  Year-to-date provision was $1.0 million compared to a recovery of $6.8 million during the first six months of 2021.  from prior year same quarter.  Our reserve coverage (allowance for credit losses to nonperforming loans) at June 30, 20222023 was 305.9%408.9%, compared to 309.1%382.3% at March 31, 20222023 and 197.2%305.9% at June 30, 2021.2022.  Our credit loss reserve as a percentage of total loans outstanding at June 30, 20222023 was 1.19% (1.19% excluding PPP loans)1.22% compared to 1.20%1.24% at March 31, 2022 (1.21% excluding PPP loans)2023 and 1.21%1.19% at June 30, 2021 (1.27% excluding PPP loans).2022.


Refer to Note 1 to the condensed 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 June 30, 20222023 and December 31, 20212022 were as follows:

 June 30, 2022  June 30, 2023 
(in thousands) 
Nonaccrual Loans
with No ACL
  
Nonaccrual Loans
with ACL
  
90+ and Still
Accruing
  
Total
Nonperforming
Loans
  
Nonaccrual Loans
with No ACL
  
Nonaccrual Loans
with ACL
  
90+ and Still
Accruing
  
Total
Nonperforming
Loans
 
                        
Hotel/motel $0  $0  $0  $0  $0  $0  $0  $0 
Commercial real estate residential  0   423   341   764   0   322   712   1,034 
Commercial real estate nonresidential  2,376   1,157   672   4,205   0   982   300   1,282 
Commercial other  0   232   49   281   0   753   277   1,030 
Commercial unsecured SBA PPP
  0   0   0   0 
Total commercial loans  2,376   1,812   1,062   5,250   0   2,057   1,289   3,346 
                                
Real estate mortgage  0   4,207   3,306   7,513   0   3,093   4,206   7,299 
Home equity lines  0   429   384   813   0   195   459   654 
Total residential loans  0   4,636   3,690   8,326   0   3,288   4,665   7,953 
                                
Consumer direct  0   0   32   32   0   0   6   6 
Consumer indirect  0   0   234   234   0   0   439   439 
Total consumer loans  0   0   266   266   0   0   445   445 
                                
Loans and lease financing $2,376  $6,448  $5,018  $13,842  $0  $5,345  $6,399  $11,744 

2022

 December 31, 2021  December 31, 2022 
(in thousands) 
Nonaccrual Loans
with No ACL
  
Nonaccrual Loans
with ACL
  
90+ and Still
Accruing
  
Total
Nonperforming
Loans
  
Nonaccrual Loans
with No ACL
  
Nonaccrual Loans
with ACL
  
90+ and Still
Accruing
  
Total
Nonperforming
Loans
 
                        
Hotel/motel $0  $1,075  $0  $1,075  $0  $0  $0  $0 
Commercial real estate residential  0   585   312   897   0   355   258   613 
Commercial real estate nonresidential  2,447   1,602   144   4,193   0   1,116   1,947   3,063 
Commercial other  0   302   76   378   0   982   369   1,351 
Total commercial loans  2,447   3,564   532   6,543   0   2,453   2,574   5,027 
                                
Real estate mortgage  0   4,081   4,659   8,740   0   4,069   4,929   8,998 
Home equity lines  0   579   513   1,092   0   291   487   778 
Total residential loans  0   4,660   5,172   9,832   0   4,360   5,416   9,776 
                                
Consumer direct  0   0   44   44   0   0   41   41 
Consumer indirect  0   0   206   206   0   0   465   465 
Total consumer loans  0   0   250   250   0   0   506   506 
                                
Loans and lease financing $2,447  $8,224  $5,954  $16,625  $0  $6,813  $8,496  $15,309 

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 condensed 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 June 30, 20222023 and December 31, 2021:2022 (includes loans 90 days past due and still accruing as well):

 June 30, 2022  June 30, 2023 
(in thousands) 
30-59 Days
Past Due
  
60-89
Days Past
Due
  
90+ Days
Past Due
  
Total
Past Due
  Current  Total Loans  
30-59 Days
Past Due
  
60-89
Days Past
Due
  
90+ Days
Past Due
  
Total
Past Due
  Current  Total Loans 
Hotel/motel $0  $0  $0  $0  $280,956  $280,956  $0  $0  $0  $0  $372,981  $372,981 
Commercial real estate residential  430   127   718   1,275   353,393   354,668   152   279   1,000   1,431   391,878   393,309 
Commercial real estate nonresidential  321   186   3,730   4,237   753,990   758,227   1,101   110   940   2,151   785,447   787,598 
Dealer floorplans  0   0   0   0   71,785   71,785   0   0   0   0   76,903   76,903 
Commercial other  522   46   69   637   323,454   324,091   1,062   330   694   2,086   317,752   319,838 
Commercial unsecured SBA PPP  0   3   0   3   7,785   7,788 
Total commercial loans  1,273   362   4,517   6,152   1,791,363   1,797,515   2,315   719   2,634   5,668   1,944,961   1,950,629 
                                                
Real estate mortgage  1,257   3,614   5,840   10,711   782,538   793,249   1,440   2,528   6,220   10,188   872,916   883,104 
Home equity lines  657   185   712   1,554   109,274   110,828   733   435   490   1,658   130,375   132,033 
Total residential loans  1,914   3,799   6,552   12,265   891,812   904,077   2,173   2,963   6,710   11,846   1,003,291   1,015,137 
                                                
Consumer direct  517   71   31   619   159,172   159,791   557   95   6   658   157,190   157,848 
Consumer indirect  2,921   580   234   3,735   693,325   697,060   3,147   865   439   4,451   801,630   806,081 
Total consumer loans  3,438   651   265   4,354   852,497   856,851   3,704   960   445   5,109   958,820   963,929 
                                                
Loans and lease financing $6,625  $4,812  $11,334  $22,771  $3,535,672  $3,558,443  $8,192  $4,642  $9,789  $22,623  $3,907,072  $3,929,695 

2123

 December 31, 2021  December 31, 2022 
(in thousands) 
30-59 Days
Past Due
  
60-89
Days
Past Due
  
90+ Days
Past Due
  
Total
Past Due
  Current  Total Loans  
30-59 Days
Past Due
  
60-89
Days
Past Due
  
90+ Days
Past Due
  
Total
Past Due
  Current  Total Loans 
Hotel/motel $0  $0  $0  $0  $257,062  $257,062  $0  $0  $0  $0  $343,640  $343,640 
Commercial real estate residential  274   116   845   1,235   333,998   335,233   602   225   574   1,401   371,513   372,914 
Commercial real estate nonresidential  1,303   147   3,509   4,959   752,934   757,893   2,549   395   2,611   5,555   756,794   762,349 
Dealer floorplans  0   0   0   0   69,452   69,452   0   0   0   0   77,533   77,533 
Commercial other  1,225   175   108   1,508   288,970   290,478   1,029   850   496   2,375   310,047   312,422 
Commercial unsecured SBA PPP  14   34   0   48   47,287   47,335 
Total commercial loans  2,816   472   4,462   7,750   1,749,703   1,757,453   4,180   1,470   3,681   9,331   1,859,527   1,868,858 
                                                
Real estate mortgage  1,171   2,707   6,859   10,737   756,448   767,185   869   3,402   7,067   11,338   813,658   824,996 
Home equity lines  656   315   903   1,874   104,793   106,667   786   44   740   1,570   118,970   120,540 
Total residential loans  1,827   3,022   7,762   12,611   861,241   873,852   1,655   3,446   7,807   12,908   932,628   945,536 
                                                
Consumer direct  396   179   44   619   156,064   156,683   555   126   41   722   156,782   157,504 
Consumer indirect  2,889   533   206   3,628   617,197   620,825   4,407   764   465   5,636   731,756   737,392 
Total consumer loans  3,285   712   250   4,247   773,261   777,508   4,962   890   506   6,358   888,538   894,896 
                                                
Loans and lease financing $7,928  $4,206  $12,474  $24,608  $3,384,205  $3,408,813  $10,797  $5,806  $11,994  $28,597  $3,680,693  $3,709,290 


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


Hotel/motel loans are a significant concentration for CTBI, representing approximately 7.9%9.5% 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.

2224

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 itsour 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 itsour customers.  As we underwrite our equipment lease financing in a manner similar to our commercial loan portfolio described below, the risk characteristics for this portfolio mirror that of the commercial loan portfolio.


CTBI’s participation in the CARES Act PPP loan program has resulted in a new loan segment of unsecured commercial other loans that are one hundred percent guaranteed by the SBA. 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.

23

The indirect lending area of the bank is generally deals withresponsible for purchasing/funding consumer contracts with new and used automobile dealers.  The dealers generate consumerDealer 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,borrowers, and on the collateral value.  The dealers may have limited recourse agreements with CTB.

25
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.

2426

The following tables present the credit risk profile of CTBI’s commercial loan portfolio based on rating category and payment activity, as well as gross charge-offs year to date, if any, segregated by class of loans and based on last credit decision or year of origination:

June 30, 2022 Term Loans Amortized Cost Basis by Origination Year 
June 30, 2023 Term Loans Amortized Cost Basis by Origination Year 
(in thousands)
 2022  2021  2020  2019  2018  Prior  
Revolving
Loans
  Total  2023  2022  2021  2020  2019  Prior  
Revolving
Loans
  Total 
Hotel/motel                                                
Risk rating:                                                
Pass $58,139  $28,894  $17,852  $55,356  $18,441  $38,120  $0  $216,802  $38,210  $150,521  $28,454  $17,968  $47,039  $47,091  $4,043  $333,326 
Watch  3,908   9,069   5,559   5,983   11,962   25,670   0   62,151   2,949   6,957   8,873   4,709   3,412   3,871   0   30,771 
OAEM  0   0   0   0   0   2,003   0   2,003   0   0   6,971   0   0   1,913   0   8,884 
Substandard  0   0   0   0   0   0   0   0   0   0   0   0   0   0   0   0 
Doubtful  0   0   0   0   0   0   0   0   0   0   0   0   0   0   0   0 
Total hotel/motel 
62,047  
37,963  
23,411  
61,339  
30,403  
65,793  
0  
280,956   41,159   157,478   44,298   22,677   50,451   52,875   4,043   372,981 
                                                                
Commercial real estate residential                                                                
Risk rating:                                                                
Pass 
68,934  
127,149  
42,594  
16,652  
13,499  
45,711  
10,884  
325,423   55,238   104,912   104,205   35,701   12,921   41,206   14,132   368,315 
Watch  2,881   663   3,025   1,344   2,123   7,820   45   17,901   753   1,010   835   1,948   743   7,367   144   12,800 
OAEM  0   0   0   0   0   15   0   15   0   0   0   0   0   65   0   65 
Substandard  315   4,467   1,833   374   1,661   2,455   224   11,329   286   617   4,295   623   289   6,019   0   12,129 
Doubtful  0   0   0   0   0   0   0   0   0   0   0   0   0   0   0   0 
Total commercial real estate residential 
72,130  
132,279  
47,452  
18,370  
17,283  
56,001  
11,153  
354,668   56,277   106,539   109,335   38,272   13,953   54,657   14,276   393,309 
                                                                
Commercial real estate residential current period gross charge-offs  0   0   (28)  0   0   0   0   (28)
                                
Commercial real estate nonresidential                                                                
Risk rating:                                                                
Pass 
84,474  
210,069  
92,399  
78,345  
46,995  
168,186  
23,741  
704,209   81,927   153,561   152,539   79,949   66,557   166,883   25,508   726,924 
Watch  2,618   4,361   3,304   2,451   1,542   12,155   1,010   27,441   300   3,966   6,499   9,716   7,618   6,710   711   35,520 
OAEM  0   0   0   0   0   101   20   121   2,375   19   0   0   0   74   0   2,468 
Substandard  1,385   4,791   5,024   3,094   1,018   10,812   25   26,149   1,370   1,439   2,522   4,543   3,096   9,701   0   22,671 
Doubtful  0   0   0   0   0   307   0   307   0   0   0   0   0   15   0   15 
Total commercial real estate nonresidential 
88,477  
219,221  
100,727  
83,890  
49,555  
191,561  
24,796  
758,227   85,972   158,985   161,560   94,208   77,271   183,383   26,219   787,598 
                                
Commercial real estate nonresidential current period gross charge-offs  0   0   0   (9)  0   0   0   (9)
                                                                
Dealer floorplans                                                                
Risk rating:                                                                
Pass 
0  
0  
0  
0  
0  
0  
71,398  
71,398   0   0   0   0   0   0   76,903   76,903 
Watch  0   0   0   0   0   0   387   387   0   0   0   0   0   0   0   0 
OAEM  0   0   0   0   0   0   0   0   0   0   0   0   0   0   0   0 
Substandard  0   0   0   0   0   0   0   0   0   0   0   0   0   0   0   0 
Doubtful  0   0   0   0   0   0   0   0   0   0   0   0   0   0   0   0 
Total dealer floorplans 
0  
0  
0  
0  
0  
0  
71,785  
71,785   0   0   0   0   0   0   76,903   76,903 
                                                                
Commercial other                                                                
Risk rating:                                                                
Pass 
50,382  
63,584  
38,128  
11,490  
28,379  
26,997  
78,536  
297,496   41,105   60,219   54,817   31,984   6,523   24,483   78,670   297,801 
Watch  1,118   541   614   333   362   1,075   6,902   10,945   541   1,390   980   156   334   771   5,990   10,162 
OAEM  0   32   0   0   2   0   30   64   0   30   0   0   0   0   30   60 
Substandard  958   6,630   1,191   1,168   221   744   4,674   15,586   466   4,216   4,807   943   219   564   600   11,815 
Doubtful  0   0   0   0   0   0   0   0   0   0   0   0   0   0   0   0 
Total commercial other 
52,458  
70,787  
39,933  
12,991  
28,964  
28,816  
90,142  
324,091   42,112   65,855   60,604   33,083   7,076   25,818   85,290   319,838 
                                                                
Commercial unsecured SBA PPP                                
Risk rating:                                
Pass 
0  
7,785  
3  
0  
0  
0  
0  
7,788 
Watch  0   0   0   0   0   0   0   0 
OAEM  0   0   0   0   0   0   0   0 
Substandard  0   0   0   0   0   0   0   0 
Doubtful  0   0   0   0   0   0   0   0 
Total commercial unsecured SBA PPP 
0  
7,785  
3  
0  
0  
0  
0  
7,788 
Commercial other current period gross charge-offs  (321)  (632)  (154)  (17)  (90)  (46)  0   (1,260)
                                                                
