2016
ANNUAL REPORT
Photo Location: Pullman Square, Huntington, West Virginia
Your Company
“We are committed to increasing shareholder value by
operating our community banking model with the core
values of fairness, respect, and integrity.”
-Mission Statement
A Successful Business Model
Community Trust Bancorp, Inc.'s business success is
founded in our unwavering commitment to faithfully execute
our business model of community banking with fairness,
respect, and integrity toward all of our constituents.
We continue to operate a conservative, efficient model of
traditional community banking which has been the
foundation of our customer service for more than 113 years
and has driven our strong history of earnings. Our business
model has allowed us to successfully meet the challenges of
a highly competitive business environment and an ever-
changing economy.
Economic conditions in most of the communities we serve in
Kentucky, West Virginia, and Tennessee have significantly
improved, and we are optimistic that this trend will continue.
However, some business sectors in our Eastern Region,
particularly the energy industry, remain negatively
impacted. We anticipate that most of our market areas will
continue to experience moderately improving economic
conditions.
Our organizational structure and operating philosophy are
our tools for fulfilling our mission. Our history of investment
returns continues to demonstrate the viability of our stock as
a long-term core value investment. Having a firm foundation
for our operations, a strong capital position, a highly skilled
and dedicated workforce, and a business model of
community banking allows us to operate successfully.
The directors, officers, and staff of Community Trust
Bancorp, Inc. are committed to changing operational
challenges into opportunities while remaining focused on
our core banking business and increasing shareholder
value.
Comparison of 5-Year Cumulative Total Return
$300
$200
$100
$0
2011
2012
2013
2014
2015
2016
Community Trust Bancorp, Inc.
NASDAQ Stock Market (U.S.)
NASDAQ Bank Stocks Index
An investment in CTBI stock on December 31, 2011 would have
outperformed the NASDAQ Stock Market (U.S.) but not the
NASDAQ Bank Stocks Index at December 31, 2016.
1
Photo Location: Pikeville, Kentucky Main Street
Photo Credit: Jordan M. Gibson
To Our Shareholders
Dear Shareholders
nd
Your Company's financial performance continues to
demonstrate why an investment in CTBI stock is considered
a long-term core value investment. Your Company achieved
its 2 consecutive year of record earnings with net income of
$47.3 million and earnings per share at $2.70. This
performance represents a 1.21% return on average assets
and a 9.58% return on average equity. Management
believes cost control is a continuous action, not an event,
and our ongoing focus on operational efficiencies has
allowed us to consistently maintain an efficiency ratio less
than 59.5% over the last five years. Our efficiency ratio at
year-end 2016 was 58.5%.
We were pleased to continue our commitment to
shareholders by sharing earnings with them in the form of
quarterly cash dividends. The quarterly cash dividend to
shareholders was increased to $0.32 during 2016,
representing the 36 consecutive year of increasing the
cash dividend to shareholders. Our cash dividend yield at
December 31, 2016 was 2.58%.
th
Economic Commentary
During 2016, improvement was seen in the national and
regional economies of most of our service area. With the
advent of increased optimism in the business community,
the economy should be stronger in 2017. The expectation
of regulatory relief for the business community, including
regulatory changes which can have a positive impact on
specific business sectors, combined with the probability of
changes in tax structure may have a positive impact on
business and the economy. Community Trust Bancorp, Inc.
addressed the need for economic diversity many years ago
with the expansion of your Company in Kentucky, West
Virginia, and Tennessee. We have met the challenges of
operating in varying economic conditions and continued our
long history of profitability. The economic diversity of the
geographic regions we serve allows continued growth,
although economic growth may not occur in all regions. Our
financial strength allows us to
seize the opportunities provided
by an improving economy. For our
national and regional economic
conditions, 2017 is expected to
be a year of change with
significant changes proposed in
health care and trade in addition
to changes anticipated in the tax
code and regulation.
Traditional Community
Banking
Jean R. Hale
Chairman, President and CEO
Your Company is a traditional banking company which is
dependent upon its net interest margin for most of our
income. With the economy continuing to improve, there is an
expectation of increasing interest rates which can have a
positive impact on your Company's net interest margin.
Your Company's interest rate gap is positioned to have our
loans reprice quicker than our deposits during the first nine
months of increasing rates. During 2016, we focused on
growth of our largest earning asset, our loan portfolio.
Loans grew $64.4 million from prior year 2015. We are also
pleased to report that all asset quality matrices showed
improvement during 2016. To fund our loan growth, we
grew our deposit base $100.4 million year over year.
Management has been focused for several years on
increasing our noninterest revenue through growth and
increasing the profitability of our trust company, Community
Trust and Investment Company. Our trust company
provides a full menu of products and services to meet the
needs of clients in managing their assets and planning for
their future, including wealth and trust management,
brokerage service, and life insurance. We believe with the
pressure placed on traditional noninterest revenue sources,
our trust company provides a good opportunity for the
growth of our noninterest revenue in the future.
Investor Returns
Your management is focused on providing a strong,
consistent return to our investors. The total return to our
investors for the year 2016 was 45.5%. Management
2
management team and their commitment to the execution
of our strategic plan, and the hard work and dedication of
our almost 1,000 employees. We believe challenges
provide opportunities, and with our strong foundation and
113 years of experience, we have a long history of seizing
opportunities for financial success. We are focused on the
success of your Company.
We appreciate the opportunity to serve our
constituents...Our Shareholders, Our Customers, Our
Employees, and Our Communities. Your loyalty and
support are invaluable to the success of your Company!
Jean R. Hale
Chairman, President and CEO
believes an investment in Community Trust Bancorp, Inc. is
a long-term core value investment. We believe in returning
to our shareholders in several ways, including cash
dividends, stock dividends, stock splits, and price
appreciation. Our goal is to return between 45% and 50%
of earnings to our shareholders in the form of cash
dividends. Our dividend payout ratio was 46.7% for 2016.
The balance of our earnings is retained as capital, funding
the continued growth of your Company to increase its
earning capacity long-term. During 2016, the shareholders'
equity of your Company grew 5.3% to $500.6 million.
Prices of financial sector stocks increased significantly
during the fourth quarter of 2016. CTBI experienced a
33.7% increase in the market price of our shares during the
fourth quarter 2016 and a 41.9% increase year over year.
The price of our stock to our tangible book value increased
34%, from 1.50x at year-end 2015 to 2.01x at year-end
2016. The increase experienced in the financial sector has
been primarily driven by the expectation of interest rate
increases and changes in the regulatory environment.
Strong Financial Performance
We believe that the consistently strong financial
performance of your Company can be attributed to many
things. Our decision to manage your Company using a
community banking business model, the strength and
dedicated service of our directors, a highly qualified
Sales Price
(quarterly)
High
Low
Close
Mar 31
$36.00
$30.89
$35.32
Jun 30
$36.95
$32.98
$34.66
Sep 30
$37.49
$33.71
$37.11
Dec 31
$51.35
$35.85
$49.60
3
Financial Highlights
(in thousands except ratios, per share amounts, and employees)
For the Year
Net income
Basic earnings per share
Diluted earnings per share
Cash dividends per share
Average shares outstanding
At Year End
Assets
Earning assets
Deposits, incl. repurchase agreements
Loans
Allowance for loan and lease losses
Shareholders' equity
Book value per share
Market price per common share
Common shares outstanding
Full time equivalent employees
Significant Ratios
For the year
Return on average assets
Return on average common equity
Net interest margin
Net charge-offs to average loans
Efficiency ratio
At year end
Capital ratios:
Equity to assets
Tier 1 leverage
Common equity Tier 1
Tier 1 risk based
Total risk based
Allowance to net loans
Allowance to nonperforming loans
2016
2015
Percentage Change
$
47,346
2.70
2.70
1.26
17,548
$
46,432
2.66
2.66
1.22
17,431
%
2.0
1.5
1.5
3.3
0.7
%
2016
2015
Percentage Change
$
3,932,169
3,667,626
3,332,373
2,938,371
35,933
500,615
28.40
49.60
$
3,903,934
3,635,857
3,232,007
2,873,961
36,094
475,583
27.12
34.96
17,629
996
17,537
984
%
0.7
0.9
3.1
2.2
)
0.4
5.3
4.7
41.9
(
%
0.5
1.2
2016
2015
Percentage Change
%
1.21
9.58
3.70
0.28
58.54
%
12.73
12.75
15.18
17.25
18.50
1.22
130.81
%
1.23
9.97
3.81
0.25
58.20
%
12.18
12.40
14.58
16.70
17.95
1.26
126.16
%
)
(
1.6
)
(
3.9
)
(
2.9
12.0
0.6
%
4.5
2.8
4.1
3.3
3.1
)
3.2
3.7
(
4
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
Net Income
(in thousands)
$44,862
$45,172
$43,251
$46,432
$47,346
$50,000
$40,000
$30,000
$20,000
$10,000
$0
2012
2013
2014
2015
2016
Earnings Per Share
Dividends Per Share
$2.64
$2.63
$2.50
$2.66
$2.70
$1.40
$1.20
$1.136
$1.154
$1.181
$1.220
$1.260
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
Shareholders' Equity
(in thousands)
$475,583
$500,615
$447,877
$400,344
$412,492
$550,000
$500,000
$450,000
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
2012
2013
2014
2015
2016
5
Financial Highlights
Consolidated Statements of Income
Year Ended December 31
(in thousands except per share data)
2016
2015
Percentage Change
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net Income
Cash dividends per share
Book value per share
$
$
$
146,576
13,555
133,021
7,872
48,441
107,126
66,464
19,118
47,346
1.26
28.40
$
$
$
144,020
11,773
132,247
8,650
46,809
105,443
64,963
18,531
46,432
1.22
27.12
Average shares outstanding
17,548
17,431
%
1.8
15.1
0.6
)
(
9.0
3.5
1.6
2.3
3.2
2.0
%
3.3
4.7
0.7
%
Consolidated Balance Sheets
At December 31
(in thousands)
Assets
2016
2015
Percentage Change
Cash and deposits in other banks
Federal funds sold
Securities
Loans, net of allowance
Other assets
$
145,169
527
606,260
2,902,438
277,775
$
190,652
791
596,597
2,837,867
278,027
Total Assets
$3,932,169
$3,903,934
Liabilities and Shareholders’ Equity
Deposits
Repurchase agreements
Federal funds purchased
Advances from Federal Home Loan Bank
Long-term debt
Other liabilities
$
3,081,308
251,065
4,816
944
61,341
32,080
$
2,980,782
251,225
3,596
101,056
61,341
30,351
Total Liabilities
3,431,554
3,428,351
Shareholders' Equity
500,615
475,583
Total Liabilities and Shareholders' Equity
$3,932,169
$3,903,934
%
(
(
)
23.9
)
33.4
1.6
2.3
)
0.1
(
0.7
%
3.4
)
(
0.1
33.9
)
99.1
0.0
5.7
(
0.1
5.3
0.7
6
Noninterest Income
(in thousands)
$49,304
$45,957
$45,081
$46,809
$48,441
$55,000
$50,000
$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
2012
2013
2014
2015
2016
5-Year Cumulative Average Asset Growth
Efficiency Ratio
4.56%
4.09%
3.84%
3.31%
5.00%
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
70.00%
60.00%
57.93%
59.33%
59.12%
58.20%
58.54%
2.26%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
Nonperforming Assets to Loans and Foreclosed Properties
4 .0 0 %
3 .50 %
3 .0 0 %
2 .50 %
2 .0 0 %
1.50 %
1.0 0 %
0 .50 %
0 .0 0 %
3 .2 0 %
3 .12 %
2 .74 %
2 .3 8 %
2 .13 %
2 0 12
2 0 13
2 0 14
2 0 15
2 0 16
7
Photo Location: Danville, Kentucky Main Street
Photo Credit: Rhonda Gilliam, Community Trust Bank
Shareholders
As a performance-driven team, our directors, officers, and
staff focus on providing a stable and competitive return for
our investors year after year. Our history of strong returns to
investors continued during 2016, as we increased the cash
dividend to our shareholders for the 36 consecutive year.
th
Community Trust achieved record earnings of $47.3 million.
Our stock experienced a 41.9% increase in its price in 2016.
By comparison, the NASDAQ Bank Index of 347 companies
rose 35.0%.
