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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 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.
Community Trust Bancorp, Inc. (“CTBI”) is a bank holding company registered with the Board of Governors of the Federal Reserve System pursuant to Section 5(a) of the Bank Holding Company Act of 1956, as amended. CTBI was incorporated August 12, 1980, under the laws of the Commonwealth of Kentucky for the purpose of becoming a bank holding company. Currently, CTBI owns all the capital stock of one commercial bank and one trust company, serving small and mid-sized communities in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. The commercial bank is Community Trust Bank, Inc., Pikeville, Kentucky (“CTB”) and the trust company is Community Trust and Investment Company, Lexington, Kentucky (“CTIC”).
At December 31, 2023, CTBI had total consolidated assets of $5.8 billion and total consolidated deposits, including repurchase agreements, of $4.9 billion. Total shareholders’ equity at December 31, 2023 was $702.2 million. Trust assets under management at December 31, 2023 were $3.4 billion, including CTB’s investment portfolio totaling $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. Lines of credit, revolving lines of credit, term loans, and other specialized loans, including asset-based financing, are also available. Our corporate subsidiaries act as trustees of personal trusts, as executors of estates, as trustees for employee benefit trusts, as paying agents for bond and stock issues, as investment agent, as depositories for securities, and as providers of full-service brokerage and insurance services.
CTBI has supported numerous community organizations through financing projects for affordable housing, economic development, and revitalization of distressed and underserved areas. CTB’s community development lending totaled over $43 million for the year 2023. Also, during 2023, CTBI made contributions totaling over $807 thousand to aid low and moderate income families and communities and encourage economic development. Our employees served over 1,500 hours throughout the year with organizations that provide affordable housing and other services to low and moderate income families and encourage economic development for small businesses and farms.
COMPETITION
CTBI’s subsidiaries face substantial competition for deposit, credit, trust, wealth management, and brokerage relationships in the communities we serve. Competing providers include state banks, national banks, thrifts, trust companies, insurance companies, mortgage banking operations, credit unions, finance companies, brokerage companies, and other financial and non-financial companies which may offer products functionally equivalent to those offered by our subsidiaries. As financial services become increasingly dependent on technology, permitting transactions to be conducted by telephone, mobile banking, and the internet, non-bank institutions are able to attract funds and provide lending and other financial services without offices located in our market areas. Many of our nonbank competitors have fewer regulatory constraints, broader geographic service areas, greater capital, and, in some cases, lower cost structures. In addition, competition for quality customers has intensified as a result of changes in regulation, consolidation among financial service providers, and advances in technology and product delivery systems. Many of these providers offer services within and outside the market areas served by our subsidiaries. We strive to offer competitively priced products along with quality customer service to build customer relationships in the communities we serve.
The United States and global markets, as well as general economic conditions, have been volatile. Larger financial institutions could strengthen their competitive position as a result of ongoing consolidation within the financial services industry.
Banking legislation in Kentucky places no limits on the number of banks or bank holding companies that a bank holding company may acquire. Interstate acquisitions are allowed where reciprocity exists between the laws of Kentucky and the home state of the bank or bank holding company to be acquired. Bank holding companies continue to be limited to control of less than 15% of deposits held by federally insured depository institutions in Kentucky (exclusive of inter-bank and foreign deposits). Competition for deposits may be increasing as a consequence of Federal Deposit Insurance Corporation (“FDIC”) assessments shifting from deposits to an asset-based formula, as larger banks may move away from non-deposit funding sources.
No material portion of our business is seasonal. We are not dependent upon any one customer or a few customers, and the loss of any one or a few customers would not have a material adverse effect on us. See note 18 to the consolidated financial statements contained herein for additional information regarding concentrations of credit.
We do not engage in any operations in foreign countries.
HUMAN CAPITAL
We recognize the long-term value of a highly skilled, dedicated workforce, with an average tenure of over 10 years, and are committed to providing our employees with opportunities for personal and professional growth, whether it is by providing reimbursement of educational expenses, encouraging attendance at seminars and in-house training programs, or sponsoring memberships in local civic organizations.
Our employees recognize the long-term benefit of working with our organization as evidenced by the 20% of our employees who have more than 20 years of service. Our employees participate in numerous coaching, training, and educational programs, including required periodic training on topics such as ethics, privacy regulations, anti-money laundering, and UDAAP (Unfair, Deceptive, or Abusive Acts or Practices). Additionally, CTBI makes online training available to employees. Employees also have the opportunity to utilize programs that provide skill development online with over 8,000 varied courses, including topics in banking, finance, computers, customer service, sales, management, and personal skills such as time management, project management, and communication skills.
In addition to classes provided by our training department, employees also have the opportunity to work on their skill development through attending secondary education courses. These are funded through our Educational Assistance Program.
As of December 31, 2023, CTBI and our subsidiaries had 967 full-time equivalent employees. Females comprise 76% of our workforce, and 60% of our managerial positions (supervisor or above) are held by females. This includes 65% of our branch managers, 29% of our market presidents, and 32% of our senior vice presidents. At the time of this filing, our Board of Directors is 25% female.
CTBI offers our employees competitive compensation, as well as a highly competitive benefits package. A retirement plan, an employee stock ownership plan, group life insurance, major medical insurance, a cafeteria plan, education reimbursement, and management and employee incentive compensation plans are available to all eligible personnel.
Employees are also offered the opportunity to complete periodic employee satisfaction surveys anonymously.
We have actively supported our employees with a wellness program for the past 20 years. Since beginning the program in 2004, participating employees have experienced improvements in preventing cardiovascular disease, cancer, and diabetes. Many of our employees have experienced decreases in elevated medical risk factors, including alcohol consumption, tobacco usage, physical inactivity, high stress, high cholesterol, and high blood pressure.
SUPERVISION AND REGULATION
General
As a registered bank holding company, we are restricted to those activities permissible under the Bank Holding Company Act of 1956, as amended, and are subject to actions of the Board of Governors of the Federal Reserve System thereunder. We are required to file an annual report with the Federal Reserve Board and are subject to an annual examination by the Board.
Community Trust Bank, Inc. is a state-chartered bank subject to state and federal banking laws and regulations and periodic examination by the Kentucky Department of Financial Institutions and the restrictions, including dividend restrictions, thereunder. CTB is also a member of the Federal Reserve System and is subject to certain restrictions imposed by and to examination and supervision under the Federal Reserve Act. Community Trust and Investment Company is also regulated by the Kentucky Department of Financial Institutions and the Federal Reserve.
Deposits of CTB are insured up to applicable limits by the FDIC, which subjects banks to regulation and examination under the provisions of the Federal Deposit Insurance Act.
The operations of CTBI and our subsidiaries are also affected by other banking legislation and policies and practices of various regulatory authorities. Such legislation and policies include statutory maximum rates on some loans, reserve requirements, domestic monetary and fiscal policy, and limitations on the kinds of services that may be offered.
CTBI’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on our website at www.ctbi.com as soon as reasonably practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission. CTBI’s Code of Business Conduct and Ethics and other corporate governance documents are also available on our website. Copies of our annual report will be made available free of charge upon written request to:
Community Trust Bancorp, Inc.
Mark A. Gooch
Vice Chairman, President, and CEO
P.O. Box 2947
Pikeville, KY 41502-2947
The Securities and Exchange Commission (“SEC”) maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding CTBI and other issuers that file electronically with the SEC.
Capital Requirements
Insured depository institutions are required to meet certain capital level requirements. On October 29, 2019, federal banking regulators adopted a final rule to simplify the regulatory capital requirements for eligible community banks and holding companies that opt-in to the community bank leverage ratio framework (the “CBLR framework”), as required by Section 201 of the Economic Growth, Relief and Consumer Protection Act of 2018. Under the final rule, which became effective as of January 1, 2020, community banks and holding companies (which includes CTB and CTBI) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, were eligible to opt-in to the CBLR framework. The community bank leverage ratio is the ratio of a banking organization’s Tier 1 capital to its average total consolidated assets, both as reported on the banking organization’s applicable regulatory filings.
In April 2020, as directed by Section 4012 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the regulatory agencies introduced temporary changes to the CBLR. These changes, which subsequently were adopted as a final rule, temporarily reduced the CBLR requirement to 8% through the end of calendar year 2020. Beginning in calendar year 2021, the CBLR requirement increased to 8.5% for the calendar year before returning to 9% in calendar year 2022. Management elected to use the CBLR framework for CTBI and CTB. CTBI’s CBLR ratio as of December 31, 2023 was 13.69%. CTB’s CBLR ratio as of December 31, 2023 was 13.22%.
An investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that management believes affect us are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference herein. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This report is qualified in its entirety by these risk factors. See also, “Cautionary Statement Regarding Forward-Looking Statements.” If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment.
Economic Environment Risks
Economic Risk
CTBI may continue to be adversely affected by economic and market conditions.
Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent upon the business environment in the markets where we operate, in the states of Kentucky, West Virginia, and Tennessee and in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors. Such conditions could adversely affect the credit quality of our loans and our business, financial condition, and results of operations.
Economy of Our Markets
Our business may continue to be adversely affected by ongoing weaknesses in the local economies on which we depend.
Our loan portfolio is concentrated primarily in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. Our profits depend on providing products and services to clients in these local regions. Although unemployment rates in many of our markets have decreased, they remain above the national average. Increases in unemployment, decreases in real estate values, or increases in interest rates could weaken the local economies in which we operate. These economic indicators typically affect certain industries, such as real estate and financial services, more significantly. Also, our growth within certain of our markets may be adversely affected by inconsistent access to high speed internet and the lack of population and business growth in such markets in recent years. Weakness in our market area could depress our earnings and consequently our financial condition because:
| | • | Clients may not want, need, or qualify for our products and services; |
| | • | Borrowers may not be able to repay their loans; |
| | • | The value of the collateral securing our loans to borrowers may decline; and |
| | • | The quality of our loan portfolio may decline. |
Climate Change Risk
Our business may be adversely impacted by climate change and related initiatives.
Climate change and other emissions-related laws, regulations, and agreements have been proposed and, in some cases adopted, on the international, federal, state, and local levels. These final and proposed initiatives take the form of restrictions, caps, taxes, or other controls on emissions. Our markets include areas where the coal industry was historically a significant part of the local economy. The importance of the coal industry to such areas has, however, continued to decline substantially and the economies of our markets have become more diversified. Nevertheless, to the extent that existing or new climate change laws, regulations, or agreements further impact production, purchase, or use of coal, the economies of certain areas within our markets, the demand for financing, the value of collateral securing our coal-related loans, and our financial condition and results of operations may be adversely affected.
We, like all businesses, as well as our market areas, borrowers, and customers, may be adversely impacted to the extent that weather-related events cause damage or disruption to properties or businesses.
Risk from COVID-19 and Other Infectious Disease Outbreaks Generally
Our business, results of operations and financial condition may be adversely affected by epidemics and pandemics, such as the COVID-19 outbreak, or other infectious disease outbreaks.
We may face risks related to epidemics, pandemics or other infectious disease outbreaks, which could result in a widespread health crisis that adversely affects general commercial activity, the global economy (including the states and local economies in which we operate), and financial markets. For example, the spread of COVID-19, which was identified as a pandemic by the World Health Organization and declared a national emergency in the United States, created a global public-health crisis that resulted in significant economic uncertainty, and has impacted household, business, economic, and market conditions, including in the states and local economies in which we conduct nearly all of our business.
The resurgence of the COVID-19 pandemic, or a new epidemic, pandemic or infectious disease outbreak, may result in us having to close certain offices and may require us to limit how customers conduct business through our branch network. If our employees are required to work remotely, we may be exposed to increased cybersecurity risks such as phishing, malware, and other cybersecurity attacks, all of which could expose us to liability and could seriously disrupt our business operations. Furthermore, our business operations may be disrupted due to vendors and third-party service providers being unable to work or provide services effectively during such a health crisis, including because of illness, quarantines, or other government actions.
In addition, an epidemic, a pandemic or another infectious disease outbreak, or the resurgence of the COVID-19 pandemic, could again significantly impact households and businesses, or cause limitations on commercial activity, increased unemployment, and general economic and financial instability. An economic slow-down, or the reversal of the economic recovery, in the regions in which we conduct our business could result in declines in loan demand and collateral values. Furthermore, negative impacts on our customers caused by such a health crisis, including the resurgence of COVID-19, could result in increased risk of delinquencies, defaults, foreclosures, and losses on our loans. Moreover, governmental and regulatory actions taken in response to an epidemic, a pandemic, or another infectious disease outbreak may include decreased interest rates, which could adversely impact our interest margins and may lead to decreases in our net interest income.