Commercial loans                                                                
Risk rating:                                                                
Pass 
261,929  
437,481  
190,976  
161,843  
107,314  
279,014  
184,559  
1,623,116   216,480   469,213   340,015   165,602   133,040   279,663   199,256   1,803,269 
Watch  10,525   14,634   12,502   10,111   15,989   46,720   8,344   118,825   4,543   13,323   17,187   16,529   12,107   18,719   6,845   89,253 
OAEM  0   32   0   0   2   2,119   50   2,203   2,375   49   6,971   0   0   2,052   30   11,477 
Substandard  2,658   15,888   8,048   4,636   2,900   14,011   4,923   53,064   2,122   6,272   11,624   6,109   3,604   16,284   600   46,615 
Doubtful  0   0   0   0   0   307   0   307   0   0   0   0   0   15   0   15 
Total commercial loans $275,112  $468,035  $211,526  $176,590  $126,205  $342,171  $197,876  $1,797,515  $225,520  $488,857  $375,797  $188,240  $148,751  $316,733  $206,731  $1,950,629 
                                
Total commercial loans current period gross charge-offs $(321) $(632) $(182) $(26) $(90) $(46) $0  $(1,297)

2527

December 31, 2021 Term Loans Amortized Cost Basis by Origination Year 
December 31, 2022 Term Loans Amortized Cost Basis by Origination Year 
(in thousands)
 2021  2020  2019  2018  2017  Prior  
Revolving
Loans
  Total  2022  2021  2020  2019  2018  Prior  
Revolving
Loans
  Total 
Hotel/motel                                                
Risk rating:                                                
Pass $42,056  $11,231  $53,713  $18,752  $32,765  $20,087  $0  $178,604  $145,262  $36,002  $17,742  $54,328  $13,178  $35,179  $545  $302,236 
Watch  9,234   14,021   8,813   8,780   2,678   30,502   0   74,028   7,921   8,996   5,523   3,453   0   13,555   0   39,448 
OAEM  0   0   0   0   0   0   0   0   0   0   0   0   0   1,956   0   1,956 
Substandard  0   0   0   3,355   1,075   0   0   4,430   0   0   0   0   0   0   0   0 
Doubtful  0   0   0   0   0   0��  0   0   0   0   0   0   0   0   0   0 
Total hotel/motel 
51,290  
25,252  
62,526  
30,887  
36,518  
50,589  
0  
257,062  
153,183  
44,998  
23,265  
57,781  
13,178  
50,690  
545  
343,640 
                                                                
Commercial real estate residential                                                                
Risk rating:                                                                
Pass 
142,364  
54,380  
22,320  
19,826  
11,919  
45,791  
9,544  
306,144  
119,826  
110,963  
38,423  
15,467  
10,492  
36,307  
14,297  
345,775 
Watch  2,643   2,359   1,962   2,119   554   6,949   156   16,742   1,474   898   1,675   848   2,136   7,015   152   14,198 
OAEM  0   0   0   0   16   0   0   16   0   0   0   39   0   0   29   68 
Substandard  4,822   1,990   620   1,835   596   2,468   0   12,331   182   4,289   1,878   346   3,639   2,539   0   12,873 
Doubtful  0   0   0   0   0   0   0   0   0   0   0   0   0   0   0   0 
Total commercial real estate residential 
149,829  
58,729  
24,902  
23,780  
13,085  
55,208  
9,700  
335,233  
121,482  
116,150  
41,976  
16,700  
16,267  
45,861  
14,478  
372,914 
                                                                
Commercial real estate nonresidential                                                                
Risk rating:                                                                
Pass 
214,563  
99,131  
82,386  
57,397  
55,422  
168,533  
22,389  
699,821  
175,220  
171,311  
80,932  
70,848  
44,099  
137,575  
23,166  
703,151 
Watch  5,130   2,865   3,981   2,802   3,655   11,828   767   31,028   3,331   5,765   10,090   2,178   1,962   10,022   1,550   34,898 
OAEM  0   0   0   0   0   178   20   198   19   0   0   0   0   90   0   109 
Substandard  5,201   5,098   3,764   600   2,016   9,659   200   26,538   1,939   2,537   4,877   3,135   508   10,865   25   23,886 
Doubtful  0   0   0   0   0   308   0   308   0   0   0   0   0   305   0   305 
Total commercial real estate nonresidential 
224,894  
107,094  
90,131  
60,799  
61,093  
190,506  
23,376  
757,893  
180,509  
179,613  
95,899  
76,161  
46,569  
158,857  
24,741  
762,349 
                                                                
Dealer floorplans                                                                
Risk rating:                                                                
Pass 
0  
0  
0  
0  
0  
0  
69,105  
69,105  
0  
0  
0  
0  
0  
0  
77,153  
77,153 
Watch  0   0   0   0   0   0   347   347   0   0   0   0   0   0   380   380 
OAEM  0   0   0   0   0   0   0   0   0   0   0   0   0   0   0   0 
Substandard  0   0   0   0   0   0   0   0   0   0   0   0   0   0   0   0 
Doubtful  0   0   0   0   0   0   0   0   0   0   0   0   0   0   0   0 
Total dealer floorplans 
0  
0  
0  
0  
0  
0  
69,452  
69,452  
0  
0  
0  
0  
0  
0  
77,533  
77,533 
                                                                
Commercial other                                                                
Risk rating:                                                                
Pass 
72,650  
43,838  
16,495  
29,858  
9,105  
13,346  
75,119  
260,411  
78,846  
60,550  
34,841  
8,922  
2,333  
23,961  
77,355  
286,808 
Watch  7,196   1,967   1,582   599   332   1,071   11,792   24,539   1,622   393   604   217   159   780   6,402   10,177 
OAEM  0   0   268   383   12   1   482   1,146   30   0   0   0   0   0   30   60 
Substandard  1,600   1,589   147   184   287   451   124   4,382   6,090   5,489   885   356   143   758   952   14,673 
Doubtful  0   0   0   0   0   0   0   0   466   129   0   109   0   0   0   704 
Total commercial other 
81,446  
47,394  
18,492  
31,024  
9,736  
14,869  
87,517  
290,478  
87,054  
66,561  
36,330  
9,604  
2,635  
25,499  
84,739  
312,422 
                                                                
Commercial unsecured SBA PPP                                
Risk rating:                                
Pass 
46,227  
1,108  
0  
0  
0  
0  
0  
47,335 
Watch  0   0   0   0   0   0   0   0 
OAEM  0   0   0   0   0   0   0   0 
Substandard  0   0   0   0   0   0   0   0 
Doubtful  0   0   0   0   0   0   0   0 
Total commercial unsecured SBA PPP 
46,227  
1,108  
0  
0  
0  
0  
0  
47,335 
                                
Commercial loans                                                                
Risk rating:                                                                
Pass 
517,860  
209,688  
174,914  
125,833  
109,211  
247,757  
176,157  
1,561,420  
519,154  
378,826  
171,938  
149,565  
70,102  
233,022  
192,516  
1,715,123 
Watch  24,203   21,212   16,338   14,300   7,219   50,350   13,062   146,684   14,348   16,052   17,892   6,696   4,257   31,372   8,484   99,101 
OAEM  0   0   268   383   28   179   502   1,360   49   0   0   39   0   2,046   59   2,193 
Substandard  11,623   8,677   4,531   5,974   3,974   12,578   324   47,681   8,211   12,315   7,640   3,837   4,290   14,162   977   51,432 
Doubtful  0   0   0   0   0   308   0   308   466   129   0   109   0   305   0   1,009 
Total commercial loans $553,686  $239,577  $196,051  $146,490  $120,432  $311,172  $190,045  $1,757,453  $542,228  $407,322  $197,470  $160,246  $78,649  $280,907  $202,036  $1,868,858 

2628

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:

June 30, 2022 Term Loans Amortized Cost Basis by Origination Year 
June 30, 2023 Term Loans Amortized Cost Basis by Origination Year 
(in thousands) 2022  2021  2020  2019  2018  Prior  
Revolving
Loans
  Total  2023  2022  2021  2020  2019  Prior  
Revolving
Loans
  Total 
Home equity lines                                                
Performing $0  $0  $0  $0  $0  $11,986  $98,029  $110,015  $0  $0  $0  $0  $0  $9,047  $122,332  $131,379 
Nonperforming  0   0   0   0   0   469   344   813   0   0   0   0   0   403   251   654 
Total home equity lines 
0  
0  
0  
0  
0  
12,455  
98,373  
110,828   0   0   0   0   0   9,450   122,583   132,033 
                                                                
Home equity lines current period gross charge-offs                      (13)  0   (13)
                                
Mortgage loans                                                                
Performing 
94,529  
190,170  
142,645  
66,499  
32,630  
259,263  
0  
785,736   96,372   175,566   169,481   125,782   59,375   249,229   0   875,805 
Nonperforming  0   167   77   323   412   6,534   0   7,513   0   0   311   121   773   6,094   0   7,299 
Total mortgage loans 
94,529  
190,337  
142,722  
66,822  
33,042  
265,797  
0  
793,249   96,372   175,566   169,792   125,903   60,148   255,323   0   883,104 
                                
Mortgage loans current period gross charge-offs  0   0   (47)  0   (1)  (47)  0   (95)
                                                                
Residential loans                                                                
Performing 
94,529  
190,170  
142,645  
66,499  
32,630  
271,249  
98,029  
895,751   96,372   175,566   169,481   125,782   59,375   258,276   122,332   1,007,184 
Nonperforming  0   167   77   323   412   7,003   344   8,326   0   0   311   121   773   6,497   251   7,953 
Total residential loans $94,529  $190,337  $142,722  $66,822  $33,042  $278,252  $98,373  $904,077  $96,372  $175,566  $169,792  $125,903  $60,148  $264,773  $122,583  $1,015,137 
                                                                
Total residential loans current period gross charge-offs $
0  $
0  $
(47) $
0  $
(1) $
(60) $
0  $
(108)
                                
Consumer direct loans                                                                
Performing $38,166  $54,692  $30,692  $14,493  $8,251  $13,465  $0  $159,759  $35,168  $45,893  $33,307  $19,215  $9,082  $15,177  $0  $157,842 
Nonperforming  29   1   2   0   0   0   0   32   0   6   0   0   0   0   0   6 
Total consumer direct loans 
38,195  
54,693  
30,694  
14,493  
8,251  
13,465  
0  
159,791   35,168   45,899   33,307   19,215   9,082   15,177   0   157,848 
                                
Total consumer direct loans current period gross charge-offs  0   (146)  (42)  (30)  (14)  (6)  0   (238)
                                                                
Consumer indirect loans                                                                
Performing 
223,710  
207,562  
148,495  
60,781  
38,395  
17,883  
0  
696,826   217,355   306,664   136,812   90,812   33,856   20,143   0   805,642 
Nonperforming  0   118   34   56   11   15   0   234   0   157   183   36   18   45   0   439 
Total consumer indirect loans 
223,710  
207,680  
148,529  
60,837  
38,406  
17,898  
0  
697,060   217,355   306,821   136,995   90,848   33,874   20,188   0   806,081 
                                                                
Total consumer indirect loans current period gross charge-offs  (42)  (785)  (883)  (217)  (75)  (73)  0   (2,075)
                                
Consumer loans                                                                
Performing 
261,876  
262,254  
179,187  
75,274  
46,646  
31,348  
0  
856,585   252,523   352,557   170,119   110,027   42,938   35,320   0   963,484 
Nonperforming  29   119   36   56   11   15   0   266   0   163   183   36   18   45   0   445 
Total consumer loans $261,905  $262,373  $
179,223  $
75,330  $46,657  $31,363  $0  $856,851  $252,523  $352,720  $170,302  $110,063  $42,956  $35,365  $0  $963,929 
                                
Total consumer loans current period gross charge-offs $
(42) $
(931) $
(925) $
(247) $
(89) $
(79) $
0  $
(2,313)

2729

December 31, 2021 Term Loans Amortized Cost Basis by Origination Year 
December 31, 2022 Term Loans Amortized Cost Basis by Origination Year 
(in thousands) 2021  2020  2019  2018  2017  Prior  
Revolving
Loans
  Total  2022  2021  2020  2019  2018  Prior  
Revolving
Loans
  Total 
Home equity lines                                                
Performing $0  $0  $0  $0  $0  $10,909  $94,666  $105,575  $0  $0  $0  $0  $0  $10,195  $109,567  $119,762 
Nonperforming  0   0   0   0   0   520   572   1,092   0   0   0   0   0   502   276   778 
Total home equity lines 
0  
0  
0  
0  $
0  
11,429  
95,238  
106,667  
0  
0  
0  
0  
0  
10,697  
109,843  
120,540 
                                                                
Mortgage loans                                                                
Performing 
195,731  
161,471  
75,792  
37,188  
42,597  
245,666  
0  
758,445  
176,736  
177,469  
132,795  
62,415  
30,473  
236,110  
0  
815,998 
Nonperforming  0   63   424   364   558   7,331   0   8,740   0   282   98   791   422   7,405   0   8,998 
Total mortgage loans 
195,731  
161,534  
76,216  
37,552  
43,155  
252,997  
0  
767,185  
176,736  
177,751  
132,893  
63,206  
30,895  
243,515  
0  
824,996 
                                                                
Residential loans                                                                
Performing 
195,731  
161,471  
75,792  $
37,188  
42,597  
256,575  
94,666  
864,020  
176,736  
177,469  
132,795  
62,415  
30,473  
246,305  
109,567  
935,760 
Nonperforming  0   63   424   364   558   7,851   572   9,832   0   282   98   791   422   7,907   276   9,776 
Total residential loans $195,731  $161,534  $76,216  $37,552  $43,155  $264,426  $95,238  $873,852  $176,736  $177,751  $132,893  $63,206  $30,895  $254,212  $109,843  $945,536 
                                                                
Consumer direct loans                                                                
Performing $71,626  $39,312  $18,492  $10,468  $4,490  $12,251  $0  $156,639  $62,239  $42,014  $23,921  $11,166  $6,766  $11,357  $0  $157,463 
Nonperforming  0   4   3   34   3   0   0   44   25   11   5   0   0   0   0   41 
Total consumer direct loans 
71,626  
39,316  
18,495  
10,502  
4,493  
12,251  
0  
156,683  
62,264  
42,025  
23,926  
11,166  
6,766  
11,357  
0  
157,504 
                                                                
Consumer indirect loans                                                                
Performing 
263,127  
190,145  
80,793  
54,437  
23,449  
8,668  
0  
620,619  
371,079  
168,513  
116,267  
45,748  
26,247  
9,073  
0�� 
736,927 
Nonperforming  24   135   20   0   23   4   0   206   65   251   96   30   1   22   0   465 
Total consumer indirect loans 
263,151  
190,280  
80,813  
54,437  
23,472  
8,672  
0  
620,825  
371,144  
168,764  
116,363  
45,778  
26,248  
9,095  
0  
737,392 
                                                                
Consumer loans                                                                
Performing 
334,753  
229,457  
99,285  
64,905  
27,939  
20,919  
0  
777,258  
433,318  
210,527  
140,188  
56,914  
33,013  
20,430  
0  
894,390 
Nonperforming  24   139   23   34   26   4   0   250   90   262   101   30   1   22   0   506 
Total consumer loans $334,777  $229,596  $99,308  $64,939  $27,965  $20,923  $0  $777,508  $433,408  $210,789  $140,289  $56,944  $33,014  $20,452  $0  $894,896 

* 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 resumedare in process was $4.33.8 million at June 30, 2022.2023.  The total of consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings began, but had been suspended,have resumed with restricted parameters was $3.3million at December 31, 2021 was $2.3 million.2022.