While increasing our cash dividend to our shareholders, we
continued to grow our shareholders' equity to $500.6 million
at December 31, 2016, a 5.3% increase from December 31,
2015. At December 31, 2016, our cash dividend yield was
2.58%, and the five-year compound growth rate of cash
dividends per share was 2.4%. The five-year compound
growth rate of earnings per share was 3.2% at December
31, 2016.
CTBI continues to maintain a significantly higher level of
capital than required by regulators. Our ratios as of
December 31, 2016 all exceed the threshold for meeting the
definition of “well-capitalized” as shown by the table below:
Actual
12.75%
15.18%
17.25%
For Capital
Adequacy
Purposes
To Be
Well-
Capitalized
4.00%
4.50%
6.00%
5.00%
6.50%
8.00%
Tier 1 capital
(to average assets)
Common equity Tier 1 capital
(to risk weighted assets)
Tier 1 capital
(to risk weighted assets)
Total capital
(to risk weighted assets)
8
Our tangible common equity/tangible assets ratio also
remained strong at 11.25% at December 31, 2016.
Our stock is included in the Russell 2000 Index of small cap
companies providing us with a good benchmark for
comparing our stock's performance to other small cap
investor opportunities. During the 10-year period ending
December 31, 2016, CTBI produced an annualized return of
6.49%, while the Russell 2000 Index produced an
annualized return of 6.99%.
CTBI stock is traded on the prestigious NASDAQ Global
Select Market (a founding stock selection) and is also one of
50 founding stocks of the NASDAQ's Dividend Achievers
Index. An investment in CTBI stock on December 31, 2011
would have provided an annualized return of 16.72% as of
December 31, 2016.
Book Value Per Share
$30.00
$25.00
$23.31
$23.70
$27.12
$28.40
$25.64
$20.00
$15.00
$10.00
$5.00
$0.00
18.50%
8.00%
10.00%
2012
2013
2014
2015
2016
Photo Location:
Ashland,
Kentucky
Customers
Our customers – individuals, businesses, and
organizations – know that they can turn to us, with
confidence, for their many financial product and service
needs. In 2016, Community Trust served more than
245,000 customers.
We offer our customers a wide variety of banking products
and services. We are committed to serving our broad range
of customers with products and services designed to fit
each customer's needs. In 2016, for the eighth consecutive
year, we were recognized by the Small Business
Administration (SBA) as the top community bank SBA
lender in the Commonwealth of Kentucky based on the total
number of loans. We also offer USDA guaranteed loans and
an entire suite of commercial loans and leases, mortgage
loans, and consumer loans.
Our deposit related products and services include
certificates of deposits, savings accounts, online banking
and online bill payment (at www.ctbi.com), mobile banking,
remote deposit capture, and commercial cash
management services. This year we introduced a new
product, the Carefree CD, which allows customers to
increase the interest rate of their certificate of deposit once
during its term. This should prove to be a popular product in
a rising interest rate environment.
We offer our customers convenient access to their accounts
through our network of 86 ATMs. The total number of ATMs
to which our customers have free access is more than 160.
Please visit our website at https://www.ctbi.com/ctbi/about-
us/atm-location-listing for a complete listing of our ATM
locations.
With our continuing focus on customer service, we were
pleased in 2016 to expand our menu of mobile and online
banking services to include mobile banking Check Remote
Deposit Capture. Our customers can now make a deposit
into their account by taking a picture of a check with their
smartphone. The People Pay and External Transfers
products were added to our services, allowing our
customers to directly pay another person or transfer funds
to an external account electronically from their Community
Trust Bank account.
To enhance the product utilization experience, the features
of Mobile Passcode and Touch ID were introduced. These
are quick access methods that increase the speed of
access to mobile banking by entering a short set of digits
(Mobile Passcode) or a fingerprint (Touch ID) instead of a
full user name and password. This increases convenience
while still maintaining the security of financial information.
We continued expanding our product offering by making
Apple Pay™ available to our customers, allowing them to
use their favorite Visa® debit card to pay the easy, secure,
and private way at hundreds of thousands of stores and
through participating apps.
We offer customers a full line of wealth and trust
management, estate planning, and retirement planning
services, in addition to full service brokerage and life
insurance products. Our trust and wealth management
professionals are dedicated to helping individuals and
businesses identify the right products and services to meet
their unique needs.
We are pleased to have served our customers for 113
years. Our employees are focused on providing a
rewarding banking experience to our customers, whether it
is in one of our 80 banking offices, five trust offices, or
through our online and mobile banking systems.
9
and growth is in the level of service we provide to our
customers. We recognize the hard work and dedication of
our employees. In February 2017, we held our 18 annual
“Pinnacle of Success” awards banquet and recognized 56
employees for their outstanding performance in business
development and service during the prior year. We have
included the names of those employees, as well as the
offices, markets, and regions recognized, following the
Branch Locations listing on page 16.
th
We know that the success of our employees means success
for your Company. Our employees' commitment to the
mission of your Company and our constituents is evidenced
by their ownership of the Company's stock. Through their
401(k) and ESOP plans, our employees collectively own 1.3
million shares, or 7.2%, of Community Trust Bancorp, Inc.
stock, making them our largest shareholder. In 2016,
Community Trust Bancorp, Inc. contributed $2.5 million to
these plans.
Photo Location: Lexington, Kentucky
Employees
We know that Community Trust's most valuable asset is our
employees. Recognizing this, we have recruited, hired, and
retained the finest hard-working and talented employees.
Our nearly 1,000 employee team works together to provide
each customer the best service each and every day. Our
continued success would not be possible without the
dedication of our employees to meet the financial needs of
our customers.
We 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 by sponsoring memberships in local civic
organizations. Our employees participated in numerous
coaching, training, and education programs throughout the
year. Additionally, Community Trust makes online training
available to employees; as a result, employees completed
33 different online courses through our Regulatory
University program.
We actively support our employees with a wellness
program. Since beginning the program in 2004, participating
employees have experienced improvements in preventing
cardiovascular disease, cancer, and diabetes. Many of our
in elevated
employees have experienced decreases
medical risk factors, including alcohol consumption,
tobacco usage, physical inactivity, high stress, high
cholesterol, and high blood pressure.
We recognize that within our industry the products are
basically the same from company to company; however, we
believe that the difference we can make in our profitability
10
Photo Location:
Photo Credit: Charles Hutson
LaFollette,
Tennessee
Communities
®
Our corporate motto is “building communities…built on
trust .” We believe in living our motto as we work to help our
friends and neighbors fulfill their financial dreams.
We are actively involved in every community we serve. We
dedicate our resources, both human and financial, to help
make the places where we live and work better, not only for
current generations, but also for generations yet to come.
Our continuing support of our communities, both financially
and through the volunteer service of our employees, has
helped build great places to live and work for both our
customers and our employees. During 2016, we donated
more than $900,000 to community organizations involved in
a wide variety of civic activities, including economic
development, affordable housing, job creation, education,
cultural enrichment, medical research, and health care.
Community Trust employees provide leadership, monetary
support, and countless volunteer hours to many exceptional
local community organizations in all of the communities we
serve. Our employees are active in a wide variety of
community organizations, including Chambers of
Commerce, United Way, One East Kentucky, YMCA,
American Cancer Society's Relay For Life, Habitat for
Humanity, Kentucky Blood Center, Diabetes Coalition,
March of Dimes, little league sports programs, Boy and Girl
Scouts of America, The Salvation Army, volunteer fire
departments, home realtor and builder organizations, and
independent and state supported colleges and universities.
Our employees volunteer thousands of hours each year to
these and other excellent local community organizations.
In 2016, Community Trust continued to actively support
SOAR (Shaping Our Appalachian Region), an organization
created to expand job opportunities; enhance the economy
of the region; encourage innovation, entrepreneurship,
geographic cooperation, and a diversified workforce;
improve the quality of life of our citizens; and support all
those working to achieve these goals. Community Trust has
partnered with SOAR since its inception with support,
including service in leadership positions and providing
office space for its Pikeville, Kentucky headquarters.
Community Trust is dedicated to helping our communities
grow and prosper now and in the future. We are proud to be
a part of our hometowns across Kentucky, West Virginia,
and Tennessee!
CTBI Cash Contributions
$1,000,000
$900,000
$800,000
$753,000
$811,000
$819,000
$904,000
$854,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
2012
2013
2014
2015
2016
11
Photo Location: Somerset, Kentucky
Executive Committee
JEAN R. HALE
Chairman, President
and CEO
Community Trust Bancorp, Inc.
Chairman
Community Trust Bank, Inc. and
Community Trust and
Investment Company
MARK A. GOOCH
Executive Vice President and
Secretary
Community Trust Bancorp, Inc.
Director, President and CEO
Community Trust Bank, Inc.
Director and Vice President
Community Trust and
Investment Company
ANDY WATERS
Executive Vice President
Community Trust Bancorp, Inc.
Director, President and CEO
Community Trust and Investment
Company
JAMES B. DRAUGHN
Executive Vice President
Community Trust Bancorp, Inc.
Executive Vice
President/Operations
Community Trust Bank, Inc.
JAMES J. GARTNER
Executive Vice President
Community Trust Bancorp, Inc.
Executive Vice President/
Chief Credit Officer
Community Trust Bank, Inc.
C. WAYNE HANCOCK II
Executive Vice President
Community Trust Bancorp, Inc.
Executive Vice President/
Senior Staff Attorney
Community Trust Bank, Inc.
*
STEVEN E. JAMESON
Executive Vice President
Community Trust Bancorp, Inc.
Executive Vice President/Chief
Internal Audit & Risk Officer
Community Trust Bank, Inc.
ANDREW JONES
Executive Vice President
Community Trust Bancorp, Inc.
Executive Vice President/
Northeastern Region President
Community Trust Bank, Inc.
LARRY W. JONES
Executive Vice President
Community Trust Bancorp, Inc.
Executive Vice President/
Central Kentucky Region President
Community Trust Bank, Inc.
RICHARD W. NEWSOM
Executive Vice President
Community Trust Bancorp, Inc.
Executive Vice President/
Eastern Region President
Community Trust Bank, Inc.
RICKY D. SPARKMAN
Executive Vice President
Community Trust Bancorp, Inc.
Executive Vice President/South
Central Region President
Community Trust Bank, Inc.
KEVIN J. STUMBO
Executive Vice President, CFO and Treasurer
Community Trust Bancorp, Inc.
Executive Vice President/CFO
Community Trust Bank, Inc.
Vice President
Community Trust and
Investment Company
12
* Non-voting Member
Photo Location:
Photo Credit: Harrodsburg/Mercer County Tourist Commission
Harrodsburg, Kentucky
Main Street
Boards of Directors
*
**
***
**
***
JEAN R. HALE
Chairman, President and CEO
Community Trust Bancorp, Inc.
Chairman
Community Trust Bank, Inc. and
Community Trust and Investment
Company
***
MARK A. GOOCH
Executive Vice President and
Secretary
Community Trust Bancorp, Inc.
Director, President and CEO
Community Trust Bank, Inc.
Director and Vice President
Community Trust and Investment
Company
ANDY WATERS
Executive Vice President
Community Trust Bancorp, Inc.
Director, President and CEO
Community Trust and Investment
Company
*
***
CHARLES J. BAIRD
President
Baird & Baird, P.S.C.
Pikeville, Kentucky
**
J. MARK CAMPBELL
President
Cambrian Coal, LLC
Charleston, West Virginia
*
NICK CARTER
Private Investor
Lexington, Kentucky
**
DAVID E. COLLINS
Managing Partner
Collins & Slone, LLP
Pikeville, Kentucky
***
E.B. LOWMAN II
Chairman and CEO
Cardinal Management Ltd.
Ashland, Kentucky
**
***
CRIT LUALLEN
Former Lt. Governor
Commonwealth of Kentucky
Frankfort, Kentucky
KRISHNA M. MALEMPATI
Vice President
OM Ventures Inc.
Managing Partner
Park Hills Shopping Center
Tampa, Florida
JAMES E. MCGHEE II
President
Three JC Investments, LLC
Pikeville, Kentucky
FRANKY MINNIFIELD
President
Minnifield Enterprize, Inc.
Lexington, Kentucky
M. LYNN PARRISH
President
Marwood Land Company, Inc.
Pikeville, Kentucky
Boards of Directors
Community Trust Bancorp, Inc.
Community Trust Bank, Inc.