The extent to which a widespread health crisis may impact our business, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and severity of the crisis, the potential for seasonal or other resurgences, actions taken by governmental authorities and other third parties to contain and treat such an epidemic, a pandemic or another infections disease outbreak, and how quickly and to what extent normal economic and operating conditions can resume. Moreover, the effects of a widespread health crisis may heighten many of the other risks described in this “Risk Factors” section. As a result, the negative effects on our business, results of operations, and financial condition from an epidemic, a pandemic, or another infectious disease outbreak, including the resurgence of the COVID-19 pandemic, could be material.
Operational Risks
Interest Rate Risk
Changes in interest rates could adversely affect our earnings and financial condition.
Our earnings and financial condition are dependent to a large degree upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest-rate spreads, meaning the difference between the interest rates earned on loans and investments and the interest rates paid on deposits and borrowings, could adversely affect our earnings and financial condition. Interest rates are highly sensitive to many factors, including:
| | • | The rate of economic growth; |
| | • | Instability in domestic and foreign financial markets. |
Changes in market interest rates will also affect the level of voluntary prepayments on our loans and the receipt of payments on our mortgage-backed securities resulting in the receipt of proceeds that may be reinvested at a lower rate than the loan or mortgage-backed security being prepaid.
We originate residential loans for sale and for our portfolio. The origination of loans for sale is designed to meet client financing needs and earn fee income. The origination of loans for sale is highly dependent upon the local real estate market and the level and trend of interest rates. Increasing interest rates may reduce the origination of loans for sale and consequently the fee income we earn. While our commercial banking, construction, and income property loan portfolios remain a significant portion of our activities, high interest rates may reduce our mortgage-banking activities and thereby our income. In contrast, decreasing interest rates have the effect of causing clients to refinance mortgage loans faster than anticipated. This causes the value of assets related to the servicing rights on loans sold to be lower than originally anticipated. If this happens, we may need to write down our servicing assets faster, which would accelerate our expense and lower our earnings.
We consider interest rate risk one of our most significant market risks. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of our net interest revenue is largely dependent upon the effective management of interest rate risk. We employ a variety of measurement techniques to identify and manage our interest rate risk, including the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain financial assets and liabilities. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain, and as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.
Credit Risk
Our earnings and reputation may be adversely affected if we fail to effectively manage our credit risk.
Originating and underwriting loans are integral to the success of our business. This business requires us to take “credit risk,” which is the risk of losing principal and interest income because borrowers fail to repay loans. Collateral values and the ability of borrowers to repay their loans may be affected at any time by factors such as:
| | • | The length and severity of downturns in the local economies in which we operate or the national economy; |
| | • | The length and severity of downturns in one or more of the business sectors in which our customers operate, particularly the automobile, hotel/motel, and residential development industries; or |
| | • | A rapid increase in interest rates. |
Our loan portfolio includes loans with a higher risk of loss.
We originate commercial real estate residential loans, commercial real estate nonresidential loans, hotel/motel loans, other commercial loans, consumer loans, and residential mortgage loans, primarily within our market area. Commercial real estate residential, commercial real estate nonresidential, hotel/motel, and other commercial loans tend to involve larger loan balances to a single borrower or groups of related borrowers and are most susceptible to a risk of loss during a downturn in the business cycle. These loans also have historically had a greater credit risk than other loans for the following reasons:
| | • | Commercial Real Estate Residential. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. As of December 31, 2023, commercial real estate residential loans comprised approximately 10% of our total loan portfolio. |
| | • | Commercial Real Estate Nonresidential. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. As of December 31, 2023, commercial real estate nonresidential loans comprised approximately 19% of our total loan portfolio. |
| | • | Hotel/Motel. The hotel and motel industry is highly susceptible to changes in the domestic and global economic environments, which has caused the industry to experience substantial volatility due to the recent global pandemic. As of December 31, 2023, hotel/motel loans comprised approximately 10% of our total loan portfolio. |
| | • | Other Commercial Loans. Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid, or fluctuate in value based on the success of the business. As of December 31, 2023, other commercial loans comprised approximately 10% of our total loan portfolio. |
Consumer loans may carry a higher degree of repayment risk than residential mortgage loans, particularly when the consumer loan is unsecured. Repayment of a consumer loan typically depends on the borrower’s financial stability, and it is more likely to be affected adversely by job loss, illness, or personal bankruptcy. In addition, federal and state bankruptcy, insolvency, and other laws may limit the amount we can recover when a consumer client defaults. As of December 31, 2023, consumer loans comprised approximately 24% of our total loan portfolio. As of December 31, 2023, approximately 84% of our consumer loans and 20% of our total loan portfolio were consumer indirect loans. Consumer indirect loans are fixed rate loans secured by new and used automobiles, trucks, vans, and recreational vehicles originated at selling dealerships which are purchased by us following our review and approval of such loans. These loans generally have a greater risk of loss in the event of default than, for example, one-to-four family residential mortgage loans due to the rapid depreciation of vehicles securing the loans. We face the risk that the collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. We also assume the risk that the dealership administering the lending process does not comply with applicable consumer protection law and regulations.
A significant part of our lending business is focused on small to medium-sized business which may be impacted more severely during periods of economic weakness.
A significant portion of our commercial loan portfolio is tied to small to medium-sized businesses in our markets. During periods of economic weakness, small to medium-sized businesses may be impacted more severely than larger businesses. As a result, the ability of smaller businesses to repay their loans may deteriorate, particularly if economic challenges persist over a period of time, and such deterioration would adversely impact our results of operations and financial condition.
A large percentage of our loan portfolio is secured by real estate, in particular commercial real estate. Weakness in the real estate market or other segments of our loan portfolio would lead to additional losses, which could have a material adverse effect on our business, financial condition, and results of operations.
As of December 31, 2023, approximately 66% of our loan portfolio was secured by real estate, with approximately 39% of the portfolio consisting of commercial real estate. High levels of commercial and consumer delinquencies or declines in real estate market values could require increased net charge-offs and increases in the allowance for credit losses, which could have a material adverse effect on our business, financial condition, and results of operations and prospects.
Competition
Strong competition within our market area may reduce our ability to attract and retain deposits and originate loans.
We face competition both in originating loans and in attracting deposits. Competition in the financial services industry is intense. We compete for clients by offering excellent service and competitive rates on our loans and deposit products. The type of institutions we compete with include commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms. Competition arises from institutions located within and outside our market areas. As financial services become increasingly dependent on technology, permitting transactions to be conducted by telephone, mobile banking, and the internet, non-bank institutions are able to attract funds and provide lending and other financial services without offices located in our market areas. As a result of their size and ability to achieve economies of scale, certain of our competitors offer a broader range of products and services than we offer. With the increased consolidation in the financial industry, larger financial institutions may strengthen their competitive positions. In addition, to stay competitive in our markets we may need to adjust the interest rates on our products to match the rates offered by our competitors, which could adversely affect our net interest margin. As a result, our profitability depends upon our continued ability to successfully compete in our market areas while achieving our investment objectives.
Technology and other changes are allowing consumers to complete financial transactions through alternative methods to those which historically involved banks. For example, consumers can now hold funds that would have been held as bank deposits in mutual funds, brokerage accounts, general purpose reloadable prepaid cards, or cyber currency. In addition, consumers can complete transactions, such as paying bills or transferring funds, directly without utilizing the services of a bank. The process of eliminating banks as intermediaries (known as disintermediation) could result in the loss of fee income, as well as the loss of deposits and the income that might be generated from those deposits. The related revenue reduction could adversely affect our financial condition, cash flows, and results of operations.
Operational Risk
An extended disruption of vital infrastructure or a security breach could negatively impact our business, results of operations, and financial condition.
Our operations depend upon, among other things, our infrastructure, including equipment and facilities. Extended disruption of vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking or viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of our control could have a material adverse impact on the financial services industry as a whole and on our business, results of operations, cash flows, and financial condition in particular. Our business recovery plan may not work as intended or may not prevent significant interruption of our operations. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in the loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have an adverse effect on our financial condition and results of operation.
Our information technology systems and networks may experience interruptions, delays, or cessations of service or produce errors due to regular maintenance efforts, such as systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time-consuming, disruptive, and resource intensive. Such disruptions could damage our reputation and otherwise adversely impact our business and results of operations.
Third party vendors provide key components of our business infrastructure, such as processing, internet connections, and network access. While CTBI selected these third party vendors carefully through our vendor management process, we do not control their actions and generally are not able to obtain satisfactory indemnification provisions in our third party vendor written contracts. Any problems caused by third parties or arising from their services, such as disruption in service, negligence in the performance of services or a breach of customer data security with regard to the third parties’ systems, could adversely affect our ability to deliver services, negatively impact our business reputation, cause a loss of customers, or result in increased expenses, regulatory fines and sanctions, or litigation.
Claims and litigation may arise pertaining to fiduciary responsibility.
Customers may, from time to time, make a claim and take legal action pertaining to our performance of fiduciary responsibilities. Whether customer claims and legal action related to our performance of fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant financial liability, adversely affect the market perception of us and our products and services, and impact customer demand for those products and services. Any such financial liability or reputational damage could have an adverse effect on our business, financial condition, and results of operations.
Significant legal actions could subject us to uninsured liabilities.
From time to time, we may be subject to claims related to our operations. These claims and legal actions, including supervisory actions by our regulators, could involve significant amounts. We maintain insurance coverage in amounts and with deductibles we believe are appropriate for our operations. However, our insurance coverage may not cover all claims against us and related costs, and further insurance coverage may not continue to be available at a reasonable cost. As a result, CTBI could be exposed to uninsured liabilities, which could adversely affect CTBI’s business, financial condition, or results of operations.
Technology Risk
CTBI continually encounters technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
Cyber Risk
A breach in the security of our systems could disrupt our business, result in the disclosure of confidential information, damage our reputation, and create significant financial and legal exposure for us.
Our businesses are dependent on our ability and the ability of our third party service providers to process, record, and monitor a large number of transactions. If the financial, accounting, data processing, or other operating systems and facilities fail to operate properly, become disabled, experience security breaches, or have other significant shortcomings, our results of operations could be materially adversely affected.
Management is responsible for the day-to-day management of information security risk, while the Risk and Compliance Committee of our Board of Directors is responsible for the oversight of information security risk. The Risk and Compliance Committee has the responsibility to satisfy itself that the processes designed and implemented by management are adequate and functioning as designed. The Chairman of this Committee makes a quarterly report to the Board covering key risk areas. We have an annual third-party information technology review conducted by information security professionals following industry-standard testing procedures. All employees go through information security training annually, in addition to random quarterly phishing testing. In the event of an information security breach, we have an insurance policy in place.
Although we and our third party service providers devote significant resources to maintain and upgrade our systems and processes that are designed to protect the security of computer systems, software, networks, and other technology assets and the confidentiality, integrity, and availability of information belonging to us and our customers, there is no assurance that our security systems and those of our third party service providers will provide absolute security. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks, and other means. Despite our efforts and those of our third party service providers to ensure the integrity of these systems, it is possible that we or our third party service providers may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, especially because techniques used change frequently or are not recognized until launched, and because security attacks can originate from a wide variety of sources.
A successful breach of the security of our systems or those of our third party service providers could cause serious negative consequences to us, including significant disruption of our operations, misappropriation of our confidential information or the confidential information of our customers, or damage to our computers or operating systems, and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss in confidence in our security measures, customer dissatisfaction, litigation exposure, and harm to our reputation, all of which could have a material adverse effect on us. While we maintain insurance coverage that should, subject to policy terms and conditions, cover certain aspects of our cyber risks, this insurance coverage may be insufficient to cover all losses we could experience resulting from a cyber-security breach. Moreover, the cost of insurance sufficient to cover substantially all, or a reasonable portion, of losses related to cyber security breaches is expected to increase and such increases are likely to be material.
CTBI has not experienced any data breaches; however, one of our third party vendors did experience a data breach during 2023 as disclosed in note 19 to our consolidated financial statements. The incident did not impact the ongoing operations of CTBI, and we expect our insurance policy to cover many of the costs related to the incident.
Banking customers and employees have been, and will likely continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, account information, or other personal information, or to introduce viruses or other malware to bank information systems or customers’ computers. Though we endeavor to lessen the success of such threats through the use of authentication technology and employee education, such cyber-attacks remain a serious issue. Publicity concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications as a means of conducting banking and other commercial transactions.
We could incur increased costs or reductions in revenue or suffer reputational damage in the event of misuse of information.