2830

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:

 June 30, 2022  June 30, 2023 
(in thousands) 
Number of
Loans
  
Recorded
Investment
  
Specific
Reserve
  
Number of
Loans
  
Recorded
Investment
  
Specific
Reserve
 
Hotel/motel  1  $1,196  $0   2  $8,114  $0 
Commercial real estate residential  4   6,957   0   3   6,353   0 
Commercial real estate nonresidential  10   18,218   200   6   11,704   0 
Commercial other  3   10,190   550   2   6,585   0 
Total collateral dependent loans  18  $36,561  $750   13  $32,756  $0 

 December 31, 2021  December 31, 2022 
(in thousands) 
Number of
Loans
  
Recorded
Investment
  
Specific
Reserve
  
Number of
Loans
  
Recorded
Investment
  
Specific
Reserve
 
Hotel/motel  2  $9,462  $600   1  $1,168  $0 
Commercial real estate residential  4   7,255   0   4   7,786   0 
Commercial real estate nonresidential  11   19,943   200   8   14,718   200 
Commercial other  1   1,113   350   2   8,926   1,000 
Total collateral dependent loans  18  $37,773  $1,150   15  $32,598  $1,200 

 June 30, 2021  June 30, 2022 
(in thousands) 
Number of
Loans
  
Recorded
Investment
  
Specific
Reserve
  
Number of
Loans
  
Recorded
Investment
  
Specific
Reserve
 
Hotel/motel  4  $22,540  $600   1  $1,196  $0 
Commercial real estate residential  4   7,508   0   4   6,957   0 
Commercial real estate nonresidential  12   21,837   200   10   18,218   200 
Commercial other  1   1,217   450   3   10,190   550 
Total collateral dependent loans  21  $53,102  $1,250   18  $36,561  $750 


The hotel/motel, commercial real estate residential, and commercial real estate nonresidential segments are all collateralized with real estate. NaN of the 3The two loans listed in the commercial other segment at June 30, 2022 is collateralized by various chattel, including surface mining equipment, preparation plant equipment, and a first mortgage on a preparation plant, real estate, and improvements2023 .The other 2 loans in this category are collateralized by accounts receivable,inventory, equipment, and inventory.accounts receivable.

31

Certain loans have been modified in TDRs, where the customer is facing financial difficulty and economic concessions were granted to borrowers consisting of reductions in the interest rates, payment extensions, forgiveness of principal, and forbearances.  Those loans, segregated by class of loans and concession granted, are presented below for the three months ended June 30, 2023:

  Interest Rate Reduction  Term Extension 
(in thousands) 
Amortized Cost at
June 30, 2023
  % of total  
Amortized Cost at
June 30, 2023
  % of total 
Hotel/motel $0   0.00% $0   0.00%
Commercial real estate residential  0   0.00   44   0.01
 
Commercial real estate nonresidential  73   0.01
   13   0.00 
Dealer floorplans  0   0.00   0   0.00 
Commercial other  0   0.00   522   0.16
 
Commercial loans  73   0.00   579   0.03
 
                 
Real estate mortgage  0   0.00   877   0.10
 
Home equity lines  0   0.00   0   0.00 
Residential loans  0   0.00   877   0.09
 
                 
Consumer direct  0   0.00   54   0.03 
Consumer indirect  0   0.00   95   0.01 
Consumer loans  0   0.00   149   0.02 
                 
Loans and lease financing $73   0.00% $1,605   0.04%

  
Combination – Term Extension
and Interest Rate Reduction
  Payment Change 
(in thousands) Amortized Cost at
June 30, 2023		  % of total  
Amortized Cost at
June 30, 2023
  % of total 
Hotel/motel $0   0.00% $0   0.00%
Commercial real estate residential  0   0.00   0   0.00 
Commercial real estate nonresidential  0   0.00   0   0.00 
Dealer floorplans  0   0.00   0   0.00 
Commercial other  0   0.00   300   0.09 
Commercial loans  0   0.00   300   0.02 
                 
Real estate mortgage  209   0.02   0   0.00 
Home equity lines  43   0.03   116   0.09 
Residential loans  252   0.02   116   0.01 
                 
Consumer direct  0   0.00   0   0.00 
Consumer indirect  0   0.00   0   0.00 
Consumer loans  0   0.00   0   0.00 
                 
Loans and lease financing $252   0.01
% $416   0.01
%

32

The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty for the three months ended June 30, 2023:

Loan Type
Interest Rate Reduction
Financial Impact
Term Extension
Financial Impact
Hotel/motel
Commercial real estate residential
Added a weighted-average 11.7 years to life of the loans
Commercial real estate nonresidential
Reduced weighted-average contractual interest rate from 10.8% to 8.5%

Dealer floorplans
Commercial otherAdded a weighted-average 0.8 years to life of the loans
Real estate mortgage
Added a weighted-average 4 years to life of the loans
Home equity lines
Consumer directAdded a weighted-average 0.2 years to the life of the loans
Consumer indirectAdded a weighted-average 0.5 years to the life of the loans

Loan Type
Combination – Term Extension and
 Interest Rate Reduction
Financial Impact
Payment Changes
Financial Impact
Hotel/motel
Commercial real estate residential
Commercial real estate nonresidential
Dealer floorplans
Commercial otherProvided payment changes that will be added to the end of the original loan term
Real estate mortgageReduced weighted-average contractual interest rate from 6.8% to 6.2% and increased the weighted-average life by 9.7 years
Home equity linesReduced weighted-average contractual interest rate from 10.3% to 8.3% and increased the weighted-average life by 14.3 yearsProvided payment changes that will be added to the end of the original loan term
Consumer direct
Consumer indirect
33


Those loans, segregated by class of loans and concession granted, are presented below for the six months ended June 30, 2023:

  Interest Rate Reduction  Term Extension 
(in thousands) 
Amortized Cost at
June 30, 2023
  % of total  
Amortized Cost at
June 30, 2023
  % of total 
Hotel/motel $0   0.00% $0   0.00%
Commercial real estate residential  311   0.08   1,383   0.35 
Commercial real estate nonresidential  4,573   0.58   4,800   0.61 
Dealer floorplans  0   0.00   0   0.00 
Commercial other  0   0.00   1,474   0.46 
Commercial loans  4,884   0.25   7,657   0.39 
                 
Real estate mortgage  58   0.01   3,317   0.38 
Home equity lines  0   0.00   54   0.04 
Residential loans  58   0.01   3,371   0.33 
                 
Consumer direct  0   0.00   224   0.14 
Consumer indirect  0   0.00   450   0.06 
Consumer loans  0   0.00   674   0.07 
                 
Loans and lease financing $4,942   0.13% $11,702   0.30%

  
Combination – Term Extension
and Interest Rate Reduction
  Payment Change 
(in thousands) 
Amortized Cost at
June 30, 2023
  % of total  
Amortized Cost at
June 30, 2023
  % of total 
Hotel/motel $0   0.00% $0   0.00%
Commercial real estate residential  88   0.02   0   0.00 
Commercial real estate nonresidential  0   0.00   0   0.00 
Dealer floorplans  0   0.00   0   0.00 
Commercial other  0   0.00   300   0.09 
Commercial loans  88   0.00   300   0.02 
                 
Real estate mortgage  427   0.05   0   0.00 
Home equity lines  77   0.06   116   0.09 
Residential loans  504   0.05   116   0.01 
                 
Consumer direct  0   0.00   20   0.01 
Consumer indirect  0   0.00   0   0.00 
Consumer loans  0   0.00   20   0.00 
                 
Loans and lease financing $592   0.02% $436   0.01%
34


The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty for the six months ended June 30, 2023:

Loan Type
Interest Rate Reduction
Financial Impact
Term Extension
Financial Impact
Hotel/motel
Commercial real estate residentialReduced weighted-average contractual interest rate from 9.6% to 8.0%The weighted-average term was not increased with the changes to this portfolio
Commercial real estate nonresidentialReduced weighted-average contractual interest rate from 9.5% to 7.5%The weighted-average term was not increased with the changes to this portfolio
Dealer floorplans
Commercial otherAdded a weighted-average 1.4 years to life of the loans
Real estate mortgageResulted in no change of the weighted average contractual interest rate of 3.0%Added a weighted-average 2.8 years to life of the loans
Home equity linesAdded a weighted-average 6.8 years to life of the loans
Consumer directRemoved a weighted-average 0.6 years from the life of the loans
Consumer indirectAdded a weighted-average 0.3 years to the life of the loans

Loan Type
Combination – Term Extension and
Interest Rate Reduction
Financial Impact
Payment Changes
Financial Impact
Hotel/motel
Commercial real estate residentialReduced weighted-average contractual interest rate from 10.4% to 7.2% and increased the weighted-average life by 5.9 years
Commercial real estate nonresidential
Dealer floorplans
Commercial otherProvided payment changes that will be added to the end of the original loan term
Real estate mortgageReduced weighted-average contractual interest rate from 7.1% to 6.1% and increased the weighted-average life by 11.3 years
Home equity linesReduced weighted-average contractual interest rate from 9.1% to 8.0% and increased the weighted-average life by 10.2 yearsProvided payment changes that will be added to the end of the original loan term
Consumer directProvided payment changes that will be added to the end of the original loan term
Consumer indirect

35

 Presented  below, segregated by class of loans, are TDRs that occurred during the three and six months ended June 30, 2022 and 2021 and the year ended December 31, 2021:2022:

 
Three Months Ended
June 30, 2022
 
  Pre-Modification Outstanding Balance 
(in thousands)
 
Number of
Loans
  
Term
Modification
  Combination  
Total
Modification
 
Hotel/motel  0  $
0  $
0  $
0 
Commercial real estate residential  0  
0  
0  
0 
Commercial real estate nonresidential  0   0   0   0 
Commercial other  5   5,562   0   5,562 
Total commercial loans  5   5,562   0   5,562 
                 
Real estate mortgage
  1   305   0   305 
Total residential loans
  1   305   0   305 
                 
Total troubled debt restructurings  6  $5,867  $0  $5,867 

29
 
Three Months Ended
June 30, 2022
 
  Post-Modification Outstanding Balance 
(in thousands)
 
Number of
Loans
  
Term
Modification
  Combination  
Total
Modification
 
Hotel/motel  0  $
0  $
0  $
0 
Commercial real estate residential  0  
0  
0  
0 
Commercial real estate nonresidential  0   0   0   0 
Commercial other  5   5,562   0   5,562 
Total commercial loans  5   5,562   0   5,562 
                 
Real estate mortgage
  1   305   0   305 
Total residential loans
  1   305   0   305 
                 
Total troubled debt restructurings  6  $5,867  $0  $5,867 

 
Six Months Ended
June 30, 2022
 
  Pre-Modification Outstanding Balance 
(in thousands)
 
Number of
Loans
  
Term
Modification
  Combination  
Total
Modification
 
Hotel/motel  0  $
0  $
0  $
0 
Commercial real estate residential  2   
154   
0  
154 
Commercial real estate nonresidential  2   245   0   245 
Commercial other  9   6,526   0   6,526 
Total commercial loans  13   6,925   0   6,925 
                 
Real estate mortgage
  3   305   916   1,221 
Total residential loans
  3   305   916   1,221 
                 
Total troubled debt restructurings  16  $7,230  $916  $8,146 

36
 
Six Months Ended
June 30, 2022
 
  Post-Modification Outstanding Balance 
(in thousands)
 
Number of
Loans
  
Term
Modification
  Combination  
Total
Modification
 
Hotel/motel  0  $
0  $
0  $0 
Commercial real estate residential  2  
154  
0  
154 
Commercial real estate nonresidential  2   244   0   244 
Commercial other  9   6,525   0   6,525 
Total commercial loans  13   6,923   0   6,923 
                 
Real estate mortgage
  3   305   916   1,221 
Total residential loans
  3   305   916   1,221 
                 
Total troubled debt restructurings  16  $7,228  $916  $8,144 

 
Year Ended
December 31, 2022
 
  Pre-Modification Outstanding Balance 
(in thousands)
 
Number of
Loans
  
Term
Modification
  Combination  Other  
Total
Modification
 
Commercial real estate residential  6  $
659  $
0  $
66  $725 
Commercial real estate nonresidential  8   1,206   0   118   1,324 
Hotel/motel  0   0   0   0   0 
Commercial other  22   12,812   0   66   12,878 
Total commercial loans  36   14,677   0   250   14,927 
                    
Real estate mortgage  5   593   1,309   0   1,902 
Total residential loans  5   593   1,309   0   1,902 
                    
Total troubled debt restructurings  41  $15,270  $1,309  $250  $16,829 

 
Year Ended
December 31, 2022
 
  Post-Modification Outstanding Balance 
(in thousands)
 
Number of
Loans
  
Term
Modification
  Combination  Other  
Total
Modification
 
Commercial real estate residential  6  $
659  $
0  $
66  $
725 
Commercial real estate nonresidential  8   1,342   0   118   1,460 
Hotel/motel  0   0   0   0   0 
Commercial other  22   12,811   0   66   12,877 
Total commercial loans  36   14,812   0   250   15,062 
                    
Real estate mortgage  5   593   1,309   0   1,902 
Total residential loans  5   593   1,309   0   1,902 
                    
Total troubled debt restructurings  41  $15,405  $1,309  $250  $16,964 

30
 
Year Ended
December 31, 2021
    
  Pre-Modification Outstanding Balance    
(in thousands)
 