Community Trust and Investment Company
*
DR. JAMES R. RAMSEY
Retired President and Professor
of Economics
University of Louisville
Director
Texas Roadhouse, Inc. and
Aquila Municipal Trust
Louisville, Kentucky
*
ANTHONY W. ST. CHARLES
President and Chief Executive Officer
The St. Charles Group, LLC
Cincinnati, Ohio
13
Photo Location: Versailles Kentucky
,
Advisory Board Members
Central Region
Eastern Region
Northeastern Region
South Central Region
Larry W. Jones
Regional President
Lexington
Larry W. Jones
Regional President
James C. Baughman, Jr.
Robert A. Branham
Linda A. Carroll
C. Glen Combs
Jenny Dulworth-Albert
James Keeton III
Robert Kelly
Todd Sallee
Daryl Smith
Danville/Harrodsburg
David Maynard
Market President
Bob Allen
Scott Burks
James Walker Cox
Bob Davis
Bruce Harper
James G. Ingram
Alvis Johnson
Myrna Miller
Larry Scott, M.D.
Walter “Skip” Stocker
Mt. Sterling
Bill McKenna
Market President
Byron Amburgey
Marcus Shane Back
Jeff Brother
Reid Evans
O. Keith Gannon
Angela Patrick
E. Dale Sorrell
Richard Newsom
Regional President
Andrew Jones
Regional President
Ricky Sparkman
Regional President
Richmond
Pikeville*
Ashland
Campbellsville
Williamsburg
Tim Houck
Market President
William Brett Keene
Market President
Andrew Jones
Regional President
Ricky Sparkman
Regional President
Michael Blount
Interim Market President
R. Don Adkins++
E. L. Ballou, D.M.D.
Ray F. Bryant
Joseph E. Early, Sr.
Paul Estes
Vernon B. Faulkner+++
Dallas B. Steely
Mark S. Stephens
Lonnie D. Walden
Jeannette Crockett
Alison Emmons
David Fernandez
James H. Howard
Elizabeth McCarty
David McFaddin
Randall Stone
Versailles
Billie Dollins
Market President
Robert Cleveland
Jack Givens
Phil Huddleston
Alice Kiviniemi
Rodney Mitchell
Billy Van Pelt
Mark Wainwright, M.D.
Winchester
David Wills
Market President
Thomas R. Goebel
Carl E. Jennings
Robert M. Powe, Jr.
David W. Underhill
Gardner D. Wagers
Floyd/Knott/Johnson*
David Tackett
Market President
Hazard
Paul Daniels, Sr.
E. B. Lowman II
E. B. Lowman III
John McMeans
Ann Perkins
James C. Williams
Janice Brafford-King
Market President
Advantage Valley
William Bettinazzi
Frances Feltner
Meriwether W. Hall
Charles Housley
Syamala H. K. Reddy, M.D.
Jeff Sandlin
Tim Short
Alan Dale Williams
Tug Valley
Duanne Thompson
Market President
William F. Blackburn III
James H. Caines
Harold Davis
Timothy A. Hatfield
Philip Haywood
John Mark Hubbard
Louie Jiunta
Paul E. Pinson
Whitesburg
Reed Caudill
Market President
Herbert Caudill
Bill Joe Collier
Sam W. Quillen, Jr., D.M.D.
Pauline C. Ritter-Combs
Allen Burner
Market President
Randie Gail Lawson
Christopher J. Plybon
Julian Saad
Steve Smith
William Jack Stevens
Flemingsburg
Emery O. Clark
Market President
Michael A. Boyd, M.D.
Steve Humphries
Duane Lowe
T. Scott Perkins, D.M.D.
James Sauer
J. E. Smith, Jr.+
Frank Vice, D.V.M.
Summersville
Paul Buechler
Ellis S. Frame III
David Michael Hughes
Marshall Robinson
Barry Bertram
Salem M. George, M.D.
Jerry Russell
John Waldrop
James Whitlock
LaFollette
Rhonda Longmire
Market President
George Ellison
James C. Farris, M.D.
Marvin Minton
Peggy Payne
Tom Robards
Conrad Troutman
Robert L. Woodson III
Middlesboro
Tim Helton
Market President
Marcum Brogan
Meredith J. Evans, M.D.
Keith A. Nagle
Richard H. Tamer
Mt. Vernon
Michael Blount
Market President
Martha Cox
Connie Hunt
Gary W. Mink
Tommy Mink
14
+Retired 12/31/2016 ++Deceased 2/13/2017 +++Deceased 12/28/2016
*These markets are served by the Community Trust Bank, Inc. Board of Directors.
Photo Location: Prestonsburg, Kentucky
Shareholder Information
Dividend Reinvestment
Community Trust Bancorp, Inc. offers its
shareholders an automatic dividend reinvestment
program. The program enables shareholders to
reinvest their dividends in shares at the prevailing
market price. For more information, contact us at:
Community Trust Bancorp, Inc.
c/o Broadridge Corporate Issuer Solutions, Inc.
P.O. Box 1342
Brentwood, NY 11717-0718
866.232.3034
shareholder@broadridge.com
Form 10-K
CTBI's annual report on Form 10-K filed
with the Securities and Exchange Commission
is available without charge on our website at
www.ctbi.com or by writing:
Community Trust Bancorp, Inc.
Jean R. Hale
Chairman, President & CEO
P.O. Box 2947
Pikeville, KY 41502-2947
Current Analyst Coverage
J.J.B. Hilliard, W.L. Lyons, LLC
Keefe, Bruyette & Woods, Inc.
Raymond James and Associates, Inc.
Sandler O'Neill & Partners, LP
Stephens, Inc.
Corporate Address
Community Trust Bancorp, Inc.
346 North Mayo Trail
P.O. Box 2947
Pikeville, KY 41502-2947
606.432.1414
www.ctbi.com
Notice of Annual Meeting
The annual meeting of the
shareholders will be held at
10:00 a.m. on April 25, 2017 at:
Community Trust Bancorp, Inc.
346 North Mayo Trail
Pikeville, Kentucky
Transfer Agent
Inquiries relating to shareholder records,
stock transfers, changes of ownership,
changes of address, and dividend payments
should be sent to the transfer agent at:
Broadridge Corporate Issuer Solutions, Inc.
P.O. Box 1342
Brentwood, NY 11717-0718
866.232.3034
720.358.3637 (International)
shareholder@broadridge.com
Inquiries may also be directed to
Community Trust Bancorp, Inc.'s Stock
Transfer Administrator, Marilyn Justice, at:
Community Trust Bank, Inc.
P.O. Box 2947
Pikeville, KY 41502-2947
606.437.3279
800.422.1090, ext. 3279 (Toll Free)
justicma@ctbi.com
15
Branch Locations
Central Region
Danville
Danville Main Street
Danville Manor
Harrodsburg
462 W. Main St.
1560 Hustonville Rd.
570 Chestnut St.
859-239-9200
859-239-9460
859-734-4354
Richmond
Eastern ByPass
Richmond Main
Berea North
860 Eastern ByPass
128 W. Main St.
525 Walnut Meadow Rd.
859-624-4622
859-623-2747
859-985-0561
*
Lexington
Lexington Vine
Beaumont
Hamburg
Leestown
Pasadena
Richmond Road
Mt. Sterling
Mt. Sterling Main
Mt. Sterling North
100 E. Vine St.
901 Beaumont Centre Pkwy.
2417 Sir Barton Way
109 Louie Place
185 Pasadena Dr., Suite 100
3090 Richmond Rd.
859-389-5350
859-223-1111
859-264-1938
859-258-2659
859-313-5425
859-269-0164
110 N. Maysville St.
196 Evans Dr.
859-497-6900
859-497-6970
*
Versailles
Versailles Main
Woodford Plaza
Frankfort East
Frankfort West
Georgetown Wal-Mart
101 N. Main St.
470 Lexington Rd.
427 Versailles Rd.
1205 S. Hwy. 127
112 Osbourne Way
859-879-5400
859-879-5480
502-848-0913
502-696-0720
502-863-4693
Winchester
Winchester Main
Winchester Plaza
120 S. Main St.
125 Winchester Plaza
859-745-7200
859-745-7200
Eastern Region
Floyd/Knott/Johnson
Allen
Floyd County
Paintsville
Knott County
6424 Ky Rt. 1428
161 S. Lake Dr.
470 N. Mayo Trl.
107 W. Main St.
1665 Combs Rd.
100 Citizens Ln.
101 Village Ln.
Hazard
Airport Gardens
Black Gold
Hazard Village
Tug Valley
Williamson
Tug Valley
606-874-0408
606-886-2382
606-788-9934
606-785-5095
606-487-2160
606-436-2157
606-487-2152
101 E. 2nd Ave.
28160 US Hwy. 119
304-235-5454
606-237-6051
Northeastern Region
Advantage Valley
Alum Creek
Hamlin
Fort Gay
Pullman Square
315 Midway Rd.
8049 Lynn Ave.
735 Court St.
952 3rd Ave.
304-756-3317
304-824-7223
304-648-7200
304-697-0272
Flemingsburg
Ewing
Flemingsburg Main
South Ridge
1527 Ewing Rd.
36 Brookhaven Dr.
108 Clark St.
606-267-2061
606-845-3551
606-849-2304
South Central Region
Campbellsville
Campbellsville Main
Campbellsville Bypass
Columbia
Greensburg
Lebanon
Somerset North
Somerset South
Jamestown
Williamsburg
Williamsburg Main
Convenience Center
Corbin
London South
London North
1218 E. Broadway
402 Campbellsville Bypass
1005 Jamestown St.
205 S. Main St.
521 W. Main St.
239 N. Hwy. 27
3809 S. Hwy. 27
752 N. Main St.
201 N. 3rd St.
895 S. Hwy. 25 W.
678 US Hwy. 25 W.
1706 Hwy. 192 W.
38 Shiloh Dr.
270-789-5900
270-789-5900
270-384-4771
270-932-7464
270-692-0064
606-679-8826
606-679-8446
270-343-2556
606-549-5000
606-539-2251
606-526-8777
606-877-2644
606-864-2439
Pikeville
Elkhorn City
Marrowbone
Mouthcard
Phelps
Pikeville Main
Pikeville Main Street
Pikeville Wal-Mart
Town Mountain
Virgie
Weddington Plaza
*
Whitesburg
Whitesburg Main
West Whitesburg
Jenkins
Isom
Neon
211 W. Russell St.
10579 Regina Belcher Hwy.
32 N. Levisa Rd.
38720 State Hwy. 194 E.
346 N. Mayo Trl.
137 Main St. # 4
254 Cassidy Blvd.
105 Northgate Dr.
1056 KY Hwy. 610 W.
4205 North Mayo Trl.
155 Main St.
24 Pkwy. Plaza Loop
9505 Hwy. 805, Suite A
56 Isom Plaza
1001 Hwy. 317
606-754-5589
606-754-4462
606-835-4907
606-456-8701
606-432-1414
606-437-3326
606-437-0048
606-437-3323
606-639-4451
606-432-4529
606-633-0161
606-633-4532
606-832-2477
606-633-5995
606-855-4435
*
Ashland
Ashland Main
South Ashland
Summit
Westwood
Russell
Summersville
Summersville
1544 Winchester Ave.
2101 29th St.
7100 US Route 60
721 Wheatley Rd.
970 Diederich Blvd.
606-329-6000
606-329-6600
606-928-9555
606-329-6610
606-329-6680
507 Main St.
304-872-2711
Middlesboro
Middlesboro Main
Middlesboro East
Pineville
Mt. Vernon
Mt. Vernon Main
Mt. Vernon Downtown
*
LaFollette
LaFollette Main
LaFollette Mall
Jacksboro
Clinton
1918 Cumberland Ave.
1206 E. Cumberland Ave.
11792 US Hwy. 25 E.
606-248-9600
606-248-9642
606-337-6122
2134 Lake Cumberland Rd.
120 Main St.
606-256-5141
606-256-5142
106 S. Tennessee Ave.
2205 Jacksboro Pike
2603 Jacksboro Pike
2106 Charles G. Seivers Blvd.
423-562-3364
423-562-9918
423-566-7800
865-457-8684
16
*Community Trust and Investment Company has offices in these locations.