Our operations rely on the secure processing, transmission, and storage of confidential information in our computer systems and networks regarding our customers and their accounts. To provide these products and services, we use information systems and infrastructure that we and third party service providers operate. As a financial institution, we also are subject to and examined for compliance with an array of data protection laws, regulations, and guidance, as well as to our own internal privacy and information security policies and programs.
Information security risks for financial institutions like us have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, and other external parties. Our technologies and systems may become the target of cyber-attacks or other attacks that could result in the misuse or destruction of our or our customers’ confidential, proprietary, or other information or that could result in disruptions to the business operations of us or our customers or other third parties. Also, our customers, in order to access some of our products and services, may use personal computers, smart mobile phones, tablet PCs, and other devices that are beyond our controls and security systems. Further, a breach or attack affecting one of our third-party service providers or partners could impact us through no fault of our own. In addition, because the methods and techniques employed by perpetrators of fraud and others to attack systems and applications change frequently and often are not fully recognized or understood until after they have been launched, we and our third-party service providers and partners may be unable to anticipate certain attack methods in order to implement effective preventative measures.
While we have policies and procedures designed to prevent or limit the effect of the possible security breach of our information systems, if unauthorized persons were somehow to get access to confidential or proprietary information in our possession or to our proprietary information, it could result in litigation and regulatory investigations, significant legal and financial exposure, damage to our reputation, or a loss of confidence in the security of our systems that could materially adversely affect our results of operation.
Counterparty Risk
The soundness of other financial institutions could adversely affect CTBI.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional counterparties. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan due us. There is no assurance that any such losses would not materially and adversely affect our businesses, financial condition, or results of operations.
Acquisition Risks
Acquisition Risk
We may have difficulty in the future continuing to grow through acquisitions.
We may experience difficulty in making acquisitions on acceptable terms due to the decreasing number of suitable acquisition targets, competition for attractive acquisitions, regulatory impediments, and certain limitations on interstate acquisitions.
Any future acquisitions or mergers by CTBI or our banking subsidiary are subject to approval by the appropriate federal and state banking regulators. The banking regulators evaluate a number of criteria in making their approval decisions, such as:
| | • | Safety and soundness guidelines; |
| | • | Compliance with all laws including the USA PATRIOT Act, the International Money Laundering Abatement and Anti-Terrorist Financing Act, the Sarbanes-Oxley Act and the related rules and regulations promulgated under such Act or the Exchange Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, and all other applicable fair lending and consumer protection laws and other laws relating to discriminatory business practices; and |
| | • | Anti-competitive concerns with the proposed transaction. |
If the banking regulators or a commenter on our regulatory application raise concerns about any of these criteria at the time a regulatory application is filed, the banking regulators may deny, delay, or condition their approval of a proposed transaction. We have grown, and, subject to regulatory approval, intend to continue to grow, through acquisitions of banks and other financial institutions. After these acquisitions, we may experience adverse changes in results of operations of acquired entities, unforeseen liabilities, asset quality problems of acquired entities, loss of key personnel, loss of clients because of change of identity, difficulties in integrating data processing and operational procedures, and deterioration in local economic conditions. These various acquisition risks can be heightened in larger transactions.
Integration Risk
We may not be able to achieve the expected integration and cost savings from our bank acquisition activities.
We have a long history of acquiring financial institutions and, subject to regulatory approval, we expect this acquisition activity to resume in the future. Difficulties may arise in the integration of the business and operations of the financial institutions that agree to merge with and into CTBI and, as a result, we may not be able to achieve the cost savings and synergies that we expect will result from the merger activities. Achieving cost savings is dependent on consolidating certain operational and functional areas, eliminating duplicative positions and terminating certain agreements for outside services. Additional operational savings are dependent upon the integration of the banking businesses of the acquired financial institution with that of CTBI, including the conversion of the acquired entity’s core operating systems, data systems, and products to those of CTBI and the standardization of business practices. Complications or difficulties in the conversion of the core operating systems, data systems, and products of these other banks to those of CTBI may result in the loss of clients, damage to our reputation within the financial services industry, operational problems, one-time costs currently not anticipated by us, and/or reduced cost savings resulting from the merger activities.
Market and Liquidity Risks
Market Risk
CTBI’s stock price is volatile.
Our stock price has been volatile in the past, and several factors could cause the price to fluctuate substantially in the future. These factors include:
| | • | Actual or anticipated variations in earnings; |
| | • | Changes in analysts’ recommendations or projections; |
| | • | CTBI’s announcements of developments related to our businesses; |
| | • | Operating and stock performance of other companies deemed to be peers; |
| | • | New technology used or services offered by traditional and non-traditional competitors; |
| | • | News reports of trends, concerns, and other issues related to the financial services industry; and |
| | • | Additional governmental policies and enforcement of current laws. |
Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to CTBI’s performance. Investor confidence in financial institutions has declined as a result of the bank failures that occurred in 2023. General market price declines or market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.
Liquidity Risk
CTBI is subject to liquidity risk.
CTBI requires liquidity to meet our deposit and debt obligations as they come due and to fund loan demands. CTBI’s access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could reduce our access to liquidity sources include a downturn in the market, difficult credit markets, or adverse regulatory actions against CTBI. CTBI’s access to deposits may also be affected by the liquidity needs of our depositors. In particular, a substantial majority of CTBI’s liabilities are demand, savings, interest checking, and money market deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of our assets are loans, which cannot be called or sold in the same time frame. To the extent that consumer confidence in other investment vehicles, such as the stock market, increases, customers may move funds from bank deposits and products into such other investment vehicles. In addition, given the adoption of electronic banking, these transfers could occur more quickly than they have historically. Although CTBI historically has been able to replace maturing deposits and advances as necessary, we might not be able to replace such funds in the future, especially if a large number of our depositors sought to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on our financial condition and results of operations.
Adverse developments affecting the financial services industry, such as recent bank failures or concerns involving liquidity, may have a material effect on our operations.
Recent events relating to the failures of Silicon Valley Bank and Signature Bank in March 2023 have caused general uncertainty and concerns regarding the adequacy of liquidity in the banking sector as a whole. A financial institution’s liquidity reflects its ability to meet customer demand for loans, accommodating possible outflows in deposits, and accessing alternative sources of funds when needed, while at the same time taking advantage of interest rate market opportunities. The ability to manage liquidity is fundamental to a financial institution’s business and success. The bank failures in March 2023 highlight the potential results of an insured depository institution unexpectedly having to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institutions ability to satisfy its obligations to depositors. Current market uncertainties and other external factors may impact the competitive landscape for deposits in the banking industry in an unpredictable manner. In addition, the rising interest rate environment has continued to increase competition for liquidity and the premium at which liquidity is available to meet funding needs. These possible impacts may adversely affect our future operating results, including net income, and negatively impact capital.
Legal, Legislation, and Regulation Risks
Risks Related to Regulatory Policies and Oversight
The banking industry is heavily regulated, and our business may be adversely affected by legislation or changes in regulatory policies and oversight.
The earnings of banks and bank holding companies such as ours are affected by the policies of regulatory authorities, including the Federal Reserve Board, which regulates the money supply. Among the methods employed by the Federal Reserve Board are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial and savings banks in the past and are expected to continue to do so in the future.
In recent years, federal banking regulators have increased regulatory scrutiny, and additional limitations on financial institutions have been proposed or adopted by regulators and by Congress. Moreover, banking regulatory agencies have increasingly over the last few years used authority under Section 5 of the Federal Trade Commission Act to take supervisory or enforcement action with respect to alleged unfair or deceptive acts or practices by banks to address practices that may not necessarily fall within the scope of a specific banking or consumer finance law. The banking industry is highly regulated and changes in federal and state banking regulations as well as policies and administration guidelines may affect our practices, growth prospects, and earnings. In particular, there is no assurance that governmental actions designed to stabilize the economy and banking system will not adversely affect our financial position or results of operations.
From time to time, CTBI and/or our subsidiaries may be involved in information requests, reviews, investigations, and proceedings (both formal and informal) by various governmental agencies and law enforcement authorities regarding our respective businesses. Any of these matters may result in material adverse consequences to CTBI and our subsidiaries, including adverse judgements, findings, limitations on merger and acquisition activity, settlements, fines, penalties, orders, injunctions, and other actions. Such adverse consequences may be material to the financial position of CTBI or our results of operations.
In particular, consumer products and services are subject to increasing regulatory oversight and scrutiny with respect to compliance with consumer laws and regulations. We may face a greater number or wider scope of investigations, enforcement actions, and litigation in the future related to consumer practices. In addition, any required changes to our business operations resulting from these developments could result in a significant loss of revenue, require remuneration to customers, trigger fines or penalties, limit the products or services we offer, require us to increase certain prices and therefore reduce demand for our products, impose additional compliance costs on us, cause harm to our reputation, or otherwise adversely affect our consumer business.
The financial services industry has experienced leadership changes at federal banking agencies, which may impact regulations and government policy applicable to us. New appointments to the Board of Governors of the Federal Reserve could affect monetary policy and interest rates.
We are required to maintain certain minimum amounts and types of capital and may be subject to more stringent capital requirements in the future. A failure to meet applicable capital requirements could have a material adverse effect on our financial condition and results of operations.
We are subject to regulatory requirements specifying minimum amounts and types of capital that we must maintain. From time to time, banking regulators change these regulatory capital adequacy guidelines. See Item 1 above for additional information regarding current capital requirements. A failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material adverse effect on our financial condition and results of operations.
Environmental Liability Risk
We are subject to environmental liability risk associated with lending activity.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.
| Item1B. | Unresolved Staff Comments |
None.
As referenced in the Operational Risks/Cyber Risks section of Item 1A. Risk Factors included in this Form 10-K, our organization may be materially affected by cybersecurity threats and incidents that target its internally managed information technology systems or our critical vendor systems.
Our institution utilizes industry standard and regulatory approved assessment tools to identify cybersecurity risks and measure preparedness. The tools provide a repeatable and measurable framework for our organization to measure its cybersecurity preparedness over time.
The assessment process spans over five domains of interest: (1) cyber risk management and oversight, (2) threat intelligence and collaboration, (3) cybersecurity controls, (4) external dependencies, and (5) cyber incident management and resilience. All domains are currently assessed at an evolving maturity level which is in line with our organizations inherent risk assessment score.
Our institution has purchased and is using best of breed tools in the areas of endpoint security, Security Information Event Management (“SIEM”), Privileged Access Management (“PAM”), email and web browsing filtering and management, and user analytics. We also use a comprehensive third party 24-by-7 Security Operations Center (“SOC”) that monitors, detects, and remediates cybersecurity threats adhering to strict service response levels.
The internal assessment process and internal tools and SOC related key indicators are reported on a quarterly basis to the Security and Information Security Committee and the Enterprise-wide Risk Management Committee and annually to the Board of Directors.
The assessment process, internal tools, and corresponding SOC related services are also reviewed when new threats arise or when considering changes to the business strategy, such as expanding operations, offering new products and services, or entering into new third-party relationships that support critical activities. Consequently, management shall determine whether additional risk management practices or controls are needed to maintain or augment the institution’s cybersecurity maturity.
A comprehensive and layered auditing approach including people, processes and technology components is executed by our internal audit program in order to evaluate the effectiveness of existing controls and ensure that cybersecurity risk has been adequately mitigated within our institution. Periodic phishing tests, network and application security reviews, third-party vulnerability assessments and penetration testing are used to gauge the overall effectiveness of our cybersecurity defenses.
In an effort to continually share threat intelligence and increase awareness of cybersecurity threats, routine communication to employees is conducted to highlight internal control requirements, common cybersecurity threats and schemes. Our incident response team members also participate in the annual Financial Services Information Sharing and Analysis Center tabletop cybersecurity tabletop exercises.
Our comprehensive vendor management program and processes assess all new vendors and segments them into criticality tiers. Our most critical vendors (tiers 1 and 2) are evaluated annually based on requested vendor documents, such as Statements on Standards Attestation Engagements No. 18 (SSAE 18), financial statements, insurance, and due diligence questionnaires. The vendor management team also monitors all news alerts related to all critical vendors.
As of the date of this report, we are not aware of any cybersecurity threats, including as a result of any previous cybersecurity incidents, that have materially affected or are reasonably likely to materially affect CTBI. However, future incidents could have a material impact on CTBI’s business strategy, results of operations, or financial condition. For additional discussion of the risks posed by cybersecurity threats, see the Operational Risks/Cyber Risks section of Item 1A. Risk Factors included in this Form 10-K.