Number of
Loans
  
Term
Modification
  Combination  Other  
Total
Modification
 
Hotel/motel  0  $0  $0  $0  $0 
Commercial real estate residential  6   388   0   0   388 
Commercial real estate nonresidential  9   4,179   2,988   0   7,167 
Commercial other  5   417   0   0   417 
Total commercial loans  20   4,984   2,988   0   7,972 
                    
Real estate mortgage  3   278   277   262   817 
Total residential loans  3   278   277   262   817 
                    
Total troubled debt restructurings  23  $5,262  $3,265  $262  $8,789 

 
Year Ended
December 31, 2021
    
  Post-Modification Outstanding Balance    
(in thousands)
 
Number of
Loans
  
Term
Modification
  Combination  Other  
Total
Modification
 
Hotel/motel  0  $0  $0  $0  $0 
Commercial real estate residential  6   424   0   0   424 
Commercial real estate nonresidential  9   4,282   3,000   0   7,282 
Commercial other  5   340   0   0   340 
Total commercial loans  20   5,046   3,000   0   8,046 
                    
Real estate mortgage  3   279   277   262   818 
Total residential loans  3   279   277   262   818 
                    
Total troubled debt restructurings  23  $5,325  $3,277  $262  $8,864 

 
Three Months Ended
June 30, 2021
 
  Pre-Modification Outstanding Balance 
(in thousands)
 
Number of
Loans
  
Term
Modification
  Combination  
Total
Modification
 
Hotel/motel
  0  $
0  $0  $
0 
Commercial real estate residential  0  
0  
0  
0 
Commercial real estate nonresidential  4   2,081   136   2,217 
Commercial other  2   298   0   298 
Total commercial loans  6   2,379   136   2,515 
                 
Real estate mortgage  0   0   0   0 
Total residential loans  0   0   0   0 
                 
Total troubled debt restructurings  6  $2,379  $136  $2,515 

31
 
Three Months Ended
June 30, 2021
 
  Post-Modification Outstanding Balance 
(in thousands)
 
Number of
Loans
  
Term
Modification
  Combination  
Total
Modification
 
Hotel/motel
  0  $
0  $0  $
0 
Commercial real estate residential  0  
0  
0  
0 
Commercial real estate nonresidential  4   2,086   154   2,240 
Commercial other  2   216   0   216 
Total commercial loans  6   2,302   154   2,456 
                 
Real estate mortgage  0   0   0   0 
Total residential loans  0   0   0   0 
                 
Total troubled debt restructurings  6  $2,302  $154  $2,456 

 
Six Months Ended
June 30, 2021
 
  Pre-Modification Outstanding Balance 
(in thousands)
 
Number of
Loans
  
Term
Modification
  Combination  
Total
Modification
 
Hotel/motel
  0  $
0  $
0  $
0 
Commercial real estate residential  0  
0  
0  
0 
Commercial real estate nonresidential  5   2,081   420   2,501 
Commercial other  2   298   0   298 
Total commercial loans  7   2,379   420   2,799 
                 
Real estate mortgage  0   0   0   0 
Total residential loans  0   0   0   0 
                 
Total troubled debt restructurings  7  $2,379  $420  $2,799 

 
Six Months Ended
June 30, 2021
 
  Post-Modification Outstanding Balance 
(in thousands)
 
Number of
Loans
  
Term
Modification
  Combination  
Total
Modification
 
Hotel/motel
  0  $0  $0  $0 
Commercial real estate residential  0  
0  
0  
0 
Commercial real estate nonresidential  5   2,086   438   2,524 
Commercial other  2   216   0   216 
Total commercial loans  7   2,302   438   2,740 
                 
Real estate mortgage  0   0   0   0 
Total residential loans  0   0   0   0 
                 
Total troubled debt restructurings  7  $2,302  $438  $2,740 


No charge-offs have resulted from modifications for any of the presented periods.  We had commitments to extend additional credit in the amount of $37 thousand and $52 thousand at June 30, 2022 and December 31, 2021, respectively, on loans that were considered TDRs.

3237

LoansLoans 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 indue to a TDRborrower’s financial difficulty are closely monitored for delinquency as an early indicator of possible future default.  If loans modified in a TDRloan to a borrower experiencing financial difficulty subsequently default,defaults, CTBI evaluates the loan for possible further impairment.The table below represents the payment status of modified loans to borrowers experiencing financial difficulty.

  Past Due Status (Amortized Cost Basis) 
  Current   
30-89 Days
   
90+ Days

 Nonaccrual 
Hotel/motel
 
$
0
  
$
0
  
$
0
  
$
0
 
Commercial real estate residential
  
1,741
   
40
   
0
   
0
 
Commercial real estate nonresidential
  
9,373
   
0
   
0
   
0
 
Dealer floorplans
  
0
   
0
   
0
   
0
 
Commercial other
  
1,145
   
292
   
0
   
337
 
Real estate mortgage
  
3,374
   
125
   
118
   
185
 
Home equity lines
  
168
   
59
   
0
   
22
 
Consumer direct
  
239
   
5
   
0
   
0
 
Consumer indirect
  
371
   
78
   
0
   
0
 
Total
 
$
16,411
  
$
599
  
$
118
  
$
544
 


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 ofDuring the quarter ended June 30, 2023, there were three loans are loansto borrowers experiencing financial difficulty that were modified as TDRs within the past 12 months which have subsequently defaulted.  CTBI considers a loan in default when it is 90 days or more past due or transferred to nonaccrual.  nonaccrual.


There were 0 defaultedno troubled debt restructured loans for the three and six months ended June 30, 2022.2023.



 
Three Months Ended
June 30, 2022
  
Six Months Ended
June 30, 2022
 
(in thousands) Number of Loans  Recorded Balance  Number of Loans  Recorded Balance 
Commercial:            
Hotel/motel  0
  $0
   0
  $0
 
Commercial other  0
   0
   0   0 
Residential:                
Real estate mortgage  0   0   0   0 
Total defaulted restructured loans  0  $0   0  $0 

Financial instrument credit losses apply to off-balance sheet credit exposures such as unfunded loan commitments and standby letters of credit.  A liability for expected credit losses for off-balance sheet exposures is recognized if the entity has a present contractual obligation to extend the credit and the obligation is not unconditionally cancellable by the entity.  Changes in this allowance are reflected in other operating expenses within the non-interest expense category.  As of June 30, 2023 and December 31, 2022, the total unfunded commitment off-balance sheet credit exposure was $1.1 million and $0.7 million, respectively.
  
Three Months Ended
June 30, 2021
  
Six Months Ended
June 30, 2021
 
(in thousands) Number of Loans  Recorded Balance  Number of Loans  Recorded Balance 
Commercial:            
Hotel/motel  1  $1,113   1  $1,113 
Residential:                
Real estate mortgage  1   275   1   275 
Total defaulted restructured loans  2  $1,388   2  $1,388 

Note 5 – Other Real Estate Owned


Activity for other real estate owned was as follows:

 Three Months Ended  Six Months Ended 
 
Three Months Ended
June 30
  
Six Months Ended
June 30
  June 30  June 30 
(in thousands) 2022  2021  2022  2021  2023  2022  2023  2022 
Beginning balance of other real estate owned $2,299  $6,224  $3,486  $7,694  $2,776  $2,299  $3,671  $3,486 
New assets acquired  307   421  444   251   124   307   175   444 
Capitalized costs
  73   0   73   0   40   73   40   73 
Fair value adjustments  (23)  (350)  (269)  (504)  (25)  (23)  (106)  (269)
Sale of assets  (702)  (447)  (1,780)  (1,593)  (868)  (702)  (1,733)  (1,780)
Ending balance of other real estate owned $1,954  $5,848  $1,954  $5,848  $2,047  $1,954  $2,047  $1,954 


Carrying costs and fair value adjustments associated with foreclosed properties for the three months ended June 30, 20222023 and 20212022 were $0.1 million and $0.5 million, respectively.in each period. Carrying costs and fair value adjustments associated with foreclosed properties for the six months ended June 30, 20222023 and 20212022 were $0.40.2 million and $0.80.4 million, respectively. See Note 1 for a description of our accounting policies relative to foreclosed properties and other real estate owned.

38

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

(in thousands) 
June 30
2022
  
December 31
2021
  
June 30
2023
  
December 31
2022
 
1-4 family $638  $1,130  $574  $859 
Construction/land development/other  449   480   683   867 
Multifamily  0   88 
Non-farm/non-residential  867   1,788   790   1,945 
Total foreclosed properties $1,954  $3,486  $2,047  $3,671 

33
Note 6 – Repurchase Agreements


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


We monitor collateral levels on a continuous basis and maintain records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and we segregate the security from its general assets in accordance with regulations governing custodial holdings of securities. The primary risk with our repurchase agreements is market risk associated with the securities securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents. The carrying value of investment securities available-for-sale pledged as collateral under repurchase agreements totaled $288.9$300.3 million and $317.1$273.8 million at June 30, 20222023 and December 31, 2021,2022, 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 June 30, 20222023 and December 31, 20212022 is presented in the following tables:

 June 30, 2022 
  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 $4,081  $1,565  $2,151  $10,574  $18,371 
State and political subdivisions  89,371   521   1,963   15,745   107,600 
U.S. government sponsored agency mortgage-backed securities  25,429   8,914   5,886   72,533   112,762 
Total $118,881  $11,000  $10,000  $98,852  $238,733 

 December 31, 2021  June 30, 2023 
 Remaining Contractual Maturity of the Agreements  Remaining Contractual Maturity of the Agreements 
(in thousands) 
Overnight
and
Continuous
  
Up to
30 days
  30-90 days  
Greater
Than
90 days
  Total  
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  $16  $5,400  $10,040  $18,632  $19,951  $2,000  $0  $22,608  $44,559 
State and political subdivisions  83,375   484   13,633   9,427   106,919   99,257   1,391   0   7,898   108,546 
U.S. government sponsored agency mortgage-backed securities  24,689   0   85,967   34,881   145,537   23,552   7,609   0   43,633   74,794 
Asset-backed securities
  1,121   0   0   0   1,121 
Total $111,240  $500  $105,000  $54,348  $271,088  $143,881  $11,000  $0  $74,139  $229,020 

3439
 December 31, 2022 
  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 $21,679  $34  $2,979  $1,832  $26,524 
State and political subdivisions  96,627   466   9,634   2,140   108,867 
U.S. government sponsored agency mortgage-backed securities  17,964   0   52,387   9,385   79,736 
Asset-backed securities
  304   0   0   0   304 
Total $136,574  $500  $65,000  $13,357  $215,431 

Note 7 – Fair 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.

40
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 June 30, 20222023 and December 31, 20212022 and indicate the level within the fair value hierarchy of the valuation techniques.

    
Fair Value Measurements at
June 30, 2022 Using
     
Fair Value Measurements at
June 30, 2023 Using
 
(in thousands) Fair Value  
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  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 $430,277  $386,192  $44,085  $0  $365,394  $341,199  $24,195  $0 
State and political subdivisions  279,226   0   279,226   0   259,825   0   259,825   0 
U.S. government sponsored agency mortgage-backed securities  601,568   0   601,568   0   487,899   0   487,899   0 
Asset-backed securities  91,056   0   91,056   0   88,135   0   88,135   0 
Equity securities at fair value  2,128   0   0   2,128   2,545   0   0   2,545 
Mortgage servicing rights  8,220   0   0   8,220   8,230   0   0   8,230 

35

    
Fair Value Measurements at
December 31, 2021 Using
     
Fair Value Measurements at
December 31, 2022 Using
 
(in thousands)
 Fair Value  
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  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  $0  $381,932  $346,265  $35,667  $0 
State and political subdivisions  334,203   0   334,203   0   265,102   0   265,102   0 
U.S. government sponsored agency mortgage-backed securities  730,809   0   730,809   0   520,085   0   520,085   0 
Asset-backed securities  94,647   0   94,647   0   89,107   0   89,107   0 
Equity securities at fair value  2,253   0   0   2,253   2,166   0   0   2,166 
Mortgage servicing rights  6,774   0   0   6,774   8,468   0   0   8,468 


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 June 30, 20222023 and December 31, 2021.2022. There have been no significant changes in the valuation techniques during the quarter ended June 30, 2022.2023. 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 AFS 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.

41

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 June 30, 20222023 and December 31, 2021,2022, the only securities owned by CTBI that were valued using Level 3 criteria are Visa Class B Stock (included in equity securities at fair value). Fair value for Visa Class B Stock is determined by an independent third party utilizing assumptions about factors such as quarterly common stock dividend payments, the conversion of the securities to the relevant Class A Stock shares subject to the prevailing conversion rate, and conversion date. We have 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.

36
Mortgage Servicing Rights


Mortgage servicing rights (“MSRs”) do not trade in an active, open market with readily observable prices. CTBI reports MSRs 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, MSRs are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements of MSRs 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 MSRs.

42
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:


 
Three Months Ended
June 30, 2022
  
Three Months Ended
June 30, 2021
  
Three Months Ended
June 30, 2023
  
Three Months Ended
June 30, 2022
 
(in thousands) 
Equity
Securities
at Fair
Value
  
Mortgage
Servicing
Rights
  
Equity
Securities
at Fair
Value
  
Mortgage
Servicing
Rights
  
Equity
Securities
at Fair
Value
  
Mortgage
Servicing
Rights
  
Equity
Securities
at Fair
Value
  
Mortgage
Servicing
Rights
 
Beginning balance $2,352  $7,748  $2,243  $5,584  $2,380  $8,121  $2,352  $7,748 
Total unrealized gains (losses)                                
Included in net income  (224)  468   280   (129)  165   80   (224)  468 
Issues  0   223   0   674   0   46   0   223 
Settlements  0   (219)  0   (230)  0   (17)  0   (219)
Ending balance $2,128  $8,220  $2,523  $5,899  $2,545  $8,230  $2,128  $8,220 
                                
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 $(224) $468  $280  $(129) $165  $80  $(224) $468 


 
Six Months Ended
June 30, 2022
  
Six Months Ended
June 30, 2021
  
Six Months Ended
June 30, 2023
  
Six Months Ended
June 30, 2022
 
(in thousands) 
Equity
Securities at Fair Value
  
Mortgage
Servicing
Rights
  
Equity
Securities at Fair Value
  
Mortgage
Servicing
Rights
  
Equity
Securities
at Fair
Value
  
Mortgage
Servicing
Rights
  
Equity
Securities
at Fair
Value
  
Mortgage
Servicing
Rights
 
Beginning balance $2,253  $6,774  $2,471  $4,068  $2,166  $8,468  $2,253  $6,774 
Total unrealized gains (losses)                                
Included in net income  (125)  1,451   52   901  379   (134)  (125)  1,451 
Issues  0   452   0   1,410   0   96   0   452 
Settlements  0   (457)  0   (480)  0   (200)  0   (457)
Ending balance $2,128  $8,220  $2,523  $5,899  $2,545  $8,230  $2,128  $8,220 
                                
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 $(125) $1,451  $52  $901 $379  $(134) $(125) $1,451 

37

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

Noninterest Income            
 Three Months Ended  Six Months Ended  Three Months Ended  Six Months Ended 
 June 30  June 30  June 30  June 30 
(in thousands) 2022  2021  2022  2021  2023  2022  2023  2022 
Total gains (losses) $25 $(79) $869  $473
Total gains
 $227  $25  $44  $869 

43
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 June 30, 20222023 and December 31, 20212022 and indicate the level within the fair value hierarchy of the valuation techniques.