2017
for their
2016 Sales
& Service
Individual Success
David Akers
Donna Angel
Steve Belcher
Cindy Blanton
Michael Blount
Mike Bonfield
Steven Booth
Allen Burner
John R. Caldwell
Ryan Charles
Gerrie Clark
Kellan Clark
Delena Clevinger
Kim Copley
Wendy Corder
Tina M. Davis
Sherry Dotson
Dorothy Franklin
Melissa Hatfield
Tim Houck
Stephanie Hudson
Andrew Jarvis
Brett Keene
Robert Kelly
Bill Klier
Savi Kumar
Brent Lee
Jenny Maggard
Elizabeth Maynard-Johnson
Bobby Terrell Medley
Charlene Miller
Gaylon D. Neat
Tracy Osborne
Tina Parsons
Barry Pennington
Shellie Phipps
Donna Ray
Ty Reynolds
Melissa Rhodes
Jeremy Rigney
Charlene Ritz
Amy Selvage
Erin Serrate
Mike Shepherd
Daryl Slone
Roger Smith
Willie T. Swatzell
Helena Syck
Charles Tackett
David Tackett
Bob Watson
Kevin Way
Tammy Wheeler
David Wills
Jimmy Workman
Trina Yack
Team Success
Ashland Main Office
Ashland Market
Berea North Office
Central Region
Eastern Region
Floyd/Knott Market
Knott County Office
LaFollette Market
Northeastern Region
Pikeville Main Office
Pikeville Market
Richmond Main Office
Versailles Market
Williamsburg Market
Financial
Information
Community
Trust Bancorp,
Inc.
2016 Annual Report
Financial Statements and Supplementary Data
Community Trust Bancorp, Inc.
Consolidated Balance Sheets
(dollars in thousands)
December 31
Assets:
Cash and due from banks
Interest bearing deposits
Federal funds sold
Cash and cash equivalents
Certificates of deposit in other banks
Securities available-for-sale at fair value (amortized cost of $608,939 and $593,381, respectively)
Securities held-to-maturity at amortized cost (fair value of $867 and $1,651, respectively)
Loans held for sale
Loans
Allowance for loan and lease losses
Net loans
Premises and equipment, net
Federal Home Loan Bank stock
Federal Reserve Bank stock
Goodwill
Core deposit intangible (net of accumulated amortization of $8,483 and $8,324, respectively)
Bank owned life insurance
Mortgage servicing rights
Other real estate owned
Other assets
Total assets
Liabilities and shareholders’ equity:
Deposits:
Noninterest bearing
Interest bearing
Total deposits
Repurchase agreements
Federal funds purchased
Advances from Federal Home Loan Bank
Long-term debt
Deferred taxes
Other liabilities
Total liabilities
Commitments and contingencies (notes 18 and 20)
Shareholders’ equity:
Preferred stock, 300,000 shares authorized and unissued
Common stock, $5 par value, shares authorized 25,000,000; shares outstanding 2016 – 17,628,695; 2015 – 17,536,914
Capital surplus
Retained earnings
Accumulated other comprehensive income (loss), net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.
$
$
$
2016
2015
$
$
$
48,603
95,586
527
144,716
980
605,394
866
1,244
2,938,371
(35,933)
2,902,438
47,940
17,927
4,887
65,490
133
63,881
3,433
35,856
36,984
3,932,169
767,918
2,313,390
3,081,308
251,065
4,816
944
61,341
7,836
24,244
3,431,554
-
88,144
219,697
195,078
(2,304)
500,615
51,974
134,846
791
187,611
3,832
594,936
1,661
1,172
2,873,961
(36,094)
2,837,867
48,188
17,927
4,887
65,490
291
62,335
3,236
40,674
33,827
3,903,934
749,975
2,230,807
2,980,782
251,225
3,596
101,056
61,341
8,920
21,431
3,428,351
-
87,685
217,032
169,855
1,011
475,583
$
3,932,169
$
3,903,934
18 Consolidated Statements of Income and Comprehensive Income
(in thousands except per share data)
Year Ended December 31
Interest income:
Interest and fees on loans, including loans held for sale
Interest and dividends on securities:
Taxable
Tax exempt
Interest and dividends on Federal Reserve Bank and Federal Home Loan Bank stock
Other, including interest on federal funds sold
Total interest income
Interest expense:
Interest on deposits
Interest on repurchase agreements
Interest on advances from Federal Home Loan Bank
Interest on long-term debt
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Gains on sales of loans, net
Trust and wealth management income
Loan related fees
Bank owned life insurance
Brokerage revenue
Securities gains (losses)
Other noninterest income
Total noninterest income
Noninterest expense:
Officer salaries and employee benefits
Other salaries and employee benefits
Occupancy, net
Equipment
Data processing
Bank franchise tax
Legal fees
Professional fees
Advertising and marketing
FDIC insurance
Other real estate owned provision and expense
Repossession expense
Amortization of limited partnership investments
Other noninterest expense
Total noninterest expense
Income before income taxes
Income taxes
Net income
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during the period
Less: Reclassification adjustments for realized gains (losses) included in net income
Tax expense (benefit)
Other comprehensive income (loss), net of tax
Comprehensive income
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding-basic
Weighted average shares outstanding-diluted
Dividends declared per share
See notes to consolidated financial statements.
2016
2015
2014
$
133,965
$
130,829
$
128,457
8,265
2,718
1,011
617
146,576
10,921
1,155
62
1,417
13,555
133,021
7,872
125,149
24,966
1,831
9,585
4,107
2,199
1,314
522
3,917
48,441
12,198
44,877
7,999
2,950
6,497
5,671
1,906
1,890
2,614
1,789
2,879
1,156
2,623
12,077
107,126
66,464
19,118
47,346
(4,578)
522
(1,785)
(3,315)
44,031
2.70
2.70
17,548
17,566
$
$
$
$
9,153
2,705
1,010
323
144,020
9,616
938
49
1,170
11,773
132,247
8,650
123,597
24,282
1,978
9,286
3,821
2,158
1,426
(106)
3,964
46,809
11,652
42,911
7,826
3,049
6,743
5,174
2,236
1,884
2,428
2,382
3,533
1,265
2,580
11,780
105,443
64,963
18,531
46,432
(342)
(106)
(83)
(153)
46,279
2.66
2.66
17,431
17,483
$
$
$
$
1.260
$
1.220
$
11,314
2,576
1,136
384
143,867
9,798
841
27
1,131
11,797
132,070
8,755
123,315
23,892
1,468
9,011
3,531
1,996
2,454
(211)
2,940
45,081
11,076
43,417
8,017
3,414
7,877
4,857
2,444
1,832
2,421
2,400
3,897
1,508
859
11,980
105,999
62,397
19,146
43,251
13,928
(211)
4,949
9,190
52,441
2.50
2.49
17,326
17,397
1.181
$
$
$
$
$
19 Consolidated Statements of Changes in Shareholders’ Equity
(in thousands except per share and share amounts)
Balance, January 1, 2014
Net income
Other comprehensive income, net of tax of $4,949
Cash dividends declared ($1.181 per share)
Issuance of 10% stock dividend
Issuance of common stock
Vesting of restricted stock
Issuance of restricted stock
Forfeiture of restricted stock
Stock-based compensation and related excess tax
benefits
Balance, December 31, 2014
Net income
Other comprehensive loss, net of tax of $(83)
Cash dividends declared ($1.22 per share)
Issuance of common stock
Repurchase of common stock
Vesting of restricted stock
Issuance of restricted stock
Forfeiture of restricted stock
Stock-based compensation and related excess tax
benefits
Balance, December 31, 2015
Net income
Other comprehensive loss, net of tax of $(1,785)
Cash dividends declared ($1.26 per share)
Issuance of common stock
Repurchase of common stock
Vesting of restricted stock
Issuance of restricted stock
Forfeiture of restricted stock
Stock-based compensation and related excess tax
benefits
Balance, December 31, 2016
See notes to consolidated financial statements.
Accumulated
Other
Comprehensive
Income (Loss), Net
of Tax
$
(8,026) $
9,190
Retained Earnings
174,289
$
43,251
(20,539)
(52,304)
144,697
46,432
(21,274)
169,855
47,346
(22,123)
1,164
(153)
1,011
(3,315)
Common Shares
Common Stock
Capital Surplus
17,403,441
$
79,107
$
167,122
69,138
(8,945)
4,576
(1,835)
7,910
346
(45)
23
(9)
17,466,375
87,332
112,837
(5,724)
(46,482)
10,582
(674)
564
(29)
(232)
53
(3)
17,536,914
87,685
138,605
(11,574)
(52,963)
18,069
(356)
693
(57)
(265)
90
(2)
44,394
1,646
45
(23)
9
1,491
214,684
1,518
(160)
232
(53)
3
808
217,032
2,292
(325)
265
(90)
2
521
17,628,695
$
88,144
$
219,697
$
195,078
$
(2,304) $
Total
412,492
43,251
9,190
(20,539)
0
1,992
0
0
0
1,491
447,877
46,432
(153)
(21,274)
2,082
(189)
0
0
0
808
475,583
47,346
(3,315)
(22,123)
2,985
(382)
0
0
0
521
500,615
20 Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Deferred taxes
Stock-based compensation
Excess tax benefits of stock-based compensation
Provision for loan losses
Write-downs of other real estate owned and other repossessed assets
Gains on sale of mortgage loans held for sale
Securities (gains) losses
Gains on sale of assets, net
Proceeds from sale of mortgage loans held for sale
Funding of mortgage loans held for sale
Amortization of securities premiums and discounts, net
Change in cash surrender value of bank owned life insurance
Mortgage servicing rights:
Fair value adjustments
New servicing assets created
Changes in:
Other assets
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Certificates of deposit in other banks:
Purchase of certificates of deposit
Maturity of certificates of deposit
Securities available-for-sale (AFS):
Purchase of AFS securities
Proceeds from sales of AFS securities
Proceeds from prepayments, calls, and maturities of AFS securities
Securities held-to-maturity (HTM):
Proceeds from prepayments and maturities of HTM securities
Change in loans, net
Purchase of premises and equipment
Proceeds from sale of premises and equipment
Redemption of stock by FHLB
Additional investment in Federal Reserve Bank stock
Cancellation of Federal Reserve Bank stock
Proceeds from sale of other real estate owned and repossessed assets
Additional investment in other real estate owned and repossessed assets
Additional investment in bank owned life insurance
Net cash used in investing activities
Cash flows from financing activities:
Change in deposits, net
Change in repurchase agreements and federal funds purchased, net
Advances from Federal Home Loan Bank
Payments on advances from Federal Home Loan Bank
Issuance of common stock
Repurchase of common stock
Excess tax benefits of stock-based compensation
Dividends paid
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures:
Income taxes paid
Interest paid
Non-cash activities:
Loans to facilitate the sale of other real estate owned and repossessed assets
Common stock dividends accrued, paid in subsequent quarter
Real estate acquired in settlement of loans
See notes to consolidated financial statements.
2016
2015
2014
$
47,346
$
46,432
$
43,251
3,904
701
458
100
7,872
1,214
(1,831)
(522)
46
81,441
(79,682)
2,452
(1,546)
324
(521)
(3,205)
2,874
61,425
0
2,852
(176,236)
54,446
104,302
795
(74,379)
(3,498)
10
0
0
0
5,601
0
0
(86,107)
100,526
1,060
50,000
(150,112)
2,985
(382)
(100)
(22,190)
(18,213)
(42,895)
187,611
144,716
19,244
13,426
3,964
209
5,900
$
$
3,932
115
783
104
8,650
1,656
(1,978)
106
(321)
80,571
(77,501)
3,098
(1,638)
289
(557)
(6,274)
(2,488)
54,979
0
4,365
(81,456)
44,198
79,068
1
(161,702)
(2,246)
239
0
(18)
0
9,287
(85)
0
(108,349)
106,525
8,594
170,000
(130,114)
2,082
(189)
(104)
(21,330)
135,464
82,094
105,517
187,611
20,527
11,609
4,343
239
18,557
$
$
4,314
(1,048)
852
760
8,755
1,730
(1,468)
211
(73)
51,181
(51,149)
2,661
(1,506)
830
(374)
(60)
(1,339)
57,528
(245)
1,616
(217,949)
135,411
63,023
0
(132,906)
(2,081)
82
7,746
(1)
18
6,714
0
(5,504)
(144,076)
19,183
25,695
60,000
(116)
1,992
0
(760)
(20,570)
85,424
(1,124)
106,641
105,517
15,818
11,922
6,168
216
12,199
$
$
21 Notes to Consolidated Financial Statements
1. Accounting Policies
Basis of Presentation – The consolidated financial statements include Community Trust Bancorp, Inc. (“CTBI”) and its subsidiaries, including its principal
subsidiary, Community Trust Bank, Inc. (“CTB”). Intercompany transactions and accounts have been eliminated in consolidation.