Management receives information on cyber activities, incidents, and risk assessments quarterly from the VP/Corporate Information Security, Resilience and Data Officer (CISRDO), the SVP/Manager Application Systems, and the EVP/Operations during the Security and Information Security Committee and the Information Technology Steering Committee meetings. This information is also shared and discussed quarterly with the Enterprise-wide Risk Management Committee. Various key risk measures related to cyber risk are tracked and reported quarterly to the Enterprise-wide Risk Management Committee. Our VP/CISRDO has been with CTBI for five years and has extensive 30+ years of experience in information technology management roles in various industries. Our SVP/Manager Application Systems has been with CTBI for 32 years and has held various information technology leadership roles. Our EVP/Operations has been with the company for 30 years, leading and guiding our technology teams.
The Board of Directors monitors cyber risk through quarterly reports from the Board’s Risk and Compliance Committee. This Board committee meets quarterly and receives information concerning cyber risk activities, including cyber risk assessments and incident reporting. The Board also receives an annual report covering cyber risk from the Chief Information Technology Officer. Controls over cyber risk are reviewed throughout the year by internal audit activities and third-party assessments whose reports are reviewed by the Board’s Audit Committee.
Our main office, which is owned by Community Trust Bank, Inc., is located at 346 North Mayo Trail, Pikeville, Kentucky 41501. Following is a schedule of properties owned and leased by CTBI and our subsidiaries as of December 31, 2023:
| Location | | Owned | | | Leased | | | Total | |
| Banking locations: | | | | | | | | | |
Community Trust Bank, Inc. | | | | | | | | | |
* Pikeville Market (lease land at 3 owned locations) | | | 9 | | | | 1 | | | | 10 | |
| 10 locations in Pike County, Kentucky | | | | | | | | | | | | |
| Floyd/Knott/Johnson Market (lease land at 1 owned location) | | | 3 | | | | 1 | | | | 4 | |
| 2 locations in Floyd County, Kentucky, 1 location in Knott County, Kentucky, and 1 location in Johnson County, Kentucky | | | | | | | | | | | | |
| Tug Valley Market (lease land at 1 owned location) | | | 2 | | | | 0 | | | | 2 | |
| 1 location in Pike County, Kentucky, 1 location in Mingo County, West Virginia | | | | | | | | | | | | |
| Whitesburg Market (lease land at 1 owned location) | | | 4 | | | | 1 | | | | 5 | |
| 5 locations in Letcher County, Kentucky | | | | | | | | | | | | |
| Hazard Market (lease land at 2 owned locations) | | | 3 | | | | 0 | | | | 3 | |
| 3 locations in Perry County, Kentucky | | | | | | | | | | | | |
* Lexington Market (lease land at 3 owned locations) | | | 4 | | | | 2 | | | | 6 | |
| 6 locations in Fayette County, Kentucky | | | | | | | | | | | | |
| Winchester Market | | | 2 | | | | 0 | | | | 2 | |
| 2 locations in Clark County, Kentucky | | | | | | | | | | | | |
| Richmond Market (lease land at 1 owned location) | | | 3 | | | | 0 | | | | 3 | |
| 3 locations in Madison County, Kentucky | | | | | | | | | | | | |
| Mt. Sterling Market | | | 2 | | | | 0 | | | | 2 | |
| 2 locations in Montgomery County, Kentucky | | | | | | | | | | | | |
| Versailles Market (lease land at 2 owned locations) | | | 3 | | | | 2 | | | | 5 | |
| 1 location in Woodford County, Kentucky, 2 locations in Franklin County, Kentucky, and 2 locations in Scott County, Kentucky | | | | | | | | | | | | |
* Danville Market (lease land at 1 owned location) | | | 3 | | | | 0 | | | | 3 | |
| 2 locations in Boyle County, Kentucky and 1 location in Mercer County, Kentucky | | | | | | | | | | | | |
* Ashland Market (lease land at 1 owned location) | | | 5 | | | | 0 | | | | 5 | |
| 4 locations in Boyd County, Kentucky and 1 location in Greenup County, Kentucky | | | | | | | | | | | | |
| Flemingsburg Market | | | 3 | | | | 0 | | | | 3 | |
| 3 locations in Fleming County, Kentucky | | | | | | | | | | | | |
| Advantage Valley Market | | | 3 | | | | 1 | | | | 4 | |
| 2 locations in Lincoln County, West Virginia, 1 location in Wayne County, West Virginia, and 1 location in Cabell County, West Virginia | | | | | | | | | | | | |
| Summersville Market | | | 1 | | | | 0 | | | | 1 | |
| 1 location in Nicholas County, West Virginia | | | | | | | | | | | | |
| Middlesboro Market (lease land at 1 owned location) | | | 3 | | | | 0 | | | | 3 | |
| 3 locations in Bell County, Kentucky | | | | | | | | | | | | |
| Williamsburg Market | | | 5 | | | | 0 | | | | 5 | |
| 2 locations in Whitley County, Kentucky and 3 locations in Laurel County, Kentucky | | | | | | | | | | | | |
| Campbellsville Market (lease land at 2 owned locations) | | | 8 | | | | 0 | | | | 8 | |
| 2 locations in Taylor County, Kentucky, 2 locations in Pulaski County, Kentucky, 1 location in Adair County, Kentucky, 1 location in Green County, Kentucky, 1 location in Russell County, Kentucky, and 1 location in Marion County, Kentucky | | | | | | | | | | | | |
| Mt. Vernon Market | | | 2 | | | | 0 | | | | 2 | |
| 2 locations in Rockcastle County, Kentucky | | | | | | | | | | | | |
* LaFollette Market | | | 3 | | | | 0 | | | | 3 | |
| 2 locations in Campbell County, Tennessee and 1 location in Anderson County, Tennessee | | | | | | | | | | | | |
| Total banking locations | | | 71 | | | | 8 | | | | 79 | |
| Operational locations: | | | | | | | | | | | | |
| Community Trust Bank, Inc. | | | | | | | | | | | | |
| Pikeville (Pike County, Kentucky) (lease land at 1 owned location) | | | 1 | | | | 0 | | | | 1 | |
| Total operational locations | | | 1 | | | | 0 | | | | 1 | |
| | | | | | | | | | | | | |
| Total locations | | | 72 | | | | 8 | | | | 80 | |
*Community Trust and Investment Company has leased offices in the main office locations in these markets.
See notes 7 and 15 to the consolidated financial statements contained herein for the year ended December 31, 2023, for additional information relating to lease commitments and amounts invested in premises and equipment.
A new Lexington Market location opened in January 2024 in Boone County, Kentucky, and a new Campbellsville Market location will open in 2024 in Hardin County, Kentucky. We owned the land for both of these locations at December 31, 2023.
CTBI and subsidiaries, and from time to time, our officers, are named defendants in legal actions arising from ordinary business activities. Management, after consultation with legal counsel, believes any pending actions are without merit or that the ultimate liability, if any, will not materially affect our consolidated financial position or results of operations.
| Item 4. | Mine Safety Disclosures |
Not applicable.
Information about our Executive Officers
Set forth below are the executive officers of CTBI, their positions with CTBI, and the year in which they first became an executive officer.
Name and Age (1) | Positions and Offices Currently Held | Date First Became Executive Officer | | Principal Occupation |
| Mark A. Gooch; 65 | Vice Chairman, President, and Chief Executive Officer | 1997 | (2) |
| Vice Chairman, President, and CEO of CTBI |
| | | | | | |
| Kevin J. Stumbo; 63 | Executive Vice President, Chief Financial Officer, and Treasurer | 2002 | | | Executive Vice President/Chief Financial Officer of CTBI |
| | | | | | |
| Richard W. Newsom; 69 | Executive Vice President | 2002 | (3) |
| Executive Vice President/President of CTB |
| | | | | | |
| Andy D. Waters; 58 | Executive Vice President | 2011 | | | President and CEO of CTIC |
| | | | | | |
| C. Wayne Hancock; 49 | Executive Vice President and Secretary | 2014 | (4) |
| Executive Vice President/Chief Legal Officer of CTB |
| | | | | | |
| James B. Draughn; 64 | Executive Vice President | 2001 | | | Executive Vice President/Operations of CTB |
| | | | | | |
| Steven E. Jameson; 67 | Executive Vice President | 2004 | (5) |
| Executive Vice President/Chief Internal Audit & Risk Officer of CTB |
| | | | | | |
| Ricky D. Sparkman; 61 | Executive Vice President | 2002 | | | Executive Vice President/South Central Region President of CTB |
| | | | | | |
| D. Andrew Jones; 61 | Executive Vice President | 2010 | | | Executive Vice President/Northeastern Region President of CTB |
| | | | | | |
| David Tackett; 58 | Executive Vice President | 2022 | (6) |
| Executive Vice President/Eastern Region President of CTB |
| | | | | | |
| Billie J. Dollins; 63 | Executive Vice President | 2023 | (7) |
| Executive Vice President/Central Kentucky Region President of CTB |
| | | | | | |
| Mark E. Smith; 53 | Executive Vice President | 2024 | (8) |
| Executive Vice President/Chief Credit Officer of CTB |
| (1) | The ages listed for CTBI’s executive officers are as of February 28, 2024. |
| (2) | Mr. Gooch became President of CTBI on July 27, 2021 and assumed the additional positions of Vice Chairman and Chief Executive Officer of CTBI effective February 7, 2022, upon the retirement of Jean R. Hale. Mr. Gooch retained his previous position as Chief Executive Officer of CTB and assumed the additional roles of Chairman of CTB and Chairman of CTIC also effective with Ms. Hale’s retirement on February 7, 2022. |
| (3) | Mr. Newsom became President of CTB on February 7, 2022. He previously served as President of the Eastern Region of CTB. |
| (4) | Mr. Hancock became Secretary of CTBI on February 7, 2022. |
| (5) | Mr. Jameson is a non-voting member of the Executive Committee. |
| (6) | Mr. Tackett became Executive Vice President of CTBI and President of the Eastern Region of CTB on February 7, 2022. He previously held the position of President of the Floyd, Knott, and Johnson Market of CTB. |
| (7) | Ms. Dollins became Executive Vice President of CTBI and President of the Central Kentucky Region of CTB on January 3, 2023, following the retirement of Larry W. Jones. She previously held the position of President of the Versailles Market of CTB. |
| (8) | James J. Gartner, former Executive Vice President of CTBI and Executive Vice President/Chief Credit Officer of CTB, retired effective December 29, 2023. Mr. Smith was named Executive Vice President of CTBI and Executive Vice President/Chief Credit Officer of CTB effective January 2, 2024. |
| Item 5. | Market for the Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities |
Our common stock is listed on The NASDAQ Global Select Market under the symbol CTBI. As of January 31, 2024, there were approximately 8,400 holders of record of our outstanding common shares.
Dividends
The annual dividend paid to our stockholders was increased from $1.68 per share to $1.80 per share during 2023. We have adopted a conservative policy of cash dividends by generally maintaining an average annual cash dividend ratio of approximately 45%, with periodic stock dividends. The current year cash dividend ratio was 41.3%, and the 10-year average dividend payout ratio has been 42.2%. Dividends are typically paid on a quarterly basis. Future dividends are subject to the discretion of CTBI’s Board of Directors, cash needs, general business conditions, dividends from our subsidiaries, and applicable governmental regulations and policies. For information concerning restrictions on dividends from the subsidiary bank to CTBI, see note 20 to the consolidated financial statements contained herein for the year ended December 31, 2023.
Stock Repurchases
CTBI did not acquire any shares of stock through the stock repurchase program during the year 2023. There are 1,034,706 shares remaining under CTBI's current repurchase authorization. For further information, see the Stock Repurchase Program section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Securities Authorized for Issuance Under Equity Compensation Plans
For information concerning securities authorized for issuance under CTBI’s equity compensation plans, see Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
Common Stock Performance
The following graph shows the cumulative total return experienced by CTBI’s shareholders during the last five years compared to the NASDAQ Stock Market (U.S.) and the NASDAQ Bank Stock Index. The graph assumes the investment of $100 on December 31, 2018 in CTBI’s common stock and in each index and the reinvestment of all dividends paid during the five-year period.