    
Fair Value Measurements at
June 30, 2022 Using
     
Fair Value Measurements at
June 30, 2023 Using
 
(in thousands) Fair Value  
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  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 $4,418  $0  $0  $4,418 
Other real estate owned  621   0   0   621  $177  $0  $0  $177 


    
Fair Value Measurements at
December 31, 2021 Using
     
Fair Value Measurements at
December 31, 2022 Using
 
(in thousands)
 Fair Value  
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  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  $0  $0  $1,238  $2,703  $0  $0  $2,703 
Other real estate owned  1,487   0   0   1,487   570   0   0   570 


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.

38

Loans considered collateral dependent are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty in accordance with ASC 326-20-35-5.  Quarter-to-date fair value adjustments on collateral-There were no collateral dependent loans disclosed above were $0.3 million, $0.4 million, and $0.5 million for the quarters endedas of June 30, 2022, December 31, 2021, and June 30, 2021, respectively.  Year-to-date adjustments were $0.2 million, $0.7 million, and $0.8 million for the six months ended June 30, 2022, the year ended December 31, 2021, and the six months ended June 30, 2021, respectively.2023.

44
Other Real Estate Owned


In accordance with the provisions of ASC 360, Property, Plant, and Equipment, other real estate owned (“OREO”) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of OREO is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy. Long-lived assets are subject to nonrecurring fair value adjustments to reflect subsequent partial write-downs that are based on the observable market price or current appraised value of the collateral.  Quarter-to-date fairFair value adjustments on OREO disclosed above were $10$25 thousand $0.2 million, and $0.3 million for the quartersquarter ended June 30, 2022, December 31, 2021, and June 30, 2021, respectively.  Year-to-date adjustments were $0.2 million, $0.3 million, and $0.4 million2023, $106 thousand for the six months ended June 30, 2022,2023, and $285 thousand for the year ended December 31, 2021, and for the six months ended June 30, 2021, respectively.2022.


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.

39
Unobservable (Level 3) Inputs


The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at June 30, 20222023 and December 31, 2021.2022.


 Quantitative Information about Level 3 Fair Value Measurements Quantitative Information about Level 3 Fair Value Measurements
(in thousands) 
Fair Value at
June 30, 2022
 
Valuation
Technique(s)
Unobservable Input 
Range
(Weighted
Average)
 
Fair Value at
June 30, 2023
 
Valuation
Technique(s)
Unobservable Input 
Range
(Weighted
Average)
Equity securities at fair value $2,128 Discount cash flows, computer pricing modelDiscount rate  
8.0% - 12.0%
(10.0%)
 $2,545 Discount cash flows, computer pricing modelDiscount rate 
8.0% - 12.0%
(10.0%)
       Conversion date 
Dec 2024 –
Dec 2028
(Dec 2026)
    
Conversion date 
Dec 2025 - Dec 2029
(Dec 2027)
                
Mortgage servicing rights $8,220 Discount cash flows, computer pricing modelConstant prepayment rate  
7.0% - 25.2%
(7.3%)
 $8,230 Discount cash flows, computer pricing modelConstant prepayment rate 
0.0% - 26.7%
(7.4%)
       Probability of default  
0.0% - 100.0%
(1.0%)
    
Probability of default 
0.0% - 100%
(1.3%)
       Discount rate  
9.5% - 11.6%
(10.0%)
    
Discount rate 
9.5% - 11.5%
(10.0%)
            
   
Collateral dependent loans $4,418 Market comparable propertiesMarketability discount  
20.0% - 30.0%
(27.0%)
        
Other real estate owned $621 Market comparable propertiesComparability adjustments  
10.0% - 31.4%
(12.4%)
 $177 Market comparable propertiesComparability adjustments 
0.0% - 10.0%
(10.0%)


 Quantitative Information about Level 3 Fair Value Measurements
 (in thousands)
 
Fair Value at
December 31,
2021
 
Valuation
Technique(s)
Unobservable Input 
Range
(Weighted
Average)
Equity securities at fair value $2,253 Discount cash flows, computer pricing modelDiscount 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 modelConstant 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 propertiesMarketability discount  
20.0% - 62.0%
(41.0%)
          
Other real estate owned $1,487 Market comparable propertiesComparability adjustments  
10.0% - 45.5%
(15.1%)
45

 Quantitative Information about Level 3 Fair Value Measurements
 (in thousands)
 
Fair Value at
December 31,
2022
 
Valuation
Technique(s)
Unobservable Input 
Range
(Weighted
Average)
Equity securities at fair value $2,166 Discount cash flows, computer pricing modelDiscount rate 
8.0% - 12.0%
(10.0%)
           Conversion date 
Dec 2025 - Dec 2029
(Dec 2027)
         
Mortgage servicing rights $8,468 Discount cash flows, computer pricing modelConstant prepayment rate 
6.5% - 28.0%
(7.1%)
     
Probability of default 
0.0% - 100.0%
(1.2%)
     
Discount rate 
9.5% - 12.0%
(10.0%)
     
   
Collateral-dependent loans $2,703 Market comparable propertiesMarketability discount 
52.0% - 52.0%
(52.0%)
     
   
Other real estate owned $570 Market comparable propertiesComparability adjustments 
10.0% - 30.6%
(10.9%)

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 how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

40
Equity Securities at Fair Value


Fair 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 1.60681.5902 and the most recent dividend rate of 0.60260.7156 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 value for MSRs 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.

46
Fair Value of Financial Instruments


The following table presents estimated fair value of CTBI’s financial instruments as of June 30, 20222023 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 June 30, 20222023 were measured using an exit price notion.

    
Fair Value Measurements
at June 30, 2022 Using
     
Fair Value Measurements
at June 30, 2023 Using
 
(in thousands) 
Carrying
Amount
  
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
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 $213,666  $213,666  $0  $0  $109,545  $109,545  $0  $0 
Certificates of deposit in other banks  245   0   245   0   245   0   245   0 
Debt securities available-for-sale  1,402,127   386,192   1,015,935   0   1,201,253   341,199   860,054   0 
Equity securities at fair value  2,128   0   0   2,128   2,545   0   0   2,545 
Loans held for sale  936   957   0   0   238   244   0   0 
Loans, net  3,516,099   0   0   3,540,555   3,881,677   0   0   3,717,729 
Federal Home Loan Bank stock  8,139   0   8,139   0   6,545   0   6,545   0 
Federal Reserve Bank stock  4,887   0   4,887   0   4,887   0   4,887   0 
Accrued interest receivable  15,801   0   15,801   0   20,257   0   20,257   0 
                                
Financial liabilities:                                
Deposits $4,472,928  $1,408,148  $3,084,034  $0  $4,516,660  $1,361,078  $3,163,628  $0 
Repurchase agreements  238,733   0   0   238,899   229,020   0   0   229,277 
Federal funds purchased  500   0   500   0   500   0   500   0 
Advances from Federal Home Loan Bank  365   0   385   0   345   0   242   0 
Long-term debt  57,841   0   0   44,380   64,350   0   0   52,043 
Accrued interest payable  1,863   0   1,863   0   5,624   0   5,624   0 
                                
Unrecognized financial instruments:                                
Letters of credit $0  $0  $0  $0  $0  $0  $0  $0 
Commitments to extend credit  0   0   0   0   0   0   0   0 
Forward sale commitments  0   0   0   0   0   0   0   0 

4147

The following table presents estimated fair value of CTBI’s financial instruments as of December 31, 20212022 and indicates the level within the fair value hierarchy of the valuation techniques.


    
Fair Value Measurements
at December 31, 2021 Using
     
Fair Value Measurements
at December 31, 2022 Using
 
(in thousands) 
Carrying
Amount
  
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
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  $0  $0  $128,686  $128,686  $0  $0 
Certificates of deposit in other banks  245   0   245   0   245   0   245   0 
Debt securities available-for-sale  1,455,429   242,214   1,213,215   0   1,256,226   346,265   909,961   0 
Equity securities at fair value  2,253   0   0   2,253   2,166   0   0   2,166 
Loans held for sale  2,632   2,693   0   0   109   112   0   0 
Loans, net  3,367,057   0   0   3,480,803   3,663,309   0   0   3,511,810 
Federal Home Loan Bank stock  8,139   0   8,139   0   6,676   0   6,676   0 
Federal Reserve Bank stock  4,887   0   4,887   0   4,887   0   4,887   0 
Accrued interest receivable  15,415   0   15,415   0   19,592   0   19,592   0 
                                
Financial liabilities:                                
Deposits $4,344,292  $1,331,103  $3,043,339  $0  $4,426,143  $1,394,915  $3,050,144  $0 
Repurchase agreements  271,088   0   0   271,186   215,431   0   0   215,542 
Federal funds purchased  500   0   500   0   500   0   500   0 
Advances from Federal Home Loan Bank  375   0   400   0   355   0   380   0 
Long-term debt  57,841   0   0   45,854   57,841   0   0   55,860 
Accrued interest payable  1,016   0   1,016   0   2,237   0   2,237   0 
                                
Unrecognized financial instruments:                                
Letters of credit $0  $0  $0  $0  $0  $0  $0  $0 
Commitments to extend credit  0   0   0   0   0   0   0   0 
Forward sale commitments  0   0   0   0   0   0   0   0 
 
Note 8 – Revenue Recognition


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


CTBI’s additional source of income, also referred to as noninterest income, includes service charges on deposit accounts, gains/lossesgains on the salesales of OREO, gains/losses on the sale of property, plant and equipment,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.

42

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 0not 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.

48

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 1one 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 under accounting guidance for revenue from contracts with customers during CTBI’s ordinary activities primarily relates to gains on sales of loans, MSRs, gains/losses on the sale of investment securities, gains/losses on the sale of OREO, gains/losses on the sale of property, plant and equipment, and income from bank owned life insurance.


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

Note 9 – Earnings Per Share


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

 Three Months Ended  Six Months Ended 
 
Three Months Ended
June 30
  
Six Months Ended
June 30
  June 30  June 30 
(in thousands except per share data) 2022  2021  2022  2021  2023  2022  2023  2022 
Numerator:                        
Net income $20,271  $23,931  $39,999  $47,549  $19,404  $20,271  $38,717  $39,999 
                                
Denominator:                                
Basic earnings per share:                                
Weighted average shares  17,835   17,784   17,827   17,779   17,884   17,835   17,877   17,827 
Diluted earnings per share:                                
Effect of dilutive stock options and restricted stock grants  8   16   11   15   6   8   8   11 
Adjusted weighted average shares  17,843   17,800   17,838   17,794   17,890   17,843   17,885   17,838 
                                
Earnings per share:                                
Basic earnings per share $1.14  $1.35  $2.24  $2.67  $1.09  $1.14  $2.17  $2.24 
Diluted earnings per share  1.14   1.34   2.24   2.67   1.08   1.14   2.16   2.24 


There were 0no options to purchase common shares that were excluded from the diluted calculations above for the three and six months ended June 30, 20222023 and 2021.2022. 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.

4349
Note 10 – Accumulated Other Comprehensive Income (Loss)

Unrealized gains (losses) on AFS securities


Amounts reclassified from accumulated other comprehensive income (loss) (“AOCI”) and the affected line items in the statements of income during the three and six months ended June 30, 20222023 and 20212022 were:

 Amounts Reclassified from AOCI 

 
Three Months Ended
June 30
  
Six Months Ended
June 30
 
(in thousands) 2022  2021  2022  2021 
Affected line item in the statements of income            
Securities gains (losses) $(1) $0  $(1) $60 
Tax expense (benefit)  0   0   0   16 
Total reclassifications out of AOCI $(1) $0  $(1) $44 

Note 11 – Subsequent Events
 Amounts Reclassified from AOCI 

(in thousands)		 
Three Months Ended
June 30
  
Six Months Ended
June 30
 
 2023  2022  2023  2022 
Affected line item in the statements of income            
Securities gains (losses) $0  $(1) $4  $(1)
Tax expense (benefit)  0   0   1   0 
Total reclassifications out of AOCI $0  $(1) $3  $(1)


On July 28, 2022, several counties in eastern Kentucky experienced major flooding.  NaN counties in our service area were severely impacted.  The President of the United States signed executive orders providing for Federal Emergency Management Association assistance to individuals in affected counties, including the five in our service area.  NaN of our branch locations were impacted by the flooding causing an interruption in service in these areas as we work to repair the damage.  We are still in the process of fully assessing the financial impact of the damage and the impact to our borrowers in affected areas.
4450
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Community Trust Bancorp, Inc. (“CTBI”), our operations, and our present business environment.  The MD&A is provided as a supplement to—and should be read in conjunction with—our condensed consolidated financial statements and the accompanying notes thereto contained in Part I, Item 1 of this quarterly report, as well as our consolidated financial statements, the accompanying notes thereto, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the year ended December, 31, 2021.2022.  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

CTBICommunity 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 78seventy-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 June 30, 2022,2023, we had total consolidated assets of $5.4$5.5 billion and total consolidated deposits, including repurchase agreements, of $4.7 billion.  Total shareholders’ equity at June 30, 20222023 was $632.1$660.1 million.  Trust assets under management at June 30, 20222023 were $3.3 billion, including CTB’s investment portfolio totaling $1.4$1.2 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, linesLines 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 servicefull-service brokerage and insurance services.  For further information, see Item 1 of our annual report on Form 10-K for the year ended December 31, 2021.2022.