Nature of Operations – Substantially all assets, liabilities, revenues, and expenses are related to banking operations, including lending, investing of funds,
obtaining of deposits, trust and wealth management operations, full service brokerage operations, and other financing activities. All of our business offices and the
majority of our business are located in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee.
Use of Estimates – In preparing the consolidated financial statements, management must make certain estimates and assumptions. These estimates and
assumptions affect the amounts reported for assets, liabilities, revenues, and expenses, as well as affecting the disclosures provided. Future results could differ from
the current estimates. Such estimates include, but are not limited to, the allowance for loan and lease losses, valuation of other real estate owned, fair value of
securities and mortgage servicing rights, goodwill, and valuation of deferred tax assets.
The accompanying financial statements have been prepared using values and information currently available to CTBI.
Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in
material future adjustments in asset values, the allowance for loan and lease losses, and capital.
Cash and Cash Equivalents – CTBI considers all liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash
equivalents include cash on hand, amounts due from banks, interest bearing deposits in other financial institutions, and federal funds sold. Generally, federal funds are
sold for one-day periods.
Certificates of Deposit in Other Banks – Certificates of deposit in other banks generally mature within 18 months and are carried at cost.
Investments – Management determines the classification of securities at purchase. We classify securities into held-to-maturity, trading, or available-for-sale
categories. Held-to-maturity securities are those which we have the positive intent and ability to hold to maturity and are reported at amortized cost. In accordance
with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320, Investment Securities, investments in debt securities that are not
classified as held-to-maturity and equity securities that have readily determinable fair values shall be classified in one of the following categories and measured at fair
value in the statement of financial position:
a. Trading securities. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time)
shall be classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the
objective of generating profits on short-term differences in price.
b. Available-for-sale securities. Investments not classified as trading securities (nor as held-to-maturity securities) shall be classified as available-for-sale
securities.
We do not have any securities that are classified as trading securities. Available-for-sale securities are reported at fair value, with unrealized gains and losses included
as a separate component of shareholders’ equity, net of tax. If declines in fair value are other than temporary, the carrying value of the securities is written down to
fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not
credit related.
Gains or losses on disposition of securities are computed by specific identification for all securities except for shares in mutual funds, which are computed by
average cost. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings.
When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair market value is
below amortized cost, additional analysis is performed to determine whether an other than temporary impairment condition exists. Available-for-sale and held-to-
maturity securities are analyzed quarterly for possible other than temporary impairment. The analysis considers (i) whether we have the intent to sell our securities
prior to recovery and/or maturity and (ii) whether it is more likely than not that we will not have to sell our securities prior to recovery and/or maturity. Often, the
information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or
conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on
the CTBI’s results of operations and financial condition.
Loans – Loans with the ability and the intent to be held until maturity and/or payoff are reported at the carrying value of unpaid principal reduced by unearned
interest, an allowance for loan and lease losses, and unamortized deferred fees or costs. Income is recorded on the level yield basis. Interest accrual is discontinued
when management believes, after considering economic and business conditions, collateral value, and collection efforts, that the borrower’s financial condition is such
that collection of interest is doubtful. Any loan greater than 90 days past due must be well secured and in the process of collection to continue accruing interest. Cash
payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured.
Loans are not reclassified as accruing until principal and interest payments remain current for a period of time, generally six months, and future payments appear
reasonably certain. Included in certain loan categories of impaired loans are troubled debt restructurings that were classified as impaired. A restructuring of a debt
constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it
would not otherwise consider.
Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized over the estimated life of the related
loans, leases, or commitments as a yield adjustment.
Allowance for Loan and Lease Losses – We maintain an allowance for loan and lease losses (“ALLL”) at a level that is appropriate to cover estimated
credit losses on individually evaluated loans determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio.
Credit losses are charged and recoveries are credited to the ALLL.
22 We utilize an internal risk grading system for commercial credits. Those larger commercial credits that exhibit probable or observed credit weaknesses are
subject to individual review. The borrower’s cash flow, adequacy of collateral coverage, and other options available to CTBI, including legal remedies, are evaluated.
The review of individual loans includes those loans that are impaired as defined by ASC 310-10-35, Impairment of a Loan. We evaluate the collectability of both
principal and interest when assessing the need for loss provision. Historical loss rates are analyzed and applied to other commercial loans not subject to specific
allocations. The ALLL allocation for this pool of commercial loans is established based on the historical average, maximum, minimum, and median loss ratios.
A loan is considered impaired when, based on current information and events, it is probable that CTBI will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-
by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for
commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable
market price, or the fair value of the collateral if the loan is collateral dependent.
Homogenous loans, such as consumer installment, residential mortgages, and home equity lines are not individually risk graded. The associated ALLL for
these loans is measured under ASC 450, Contingencies.
When any secured commercial loan is considered uncollectable, whether past due or not, a current assessment of the value of the underlying collateral is
made. If the balance of the loan exceeds the fair value of the collateral, the loan is placed on nonaccrual and the loan is charged down to the value of the collateral
less estimated cost to sell or a specific reserve equal to the difference between book value of the loan and the fair value assigned to the collateral is created until such
time as the loan is foreclosed. When the foreclosed collateral has been legally assigned to CTBI, a charge off is taken, if necessary, in order that the remaining
balance reflects the fair value estimated less costs to sell of the collateral then transferred to other real estate owned or other repossessed assets. When any
unsecured commercial loan is considered uncollectable the loan is charged off no later than at 90 days past due.
All closed-end consumer loans (excluding conventional 1-4 family residential loans and installment and revolving loans secured by real estate) are charged off
no later than 120 days (5 monthly payments) delinquent. If a loan is considered uncollectable, it is charged off earlier than 120 days delinquent. For conventional 1-4
family residential loans and installment and revolving loans secured by real estate, when a loan is 90 days past due, a current assessment of the value of the real estate
is made. If the balance of the loan exceeds the fair value of the property, the loan is placed on nonaccrual. Foreclosure proceedings are normally initiated after 120
days. When the foreclosed property has been legally assigned to CTBI, the fair value less estimated costs to sell is transferred to other real estate owned and the
remaining balance is taken as a charge-off.
Historical loss rates for loans are adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss
recognition. We use twelve rolling quarters for our historical loss rate analysis. Factors that we consider include delinquency trends, current economic conditions and
trends, strength of supervision and administration of the loan portfolio, levels of underperforming loans, level of recoveries to prior year’s charge-offs, trends in loan
losses, industry concentrations and their relative strengths, amount of unsecured loans, and underwriting exceptions. Management continually reevaluates the other
subjective factors included in its ALLL analysis.
Loans Held for Sale – Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in
the aggregate. Net unrealized losses, if any, are recognized by charges to income. Gains and losses on loan sales are recorded in noninterest income.
Premises and Equipment – Premises and equipment are stated at cost less accumulated depreciation and amortization. Capital leases are included in
premises and equipment at the capitalized amount less accumulated amortization. Premises and equipment are evaluated for impairment on a quarterly basis.
Depreciation and amortization are computed primarily using the straight-line method. Estimated useful lives range up to 40 years for buildings, 2 to 10 years for
furniture, fixtures, and equipment, and up to the lease term for leasehold improvements. Capitalized leased assets are amortized on a straight-line basis over the lives of
the respective leases.
Federal Home Loan Bank and Federal Reserve Stock – CTB is a member of the Federal Home Loan Bank (“FHLB”) system. Members are required
to own a certain amount of stock based on the level of borrowings and other factors and may invest additional amounts. FHLB stock is carried at cost, classified as a
restricted security, and periodically evaluated for impairment based on the ultimate recovery par value. Both cash and stock dividends are reported as income.
CTB is also a member of its regional Federal Reserve Bank. Federal Reserve Bank stock is carried at cost, classified as a restricted security, and periodically
evaluated for impairment based on the ultimate recovery par value. Both cash and stock dividends are reported as income.
Other Real Estate Owned – When foreclosed properties are acquired, appraisals are obtained and the properties are booked at the current market value less
expected sales costs. Additionally, periodic updated appraisals are obtained on unsold foreclosed properties. When an updated appraisal reflects a market value below
the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected sales costs. Our policy for determining the
frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is
typically between 12 and 18 months but generally not more than 24 months. All revenues and expenses related to the carrying of other real estate owned are
recognized through the income statement.
Goodwill and Core Deposit Intangible – We evaluate total goodwill and core deposit intangible for impairment, based upon ASC 350, Intangibles-
Goodwill and Other, using fair value techniques including multiples of price/equity. Goodwill and core deposit intangible are evaluated for impairment on an annual
basis or as other events may warrant.
The balance of goodwill, at $65.5 million, has not changed since January 1, 2014. The activity to core deposit intangible for the years ended December 31,
2016, 2015, and 2014 is shown below.
23 Core Deposit Intangible:
(in thousands)
Beginning balance, January 1
Amortization
Ending balance, December 31
2016
2015
2014
$
$
291 $
(158)
133 $
477 $
(186)
291 $
690
(213)
477
Amortization of core deposit intangible is estimated at approximately $0.1 million for year one, at which time core deposit intangible will be fully amortized.
Transfers of Financial Assets – Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been isolated from CTBI—put presumptively beyond the reach of the transferor and its
creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge
or exchange the transferred assets, and (3) CTBI does not maintain effective control over the transferred assets through an agreement to repurchase them before their
maturity or the ability to unilaterally cause the holder to return specific assets.
Income Taxes – Income tax expense is based on the taxes due on the consolidated tax return plus deferred taxes based on the expected future tax benefits
and consequences of temporary differences between carrying amounts and tax bases of assets and liabilities, using enacted tax rates. Any interest and penalties
incurred in connection with income taxes are recorded as a component of income tax expense in the consolidated financial statements. During the years ended
December 31, 2016, 2015, and 2014, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes.
Earnings Per Share (“EPS”) – Basic EPS is calculated by dividing net income available to common shareholders by the weighted average number of
common shares outstanding, excluding restricted shares.
Diluted EPS adjusts the number of weighted average shares of common stock outstanding by the dilutive effect of stock options, including restricted shares, as
prescribed in ASC 718, Share-Based Payment.
Segments – Management analyzes the operation of CTBI assuming one operating segment, community banking services. CTBI, through its operating
subsidiaries, offers a wide range of consumer and commercial community banking services. These services include: (i) residential and commercial real estate loans; (ii)
checking accounts; (iii) regular and term savings accounts and savings certificates; (iv) full service securities brokerage services; (v) consumer loans; (vi) debit cards;
(vii) annuity and life insurance products; (viii) Individual Retirement Accounts and Keogh plans; (ix) commercial loans; (x) trust and wealth management services; (xi)
commercial demand deposit accounts; and (xii) repurchase agreements.
Bank Owned Life Insurance – CTBI’s bank owned life insurance policies are carried at their cash surrender value. We recognize tax-free income from the
periodic increases in cash surrender value of these policies and from death benefits.
Mortgage Servicing Rights – Mortgage servicing rights (“MSRs”) are carried at fair market value following the accounting guidance in ASC 860-50,
Servicing Assets and Liabilities. MSRs are valued using Level 3 inputs as defined in ASC 820, Fair Value Measurements. The fair value is determined quarterly
based on an independent third-party valuation using a discounted cash flow analysis and calculated using a computer pricing model. The system used in this evaluation,
Compass Point, attempts to quantify loan level idiosyncratic risk by calculating a risk derived value. As a result, each loan’s unique characteristics determine the
valuation assumptions ascribed to that loan. Additionally, the computer valuation is based on key economic assumptions including the prepayment speeds of the
underlying loans generated using the Andrew Davidson Prepayment Model, FHLMC/FNMA guidelines, the weighted-average life of the loan, the discount rate, the
weighted-average coupon, and the weighted-average default rate, as applicable. Along with the gains received from the sale of loans, fees are received for servicing
loans. These fees include late fees, which are recorded in interest income, and ancillary fees and monthly servicing fees, which are recorded in noninterest income.