Comparison of 5 Year Cumulative Total Return
among Community Trust Bancorp, Inc., NASDAQ Stock Market (U.S.),
and NASDAQ Bank Stocks
Fiscal Year Ending December 31 ($) | | | | | |
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
Community Trust Bancorp, Inc. | 100.00 | 121.48 | 100.49 | 122.54 | 133.78 | 132.99 |
NASDAQ Stock Market (U.S.) | 100.00 | 131.17 | 159.07 | 200.26 | 160.75 | 203.23 |
NASDAQ Bank Stocks | 100.00 | 137.18 | 119.62 | 164.26 | 135.89 | 149.56 |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Community Trust Bancorp, Inc., our operations, and our present business environment. The MD&A is provided as a supplement to—and should be read in conjunction with—our consolidated financial statements and the accompanying notes thereto contained in Item 8 of this annual report. The MD&A includes the following sections:
| ❖ | Financial Goals and Performance |
| ❖ | Results of Operations and Financial Condition |
| ❖ | Liquidity and Market Risk |
| ❖ | Impact of Inflation, Changing Prices, and Economic Conditions |
| ❖ | Stock Repurchase Program |
| ❖ | Critical Accounting Policies and Estimates |
Our Business
Community Trust Bancorp, Inc. (“CTBI”) is a bank holding company headquartered in Pikeville, Kentucky. Currently, we own one commercial bank, Community Trust Bank, Inc. (“CTB”) and one trust company, Community Trust and Investment Company. Through our subsidiaries, we have seventy-nine banking locations in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee, four trust offices across Kentucky, and one trust office in northeastern Tennessee. At December 31, 2023, we had total consolidated assets of $5.8 billion and total consolidated deposits, including repurchase agreements, of $4.9 billion. Total shareholders’ equity at December 31, 2023 was $702.2 million. Trust assets under management at December 31, 2023 were $3.4 billion, including CTB’s investment portfolio totaling $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. Lines of credit, revolving lines of credit, term loans, and other specialized loans, including asset-based financing, are also available. Our corporate subsidiaries act as trustees of personal trusts, as executors of estates, as trustees for employee benefit trusts, as paying agents for bond and stock issues, as investment agent, as depositories for securities, and as providers of full-service brokerage, and insurance services. For further information, see Item 1 of this annual report.
Financial Goals and Performance
The following table shows the primary measurements used by management to assess annual performance. The goals in the table below should not be viewed as a forecast of our performance for 2024. Rather, the goals represent a range of target performance for 2024. There is no assurance that any or all of these goals will be achieved. See “Cautionary Statement Regarding Forward Looking Statements.”
| | 2023 Goals | 2023 Performance | 2024 Goals |
| Basic earnings per share | $4.57 - $4.75 | $4.36 | $4.31 - $4.49 |
| Net income | $82.0 - $85.4 million | $78.0 million | $77.7 - $80.8 million |
| ROAA | 1.50% - 1.56% | 1.40% | 1.33% - 1.39% |
| ROAE | 12.26% - 12.76% | 11.75% | 10.99% - 11.44% |
| Revenues | $237.9 - $247.6 million | $230.8 million | $236.8 - $246.5 million |
| Noninterest revenue as % of total revenue | 24.00% - 26.00% | 25.00% | 23.50% - 25.50% |
| Assets | $5.38 - $5.72 billion | $5.77 billion | $5.74 - $6.10 billion |
| Loans | $3.77 - $3.92 billion | $4.05 billion | $4.18 - $4.35 billion |
Deposits, including repurchase agreements
| $4.64 - $4.83 billion | $4.95 billion | $4.97 - $5.17 billion |
| Shareholders’ equity | $686.5 - $714.5 million | $702.2 million | $711.2 - $740.3 million |
Results of Operations and Financial Condition
We reported earnings of $78.0 million, or $4.36 per basic share, for the year ended December 31, 2023 compared to $81.8 million, or $4.59 per basic share, for the year ended December 31, 2022. Year over year earnings were impacted by increases in provision for loan losses and noninterest expense and a decrease in noninterest income. Total revenue for 2023 was $3.8 million above prior year, as net interest revenue increased $4.0 million and noninterest income decreased $0.3 million compared to prior year.
2023 Highlights
| ❖ | Net interest income for the year ended December 31, 2023 increased $4.0 million, or 2.4%, from December 31, 2022 with a $114.8 million increase in average earning assets. |
| ❖ | Provision for credit losses was $6.8 million for the year ended December 31, 2023 compared to $4.9 million for the year ended December 31, 2022. |
| ❖ | Our loan portfolio increased $341.6 million, or 9.2%, from December 31, 2022 to December 31, 2023. |
| ❖ | Net loan charge-offs were $3.2 million, or 0.08% of average loans annualized, for the year ended December 31, 2023 compared to $0.7 million, or 0.02% of average loans annualized, for the year ended December 31, 2022. |
| ❖ | Our total nonperforming loans at $14.0 million at December 31, 2023 decreased $1.3 million, or 8.8%, from December 31, 2022. Nonperforming assets at $15.6 million decreased $3.4 million, or 17.9%, from December 31, 2022. |
| ❖ | Deposits, including repurchase agreements, at December 31, 2023 increased $308.3 million, or 6.6%, from December 31, 2022. |
| ❖ | Noninterest income for the year ended December 31, 2023 of $57.7 million decreased $0.3 million, or 0.4%, compared to the year ended December 31, 2022. |
| ❖ | Noninterest expense for the year ended December 31, 2023 of $125.4 million increased $4.3 million, or 3.6%, compared to the year ended December 31, 2022. |
Income Statement Review
| (dollars in thousands) | | | | | | | | Change 2023 vs. 2022 | |
| Year Ended December 31 | | 2023 | | | 2022 | | | Amount | | | Percent | |
| Net interest income | | $ | 173,110 | | | $ | 169,102 | | | $ | 4,008 | | | | 2.4 | % |
| Provision for credit losses (recovery) | | | 6,811 | | | | 4,905 | | | | 1,906 | | | | 38.9 | |
| Noninterest income | | | 57,659 | | | | 57,916 | | | | (257 | ) | | | (0.4 | ) |
| Noninterest expense | | | 125,390 | | | | 121,071 | | | | 4,319 | | | | 3.6 | |
| Income taxes | | | 20,564 | | | | 19,228 | | | | 1,336 | | | | 6.9 | |
| Net income | | $ | 78,004 | | | $ | 81,814 | | | $ | (3,810 | ) | | | (4.7 | )% |
| | | | | | | | | | | | | | | | | |
| Average earning assets | | $ | 5,244,128 | | | $ | 5,129,345 | | | $ | 114,783 | | | | 2.2 | % |
| | | | | | | | | | | | | | | | | |
| Yield on average earnings assets, tax equivalent* | | | 5.15 | % | | | 3.87 | % | | | 1.28 | % | | | 33.1 | % |
| Cost of interest bearing funds | | | 2.72 | % | | | 0.85 | % | | | 1.87 | % | | | 220.0 | % |
| | | | | | | | | | | | | | | | | |
| Net interest margin, tax equivalent* | | | 3.32 | % | | | 3.32 | % | | | 0.0 | % | | | 0.0 | % |
*Yield on average earning assets and net interest margin are computed on a taxable equivalent basis using a 24.95% tax rate.
Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates
| | | 2023 | | | 2022 | |
| (in thousands) | | Average Balances | | | Interest | | | Average Rate | | | Average Balances | | | Interest | | | Average Rate | |
| Earning assets: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Loans (1)(2)(3) | | $ | 3,888,585 | | | $ | 231,114 | | | | 5.94 | % | | $ | 3,552,941 | | | $ | 169,950 | | | | 4.78 | % |
| Loans held for sale | | | 228 | | | | 31 | | | | 13.60 | | | | 893 | | | | 94 | | | | 10.53 | |
| Securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and agencies | | | 855,300 | | | | 17,369 | | | | 2.03 | | | | 1,022,511 | | | | 14,699 | | | | 1.44 | |
| Tax exempt state and political subdivisions (3) | | | 105,158 | | | | 3,568 | | | | 3.39 | | | | 119,118 | | | | 3,795 | | | | 3.19 | |
| Other securities | | | 243,012 | | | | 9,894 | | | | 4.07 | | | | 260,423 | | | | 6,996 | | | | 2.69 | |
| Federal Reserve Bank and Federal Home Loan Bank stock | | | 10,841 | | | | 759 | | | | 7.00 | | | | 12,388 | | | | 603 | | | | 4.87 | |
| Federal funds sold | | | 256 | | | | 9 | | | | 3.52 | | | | 414 | | | | 15 | | | | 3.62 | |
| Interest bearing deposits | | | 138,646 | | | | 6,968 | | | | 5.03 | | | | 158,563 | | | | 2,484 | | | | 1.57 | |
| Other investments | | | 245 | | | | 0 | | | | 0.00 | | | | 245 | | | | 0 | | | | 0.00 | |
| Investment in unconsolidated subsidiaries | | | 1,857 | | | | 129 | | | | 6.95 | | | | 1,849 | | | | 62 | | | | 3.35 | |
| Total earning assets | | $ | 5,244,128 | | | $ | 269,841 | | | | 5.15 | % | | $ | 5,129,345 | | | $ | 198,698 | | | | 3.87 | % |
| Allowance for credit losses | | | (47,606 | ) | | | | | | | | | | | (43,081 | ) | | | | | | | | |
| | | | 5,196,522 | | | | | | | | | | | | 5,086,264 | | | | | | | | | |
| Nonearning assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | | 61,184 | | | | | | | | | | | | 59,645 | | | | | | | | | |
| Premises and equipment and right of use assets, net | | | 60,232 | | | | | | | | | | | | 53,928 | | | | | | | | | |
| Other assets | | | 254,203 | | | | | | | | | | | | 238,859 | | | | | | | | | |
| Total assets | | $ | 5,572,141 | | | | | | | | | | | $ | 5,438,696 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
| Savings and demand deposits | | $ | 2,136,653 | | | $ | 52,336 | | | | 2.45 | % | | $ | 2,020,065 | | | $ | 16,526 | | | | 0.82 | % |
| Time deposits | | | 1,071,584 | | | | 28,831 | | | | 2.69 | | | | 1,027,726 | | | | 7,542 | | | | 0.73 | |
| Repurchase agreements and federal funds purchased | | | 219,591 | | | | 8,994 | | | | 4.10 | | | | 243,102 | | | | 2,540 | | | | 1.04 | |
| Advances from Federal Home Loan Bank | | | 18,494 | | | | 1,004 | | | | 5.43 | | | | 898 | | | | 20 | | | | 2.23 | |
| Long-term debt | | | 64,351 | | | | 4,257 | | | | 6.62 | | | | 57,841 | | | | 1,943 | | | | 3.36 | |
| Finance lease liability | | | 3,469 | | | | 118 | | | | 3.40 | | | | 1,589 | | | | 69 | | | | 4.34 | |
| Total interest bearing liabilities | | $ | 3,514,142 | | | $ | 95,540 | | | | 2.72 | % | | $ | 3,351,221 | | | $ | 28,640 | | | | 0.85 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | | 1,343,917 | | | | | | | | | | | | 1,398,778 | | | | | | | | | |
| Other liabilities | | | 50,418 | | | | | | | | | | | | 46,274 | | | | | | | | | |
| Total liabilities | | | 4,908,477 | | | | | | | | | | | | 4,796,273 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Shareholders’ equity | | | 663,664 | | | | | | | | | | | | 642,423 | | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 5,572,141 | | | | | | | | | | | $ | 5,438,696 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income, tax equivalent | | | | | | $ | 174,301 | | | | | | | | | | | $ | 170,058 | | | | | |
| Less tax equivalent interest income | | | | | | | 1,191 | | | | | | | | | | | | 956 | | | | | |
| Net interest income | | | | | | $ | 173,110 | | | | | | | | | | | $ | 169,102 | | | | | |
| Net interest spread | | | | | | | | | | | 2.43 | % | | | | | | | | | | | 3.02 | % |
| Benefit of interest free funding | | | | | | | | | | | 0.89 | | | | | | | | | | | | 0.30 | |
| Net interest margin | | | | | | | | | | | 3.32 | % | | | | | | | | | | | 3.32 | % |
(1) Interest includes fees on loans of $1,770 and $1,723 in 2023 and 2022, respectively.
(2) Loan balances include deferred loan origination costs and principal balances on nonaccrual loans.
(3) Tax exempt income on securities and loans is reported on a fully taxable equivalent basis using a 24.95% rate.