4551
Results of Operations and Financial Condition

We reported earnings for the second quarter 20222023 of $20.3$19.4 million, or $1.14$1.09 per basic share, compared to $19.7$19.3 million, or $1.11$1.08 per basic share, earned during the first quarter 20222023 and $23.9$20.3 million, or $1.35$1.14 per basic share, earned during the second quarter 2021.2022.  Total revenue was $0.3$0.2 million above prior quarter but $0.2and $2.5 million belowabove prior year same quarter.  Net interest revenue increaseddecreased $0.8 million compared to prior quarter andbut increased $2.3 million compared to prior year same quarter; however,quarter, and noninterest income decreased $0.5increased $1.1 million compared to prior quarter and $1.0$0.3 million compared to prior year same quarter.  The decrease in noninterest income quarter over quarter was primarily the result of a variance in the valuation of our mortgage servicing rights, while the decrease year over year was primarily the result of a decrease in gains on sales of loans.  ProvisionOur provision for credit losses for the quarter was $0.1 million, compared to provision ofincreased $0.9 million for thefrom prior quarter ended March 31, 2022 and a recovery of provision of $4.3was $1.9 million for thehigher than second quarter 2021.2022.  Noninterest expense increased $0.6decreased $0.9 million compared to prior quarter and $0.5but was $1.0 million compared tohigher than prior year same quarter.  Net incomeEarnings for the six months ended June 30, 2022 was below prior year by $7.52023 were $38.7 million, primarily dueor $2.17 per basic share, compared to $40.0 million, or $2.24 per basic share, for the $6.8 million recovery of provision for credit losses taken in 2021.six months ended June 30, 2022.

Quarterly Highlights

❖
Net interest income for the quarter of $40.8$43.1 million was $0.8 million below prior quarter but $2.3 million above prior year same quarter, andas our net interest margin decreased 14 basis points from prior quarter but increased 15 basis points from prior year same quarter.

❖
Provision for loancredit losses for the quarter was $0.1 million, compared to provision of $0.9at $2.0 million for the quarter ended March 31, 2022increased $0.9 million from prior quarter and a recovery of provision of $4.3$1.9 million for the second quarter 2021.from prior year same quarter.

❖
Our loan portfolio increased $42.9$152.3 million, an annualized 4.9%16.2%, during the quarterfrom March 31, 2023 and $149.6$220.4 million, or an annualized 8.9%12.0%, from December 31, 2021.  Loans, excluding Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans, increased $57.6 million during the quarter.2022.

❖
NetWe had net loan charge-offs were $42of $674 thousand, or 0.07% of average loans annualized for the second quarter 2023 compared to $414 thousand, or 0.04% of average loans annualized for the first quarter 2023 and $43 thousand, or less than 0.01% of average loans annualized, for the quarter ended June 30, 2022 compared to net loan charge-offs of $0.3 million, 0.04% of average loans annualized, for the first quarter 2022 and a net recovery of loan charge-offs for the second quarter 2021 of $0.6 million.2022.

❖
Asset quality remains strong from prior quarter as ourOur total nonperforming loans excluding troubled debt restructurings (“TDRs”), increased slightlydecreased to $13.8$11.7 million at June 30, 20222023 from $13.7$12.2 million at March 31, 2022 but decreased from the $16.62023 and $15.3 million at December 31, 2021.2022.  Nonperforming assets at $15.8$13.8 million decreased $0.2$1.2 million from March 31, 20222023 and $4.3$5.2 million from December 31, 2021.2022.

❖
Deposits, including repurchase agreements, increased $28.7at $4.7 billion decreased $6.5 million, or an annualized 2.5%0.6%, during the quarter and $96.3from March 31, 2023 but increased $104.1 million, or an annualized 4.2%4.5%, from December 31, 2021.2022.

❖
Shareholders’ equity declined $21.3at $660.1 million increased $3.3 million, or an annualized 13.1%2.0%, during the quarter and $66.2$32.1 million, or an annualized 19.1%10.3%, from December 31, 2021, as a result of the continued increase in unrealized losses on our securities portfolio.2022.

❖
Noninterest income for the quarter ended June 30, 20222023 of $14.5$14.8 million was $0.5$1.1 million, or 3.1%7.9%, belowabove prior quarter and $1.0$0.3 million, or 6.6%1.8%, belowabove prior year same quarter.

❖
Noninterest expense for the quarter ended June 30, 20222023 of $30.0$31.0 million was $0.6$0.9 million, or 2.1%2.7%, higher thanbelow prior quarter and $0.5but $1.0 million, or 1.6%3.5%, above prior year same quarter.

4652
Income Statement Review

Six Months Ended June 30       Change 2023 vs. 2022 
(dollars in thousands)   2022     2021    Change 2022 vs. 2021   2023  2022  Amount  Percent 
Quarter Ended June 30Amount  Percent
Net interest income
 
$
80,822
  
$
80,249
  
$
573
  
0.7
%
 
$
86,995
  
$
80,822
  
$
6,173
  
7.6
%
Provision for credit losses (recovery)
 
952
  
(6,756
)
 
7,708
  
(114.1
)
Provision for credit losses
 
3,125
  
952
  
2,173
  
228.2

Noninterest income
 
29,466
  
31,098
  
(1,632
)
 
(5.2
)
 
28,438
  
29,466
  
(1,028
)
 
(3.5
)
Noninterest expense
 
59,337
  
57,808
  
1,529
  
2.6

 
62,915
  
59,337
  
3,578
  
6.0

Income taxes
  
10,000
  
12,746
  
(2,746
)
 
(21.5
)
  
10,676
   
10,000
   
676
   
6.8

Net income
 
$
39,999
  
$
47,549
  
$
(7,550
)
 
(15.9
)%
 
$
38,717
  
$
39,999
  
$
(1,282
)
 
(3.2
)%
                        
Average earning assets
 
$
5,137,421
  
$
5,071,907
  
$
65,514
  
1.3
%
 
$
5,160,712
  
$
5,137,421
  
$
23,291
  
0.5
%
                        
Yield on average earnings assets, tax equivalent*
 
3.51
%
 
3.52
%
 
(0.01)
%
 
(0.4)
%
 
4.94
%
 
3.51
%
 
1.43
%
 
40.9
%
Cost of interest bearing funds
 
0.48
%
 
0.47
%
 
0.01
%
 
3.4
%
 
2.30
%
 
0.48
%
 
1.82
%
 
376.7
%
                        
Net interest margin, tax equivalent*
 
3.19
%
 
3.21
%
 
(0.02
)%
 
(0.5
)%
 
3.42
%
 
3.19
%
 
0.23
%
 
7.3
%

*Yield on average earning assets and net interest margin are computed on a taxable equivalent basis using a 24.95% tax rate.

47
Net Interest Income

($ in thousands)   
2Q
2022
   
1Q
2022
  
2Q
2021
   
Percent
Change
2Q 2022
Compared to:
  
YTD
2022
   
YTD
2021
  
Percent
Change
  
       Percent Change       
       
2Q 2023
Compared to:
       
($ in thousands)   
2Q
2022
   
1Q
2022
  
2Q
2021
  
1Q
2022
 
2Q
2021
  
YTD
2022
   
YTD
2021
  
Percent
Change
   
2Q
2023
 
1Q
2023
 
2Q
2022
 
1Q
2023
 
2Q
2022
 
YTD
2023
 
YTD
2022
 Percent Change 
 
Income on earning assets 
$
45,352
 
$
43,527
 
$
43,875
 
4.2
%
 
3.4
%
 
$
88,879
 
$
88,086
 
0.9
%
 
$
64,827
 
$
60,995
 
$
45,352
 
6.3
%
 
42.9
%
 
$
125,822
 
$
88,879
 
41.6
%
Expense on interest bearing liabilities 
4,562
 
3,495
 
3,868
 
30.5

 
17.9

 
8,057
 
7,837
 
2.8

 
21,748
 
17,079
 
4,562
 
27.3

 
376.7

 
38,827
 
8,057
 
381.9

Net interest income 
$
40,790
 
$
40,032
 
$
40,007
 
1.9
%
 
2.0
%
 
$
80,822
 
$
80,249
 
0.7
%
 

43,079
 

43,916
 

40,790
 
(1.9
)
 
5.6

 

86,995
 

80,822
 
7.6

TEQ 
232
 
235
 
230
 
(1.3
)
 
0.9

 
467
 
447
 
4.5

 
298
 
298
 
232
 
0.1

 
28.6

 
596
 
467
 
27.6

Net interest income, tax equivalent 
$
41,022
 
$
40,267
 
$
40,237
 
1.9
%
 
1.9
%
 
$
81,289
 
$
80,696
 
0.7

 
$
43,377
 
$
44,214
 
$
41,022
 
(1.9
%)
 
5.7
%
 
$
87,591
 
$
81,289
 
7.8
%
                                  
Average yield and rates paid:                                  
Earning assets yield 
3.56
%
 
3.46
%
 
3.41
%
 
2.9
%
 
4.2
%
 
3.51
%
 
3.52
%
 
(0.4
)%
 
5.03
%
 
4.84
%
 
3.56
%
 
3.9
%
 
41.5
%
 
4.94
%
 
3.51
%
 
40.9
%
Rate paid on interest bearing liabilities  
0.54

  
0.42

  
0.45

  
28.2

  
19.7

  
0.48

  
0.47

  
3.4

  
2.54

  
2.06

  
0.54

  
23.3

  
368.2

  
2.30

  
0.48

  
376.7

Gross interest margin 
3.02
%
 
3.04
%
 
2.96
%
 
(0.6
)%
 
1.9
%
 
3.03
%
 
3.05
%
 
(0.9
)%
 
2.49
%
 
2.78
%
 
3.02
%
 
(10.4
)%
 
(17.5
)%
 
2.64
%
 
3.03
%
 
(12.8
)%
Net interest margin 
3.20
%
 
3.18
%
 
3.11
%
 
0.6
%
 
2.8
%
 
3.19
%
 
3.21
%
 
(0.5
)%
 
3.35
%
 
3.49
%
 
3.20
%
 
(4.1
)%
 
4.7
%
 
3.42
%
 
3.19
%
 
7.3
%
                                  
Average balances:                                  
Investment securities 
$
1,454,371
 
$
1,486,799
 
$
1,225,369
 
(2.2
)%
 
18.7
%
 
$
1,470,495
 
$
1,145,018
 
28.4
%
 
$
1,230,556
 
$
1,251,948
 
$
1,454,371
 
(1.7
)%
 
(15.3
)%
 
$
1,241,193
 
$
1,470,495
 
(15.5
)%
Loans 
$
3,538,324
 
$
3,440,439
 
$
3,495,655
 
2.8
%
 
1.2
%
 
$
3,489,652
 
$
3,521,861
 
(0.9
)%
 
$
3,836,446
 
$
3,739,443
 
$
3,538,324
 
2.6
%
 
8.4
%
 
$
3,788,213
 
$
3,489,652
 
8.6
%
Earning assets 
$
5,140,656
 
$
5,134,150
 
$
5,184,923
 
0.1
%
 
(0.9
)%
 
$
5,137,421
 
$
5,071,907
 
1.3
%
 
$
5,189,716
 
$
5,131,385
 
$
5,140,656
 
1.1
%
 
1.0
%
 
$
5,160,712
 
$
5,137,421
 
0.5
%
Interest-bearing liabilities 
$
3,373,741
 
$
3,350,208
 
$
3,424,218
 
0.7
%
 
(1.5
)%
 
$
3,362,039
 
$
3,379,958
 
(0.5
)%
 
$
3,435,072
 
$
3,362,331
 
$
3,373,741
 
2.2
%
 
1.8
%
 
$
3,398,902
 
$
3,362,039
 
1.1
%

53
Net interest income for the quarter ended June 30, 2022 of $40.8$43.1 million was $0.8 million abovebelow prior quarter andbut $2.3 million above prior year same quarter.  Our net interest income excluding PPP loans for the quarter ended June 30, 2022 was $40.3 million compared to $38.6 million for the quarter ended March 31, 2022 and $36.4 million for the quarter ended June 30, 2021.  Our net interest margin, on a fully tax equivalent basis, at 3.20% for the second quarter 2022 increased 23.35% decreased 14 basis points from prior quarter and 9but increased 15 basis points from prior year same quarter, as ourquarter.  Our average earning assets increased $6.5$58.3 million from prior quarter but decreased $44.3and $49.1 million from prior year same quarter.  Our yield on average earning assets for the second quarter 2022 increased 1019 basis points from prior quarter and 15147 basis points from prior year same quarter, and our cost of funds increased 1248 basis points from prior quarter and 9200 basis points from prior year same quarter.  As discussed more fully below,Money market accounts, certificates of deposit, and other time deposits all experienced significant increases in rates during the impact of the PPP loans to thequarter.  Our net interest marginincome for the second quarter 2022 was 3 basis points.  Excluding the impact of the PPP loans, the change in net interest margin was 10 basis points, quarter over quarter.  The Federal Open Market Committee (“FOMC”) has increased the target federal funds rate three times in 2022.  The FOMC raised the target rate by 25, 50, and 75 basis points, respectively, on March 17, May 5, and June 16, 2022.  These rate increases have had a positive impact on our net interest margin and may help our margin improve as rates continue to rise.

48
The PPP loan portfolio had an annualized yield for the quartersix months ended June 30, 2022 of 13.56%2023 was $87.0 million compared to 17.03%$80.8 million for the first quarter 2022.  Interest income on the portfolio was $45 thousand during the quarter, down $51 thousand from prior quarter, while the amortization of net loan origination fees from current outstanding loans and recognition of net fee income from paid and forgiven loans was $463 thousand, down $915 thousand from prior quarter.  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 an increase of 3 basis points for the second quarter 2022 compared to an increase of 11 basis points for the first quartersix months ended June 30, 2022.

Our ratio of average loans to deposits, including repurchase agreements, was 81.2% for the quarter ended June 30, 2023 compared to 79.8% for the quarter ended March 31, 2023 and 75.2% for the quarter ended June 30, 2022 compared to 74.2% for the quarter ended March 31, 2022 and 75.0% for the quarter ended June 30, 2021.