Costs of servicing loans are charged to expense as incurred. Changes in fair market value of the MSRs are reported as an increase or decrease to mortgage banking
income.
Share-Based Compensation – CTBI has a share-based employee compensation plan, which is described more fully in note 15 to the consolidated financial
statements. CTBI accounts for this plan under the recognition and measurement principles of ASC 718, Share-Based Payment.
Comprehensive Income – Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other
comprehensive income includes unrealized appreciation (depreciation) on available-for-sale securities and unrealized appreciation (depreciation) on available-for-sale
securities for which a portion of an other than temporary impairment has been recognized in income.
Transfers between Fair Value Hierarchy Levels – Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs),
and Level 3 (significant unobservable inputs) are recognized on the period ending date.
Reclassifications – Certain reclassifications considered to be immaterial have been made in the prior year consolidated financial statements to conform to
current year classifications. These reclassifications had no effect on net income.
New Accounting Standards –
ò
Elimination of Extraordinary Reporting – In January 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-01, Income
Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary
Items. ASU No. 2015-01 eliminated from U.S. GAAP the concept of an extraordinary item. The FASB issued this ASU as part of its initiative to reduce complexity
in accounting standards. The objective of the simplification initiative was to identify, evaluate, and improve areas of U.S. GAAP for which cost and complexity could
be reduced while maintaining or improving the usefulness of the information provided to the users of financial statements. The amendments in this ASU were effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this ASU did not have an impact on CTBI’s
consolidated financial statements as no extraordinary items have been presented.
24 ò
Intangibles – Goodwill and Other – Internal-Use Software – In April 2015, the FASB issued ASU No. 2015-05, Intangibles – Goodwill and
Other – Internal-Use Software (Subtopic 350-40). The amendments in this update provided guidance to customers about whether a cloud computing arrangement
includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the
arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should
account for the arrangement as a service contract. The guidance did not change GAAP for a customer’s accounting for service contracts. In addition, the guidance in
this update supersedes paragraph 350-40-25-16. Consequently, all software licenses within the scope of Subtopic 350-40 are accounted for consistent with other
licenses of intangible assets. For public business entities, the amendments were effective for annual periods, including interim periods within those annual periods,
beginning after December 15, 2015. The adoption of this ASU did not have a material effect on CTBI’s consolidated financial statements.
ò
Income Taxes – In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740). Topic 740 requires an entity to separate
deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. Deferred tax liabilities and assets are
classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. Deferred tax liabilities and assets that are not
related to an asset or liability for financial reporting are classified according to the expected reversal date of the temporary difference. To simplify the presentation of
deferred income taxes, the amendments in this Update require that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of
financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. The previous requirement that deferred
tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount was not affected by the amendments in this Update. For
public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual
periods. This ASU has been implemented with no material impact on CTBI’s consolidated financial statements.
ò
Financial Instruments – Overall – In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10).
The amendments in this Update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than
those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this Update also require an entity to
present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit
risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in
this Update eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial
instruments measured at amortized cost on the balance sheet for public business entities. Public business entities will be required to use the exit price notion when
measuring the fair value of financial instruments for disclosure purposes. This Update is the final version of Proposed ASU 2013-220—Financial Instruments—Overall
(Subtopic 825-10) and Proposed ASU 2013-221—Financial Instruments—Overall (Subtopic 825-10). For public business entities, the amendments in this Update are
effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments should be applied by means of a
cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. The amendments related to equity securities without readily
determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. Management
does not expect an impact on CTBI’s accounting for equity investments as a result of this ASU. At this time, we cannot quantify the change in the fair value
disclosures since we are currently evaluating the full impact of this ASU and are in the planning stages of developing appropriate procedures and processes to comply
with the disclosure requirements of such amendments.
ò
Leases – In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 establishes a right of use model that requires
a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for
sales-type and direct financing leases. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the
lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor does not convey risks and rewards or control,
an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for
public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest
comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted. CTBI has an implementation team working
through the provisions of ASU 2016-02 including reviewing all leases to assess the impact on its accounting and disclosures. CTBI does not anticipate a significant
increase in leasing activity between now and the date of adoption. While we expect the impact of this ASU to be significant, we have not finalized our calculation
of the estimated amounts as we are currently evaluating certain significant variables within the calculation including the impact of individual renewal options and
applicable discount rates for each individual lease.
ò
Investments—Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting – In March 2016,
the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of
Accounting. The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the
level of ownership interest or degree of influence.
The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership
interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity
method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of
acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the
investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the
investment is required.
The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize
through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity
method. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in
the adoption of the equity method.
The amendments became effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 and will not
have a material impact on CTBI’s consolidated financial statements.
25 ò
Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting – In April 2016, the FASB issued
Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment
awards to their employees.
Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of
awards as either equity or liabilities; and (c) classification on the statement of cash flows.
For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.
CTBI adopted this ASU effective January 1, 2017, and it will not have a material impact on our consolidated financial statements.
ò
Revenue from Contracts with Customers – In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The
core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for some costs to
obtain or fulfill a contract with a customer, as well as enhanced disclosure requirements. In August 2015, the FASB issued ASU 2015-14 which deferred the effective
date of ASU 2014-09 to fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2017. In March 2016, the FASB issued
ASU 2016-08 which clarified the revenue recognition implementation guidance on principal versus agent considerations and is effective during the same period as ASU
2014-09. In April 2016, the FASB issued ASU 2016-10 which clarified the revenue recognition guidance regarding the identification of performance obligations and the
licensing implementation and is effective during the same period as ASU 2014-09. In May 2016, the FASB issued ASU 2016-12 which narrowly amended the revenue
recognition guidance regarding collectability, noncash consideration, presentation of sales tax, and transition. ASU 2016-12 is effective during the same period as ASU
2014-09. Management is currently evaluating the effects of these ASUs on its financial statements and disclosures but does not expect a material impact on CTBI’s
consolidated financial statements, as we have determined the majority of the revenues earned by CTBI are not within the scope of ASU 2014-09.
ò
Accounting for Credit Losses – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments. The provisions of ASU 2016-13 were issued to provide financial statement users with more decision-
useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for
investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at
each reporting date. This ASU requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an
allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable incurred loss recognition in current
GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current
conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.
For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized
cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for
credit losses on PCD assets are recognized through the statement of income as a credit loss expense.
Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the
security.
ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. CTBI has an implementation team working through the provisions of
ASU 2016-13 including assessing the impact on its accounting and disclosures.
ò
Statement of Cash Flows – In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments. Stakeholders indicated that there is diversity in practice in how certain cash receipts and cash payments are presented
and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This ASU addresses the following eight specific cash flow
issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are
insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the
settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies
(BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application
of the predominance principle. The amendments in this Update apply to all entities that are required to present a statement of cash flows under Topic 230. This
Update is the final version of Proposed Accounting Standards Update EITF-15F—Statement of Cash Flows—Classification of Certain Cash Receipts and Cash
Payments (Topic 230), which has been deleted. The amendments in this Update are effective for public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. The amendments in this Update should be applied using a retrospective transition method to each period
presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of
the earliest date practicable. Management intends to adopt this ASU effective January 1, 2018, and we do not expect a material impact on CTBI’s consolidated
financial statements.
ò
Simplifying the Test for Goodwill Impairment – In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other
(Topic 350) – Simplifying the Test for Goodwill Impairment. These amendments eliminate Step 2 from the goodwill impairment test. The amendments also
eliminate the requirements from any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to
perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative
impairment test is necessary. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods with those fiscal years. ASU 2017-04
should be implemented on a prospective basis. Management does not expect ASU 2017-04 to have an impact on CTBI’s consolidated financial statements.
26 ò
Accounting Changes and Error Correction and Investments – Equity Method and Joint Ventures – In January 2017, the FASB issued
ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments -Equity Method and Joint Ventures (Topic 323): Amendments to
SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. ASU 2017-03 provides amendments
that add paragraph 250-10-S99-6 which includes the text of "SEC Staff Announcement: Disclosure of the Impact That Recently Issued Accounting Standards Will
Have on the Financial Statements of a Registrant When Such Standards Are Adopted in a Future Period (in accordance with Staff Accounting Bulletin (SAB) Topic
11.M). This announcement applies to ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606); ASU No. 2016-02, Leases (Topic 842); and ASU
2016-03, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent amendments. CTBI has
enhanced its disclosures regarding the impact of recently issued accounting standards adopted in a future period will have on its accounting and disclosures in this
footnote.
2. Cash and Due from Banks and Interest Bearing Deposits
Included in cash and due from banks and interest bearing deposits are amounts required to be held at the Federal Reserve or maintained in vault cash in
accordance with regulatory reserve requirements. The balance requirements were $74.1 million and $69.4 million at December 31, 2016 and 2015, respectively.
At December 31, 2016, CTBI had cash accounts which exceeded federally insured limits, and therefore are not subject to FDIC insurance, with $93.4 million
in deposits with the Federal Reserve, $23.3 million in deposits with Fifth Third Bank, and $2.2 million in deposits with the Federal Home Loan Bank.
3. Securities
Securities are classified into held-to-maturity and available-for-sale categories. Held-to-maturity (HTM) securities are those that CTBI has the positive intent
and ability to hold to maturity and are reported at amortized cost. Available-for-sale (AFS) securities are those that CTBI may decide to sell if needed for liquidity,
asset-liability management or other reasons. Available-for-sale securities are reported at fair value, with unrealized gains or losses included as a separate component
of equity, net of tax.
The amortized cost and fair value of securities at December 31, 2016 are summarized as follows:
Available-for-Sale
(in thousands)
U.S. Treasury and government agencies
State and political subdivisions
U.S. government sponsored agency mortgage-backed securities
Total debt securities
CRA investment funds
Total available-for-sale securities
Held-to-Maturity
(in thousands)
U.S. Treasury and government agencies
State and political subdivisions
Total held-to-maturity securities
Available-for-Sale
(in thousands)
U.S. Treasury and government agencies
State and political subdivisions
U.S. government sponsored agency mortgage-backed securities
Total debt securities
CRA investment funds
Total available-for-sale securities
Held-to-Maturity
(in thousands)
U.S. Treasury and government agencies
State and political subdivisions
Total held-to-maturity securities
Amortized Cost
$
223,014 $
133,351
227,574
583,939
25,000
608,939 $
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
193 $
1,957
1,008
3,158
76
3,234 $
(743) $
(1,792)
(3,526)
(6,061)
(718)
(6,779) $
222,464
133,516
225,056
581,036
24,358
605,394
Amortized Cost
$
0 $
866
866 $
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
0 $
1
1 $
0 $
0
0 $
0
867
867
Amortized Cost
$
240,434 $
125,665
202,282
568,381
25,000
593,381 $
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
311 $
3,707
1,564
5,582
132
5,714 $
(1,351) $
(157)
(2,270)
(3,778)
(381)
(4,159) $
239,394
129,215
201,576
570,185
24,751
594,936
Amortized Cost
$
480 $
1,181
1,661 $
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Value
0 $
2
2 $
(12) $
0
(12) $
468
1,183
1,651
$
$
$
$
The amortized cost and fair value of securities at December 31, 2015 are summarized as follows:
27
The amortized cost and fair value of securities at December 31, 2016 by contractual maturity are shown below. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-Sale
Held-to-Maturity
(in thousands)
Due in one year or less
Due after one through five years
Due after five through ten years
Due after ten years
U.S. government sponsored agency mortgage-backed securities
Total debt securities
CRA investment funds
Total securities
Amortized Cost
$
104,396 $
101,799
60,047
90,123
227,574
583,939
25,000
608,939 $
Fair Value
Amortized Cost
Fair Value
104,383 $
102,135
60,358
89,104
225,056
581,036
24,358
605,394 $
0 $
866
0
0
0
866
0
866 $
0
867
0
0
0
867
0
867
$
In 2016, there was a net gain of $522 thousand realized on sales and calls of AFS securities, consisting of a pre-tax gain of $529 thousand and a pre-tax loss of
$7 thousand. There was a net loss of $106 thousand realized in 2015 and a net loss of $211 thousand realized in 2014.
The amortized cost of securities pledged as collateral, to secure public deposits and for other purposes, was $221.2 million at December 31, 2016 and $228.2
million at December 31, 2015.
The amortized cost of securities sold under agreements to repurchase amounted to $303.5 million at December 31, 2016 and $285.5 million at December 31,
2015.