Net Interest Differential
The following table illustrates the approximate effect of volume and rate changes on net interest differentials between 2023 and 2022.
| | | Total Change | | | Change Due to | |
| (in thousands) | | | 2023/2022 | | | Volume | | | Rate | |
| Interest income: | | | | | | | | | | |
| Loans | | $ | 61,164 | | | $ | 17,147 | | | $ | 44,017 | |
| Loans held for sale | | | (63 | ) | | | (55 | ) | | | (8 | ) |
| U.S. Treasury and agencies | | | 2,670 | | | | (2,122 | ) | | | 4,792 | |
| Tax exempt state and political subdivisions | | | (227 | ) | | | (426 | ) | | | 199 | |
| Other securities | | | 2,898 | | | | (440 | ) | | | 3,338 | |
| Federal Reserve Bank and Federal Home Loan Bank stock | | | 156 | | | | (68 | ) | | | 224 | |
| Federal funds sold | | | (6 | ) | | | (6 | ) | | | 0 | |
| Interest bearing deposits | | | 4,484 | | | | (275 | ) | | | 4,759 | |
| Other investments | | | 0 | | | | 0 | | | | 0 | |
| Investment in unconsolidated subsidiaries | | | 67 | | | | 0 | | | | 67 | |
| Total interest income | | | 71,143 | | | | 13,755 | | | | 57,388 | |
| | | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | | |
| Savings and demand deposits | | | 35,810 | | | | 1,007 | | | | 34,803 | |
| Time deposits | | | 21,289 | | | | 335 | | | | 20,954 | |
| Repurchase agreements and federal funds purchased | | | 6,454 | | | | (223 | ) | | | 6,677 | |
| Advances from Federal Home Loan Bank | | | 984 | | | | 917 | | | | 67 | |
| Long-term debt | | | 2,314 | | | | 241 | | | | 2,073 | |
| Finance lease liability | | | 49 | | | | 67 | | | | (18 | ) |
| Total interest expense | | | 66,900 | | | | 2,344 | | | | 64,556 | |
| | | | | | | | | | | | | |
| Net interest income | | $ | 4,243 | | | $ | 11,411 | | | $ | (7,168 | ) |
For purposes of the above table, changes which are due to both rate and volume are allocated based on a percentage basis, using the absolute values of rate and volume variance as a basis for percentages. Income is stated at a fully taxable equivalent basis, using a 24.95% tax rate.
Net Interest Income
(dollars in thousands) Year Ended December 31 | | 2023 | | | 2022 | | | Percent Change | |
| Components of net interest income: | | | | | | | | | |
| Income on earning assets | | $ | 268,650 | | | $ | 197,742 | | | | 35.9 | % |
| Expense on interest bearing liabilities | | | 95,540 | | | | 28,640 | | | | 233.6 | % |
| Net interest income | | | 173,110 | | | | 169,102 | | | | 2.4 | % |
| TEQ | | | 1,191 | | | | 956 | | | | 24.6 | % |
| Net interest income, tax equivalent | | $ | 174,301 | | | $ | 170,058 | | | | 2.5 | % |
| | | | | | | | | | | | | |
| Average yield and rates paid: | | | | | | | | | | | | |
| Earning assets yield | | | 5.15 | % | | | 3.87 | % | | | 33.1 | % |
| Rate paid on interest bearing liabilities | | | 2.72 | % | | | 0.85 | % | | | 220.0 | % |
| Gross interest margin | | | 2.43 | % | | | 3.02 | % | | | (19.6 | )% |
| Net interest margin | | | 3.32 | % | | | 3.32 | % | | | 0.0 | % |
| | | | | | | | | | | | | |
| Average balances: | | | | | | | | | | | | |
| Investment securities | | $ | 1,203,470 | | | $ | 1,402,052 | | | | (14.2 | )% |
| Loans | | $ | 3,888,585 | | | $ | 3,552,941 | | | | 9.4 | % |
| Earning assets | | $ | 5,244,128 | | | $ | 5,129,345 | | | | 2.2 | % |
| Interest-bearing liabilities | | $ | 3,514,142 | | | $ | 3,351,221 | | | | 4.9 | % |
Net interest income for the year ended December 31, 2023 of $173.1 million increased $4.0 million, or 2.4%, from prior year with an increase in average earning assets for the year 2023 of $114.8 million, or 2.2%. Our yield on average earning assets for the year 2023 increased 128 basis points from prior year, and our cost of interest bearing funds increased 187 basis points during the same time period. Our net interest margin, on a fully tax equivalent basis, for the year 2023 remained at 3.32% from the year ended December 31, 2022. Noninterest bearing deposits decreased $134.2 million over prior year. Average loans to deposits, including repurchase agreements, for the year ended December 31, 2023 were 81.5% compared to 75.8% for the year ended December 31, 2022.
Provision for Credit Losses
Provision for credit losses for the year 2023 was $6.8 million compared to $4.9 million during the year 2022. See below for discussion of our allowance for credit losses.
Noninterest Income
(dollars in thousands) Year Ended December 31 | | 2023 | | | 2022 | | | Percent Change | |
| Deposit service charges | | $ | 29,935 | | | $ | 29,049 | | | | 3.0 | % |
| Trust revenue | | | 13,025 | | | | 12,394 | | | | 5.1 | % |
| Gains on sales of loans | | | 395 | | | | 1,525 | | | | (74.1 | )% |
| Loan related fees | | | 3,792 | | | | 6,185 | | | | (38.7 | )% |
| Bank owned life insurance revenue | | | 3,517 | | | | 2,708 | | | | 29.8 | % |
| Brokerage revenue | | | 1,473 | | | | 1,846 | | | | (20.2 | )% |
| Other | | | 5,522 | | | | 4,209 | | | | 31.2 | % |
| Total noninterest income | | $ | 57,659 | | | $ | 57,916 | | | | (0.4 | )% |
Noninterest income for the year 2023 was $57.7 million compared to $57.9 million for the year 2022. Noninterest income was impacted year over year by a $2.4 million decline in loan related fees, a $1.1 million decline in gains on sales of loans, and a $0.4 million decline in brokerage revenue, offset by increases of $0.9 million in deposit related fees, $0.6 million in trust revenue, $1.2 million in securities gains, and $0.8 million in bank owned life insurance revenue.
Noninterest Expense
(dollars in thousands) Year Ended December 31 | | 2023 | | | 2022 | | | Percent Change | |
| Salaries | | $ | 51,283 | | | $ | 48,934 | | | | 4.8 | % |
| Employee benefits | | | 22,428 | | | | 23,556 | | | | (4.8 | )% |
| Net occupancy and equipment | | | 11,843 | | | | 11,083 | | | | 6.9 | % |
| Data processing | | | 9,726 | | | | 8,910 | | | | 9.2 | % |
| Legal and professional fees | | | 3,350 | | | | 3,434 | | | | (2.4 | )% |
| Advertising and marketing | | | 3,214 | | | | 3,005 | | | | 7.0 | % |
| Taxes other than property and payroll | | | 1,706 | | | | 1,570 | | | | 8.7 | % |
| Net other real estate owned expense | | | 350 | | | | 456 | | | | (23.4 | )% |
| Other | | | 21,490 | | | | 20,123 | | | | 6.8 | % |
| Total noninterest expense | | $ | 125,390 | | | $ | 121,071 | | | | 3.6 | % |
Noninterest expense for the year 2023 was $125.4 million compared to $121.1 million for the year 2022 with increases of $1.2 million in personnel expense, $0.8 million in occupancy and equipment, $0.8 million in data processing expense, $1.0 million in FDIC insurance premiums, and $0.4 million in telephone expense.
In recognition of our employees’ significant efforts, the Compensation Committee of the Board of Directors authorized a discretionary gift/payment to all full-time employees hired prior to July 1, 2023 of $1000 and all full-time employees hired after June 30, 2023 of $500. The Committee also authorized a discretionary gift/payment to our Executive Committee and other members of senior management. This discretionary gift/payment was paid on January 19, 2024 to all eligible employees. This payment was accrued as of December 31, 2023 in the amount of $1.2 million.
* Please refer to our annual report on Form 10-K for the year ended December 31, 2022 for detailed income discussion related to the year 2021.
Balance Sheet Review
CTBI’s total assets at $5.8 billion increased $389.4 million, or 7.2%, from December 31, 2022. Loans outstanding at December 31, 2023 were $4.1 billion, increasing $341.6 million, or 9.2%, year over year. The increase in loans from prior year included a $114.9 million increase in the commercial loan portfolio, a $139.0 million increase in the residential loan portfolio, an $86.1 million increase in the indirect loan portfolio, and a $1.6 million increase in the consumer direct loan portfolio. Our commercial real estate (“CRE”) non-residential portfolio consisted of 1,763 loans with a total balance of $783.5 million as of December 31, 2023. Our CRE office portfolio as of December 31, 2023 consisted of 176 loans with a total balance of $87.3 million, or 10.0% of the total number of CRE non-residential loans and 11.14% of CRE non-residential total dollars outstanding. CTBI’s investment portfolio decreased $91.5 million, or 7.3%, from December 31, 2022. Deposits in other banks increased $135.2 million from December 31, 2022. Deposits, including repurchase agreements, at $4.9 billion increased $308.3 million, or 6.6%, from December 31, 2022.
Shareholders’ equity at December 31, 2023 of $702.2 million was a $74.2 million, or 11.8%, increase from the $628.0 million at December 31, 2022. Net unrealized losses on securities, net of tax, were $103.3 million at December 31, 2023, compared to $129.2 million at December 31, 2022. Management has the ability and intent to hold these securities to recovery or maturity. CTBI’s annualized dividend yield to shareholders as of December 31, 2023 was 4.20%.
Loans
| (dollars in thousands) | | December 31, 2023 | |
| Loan Category | | Balance | | | Variance from Prior Year | | | Net (Charge-Offs)/ Recoveries | | | Nonperforming | | | ACL | |
| Commercial: | | | | | | | | | | | | | | | |
| Hotel/motel | | $ | 395,765 | | | | 15.2 | % | | $ | 0 | | | $ | 0 | | | $ | 4,592 | |
| Commercial real estate residential | | | 417,943 | | | | 12.1 | | | | 97 | | | | 1,557 | | | | 4,285 | |
| Commercial real estate nonresidential | | | 778,637 | | | | 2.1 | | | | 393 | | | | 2,950 | | | | 7,560 | |
| Dealer floorplans | | | 70,308 | | | | (9.3 | ) | | | 0 | | | | 0 | | | | 659 | |
| Commercial other | | | 321,082 | | | | 2.8 | | | | (1,434 | ) | | | 850 | | | | 3,760 | |
| Total commercial | | | 1,983,735 | | | | 6.1 | | | | (944 | ) | | | 5,357 | | | | 20,856 | |
| | | | | | | | | | | | | | | | | | | | | |
| Residential: | | | | | | | | | | | | | | | | | | | | |
| Real estate mortgage | | | 937,524 | | | | 13.6 | | | | (99 | ) | | | 7,298 | | | | 10,197 | |
| Home equity | | | 147,036 | | | | 22.0 | | | | (17 | ) | | | 743 | | | | 1,367 | |
| Total residential | | | 1,084,560 | | | | 14.7 | | | | (116 | ) | | | 8,041 | | | | 11,564 | |
| | | | | | | | | | | | | | | | | | | | | |
| Consumer: | | | | | | | | | | | | | | | | | | | | |
| Consumer direct | | | 159,106 | | | | 1.0 | | | | (237 | ) | | | 15 | | | | 3,261 | |
| Consumer indirect | | | 823,505 | | | | 11.7 | | | | (1,952 | ) | | | 555 | | | | 13,862 | |
| Total consumer | | | 982,611 | | | | 9.8 | | | | (2,189 | ) | | | 570 | | | | 17,123 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total loans | | $ | 4,050,906 | | | | 9.2 | % | | $ | (3,249 | ) | | $ | 13,968 | | | $ | 49,543 | |
Total Deposits and Repurchase Agreements
| (dollars in thousands) | | 2023 | | | 2022 | | | Percent Change | |
| Noninterest bearing deposits | | $ | 1,260,690 | | | $ | 1,394,915 | | | | (9.6 | )% |
| Interest bearing deposits | | | | | | | | | | | | |
| Interest checking | | | 123,927 | | | | 112,265 | | | | 10.4 | % |
| Money market savings | | | 1,525,537 | | | | 1,348,809 | | | | 13.1 | % |
| Savings accounts | | | 535,063 | | | | 654,380 | | | | (18.2 | )% |
| Time deposits | | | 1,279,405 | | | | 915,774 | | | | 39.7 | % |
| Repurchase agreements | | | 225,245 | | | | 215,431 | | | | 4.6 | % |
| Total interest bearing deposits and repurchase agreements | | | 3,689,177 | | | | 3,246,659 | | | | 13.6 | % |
| Total deposits and repurchase agreements | | $ | 4,949,867 | | | $ | 4,641,574 | | | | 6.6 | % |
Average Deposits and Other Borrowed Funds
| (in thousands) | | 2023 | | | 2022 | |
| Deposits: | | | | | | |
| Noninterest bearing deposits | | $ | 1,343,917 | | | $ | 1,398,778 | |
| Interest bearing deposits | | | 128,061 | | | | 104,631 | |
| Money market accounts | | | 1,407,611 | | | | 1,248,067 | |
| Savings accounts | | | 600,981 | | | | 667,367 | |
| Certificates of deposit of $100,000 or more | | | 572,959 | | | | 556,849 | |
| Certificates of deposit < $100,000 and other time deposits | | | 498,625 | | | | 470,877 | |
| Total deposits | | | 4,552,154 | | | | 4,446,569 | |
| | | | | | | | | |
| Other borrowed funds: | | | | | | | | |
| Repurchase agreements and federal funds purchased | | | 219,591 | | | | 243,102 | |
| Advances from Federal Home Loan Bank | | | 18,494 | | | | 898 | |
| Long-term debt | | | 64,351 | | | | 57,841 | |
| Finance lease liability | | | 3,469 | | | | 1,589 | |
| Total other borrowed funds | | | 305,905 | | | | 303,430 | |
| Total deposits and other borrowed funds | | $ | 4,858,059 | | | $ | 4,749,999 | |
The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2023 occurred at October 31, 2023, with a month-end balance of $235.0 million. The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2022 occurred at February 28, 2022, with a month-end balance of $277.9 million.