Provision for Credit Losses

ProvisionOur provision for credit losses for the quarter ended June 30, 2022 was $0.1 million, compared to provision ofincreased $0.9 million for thefrom prior quarter ended March 31, 2022 and a recovery of provision of $4.3$1.9 million for the second quarter 2021.from prior year same quarter.  Year-to-date provision was $1.0increased $2.2 million compared to a recovery of $6.8 million during the first six months of 2021.from prior year.  Our reserve coverage (allowance for credit losses to nonperforming loans) at June 30, 20222023 was 305.9%408.9% compared to 309.1%382.3% at March 31, 20222023 and 197.2%305.9% at June 30, 2021.2022.  Our credit loss reserve as a percentage of total loans outstanding at June 30, 20222023 was 1.19% (1.19% excluding PPP loans)1.22% compared to 1.20%1.24% at March 31, 2022 (1.21% excluding PPP loans)2023 and 1.21%1.19% at June 30, 2021 (1.27% excluding PPP loans).2022.

Noninterest Income

($ in thousands)   
2Q
2022
   
1Q
2022
  
2Q
2021

  
Percent Change
2Q 2022 Compared
to:
   
YTD
2022
   
YTD
2021
   
Percent
Change
  
       Percent Change          
       
2Q 2023 Compared
to:
          
($ in thousands)   
2Q
2022
   
1Q
2022
  
2Q
2021

  
1Q
2022
 
2Q
2021
   
YTD
2022
   
YTD
2021
   
Percent
Change
   
2Q
2023
 
1Q
2023
 
2Q
2022
 
1Q
2023
 
2Q
2022
  
YTD
2023
  
YTD
2022
  Percent Change 
 
7.7
%
 
14.2
 $7,513 $7,287 $7,263 3.1% 3.4%
 $14,800  $14,009  5.6%
Trust revenue 
3,198
 
3,248
 
3,349
 
(1.5
)
 
(4.5
)
 
6,446
 
6,300
 
2.3

 3,351 3,079 3,198 8.9
 4.8
 6,430  6,446  (0.2)
Gains on sales of loans 
519
 
597
 
1,907
 
(13.0
)
 
(72.8
)
 
1,116
 
4,340
 
(74.3
)
 115 121 519 (5.3) (77.9) 236  1,116  (78.9)
Loan related fees 
1,415
 
2,062
 
1,004
 
(31.4
)
 
41.0

 
3,477
 
3,274
 
6.2

 1,197 845 1,415 41.7
 (15.4) 2,042  3,477  (41.3)
Bank owned life insurance revenue 
702
 
691
 
581
 
1.7

 
20.8

 
1,393
 
1,154
 
20.7

 735 858 702 (14.4) 4.7
 1,593  1,393  14.4
Brokerage revenue 
459
 
590
 
554
 
(22.2
)
 
(17.2
)
 
1,049
 
1,011
 
3.8

 388 348 459 11.5
 (15.4) 736  1,049  (29.8)
Other  
945
  
1,031
  
1,768
  
(8.5
)
  
(46.7
)
  
1,976
  
2,639
  
(25.2
)
  1,457  1,144  945  27.4
  54.3
  2,601   1,976   31.6
Total noninterest income 
$
14,501
 
$
14,965
 
$
15,521
 
(3.1
)%
 
(6.6
)%
 
$
29,466
 
$
31,098
 
(5.2
)%
 $14,756 $13,682 $14,501 7.9% 1.8% $28,438  $29,466  (3.5)%

Noninterest income for the quarter ended June 30, 20222023 of $14.5$14.8 million was $0.5$1.1 million, or 3.1%7.9%, belowabove prior quarter and $1.0$0.3 million, or 6.6%1.8%, belowabove prior year same quarter.  The quarter over quarter decreaseincrease included a $0.6$0.2 million decreaseincrease in deposit related fees, a $0.3 million increase in trust revenue, and a $0.4 million increase in loan related fees anddue to the change in the fair market value of our mortgage servicing rights. The year over year increase included a $0.3 million decreaseincrease in deposit related fees, a $0.2 million increase in trust revenue, and a $0.4 million increase in securities gains, partially offset by a $0.5$0.4 million increase in deposit related fees.  The decrease from prior year same quarter included a $1.4 million decreasedecline in gains on sales of loans and a $0.5$0.2 million decreasedecline in securities gains, partially offset by a $0.9loan related fees also resulting from the fluctuation in the fair market value of our mortgage servicing rights.  Noninterest income for the first six months of 2023 was $28.4 million increase in deposit related fees.  Year-to-date noninterest income decreased $1.6compared to $29.5 million fromfor the six months ended June 30, 2021 due to a $3.2 million decline in gains on sales of loans, partially offset by a $1.6 million increase in deposit related fees.  Gains on sales of loans were impacted by the slowdown in the industry-wide mortgage refinancing boom.  Deposit related fees were primarily impacted by debit card income and overdraft charges.  2022Loan related fees were primarily impacted by the change in the fair market value of mortgage servicing rights..

4954
Noninterest Expense

($ in thousands)
 
2Q
2022

 
1Q
2022
  
2Q
2021

Percent Change
2Q 2022 Compared to:

YTD
2022

 
YTD
2021

Percent
Change

       Percent Change       
       
2Q 2022 Compared
to:
       
($ in thousands)
 
2Q
2022

 
1Q
2022
  
2Q
2021

1Q
2022
 
2Q
2021

YTD
2022

 
YTD
2021

Percent
Change

 
2Q
2023
 
1Q
2023
 
2Q
2022
 
1Q
2023
 
2Q
2022
 
YTD
2023
 
YTD
2022
 Percent Change 
 
4.1
%
 
4.4
 $12,732 $12,633 $12,219 0.8% 4.2% $25,365 $23,958 5.9%
Employee benefits 
6,315
 
5,799
 
7,254
 
8.9

 
(12.9
)
 
12,114
 
12,675
 
(4.4
)
 5,573 6,275 6,315 (11.2) (11.7) 11,848 12,114 (2.2)
Net occupancy and equipment 
2,756
 
2,854
 
2,668
 
(3.4
)
 
3.3

 
5,610
 
5,496
 
2.1

 2,895 3,028 2,756 (4.4) 5.1
 5,923 5,610 5.6
Data processing 
2,095
 
2,201
 
1,870
 
(4.8
)
 
12.0

 
4,296
 
4,029
 
6.6

 2,383 2,303 2,095 3.5
 13.8
 4,686 4,296 9.1
Legal and professional fees 
884
 
867
 
753
 
1.9

 
17.2

 
1,751
 
1,646
 
6.4

 912 816 884 11.8
 3.2
 1,728 1,751 (1.3)
Advertising and marketing 
659
 
752
 
710
 
(12.6
)
 
(7.3
)
 
1,411
 
1,432
 
(1.4
)
 704 820 659 (14.1) 6.9
 1,524 1,411 8.0
Taxes other than property and payroll 
425
 
426
 
375
 
(0.3
)
 
13.3

 
851
 
745
 
14.2

 433 432 425 0.1
 1.7
 865 851 1.6
Net other real estate owned expense
 
43
 
353
 
488
 
(87.6
)
 
(91.1
)
 
396
 
806
 
(50.8
)
 61 119 43 (48.4) 43.6
 180 396 (54.6)
Other  
4,582
  
4,368
  
3,674
  
4.9

  
24.8

  
8,950
  
7,861
  
13.8

  5,332  5,464  4,582  (2.4)  16.4
  10,796  8,950  20.6
Total noninterest expense 
$
29,978
 
$
29,359
 
$
29,498
 
2.1
%
 
1.6
%
 
$
59,337
 
$
57,808
 
2.6
%
 $31,025 $31,890 $29,978 (2.7)% 3.5% $62,915 $59,337 6.0%

Noninterest expense for the quarter ended June 30, 20222023 of $30.0$31.0 million was $0.6$0.9 million, or 2.1%2.7%, higher thanbelow prior quarter and $0.5but $1.0 million, or 1.6%3.5%, above prior year same quarter.  The increasedecrease in noninterest expense quarter over quarter was primarily a result of a decrease in the accruals for incentive payments based on our current projected earnings for the year.  The year over year increase included a $0.3 million increase in data processing expense, a $0.3 million increase in FDIC insurance premiums, and a $0.1 million increase in occupancy and equipment.  A year over year decrease in personnel costs of $0.2 million was the result of an increasea reduction in personnel expense ($1.0 million),the accruals for incentive payments of $1.3 million, partially offset by a $0.3 million decrease in net other real estate owned expense.  The increase in personnel expense was due to increases in salariessalary expense ($0.5 million), group medical and a higher accruallife insurance expense ($0.5 million), and other employee benefits ($0.1 million).  Noninterest expense for bonuses and incentives.  Noninterest expensethe first six months of 2023 was $62.9 million compared to $59.3 million for the six months ended June 30, 2022 was $1.5 million higher than the six months ended June 30, 2021.  The year-to-date increase was primarily the result of increases in personnel expense, data processing expense, and loan related expenses..

Balance Sheet Review

CTBI’s total assets at June 30, 20222023 of $5.4$5.5 billion increased $4.2decreased $8.5 million, anor 0.6% annualized, 0.3%, from March 31, 2022 and $29.12023 but increased $140.5 million, or an annualized 1.1%5.3%, from December 31, 2021.2022.  Loans outstanding at June 30, 20222023 were $3.6$3.9 billion, an increase of $42.9$152.3 million, or an annualized 4.9%16.2%, from March 31, 20222023 and $149.6$220.4 million, or an annualized 8.9%12.0%, from December 31, 2021.  Loans, excluding PPP2022.  The increase in loans increased $57.6 million during thefrom prior quarter with an $8.4included a $73.5 million increase in the commercial loan portfolio, a $16.4$44.6 million increase in the residential loan portfolio, a $29.7$33.5 million increase in the indirect consumer loan portfolio, and a $3.1$0.7 million increase in the consumer direct loan portfolio.  The PPP loan portfolio declined during the quarter $14.7 million as a result of SBA forgiveness.  CTBI’s investment portfolio decreased $101.3$39.7 million, or an annualized 27.0%12.8%, from March 31, 20222023 and $53.3$55.0 million, or an annualized 7.4%8.8%, from December 31, 2022.  Deposits in other banks increased $30.2decreased $117.5 million from prior quarter but decreased $128.9and $19.8 million from December 31, 2021.2022.  Deposits, including repurchase agreements, at $4.7 billion increased $28.7decreased $6.5 million, or an annualized 2.5%0.6%, from March 31, 2022 and $96.32023 but increased $104.1 million, or an annualized 4.2%4.5%, from December 31, 2021.2022.

55
Shareholders’ equity at June 30, 20222023 was $632.0$660.1 million, a $21.3$3.3 million, or an annualized 13.1%2.0%, decreaseincrease from the $653.4$656.8 million at March 31, 20222023 and a $66.2$32.1 million, or an annualized 19.1%10.3%, decreaseincrease from the $698.2$628.0 million at December 31, 2022, as a result of the continued increase in unrealized losses on our securities portfolio.portfolio continue to impact equity.  Net unrealized losses on securities, net of deferred taxes, were $121.3 million at June 30, 2023, compared to $112.4 million at March 31, 2023 and $97.9 million at June 30, 2022.  Management has evaluated the unrealized losses and determined that they were primarily driven by market rates.  Management has the ability and intent to hold these securities to recovery or maturity.  CTBI’s annualized dividend yield to shareholders as of June 30, 20222023 was 3.96%4.95%.

50
Loans

(dollars in thousands) June 30, 2022 (dollars in thousands)  June 30, 2023 
Loan Category Balance  
Variance
from Prior
Year
  
Net (Charge-
Offs)/
Recoveries
  Nonperforming  ACL  Balance  Variance from Prior Year  
Net (Charge-
Offs)/
Recoveries
  Nonperforming  ACL 
Commercial:
                              
Hotel/motel
 
$
280,956
  
9.3
%
 
$
(216
)
 
$
0
  
$
4,844
  
$
372,981
  
8.5
%
 
$
0
  
$
0
  
$
5,192
 
Commercial real estate residential
 
354,668
  
5.8
  
(20
)
 
764
  
4,200
  
393,309
  
5.5
  
53
  
1,034
  
3,749
 
Commercial real estate nonresidential
 
758,227
  
0.0
  
133
  
4,205
  
8,968
  
787,598
  
3.3
  
324
  
1,282
  
7,797
 
Dealer floorplans
 
71,785
  
3.4
  
0
  
0
  
1,477
  
76,903
  
(0.8
)
 
0
  
0
  
1,157
 
Commercial other
 
324,091
  
11.6
  
(142
)
 
281
  
4,473
   
319,838
   
2.4
   
(1,080
)
  
1,030
   
6,176
 
Commercial unsecured SBA PPP
 
7,788
  
(83.5
)
 
0
  
0
  
0
 
Total commercial
 
1,797,515
  
2.3
  
(245
)
 
5,250
  
23,962
  
1,950,629
  
4.4
  
(703
)
 
3,346
  
24,071
 
                              
Residential:
                              
Real estate mortgage
 
793,249
  
3.4
  
(141
)
 
7,513
  
8,179
  
883,104
  
7.0
  
(79
)
 
7,299
  
7,884
 
Home equity
  
110,828
   
3.9
   
(17
)
  
813
   
887
  
132,033
  
9.5
  
(10
)
 
654
  
1,108
 
Total residential
 
904,077
  
3.5
  
(158
)
 
8,326
  
9,066
  
1,015,137
  
7.4
  
(89
)
 
7,953
  
8,992
 
                              
Consumer:
                              
Consumer direct
 
159,791
  
2.0
  
(85
)
 
32
  
1,621
  
157,848
  
0.2
  
(43
)
 
6
  
2,563
 
Consumer indirect
 
697,060
  
12.3
  
124
  
234
  
7,695
   
806,081
   
9.3
   
(253
)
  
439
   
12,392
 
Total consumer
  
856,851
   
10.2
   
39
   
266
   
9,316
  
963,929
  
7.7
  
(296
)
 
445
  
14,955
 
                              
Total loans
 
$
3,558,443
  
4.4
%
 
$
(364
)
 
$
13,842
  
$
42,344
  
$
3,929,695
  
5.9
%
 
$
(1,088
)
 
$
11,744
  
$
48,018
 

Total Deposits and Repurchase Agreements

(dollars in thousands)   
2Q
2022
   
1Q
2022
   
YE
2021
    
Percent Change
2Q 2022 Compared to:
  
        
Percent Change
2Q 2023 Compared to:
 
(dollars in thousands)   
2Q
2022
   
1Q
2022
   
YE
2021
    
1Q
2022
  
YE
2021
   
2Q
2023
 
1Q
2023
 
YE
2022
  
1Q
2023
  
YE
2022
 
 0.7% 5.8 $1,361,078 $1,409,839 $1,394,915  (3.5)% (2.4)%
Interest bearing deposits                          
Interest checking 99,055 89,863 97,064  10.2
 2.1
 142,542 120,678 112,265  18.1
 27.0
Money market savings 1,243,817 1,200,408 1,206,401  3.6
 3.1
 1,389,081 1,408,314 1,348,809  (1.4) 3.0
Savings accounts 671,349 666,874 632,645  0.7
 6.1
 611,772 642,232 654,380  (4.7) (6.5)
Time deposits 1,050,559 1,072,630 1,077,079  (2.1) (2.5) 1,012,187 962,361 915,774  5.2
 10.5
Repurchase agreements  238,733  254,623  271,088   (6.2)  (11.9)  229,020  208,777  215,431   9.7
  6.3
Total interest bearing deposits and repurchase agreements 3,303,513 3,284,398 3,284,277  0.6% 0.6% 3,384,602 3,342,362 3,246,659  1.3
 4.2
Total deposits and repurchase agreements $4,711,661 $4,682,927 $4,615,380  0.6% 2.1% $4,745,680 $4,752,201 $4,641,574  (0.1)% 2.2%

5156
Asset Quality

CTBI’sOur total nonperforming loans excluding TDRs, increased slightlydecreased to $13.8$11.7 million at June 30, 20222023 from $13.7$12.2 million at March 31, 2022 but decreased $2.8 million from the $16.62023 and $15.3 million at December 31, 2021.2022.  Prior year nonperforming loans, as previously reported, exclude troubled debt restructurings which have been eliminated in the current period due to implementation of Accounting Standard Update 2022-02.  Accruing loans 90+ days past due at $5.0$6.4 million increased $0.2 million from prior quarter but decreased $0.9$2.1 million from December 31, 2021.2022.  Nonaccrual loans remained at $8.8$5.3 million decreased $0.6 million from prior quarter but decreased $1.8and $1.5 million from December 31, 2021.2022.  Accruing loans 30-89 days past due at $10.6$12.2 million decreased $0.2increased $0.4 million from prior quarter and $0.3but decreased $3.1 million from December 31, 2021.2022.  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, TDR,if a borrower is experiencing financial difficulty with significant payment delay, 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%85% 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 condensed consolidated financial statements contained herein.