Asset Quality
CTBI’s total nonperforming loans were $14.0 million, or 0.34% of total loans, at December 31, 2023 compared to $15.3 million, or 0.41% of total loans, at December 31, 2022. Prior year nonperforming loans, as previously reported, exclude troubled debt restructurings (“TDRs”) which have been eliminated in the current period due to implementation of Accounting Standard Update 2022-02. Accruing loans 90+ days past due increased $1.4 million from December 31, 2022, while nonaccrual loans decreased $2.8 million from December 31, 2022. Accruing loans 30-89 days past due at $15.3 million were relatively flat to December 31, 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, nonaccrual status, and adequate loan loss reserves. The Loan Review Department has annually reviewed on average 97% 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 83% based on the loan production during the number of months included in the review scope. The review scope is generally four to six months of production. CTBI generally does not offer high risk loans such as option ARM products, high loan to value ratio mortgages, interest-only loans, loans with initial teaser rates, or loans with negative amortizations, and therefore, CTBI would have no significant exposure to these products.
For further information regarding nonperforming loans, see note 4 to the consolidated financial statements contained herein.
Our level of foreclosed properties at $1.6 million at December 31, 2023 was a decrease of $2.1 million from the $3.7 million at December 31, 2022. Sales of foreclosed properties for the year ended December 31, 2023 totaled $2.5 million while new foreclosed properties totaled $0.7 million. Nonperforming assets to loans and foreclosed properties at December 31, 2023 were 0.4% compared to 0.5% at December 31, 2022.
Net loan charge-offs were $3.2 million, 0.08% of average loans annualized, for the year ended December 31, 2023, compared to $0.7 million, 0.02% of average loans annualized, for the year ended December 31, 2022.
Allowance for Credit Losses
Our reserve coverage (allowance for credit losses to nonperforming loans) at December 31, 2023 was 354.7% compared to 300.4% at December 31, 2022. Nonaccrual loans to total loans at December 31, 2023 was 0.1% compared to 0.2% at December 31, 2022. Our allowance for credit losses to nonaccrual loans at December 31, 2023 was 1,223.9% compared to 674.9% at December 31, 2022. Our credit loss reserve as a percentage of total loans outstanding at December 31, 2023 was 1.22%, a decrease from the 1.24% at 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 December 31, 2023, we had approximately $271.4 million in cash and cash equivalents and approximately $157.5 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 $128.7 million and $309.2 million at December 31, 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 $0.3 million at December 31, 2023 compared to $0.4 million at December 31, 2022. As of December 31, 2023, we had a $476.2 million available borrowing position with the Federal Home Loan Bank. We generally rely upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash for our investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, use of short-term borrowing facilities such as repurchase agreements and federal funds purchased, and issuance of long-term debt. At December 31, 2023, we had $50 million in lines of credit with various correspondent banks available to meet any future cash 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 December 31, 2023 were deposits with the Federal Reserve of $207.6 million, compared to $72.6 million at December 31, 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 December 31, 2023, available-for-sale (“AFS”) securities comprised all of the total investment portfolio, and the AFS portfolio was approximately 166% of equity capital. Eighty-eight percent of the pledge-eligible portfolio was pledged.
Contractual Commitments
Our significant contractual obligations and commitments as of December 31, 2023 include debt, lease, and purchase obligations. As disclosed in the notes to the consolidated financial statements, we have certain obligations and commitments to make future payments under contracts.
As of December 31, 2023, our outstanding balance on long-term debt was $64.2 million, which includes junior subordinated debentures of $57.8 million and loan related borrowings of $6.4 million. The interest payments on long-term debt due in one year or less is $4.1 million, and interest payments on long-term debt due in more than one year is $28.1 million. The interest on $57.8 million in junior subordinated debentures is calculated based on the three-month CME Term SOFR plus a tenor spread adjustment of 0.26161% plus 1.59% until its maturity of June 1, 2037. The three-month CME Term SOFR rate is projected using the most likely rate forecast from assumptions incorporated in the interest rate risk model and is determined two business days prior to the interest payment date. The interest on the $6.4 million in loan related borrowings is based on a fixed rate of 3.25%. Repayment of the liability will be provided by the loan payments made by the loan customer. This principal amount is also guaranteed by the Small Business Administration. Interest on long-term debt assumes the liability will not be prepaid and interest is calculated to maturity. These assumptions are uncertain, and as a result, the actual payments will differ from the projection due to changes in economic conditions. Refer to note 10 to the consolidated financial statements contained herein for additional information regarding long-term debt.
On March 5, 2021, LIBOR’s administrator, ICE Benchmarks Administration, announced that LIBOR would no longer be provided (i) for the one-week and two-month U.S. dollar settings after December 31, 2021 and (ii) for the remaining U.S. dollar settings after June 30, 2023. The U.S. federal banking agencies issued supervisory guidance encouraging banks to stop entering into new contracts that use LIBOR as a reference rate after December 31, 2021. In addition, on March 15, 2022, the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) was signed into law. The LIBOR Act establishes a uniform national approach for replacing LIBOR in legacy contracts that do not provide for the use of a clearly defined replacement benchmark rate. As directed by the LIBOR Act, on December 16, 2022, the Federal Reserve Board issued a final rule setting forth regulations to implement the LIBOR Act, including establishing benchmark replacements based on the Secured Overnight Funding Rate for contracts governed by U.S. law that reference certain tenors of U.S. dollar LIBOR (the overnight and one-, three-, six-, and twelve-month tenors) and that do not have terms that provide for the use of a clearly defined and predictable replacement benchmark rate (“fallback provisions”) following the first London banking day after June 30, 2023. We have analyzed our financial exposure related to the discontinuation of LIBOR and consider our exposure to be insignificant.
As of December 31, 2023, our remaining contractual commitment for operating and finance leases due in one year or less is $2.0 million and operating leases due in more than one year is $21.4 million. Refer to note 15 to the consolidated financial statements contained herein for additional information regarding leases.
Commitments to extend credit and standby letters of credit do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon. As of December 31, 2023, the commitments due in one year or less for other commitments is $730.4 million and commitments due in more than one year is $305.6 million. Refer to note 17 to the consolidated financial statements contained herein for additional information regarding other commitments.
Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. As of December 31, 2023, the value of our non-cancellable unconditional purchase obligations was $9.8 million.
These contractual obligations impact our liquidity and capital resource needs. We believe our liquidity sources as mentioned in the liquidity discussion are adequate to meet our future cash requirements.
Investment Maturities
| | | Estimated Maturity at December 31, 2023 | |
| | | Within 1 Year | | | 1-5 Years | | | 5-10 Years | | | After 10 Years | | | Total Fair Value | | | Amortized Cost | |
| (in thousands) | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | |
| U.S. Treasury, government agencies, and government sponsored agency mortgage-backed securities | | $ | 25,996 | | | | 2.66 | % | | $ | 336,805 | | | | 1.31 | % | | $ | 61,380 | | | | 4.11 | % | | $ | 387,372 | | | | 2.25 | % | | $ | 811,553 | | | | 2.01 | % | | $ | 900,104 | |
| State and political subdivisions | | | 3,782 | | | | 3.66 | | | | 22,458 | | | | 2.90 | | | | 100,655 | | | | 2.12 | | | | 138,050 | | | | 2.49 | | | | 264,945 | | | | 2.40 | | | | 313,147 | |
| Asset-backed securities | | | 0 | | | | 0.00 | | | | 0 | | | | 0.00 | | | | 68,053 | | | | 7.01 | | | | 19,173 | | | | 6.39 | | | | 87,226 | | | | 6.88 | | | | 87,993 | |
| Total | | $ | 29,778 | | | | 2.79 | % | | $ | 359,263 | | | | 1.41 | % | | $ | 230,088 | | | | 4.10 | % | | $ | 544,595 | | | | 2.46 | % | | $ | 1,163,724 | | | | 2.47 | % | | $ | 1,301,244 | |
The calculations of the weighted average yields for each maturity category are based upon yield weighted by the respective costs of the securities. The weighted average rates on state and political subdivisions are computed on a taxable equivalent basis using a 24.95% tax rate.
Loan Maturities
The following table shows the amounts of loans (excluding residential mortgages of 1-4 family residences, consumer loans, and lease financing) which, based on the remaining scheduled repayments of principal are due in the periods indicated. Also, the amounts are classified according to sensitivity to changes in interest rates (fixed, variable).
CTB has changed the origination process on commercial and residential construction loans to be almost exclusively construction to permanent financing with only one note. This change is resulting in a greater number of loans showing in the after five year maturity for construction loans, even though those loans will be converted from construction loans to permanent financing by a change in the internal coding on the loans while the maturity date remains the same.
| | | Maturity at December 31, 2023 | |
| (in thousands) | | | | | but within five years | | | After five years | | | Total | |
| Commercial secured by real estate and commercial other | | $ | 225,512 | | | $ | 163,087 | | | $ | 1,423,460 | | | $ | 1,812,059 | |
| Commercial and real estate construction | | | 70,070 | | | | 23,270 | | | | 193,066 | | | | 286,406 | |
| | | $ | 295,582 | | | $ | 186,357 | | | $ | 1,616,526 | | | $ | 2,098,465 | |
| | | | | | | | | | | | | | | | | |
| Rate sensitivity: | | | | | | | | | | | | | | | | |
| Predetermined rate | | $ | 52,585 | | | $ | 86,552 | | | $ | 73,797 | | | $ | 212,934 | |
| Adjustable rate | | | 242,997 | | | | 99,805 | | | | 1,542,729 | | | | 1,885,531 | |
| | | $ | 295,582 | | | $ | 186,357 | | | $ | 1,616,526 | | | $ | 2,098,465 | |
Deposit Maturities
Maturities and/or repricing of time deposits of $100,000 or more outstanding at December 31, 2023 are summarized as follows:
| (in thousands) | | Certificates of Deposit | | | Other Time Deposits | | | Total | |
| Three months or less | | $ | 165,959 | | | $ | 7,721 | | | $ | 173,680 | |
| Over three through six months | | | 246,052 | | | | 24,859 | | | | 270,911 | |
| Over six through twelve months | | | 241,584 | | | | 18,360 | | | | 259,944 | |
| Over twelve through sixty months | | | 50,627 | | | | 11,529 | | | | 62,156 | |
| Over sixty | | | 0 | | | | 0 | | | | 0 | |
| | | $ | 704,222 | | | $ | 62,469 | | | $ | 766,691 | |
Interest Rate Risk
We consider interest rate risk one of our most significant market risks. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of our net interest revenue is largely dependent upon the effective management of interest rate risk. We employ a variety of measurement techniques to identify and manage our interest rate risk, including the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain, and as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.
CTBI’s Asset/Liability Management Committee (ALCO), which includes executive and senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk within Board-approved policy limits. Our current exposure to interest rate risks is determined by measuring the anticipated change in net interest income spread evenly over the twelve-month period.
The following table shows our estimated earnings sensitivity profile as of December 31, 2023:
Change in Interest Rates (basis points) | Percentage Change in Net Interest Income (12 Months) |
| +400 | 11.50% |
| +300 | 8.89% |
| +200 | 6.29% |
| +100 | 3.65% |
| -100 | (0.67)% |
| -200 | (2.41)% |
| -300 | (4.06)% |
| -400 | (5.68)% |
The following table shows our estimated earnings sensitivity profile as of December 31, 2022:
Change in Interest Rates (basis points) | Percentage Change in Net Interest Income (12 Months) |
| +400 | 9.98% |
| +300 | 7.26% |
| +200 | 4.60% |
| +100 | 1.94% |
| -100 | (1.95)% |
| -200 | (3.92)% |
| -300 | (5.96)% |
| -400 | (7.91)% |
The simulation model used the yield curve spread evenly over a twelve-month period. The measurement at December 31, 2023 estimates that our net interest income in an up-rate environment would increase by 11.50% at a 400 basis point change, increase by 8.89% at a 300 basis point change, increase by 6.29% at a 200 basis point change, and increase by 3.65% at a 100 basis point change. In a down-rate environment, net interest income would decrease 0.67% at a 100 basis point change, decrease by 2.41% at a 200 basis point change, decrease by 4.06% at a 300 basis point change, and decrease by 5.68% at a 400 basis point change over one year. We actively manage our balance sheet and limit our exposure to long-term fixed rate financial instruments, including loans. In order to reduce the exposure to interest rate fluctuations and to manage liquidity, we have developed sale procedures for several types of interest-sensitive assets. Primarily all long-term, fixed rate single family residential mortgage loans underwritten according to Federal Home Loan Mortgage Corporation guidelines are sold for cash upon origination or originated under terms where they could be sold. Periodically, additional assets such as commercial loans are also sold. In 2023 and 2022, proceeds of $15.2 million and $66.0 million, respectively, were realized on the sale of fixed rate residential mortgages. We focus our efforts on consistent net interest revenue and net interest margin growth through each of the retail and wholesale business lines. We do not currently engage in trading activities.
The preceding analysis was prepared using a rate ramp analysis which attempts to spread changes evenly over a specified time period as opposed to a rate shock which measures the impact of an immediate change. Had these measurements been prepared using the rate shock method, the results would vary.
Capital Resources
We continue to grow our shareholders’ equity while also providing an annual dividend yield for the year 2023 of 4.10% to shareholders. Shareholders’ equity increased 11.8% from December 31, 2022 to $702.2 million at December 31, 2023. Our primary source of capital growth is the retention of earnings. Cash dividends were $1.80 per share for 2023 compared to $1.68 per share for 2022. We retained 58.7% of our earnings in 2023 compared to 63.4% in 2022.
Insured depository institutions are required to meet certain capital level requirements. On October 29, 2019, federal banking regulators adopted a final rule to simplify the regulatory capital requirements for eligible community banks and holding companies that opt-in to the community bank leverage ratio framework (the “CBLR framework”), as required by Section 201 of the Economic Growth, Relief and Consumer Protection Act of 2018. Under the final rule, which became effective as of January 1, 2020, community banks and holding companies (which includes CTB and CTBI) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, were eligible to opt-in to the CBLR framework. The community bank leverage ratio is the ratio of a banking organization’s Tier 1 capital to its average total consolidated assets, both as reported on the banking organization’s applicable regulatory filings. Accordingly, a qualifying community banking organization that has a community bank leverage ratio greater than 9% will be considered to have met: (i) the risk-based and leverage capital requirements of the generally applicable capital rules; (ii) the capital ratio requirements in order to be considered well-capitalized under the prompt corrective action framework; and (iii) any other applicable capital or leverage requirements.
In April 2020, as directed by Section 4012 of the CARES Act, the regulatory agencies introduced temporary changes to the CBLR. These changes, which subsequently were adopted as a final rule, temporarily reduced the CBLR requirement to 8% through the end of calendar year 2020. Beginning in calendar year 2021, the CBLR requirement increased to 8.5% for the calendar year before returning to 9% in calendar year 2022. Management elected to use the CBLR framework for CTBI and CTB. CTBI’s CBLR ratio as of December 31, 2023 was 13.69%. CTB’s CBLR ratio as of December 31, 2023 was 13.22%.
As of December 31, 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.
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.
Stock Repurchase Program
CTBI’s stock repurchase program began in December 1998 with the authorization to acquire up to 500,000 shares and was increased by an additional 1,000,000 shares in each of July 2000, May 2003, and March 2020. As of December 31, 2023, a total of 2,465,294 shares have been repurchased through this program, leaving 1,034,706 shares remaining under our current repurchase authorization. The following table shows Board authorizations and repurchases made through the stock repurchase program for the years 1998 through 2023:
| | Board Authorizations | Repurchases* | Shares Available for Repurchase |
| | Average Price ($) | # of Shares |
| 1998 | 500,000 | - | 0 | |
| 1999 | 0 | 14.45 | 144,669 | |
| 2000 | 1,000,000 | 10.25 | 763,470 | |
| 2001 | 0 | 13.35 | 489,440 | |
| 2002 | 0 | 17.71 | 396,316 | |
| 2003 | 1,000,000 | 19.62 | 259,235 | |
| 2004 | 0 | 23.14 | 60,500 | |
| 2005 | 0 | - | 0 | |
| 2006 | 0 | - | 0 | |
| 2007 | 0 | 28.56 | 216,150 | |
| 2008 | 0 | 25.53 | 102,850 | |
| 2009-2019 | 0 | - | 0 | |
| 2020 | 1,000,000 | 33.64 | 32,664 | |
| 2021 | 0 | - | 0 | |
| 2022 | 0 | - | 0 | |
| 2023 | 0 | - | 0 | |
| Total | 3,500,000 | 16.17 | 2,465,294 | 1,034,706 |
*Repurchased shares and average prices have been restated to reflect stock dividends that have occurred; however, board authorized shares have not been adjusted.
In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted. Among other things, the IRA imposes a new 1% excise tax on the fair market value of stock repurchased after December 31, 2022 by publicly traded U.S. corporations like CTBI. With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our consolidated financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the consolidated financial statements.
We believe the application of accounting policies and the estimates required therein are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.
Our accounting policies are described in note 1 to the consolidated financial statements contained herein. We have identified the following critical accounting policies:
Allowance for Credit Losses – CTBI accounts for the allowance for credit losses (“ACL”) and the reserve for unfunded commitments in accordance with Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and its related subsequent amendments, commonly known as CECL.
We disaggregate our portfolio loans into portfolio segments for purposes of determining the ACL. Our loan portfolio segments include commercial, residential mortgage, and consumer. We further disaggregate our portfolio segments into classes for purposes of monitoring and assessing credit quality based on certain risk characteristics. For an analysis of CTBI’s ACL by portfolio segment and credit quality information by class, refer to note 4 to the consolidated financial statements contained herein.
CTBI maintains the ACL to absorb the amount of credit losses that are expected to be incurred over the remaining contractual terms of the related loans. Effective January 1, 2023, CTBI implemented ASU 2022-02, Financial Instruments-Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures, an amendment to ASU 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 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 along with requiring that disclosures be added by year of origination for gross charge-off information for financing receivables. Accrued interest receivable on loans is presented in the consolidated financial statements as a component of other assets. When accrued interest is deemed to be uncollectible (typically when a loan is placed on nonaccrual status), interest income is reversed. In the event that collection of principal becomes uncertain, CTBI has policies in place to reverse accrued interest in a timely manner. Therefore, CTBI elected ASU 2019-04 which allows that accrued interest would continue to be presented separately and not part of the amortized cost of the loan. For additional information on CTBI’s accounting policies related to nonaccrual loans, refer to note 1 to the consolidated financial statements contained herein.
Credit losses are charged and recoveries are credited to the ACL. The ACL is maintained at a level CTBI considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectability of loans, including historical credit loss experience, current and forecasted market and economic conditions, and consideration of various qualitative factors that, in management’s judgment, deserve consideration in estimating expected credit losses. Provisions for credit losses are recorded for the amounts necessary to adjust the ACL to CTBI’s current estimate of expected credit losses on portfolio loans. CTBI’s strategy for credit risk management includes a combination of conservative exposure limits significantly below legal lending limits and conservative underwriting, documentation, and collection standards. The strategy also emphasizes diversification on a geographic, industry, and customer level, regular credit examinations, and quarterly management reviews of large credit exposures and loans experiencing deterioration of credit quality.
CTBI’s methodology for determining the ACL requires significant management judgment and includes an estimate of expected credit losses on a collective basis for groups of loans with similar risk characteristics and specific allowances for loans which are individually evaluated.
Larger commercial loans with balances exceeding $1 million that exhibit probable or observed credit weaknesses and (i) have a criticized risk rating, (ii) are on nonaccrual status, (iii) have a borrower experiencing financial difficulty with significant payment delay, or (iv) are 90 days or more past due, are individually evaluated for an ACL. CTBI considers the current value of collateral, credit quality of any guarantees, the guarantor’s liquidity and willingness to cooperate, the loan structure and other factors when determining the amount of the ACL. Other factors may include the borrower’s susceptibility to risks presented by the forecasted macroeconomic environment, the industry and geographic region of the borrower, size and financial condition of the borrower, cash flow and leverage of the borrower, and our evaluation of the borrower’s management. Significant management judgment is required when evaluating which of these factors are most relevant in individual circumstances, and when estimating the amount of expected credit losses based on those factors. When loans are individually evaluated, allowances are determined based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral and other sources of cash flow, as well as an evaluation of legal options available to CTBI. Allowances for individually evaluated loans that are collateral-dependent are typically measured based on the fair value of the underlying collateral, less expected costs to sell where applicable. For collateral-dependent financial assets, the credit loss expected may be zero if the fair value less costs to sell exceeds the amortized cost of the loan. Loans shall not be included in both collective assessments and individual assessments. Individually evaluated loans that are not collateral-dependent are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. Specific allowances on individually evaluated commercial loans, including 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 ACL 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 ACL for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty. The fair value shall be adjusted for selling costs when foreclosure is probable.
Expected credit losses are estimated on a collective basis for loans that are not individually evaluated. These include commercial loans that do not meet the criteria for individual evaluation as well as homogeneous loans in the residential mortgage and consumer portfolio segments. CTBI uses a third party ACL software to calculate reserve estimates. Discounted cash flow (“DCF”) modeling was used 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 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.
The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated expected credit losses related to unfunded credit facilities and is included in other liabilities in the consolidated balance sheets. The determination of the adequacy of the reserve is based upon expected credit losses over the remaining contractual life of the commitments, taking into consideration the current funded balance and estimated exposure over the reasonable and supportable forecast period. This process takes into consideration the same risk elements that are analyzed in the determination of the adequacy of CTBI’s ACL, as previously discussed. Net adjustments to the reserve for unfunded commitments are included in other noninterest expense in the consolidated statements of income.
Goodwill – Business combinations entered into by CTBI typically include the recognition of goodwill. U.S. generally accepted accounting principles (“GAAP”) require goodwill to be tested for impairment on an annual basis, which for CTBI is October 1, and more frequently if events or circumstances indicate that there may be impairment. Refer to note 1 to the consolidated financial statements contained herein for a discussion on the methodology used by CTBI to assess goodwill for impairment.
Impairment exists when a reporting unit’s carrying amount of goodwill exceeds its implied fair value. In testing goodwill for impairment, U.S. GAAP permits companies to first assess qualitative factors to determine whether it is more likely than not that its fair value is less than its carrying amount. In this qualitative assessment, CTBI evaluates events and circumstances which may include, but are not limited to, the general economic environment, banking industry and market conditions, the overall financial performance of CTBI, and the performance of CTBI’s common stock, to determine if it is not more likely than not that the fair value is less than its carrying amount. If the quantitative impairment test is required or the decision to bypass the qualitative assessment is elected, CTBI performs the goodwill impairment test by comparing its fair value with its carrying amount, including goodwill. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill recorded. A recognized impairment loss cannot be reversed in future periods even if the fair value of the reporting unit subsequently recovers.
The fair value of CTBI is the price that would be received to sell the company as a whole in an orderly transaction between market participants at the measurement date. The determination of the fair value is a subjective process that involves the use of estimates and judgments, particularly related to cash flows, the appropriate discount rates and an applicable control premium. CTBI employs an income-based approach, utilizing forecasted cash flows and the estimated cost of equity as the discount rate. Significant management judgment is necessary in the preparation of the forecasted cash flows surrounding expectations for earnings projections, growth and credit loss expectations, and actual results may differ from forecasted results.
Fair Value Measurements – As a financial services company, the carrying value of certain financial assets and liabilities is impacted by the application of fair value measurements, either directly or indirectly. In certain cases, an asset or liability is measured and reported at fair value on a recurring basis, such as available-for-sale investment securities. In other cases, management must rely on estimates or judgments to determine if an asset or liability not measured at fair value warrants an impairment write-down or whether a valuation reserve should be established. Given the inherent volatility, the use of fair value measurements may have a significant impact on the carrying value of assets or liabilities or result in material changes to the consolidated financial statements from period to period. Detailed information regarding fair value measurements can be found in note 16 to the consolidated financial statements contained herein.
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
CTBI currently does not engage in any hedging activity or any derivative activity which management considers material. Analysis of CTBI’s interest rate sensitivity can be found in the Interest Rate Risk section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