Our level of foreclosed properties at $2.0 million at June 30, 20222023 was a $0.3$0.8 million decrease from the $2.3$2.8 million at March 31, 20222023 and a $1.5$1.7 million decrease from the $3.5$3.7 million at December 31, 2021.2022.  Sales of foreclosed properties for the six months ended June 30, 20222023 totaled $1.8$1.7 million while new foreclosed properties totaled $0.4$0.2 million.  At June 30, 2022,2023, the book value of properties under contracts to sell was $0.4$0.7 million; however, the closings had not occurred at quarter-end.

When foreclosed properties are acquired, appraisals are obtained and the properties are booked at the current market value less expected sales costs.  Additionally, periodic updated appraisals are obtained on unsold foreclosed properties.  When an updated appraisal reflects a fair market value below the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected sales costs.  Charges to earnings inWe had net loan charge-offs of $674 thousand, or 0.07% of average loans annualized, for the second quarter 20222023 compared to reflect the decrease in current market values$414 thousand, or 0.04% of foreclosed properties totaled $23 thousand.  There were 2 properties reappraised during the second quarter 2022.  Of these, one property was written down by $9 thousand.  Charges to earnings during the quarters ended March 31, 2022 and June 30, 2021 were $0.2 million and $0.4 million, respectively.  Charges to earningsaverage loans annualized, for the six months ended June 30, 2022 were $0.3 million compared to $0.5 million for the six months ended June 30, 2021.  Our policy for determining the frequency of periodic reviews is based upon consideration of the specific propertiesfirst quarter 2023 and the known$43 thousand, or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months.  Approximately 93% of our other real estate owned (“OREO”) properties and approximately 90% of the book value of our OREO properties have appraisals dated within the past 18 months.

52
The appraisal aging analysis of foreclosed properties, as well as the holding period, at June 30, 2022 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  
3
  
$
59
 Less than one year 
$
145
 
3 to 6 months  
16
   
1,372
 1 year  
666
 
6 to 9 months  
3
   
111
 2 years  
116
 
9 to 12 months  
4
   
110
 3 years  
69
 
12 to 18 months  
2
   
109
 4 years  
68
 
18 to 24 months  
2
   
193
 5 years  
62
 
Total  
30
  
$
1,954
 6 years  
234
 
         7 years  
310
 
         8 years  
284
 
         9 years  
0
 
         Total 
$
1,954
 

          Regulatory approval is required and has been obtained to hold foreclosed properties beyond the initial period of five years.  Additionally, CTBI is required to dispose of any foreclosed property that has not been sold within ten years.

Net loan charge-offs were $42 thousand, less than 0.01% of average loans annualized, for the quarter ended June 30, 20222022.  Net charge-offs for the six months ended June 30, 2023 were $1.1 million, or 0.06% of average loans annualized, compared to net loan charge-offs of $0.3$0.4 million, 0.04%or 0.02% of average loans annualized, for the first quarter 2022 and a net recovery of loan charge-offs for the second quarter 2021 of $0.6 million.  Year-to-date net loan charge-offs were $0.4 million, 0.02% of average loans annualized, compared to a net recovery of loan charge-offs of $0.4 million for the first six months of 2021.ended June 30, 2022.

Dividends

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

Pay DateRecord DateAmount Per Share
July 1, 2022June 15, 2022$0.400
April 1, 2022March 15, 2022$0.400
January 1, 2022December 15, 2021$0.400
October 1, 2021September 15, 2021$0.400
July 1, 2021June 15, 2021$0.385
April 1, 2021March 15, 2021$0.385
Pay DateRecord Date Amount Per Share 
July 1, 2023June 15, 2023 
$
0.440
 
April 1, 2023March 15, 2023 
$
0.440
 
January 1, 2023December 15, 2022 
$
0.440
 
October 1, 2022September 15, 2022 
$
0.440
 
July 1, 2022June 15, 2022 
$
0.400
 
April 1, 2022March 15, 2022 
$
0.400
 

57
On July 26, 2022,25, 2023, the Board of Directors of CTBI declared a quarterly cash dividend of $0.44$0.46 per share to be paid on October 1, 20222023 to shareholders of record on September 15, 2022.2023.  This represents an increase of 10%4.5% in the quarterly cash dividend.

53Allowance for Credit Losses

Our reserve coverage (allowance for credit losses to nonperforming loans) at June 30, 2023 was 408.9% compared to 382.3% at March 31, 2023 and 300.4% at December 31, 2022.  Our credit loss reserve as a percentage of total loans outstanding at June 30, 2023 was 1.22% compared to 1.24% at March 31, 2023 and December 31, 2022.

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 June 30, 2022,2023, we had approximately $213.7$109.5 million in cash and cash equivalents and approximately $1.4 billion$213.5 million in unpledged securities valued at estimated fair value designated as available-for-sale and available to meet liquidity needs on a continuing basis compared to $311.8$128.7 million and $1.5 billion$309.2 million at December 31, 2021.2022.  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$0.3 million at June 30, 2022 and2023 compared to $0.4 million at December 31, 2021.2022.  As of June 30, 2022,2023, we had a $512.7$539.2 million available borrowing position with the Federal Home Loan Bank, compared to $484.4$501.0 million at December 31, 2021.2022.  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 June 30, 2022 and at December 31, 2021,2023 we had $75$50 million in lines of credit with various correspondent banks available to meet any future cash needs.needs compared to $75 million at December 31, 2022.  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 June 30, 20222023 were deposits with the Federal Reserve of $133.4$55.1 million, compared to $262.4$72.6 million at December 31, 2021.2022.  At June 30, 2022, cash and cash equivalents included2023, we had $3.0 million in federal funds sold of $2.0 million;sold; however, we had no federal funds sold as of December 31, 2021.2022.  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 June 30, 2022,2023, available-for-sale (“AFS”) securities comprised all of the total investment portfolio, and the AFS portfolio was approximately 222%182% of equity capital.  Sixty-oneEighty-three percent of the pledge-eligible portfolio was pledged.

58
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 12-monthtwelve-month period.

Capital Resources

We continue to offer a dividend to our shareholders, providing an annualized dividend yield for the quarter ended June 30, 20222023 of 3.96%4.95%.  Shareholders’ equity declined $21.3increased $3.3 million, or an annualized 13.1%2.0%, during the quarter and $52.0$28.1 million, or 7.6%4.4%, from June 30, 2021,2022, as a result of the continued increase in unrealized losses on our securities portfolio.portfolio continue to impact equity.  Our primary source of capital growth is the retention of earnings.  Cash dividends were $0.80$0.88 per share and $0.77$0.80 per share for the six months ended June 30, 20222023 and 2021,2022, respectively.  We retained 64.3%59.4% of our earnings for the first six months of 20222023 compared to 71.2%64.3% for the first six months of 2021.2022.

54
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 (“CBLR”framework (the “CBLR framework”) 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 Coronavirus Aid, Relief, and Economic SecurityCARES Act, the regulatory agencies introduced temporary changes to the CBLR framework.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 June 30, 20222023 was 13.14%13.82%.  CTB’s CBLR ratio as of June 30, 20222023 was 12.55%13.24%.  Under either framework, CTBI and CTB would be considered well-capitalized under the applicable guidelines.

As of June 30, 2022,2023, 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.

59
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.

55
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.  CTBI repurchased 32,664 shares of its common stock during the first quarter 2020, leaving 1,034,706 shares remaining under our current repurchase authorization.  As of June 30, 2022,2023, a total of 2,465,294 shares have been repurchased through this program.

On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law in the United States.  Among other provisions, the IRA imposes an excise tax of 1% tax on the fair market value of net stock repurchases made after December 31, 2022.  The impact of this provision will be dependent on the extent of share repurchases made in future periods.

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 ourthe 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 condensed 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 condensed consolidated financial statements contained herein.

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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 adjustedEffective January 1, 2023, CTBI implemented ASU 2022-02, Financial Instruments-Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures, an amendment to 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The amendments in this ASU eliminate the accounting guidance for expected prepayments but are not extendedtroubled debt restructurings by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for expected extensions, renewals, or modifications except in circumstances where CTBI reasonably expects to executecertain loan refinancings and restructurings by creditors when a TDRborrower is experiencing financial difficulty along with the borrower or where certain extension or renewal options are embedded in the original contract and not unconditionally cancellablerequiring that disclosures be added by CTBI.year of origination for gross charge-off information for financing receivables.  Accrued interest receivable on loans is presented in ourthe 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 condensed 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.

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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 are individually evaluated for an ACL if such loans,and (i) have a criticized risk rating, (ii) are on nonaccrual status, (iii) are classified as TDRs,have a borrower experiencing financial difficulty with significant payment delay, or (iv) are 90 days or more past due.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, the size and financial condition of the borrower, the 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,loans to borrowers experiencing financial difficulty, 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 lossesACL 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 lossesACL 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.

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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 prior to June 30, 2023, CTBI usesused a static pool methodology based on our risk rating system.  See Note 4 to the condensed 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.

57During the second quarter ended June 30, 2023, CTBI began using a third party ACL software to calculate reserve estimates.  During the implementation process, discounted cash flow modeling was chosen for all loan segments.  The primary reasons that contributed to this decision were: DCF models allow for the effective incorporation of a reasonable and supportable forecast in a directionally consistent and objective manner; the analysis aligns well with other calculations outside of the ACL estimation which will mitigate model risk in other areas; and peer data is available for certain inputs if first party data is not available or meaningful.  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.   See Note 4 to the condensed consolidated financial statements contained herein for information on CTBI’s risk rating system.

CTBI’s expected credit loss models consider historical credit loss experience, peer data, 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.

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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 condensed 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 CTBIcompanies 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.

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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 deferred tax 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 ourthe consolidated financial statements from period to period.  Detailed information regarding fair value measurements can be found in Note 7 to the condensed consolidated financial statements contained herein.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits.  CTBI uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates.  Given a 200 basis point increase to the yield curve used in the simulation model, it is estimated net interest income for CTBI would increase by 4.03%3.92% over one year and 9.88%7.36% over two years.  A 100200 basis point decrease in the yield curve would decrease net interest income by an estimated 2.11%3.63% over one year and 3.41%2.89% over two years.  For further discussion of CTBI’s market risk, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Market Risk included in the annual report on Form 10-K for the year ended December 31, 2021.2022.

Item 4.  Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

CTBI’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.  As of the end of the period covered by this report, an evaluation was carried out by CTBI’s management, with the participation of our Vice Chairman, President, and Chief Executive Officer and the Executive Vice President, Chief Financial Officer, and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on this evaluation, management concluded that disclosure controls and procedures as of June 30, 20222023 were effective in ensuring material information required to be disclosed in this quarterly report on Form 10-Q was recorded, processed, summarized, and reported on a timely basis.

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CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in CTBI’s internal control over financial reporting that occurred during the six months ended June 30, 20222023 that have materially affected, or are reasonably likely to materially affect, CTBI’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.Legal ProceedingsNone
   
Item 1A.Risk FactorsNone
   
Item 2.Unregistered Sales of Equity Securities and Use of ProceedsNone
   
Item 3.
Defaults Upon Senior Securities
None
   
Item 4.
Mine Safety Disclosure
Not applicable
   
Item 5.
Other Information:
 
 CTBI’s Principal Executive Officer and Principal Financial Officer have furnished

(a)      Information required to be disclosed in a report on Form 8-K
None
(b)      Changes to director nomination proceduresNone
(c)      Insider trading arrangements
During the SEC the certifications with respect to this Form 10-Q that are required by Sections 302 and 906three months ended June 30, 2023, no director or officer of the Sarbanes-Oxley ActCTBI adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of 2002Regulation S-K.
 
   
Item 6.Exhibits: 
 (1)    Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
Exhibit 31.2
 (2)    Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
Exhibit 32.2
 (3)    XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRLExhibit 101.INS
 (4)    XBRL Taxonomy Extension Schema DocumentExhibit 101.SCH
 (5)    XBRL Taxonomy Extension Calculation LinkbaseExhibit 101.CAL
 (6)    XBRL Taxonomy Extension Definition LinkbaseExhibit 101.DEF
 (7)    XBRL Taxonomy Extension Label LinkbaseExhibit 101.LAB
 (8)    XBRL Taxonomy Extension Presentation LinkbaseExhibit 101.PRE
 (9)    Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)Exhibit 104

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SIGNATURES

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


COMMUNITY TRUST BANCORP, INC.


Date:  August 8, 20222023By:

 

/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


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