CTBI evaluates its investment portfolio on a quarterly basis for impairment. The analysis performed as of December 31, 2016 indicates that all impairment is
considered temporary, market and interest rate driven, and not credit-related. The percentage of total investments with unrealized losses as of December 31, 2016 was
65.6% compared to 61.1% as of December 31, 2015. The following tables provide the amortized cost, gross unrealized losses, and fair market value, aggregated by
investment category and length of time the individual securities have been in a continuous unrealized loss position as of December 31, 2016 that are not deemed to be
other-than-temporarily impaired.
Available-for-Sale
(in thousands)
Less Than 12 Months
U.S. Treasury and government agencies
State and political subdivisions
U.S. government sponsored agency mortgage-backed securities
Total debt securities
CRA investment funds
Total <12 months temporarily impaired AFS securities
12 Months or More
U.S. Treasury and government agencies
State and political subdivisions
U.S. government sponsored agency mortgage-backed securities
Total debt securities
CRA investment funds
Total ≥12 months temporarily impaired AFS securities
Total
U.S. Treasury and government agencies
State and political subdivisions
U.S. government sponsored agency mortgage-backed securities
Total debt securities
CRA investment funds
Total temporarily impaired AFS securities
Held-to-Maturity
(in thousands)
12 Months or More
U.S. Treasury and government agencies
Total temporarily impaired HTM securities
U.S. Treasury and Government Agencies
Amortized Cost
Gross Unrealized
Losses
Fair Value
$
$
158,732 $
53,491
135,939
348,162
17,500
365,662
1,880
751
31,132
33,763
5,000
38,763
160,612
54,242
167,071
381,925
22,500
404,425 $
(716) $
(1,780)
(2,646)
(5,142)
(444)
(5,586)
(27)
(12)
(880)
(919)
(274)
(1,193)
(743)
(1,792)
(3,526)
(6,061)
(718)
(6,779) $
158,016
51,711
133,293
343,020
17,056
360,076
1,853
739
30,252
32,844
4,726
37,570
159,869
52,450
163,545
375,864
21,782
397,646
Amortized Cost
Gross Unrealized
Losses
Fair Value
$
$
0 $
0 $
0 $
0 $
0
0
The unrealized losses in U.S. Treasury and government agencies were caused by interest rate increases. The contractual terms of those investments do not
permit the issuer to settle the securities at a price less than par which will equal amortized cost at maturity. CTBI does not consider those investments to be other-
than-temporarily impaired at December 31, 2016, because CTBI does not intend to sell the investments and it is not more likely than not that we will be required to sell
the investments before recovery of their amortized cost, which may be maturity.
28
State and Political Subdivisions
The unrealized losses in securities of state and political subdivisions were caused by interest rate increases. The contractual terms of those investments do not
permit the issuer to settle the securities at a price less than par which will equal amortized cost at maturity. CTBI does not consider those investments to be other-
than-temporarily impaired at December 31, 2016, because CTBI does not intend to sell the investments before recovery of their amortized cost and it is not more likely
than not that we will be required to sell the investments before recovery of their amortized cost, which may be maturity.
U.S. Government Sponsored Agency Mortgage-Backed Securities
The unrealized losses in U.S. government sponsored agency mortgage-backed securities were caused by interest rate increases. CTBI expects to recover the
amortized cost basis over the term of the securities. CTBI does not consider those investments to be other-than-temporarily impaired at December 31, 2016, because
(i) the decline in market value is attributable to changes in interest rates and not credit quality, (ii) CTBI does not intend to sell the investments, and (iii) it is not more
likely than not we will be required to sell the investments before recovery of their amortized cost, which may be maturity.
CRA Investment Funds
CTBI’s CRA investment funds consist of investments in fixed income mutual funds ($24.4 million of the total fair value and $718 thousand of the total
unrealized losses in common stock investments). The severity of the impairment (fair value is approximately 2.9% less than cost) and the duration of the impairment
correlates with the decline in long-term interest rates in 2016. CTBI evaluated the near-term prospects of these funds in relation to the severity and duration of the
impairment. Based on that evaluation, CTBI does not consider those investments to be other-than-temporarily impaired at December 31, 2016.
The analysis performed as of December 31, 2015 indicated that all impairment was considered temporary, market and interest rate driven, and not credit-
related. The following tables provide the amortized cost, gross unrealized losses, and fair market value, aggregated by investment category and length of time the
individual securities have been in a continuous unrealized loss position as of December 31, 2015 that are not deemed to be other-than-temporarily impaired.
Available-for-Sale
(in thousands)
Less Than 12 Months
U.S. Treasury and government agencies
State and political subdivisions
U.S. government sponsored agency mortgage-backed securities
Total debt securities
CRA investment funds
Total <12 months temporarily impaired AFS securities
12 Months or More
U.S. Treasury and government agencies
State and political subdivisions
U.S. government sponsored agency mortgage-backed securities
Total debt securities
CRA investment funds
Total ≥12 months temporarily impaired AFS securities
Total
U.S. Treasury and government agencies
State and political subdivisions
U.S. government sponsored agency mortgage-backed securities
Total debt securities
CRA investment funds
Total temporarily impaired AFS securities
Held-to-Maturity
(in thousands)
12 Months or More
U.S. Treasury and government agencies
Total temporarily impaired HTM securities
Amortized Cost
Gross Unrealized
Losses
Fair Value
$
$
142,147 $
11,190
92,009
245,346
10,000
255,346
54,773
3,187
49,908
107,868
5,000
112,868
196,920
14,377
141,917
353,214
15,000
368,214 $
(487) $
(106)
(899)
(1,492)
(183)
(1,675)
(864)
(51)
(1,371)
(2,286)
(198)
(2,484)
(1,351)
(157)
(2,270)
(3,778)
(381)
(4,159) $
141,660
11,084
91,110
243,854
9,817
253,671
53,909
3,136
48,537
105,582
4,802
110,384
195,569
14,220
139,647
349,436
14,619
364,055
Amortized Cost
Gross Unrealized
Losses
Fair Value
$
$
480 $
480 $
(12) $
(12) $
468
468
29
4. Loans
Major classifications of loans, net of unearned income, deferred loan origination costs, and net premiums on acquired loans, are summarized as follows:
(in thousands)
Commercial construction
Commercial secured by real estate
Equipment lease financing
Commercial other
Real estate construction
Real estate mortgage
Home equity
Consumer direct
Consumer indirect
Total loans
December 31
2016
December 31
2015
$
$
66,998 $
1,085,428
5,512
350,159
57,966
702,969
91,511
133,093
444,735
2,938,371 $
78,020
1,052,919
8,514
358,898
61,750
707,874
89,450
126,406
390,130
2,873,961
CTBI has segregated and evaluates its loan portfolio through nine portfolio segments. CTBI serves customers in small and mid-sized communities in eastern,
northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. Therefore, CTBI’s exposure to credit risk is significantly
affected by changes in these communities.
Commercial construction loans are for the purpose of erecting or rehabilitating buildings or other structures for commercial purposes, including any
infrastructure necessary for development. Included in this category are improved property, land development, and tract development loans. The terms of these loans
are generally short-term with permanent financing upon completion.
Commercial real estate loans include loans secured by nonfarm, nonresidential properties, 1-4 family/multi-family properties, farmland, and other commercial
real estate. These loans are originated based on the borrower’s ability to service the debt and secondarily based on the fair value of the underlying collateral.
Equipment lease financing loans are fixed, variable, and tax exempt leases for commercial purposes.
Commercial other loans consist of commercial check loans, agricultural loans, receivable financing, floorplans, loans to financial institutions, loans for
purchasing or carrying securities, and other commercial purpose loans. Commercial loans are underwritten based on the borrower’s ability to service debt from the
business’s underlying cash flows. As a general practice, we obtain collateral such as real estate, equipment, or other assets, although such loans may be
uncollateralized but guaranteed.
Real estate construction loans are typically for owner-occupied properties. The terms of these loans are generally short-term with permanent financing upon
completion.
Residential real estate loans are a mixture of fixed rate and adjustable rate first and second lien residential mortgage loans. As a policy, CTBI holds adjustable
rate loans and sells the majority of its fixed rate first lien mortgage loans into the secondary market. Changes in interest rates or market conditions may impact a
borrower’s ability to meet contractual principal and interest payments. Residential real estate loans are secured by real property.
Home equity lines are revolving adjustable rate credit lines secured by real property.
Consumer direct loans are fixed rate products comprised of unsecured loans, consumer revolving credit lines, deposit secured loans, and all other consumer
purpose loans.
Consumer indirect loans are fixed rate loans secured by automobiles, trucks, vans, and recreational vehicles originated at the selling dealership underwritten and
purchased by CTBI’s indirect lending department. Both new and used products are financed. Only dealers who have executed dealer agreements with CTBI
participate in the indirect lending program.
Not included in the loan balances above were loans held for sale in the amount of $1.2 million at December 31, 2016 and 2015.
Refer to note 1 to the condensed consolidated financial statements for further information regarding our nonaccrual policy. Nonaccrual loans segregated by
class of loans were as follows:
(in thousands)
Commercial:
Commercial construction
Commercial secured by real estate
Commercial other
Residential:
Real estate construction
Real estate mortgage
Home equity
Consumer:
Consumer direct
Total nonaccrual loans
December 31
2016
December 31
2015
$
$
1,912 $
6,326
1,559
11
6,260
555
0
16,623 $
3,402
5,928
1,485
249
5,206
183
110
16,563
30
The following tables present CTBI’s loan portfolio aging analysis, segregated by class, as of December 31, 2016 and 2015:
(in thousands)
Commercial:
30-59 Days Past
Due
60-89 Days Past
Due
90+ Days Past
Due
Total Past Due
Current
Total Loans
90+ and
Accruing*
December 31, 2016
$
Commercial construction
Commercial secured by real
estate
Equipment lease financing
Commercial other
Residential:
Real estate construction
Real estate mortgage
Home equity
Consumer:
Consumer direct
Consumer indirect
Total
$
22 $
0 $
1,940 $
1,962 $
65,036 $
66,998 $
2,033
0
997
707
1,493
829
873
3,288
10,242 $
478
0
122
42
5,278
288
265
851
7,324 $
8,847
0
1,235
152
10,695
905
68
681
24,523 $
11,358
0
2,354
901
17,466
2,022
1,206
4,820
42,089 $
1,074,070
5,512
347,805
57,065
685,503
89,489
131,887
439,915
2,896,282 $
1,085,428
5,512
350,159
57,966
702,969
91,511
133,093
444,735
2,938,371 $
28
3,015
0
141
152
6,295
467
68
681
10,847
(in thousands)
Commercial:
30-59 Days Past
Due
60-89 Days Past
Due
90+ Days Past
Due
Total Past Due
Current
Total Loans
90+ and
Accruing*
December 31, 2015
$
Commercial construction
Commercial secured by real
estate
Equipment lease financing
Commercial other
Residential:
Real estate construction
Real estate mortgage
Home equity
Consumer:
Consumer direct
Consumer indirect
Total
$
36 $
6 $
3,431 $
3,473 $
74,547 $
78,020 $
2,947
199
762
443
1,128
527
835
2,133
9,010 $
622
0
121
62
3,888
148
479
814
6,140 $
7,923
0
1,476
291
10,907
580
126
395
25,129 $
11,492
199
2,359
796
15,923
1,255
1,440
3,342
40,279 $
1,041,427
8,315
356,539
60,954
691,951
88,195
124,966
386,788
2,833,682 $
1,052,919
8,514
358,898
61,750
707,874
89,450
126,406
390,130
2,873,961 $
30
3,757
0
310
55
6,925
448
126
395
12,046
*90+ and Accruing are also included in 90+ Days Past Due column.
The risk characteristics of CTBI’s material portfolio segments are as follows:
Commercial construction loans generally are made to customers for the purpose of building income-producing properties. Personal guarantees of the principals
are generally required. Such loans are made on a projected cash flow basis and are secured by the project being constructed. Construction loan draw procedures are
included in each specific loan agreement, including required documentation items and inspection requirements. Construction loans may convert to term loans at the end
of the construction period, or may be repaid by the take-out commitment from another financing source. If the loan is to convert to a term loan, the repayment ability is
based on the borrower’s projected cash flow. Risk is mitigated during the construction phase by requiring proper documentation and inspections whenever a draw is
requested. Loans in amounts greater than $500,000 generally require a performance bond to be posted by the general contractor to assure completion of the project.
Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically
involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the
business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the
general economy. Management monitors and evaluates commercial real estate loans based on collateral and risk grade criteria.
Equipment lease financing is underwritten by our commercial lenders using the same underwriting standards as would be applied to a secured commercial loan
requesting 100% financing. The pricing for equipment lease financing is comparable to that of borrowers with similar quality commercial credits with similar collateral.
Maximum terms of equipment leasing are determined by the type and expected life of the equipment to be leased. Residual values are determined by appraisals or
opinion letters from industry experts. Leases must be in conformity with our consolidated annual tax plan. As we underwrite our equipment lease financing in a
manner similar to our commercial loan portfolio described below, the risk characteristics for this portfolio mirror that of the commercial loan portfolio.
Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The
cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the
assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans
may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be
substantially dependent on the ability of the borrower to collect amounts due from its customers.
With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, CTBI generally establishes a maximum loan-to-
value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family
residences. Residential construction loans are handled through the home mortgage area of the bank. The repayment ability of the borrower and the maximum loan-to-
value ratio are calculated using the normal mortgage lending criteria. Draws are processed based on percentage of completion stages including normal inspection
procedures. Such loans generally convert to term loans after the completion of construction.
31
Consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment
loans and certain lines of credit. Our determination of a borrower’s ability to repay these loans is primarily dependent on the personal income and credit rating of the
borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in
property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
The indirect lending area of the bank generally deals with purchasing/funding consumer contracts with new and used automobile dealers. The dealers generate
consumer loan applications which are forwarded to the indirect loan processing area for approval or denial. Loan approvals or denials are based on the
creditworthiness and repayment ability of the borrower, and on the collateral value. The dealers may have recourse agreements with CTB.
Credit Quality Indicators:
CTBI categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial
information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. CTBI also considers the fair
value of the underlying collateral and the strength and willingness of the guarantor(s). CTBI analyzes commercial loans individually by classifying the loans as to credit
risk. Loans classified as loss, doubtful, substandard, or special mention are reviewed quarterly by CTBI for further deterioration or improvement to determine if
appropriately classified and valued if deemed impaired. All other commercial loan reviews are completed every 12 to 18 months. In addition, during the renewal
process of any loan, as well as if a loan becomes past due or if other information becomes available, CTBI will evaluate the loan grade. CTBI uses the following
definitions for risk ratings:
ò=Pass grades include investment grade, low risk, moderate risk, and acceptable risk loans. The loans range from loans that have no chance of resulting in a loss
to loans that have a limited chance of resulting in a loss. Customers in this grade have excellent to fair credit ratings. The cash flows are adequate to meet
required debt repayments.
ò=Watch graded loans are loans that warrant extra management attention but are not currently criticized. Loans on the watch list may be potential troubled
credits or may warrant “watch” status for a reason not directly related to the asset quality of the credit. The watch grade is a management tool to identify
credits which may be candidates for future classification or may temporarily warrant extra management monitoring.
ò=Other assets especially mentioned (OAEM) reflects loans that are currently protected but are potentially weak. These loans constitute an undue and
unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an unwarranted
risk in light of circumstances surrounding a specific asset. Loans in this grade display potential weaknesses which may, if unchecked or uncorrected,
inadequately protect CTBI’s credit position at some future date. The loans may be adversely affected by economic or market conditions.
ò=Substandard grading indicates that the loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral
pledged. These loans have a well-defined weakness or weaknesses that jeopardize the orderly liquidation of the debt with the distinct possibility that CTBI will
sustain some loss if the deficiencies are not corrected.
ò=Doubtful graded loans have the weaknesses inherent in the substandard grading with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The probability of loss is extremely high,
but because of certain important and reasonably specific pending factors which may work to CTBI’s advantage or strengthen the asset(s), its classification as
an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures,
capital injection, perfecting liens on additional collateral, and refinancing plans.
The following tables present the credit risk profile of CTBI’s commercial loan portfolio based on rating category and payment activity, segregated by class of
loans, as of December 31, 2016 and 2015:
(in thousands)
December 31, 2016
Pass
Watch
OAEM
Substandard
Doubtful
Total
December 31, 2015
Pass
Watch
OAEM
Substandard
Doubtful
Total
Commercial
Construction
Commercial
Secured by Real
Estate
Equipment Leases
Commercial
Other
Total
$
$
$
$
55,315 $
3,366
2,535
5,592
190
66,998 $
62,978 $
4,931
2,206
6,780
1,125
78,020 $
975,383 $
51,932
25,772
31,945
396
1,085,428 $
937,196 $
71,830
13,765
29,232
896
1,052,919 $
5,206 $
137
169
0
0
5,512 $
8,514 $
0
0
0
0
8,514 $
299,301 $
32,780
7,913
9,599
566
350,159 $
312,100 $
37,670
963
7,072
1,093
358,898 $
1,335,205
88,215
36,389
47,136
1,152
1,508,097
1,320,788
114,431
16,934
43,084
3,114
1,498,351
32
The following tables present the credit risk profile of CTBI’s residential real estate and consumer loan portfolios based on performing or nonperforming status,
segregated by class, as of December 31, 2016 and 2015:
(in thousands)
December 31, 2016
Performing
Nonperforming (1)
Total
December 31, 2015
Performing
Nonperforming (1)
Total
Real Estate
Construction
Real Estate
Mortgage
Home Equity
Consumer
Direct
Consumer
Indirect
Total
$
$
$
$
57,803 $
163
57,966 $
61,446 $
304
61,750 $
690,414 $
12,555
702,969 $
695,743 $
12,131
707,874 $
90,489 $
1,022
91,511 $
88,819 $
631
89,450 $
133,025 $
68
133,093 $
444,054 $
681
444,735 $
126,170 $
236
126,406 $
389,735 $
395
390,130 $
1,415,785
14,489
1,430,274
1,361,913
13,697
1,375,610
(1) A loan is considered nonperforming if it is 90 days or more past due or on nonaccrual.
The total of consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings are in process totaled $3.5 million at
December 31, 2016 compared to $4.4 million at December 31, 2015.
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it
is probable CTBI will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include
nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing
financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other
actions intended to maximize collection.
The following table presents impaired loans, the average investment in impaired loans, and interest income recognized on impaired loans for the years ended
December 31, 2016, 2015, and 2014:
(in thousands)
Loans without a specific valuation allowance:
Commercial construction
Commercial secured by real estate
Commercial other
Real estate mortgage
Loans with a specific valuation allowance:
Commercial construction
Commercial secured by real estate
Commercial other
Totals:
Commercial construction
Commercial secured by real estate
Commercial other
Real estate mortgage
Total
December 31, 2016
Recorded
Balance
Unpaid
Contractual
Principal
Balance
Specific
Allowance
Average
Investment in
Impaired Loans
*Interest Income
Recognized
$
$
4,102 $
29,025
11,215
1,483
1,507
4,731
139
5,609
33,756
11,354
1,483
52,202 $
4,123 $
29,594
13,155
1,483
1,509
5,885
139
5,632
35,479
13,294
1,483
55,888 $
0 $
0
0
0
213
1,035
65
213
1,035
65
0
1,313 $
4,367 $
31,136
11,561
1,691
2,290
4,151
483
6,657
35,287
12,044
1,691
55,679 $
218
1,609
632
52
0
19
0
218
1,628
632
52
2,530
33
December 31, 2015
Recorded
Balance
Unpaid
Contractual
Principal
Balance
Specific
Allowance
Average
Investment in
Impaired Loans
*Interest Income
Recognized
$
2,861
30,761
7,500
1,744
$
2,862
32,166
9,148
1,744
$
0
0
0
0
$
4,574
30,605
8,802
1,179
(in thousands)
Loans without a specific valuation allowance:
Commercial construction
Commercial secured by real estate
Commercial other
Real estate mortgage
Loans with a specific valuation allowance:
Commercial construction
Commercial secured by real estate
Commercial other
Totals:
Commercial construction
Commercial secured by real estate
Commercial other
Real estate mortgage
Total
(in thousands)
Loans without a specific valuation allowance:
Commercial construction
Commercial secured by real estate
Commercial other
Real estate mortgage
Loans with a specific valuation allowance:
Commercial construction
Commercial secured by real estate
Commercial other
Totals:
Commercial construction
Commercial secured by real estate
Commercial other
Real estate mortgage
Total
$
$
$
$
3,402
2,660
960
6,263
33,421
8,460
1,744
49,888
Recorded
Balance
5,653
31,639
13,069
1,277
3,974
2,718
738
9,627
34,357
13,807
1,277
59,068
$
$
$
200
1,378
316
50
0
7
1
200
1,385
317
50
1,952
3,402
2,768
1,153
6,264
34,934
10,301
1,744
53,243
$
831
1,227
403
831
1,227
403
0
2,461
$
3,631
2,349
836
8,205
32,954
9,638
1,179
51,976
$
December 31, 2014
Unpaid
Contractual
Principal
Balance
Specific
Allowance
Average
Investment in
Impaired Loans
*Interest Income
Recognized
$
5,654
33,268
14,597
1,277
3,974
2,876
862
9,628
36,144
15,459
1,277
62,508
$
$
0
0
0
0
734
827
181
734
827
181
0
1,742
$
$
5,415
34,650
15,663
1,507
4,216
4,376
531
9,631
39,026
16,194
1,507
66,358
$
205
1,180
783
53
0
11
1
205
1,191
784
53
2,233
*Cash basis interest is substantially the same as interest income recognized.
Included in certain loan categories of impaired loans are certain loans and leases that have been modified in a troubled debt restructuring, where economic
concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could
include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Modifications of terms for our loans and their
inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may
involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral of principal and/or interest payments, regardless of the period of
the modification. All of the loans identified as troubled debt restructuring were modified due to financial stress of the borrower. In order to determine if a borrower is
experiencing financial difficulty, an evaluation is performed to determine the probability that the borrower will be in payment default on any of its debt in the foreseeable
future with the modification. This evaluation is performed under CTBI’s internal underwriting policy.
When we modify loans and leases in a troubled debt restructuring, we evaluate any possible impairment similar to other impaired loans based on the present
value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or use the current fair value of the collateral,
less selling costs for collateral dependent loans. If we determined that the value of the modified loan is less than the recorded investment in the loan (net of previous
charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the
allowance. In periods subsequent to modification, we evaluate all troubled debt restructuring, including those that have payment defaults, for possible impairment and
recognize impairment through the allowance.
34 During 2016, certain loans were modified in troubled debt restructurings, where economic concessions were granted to borrowers consisting of reductions in
the interest rates, payment extensions, forgiveness of principal, and forbearances. Presented below, segregated by class of loans, are troubled debt restructurings that
occurred during the years ended December 31, 2016 and 2015:
(in thousands)
Commercial:
Commercial construction
Commercial secured by real estate
Commercial other
Residential:
Real estate mortgage
Total troubled debt restructurings
(in thousands)
Commercial:
Commercial construction
Commercial secured by real estate
Commercial other
Residential:
Real estate mortgage
Total troubled debt restructurings
Number of Loans
Term
Modification
Rate Modification
Combination
Post-Modification
Outstanding
Balance
Year Ended
December 31, 2016
1 $
27
14
1
43 $
1,288 $
8,827
5,088
0
15,203 $
0 $
0
0
0
0 $
0 $
581
87
281
949 $
1,288
9,408
5,175
281
16,152
Number of Loans
Term
Modification
Rate Modification
Combination
Post-Modification
Outstanding
Balance
Year Ended
December 31, 2015
3 $
21
7
3
34 $
428 $
4,244
3,847
0
8,519 $
0 $
0
0
0
0 $
0 $
1,760
0
848
2,608 $
428
6,004
3,847
848
11,127
No charge-offs have resulted from modifications for any of the presented periods. We have commitments to extend additional credit in the amount of $0.1
million on loans that are considered troubled debt restructurings.
Loans retain their accrual status at the time of their modification. As a result, if a loan is on nonaccrual at the time it is modified, it stays as nonaccrual, and if a
loan is on accrual at the time of the modification, it generally stays on accrual. Commercial and consumer loans modified in a troubled debt restructuring are closely
monitored for delinquency as an early indicator of possible future default. If loans modified in a troubled debt restructuring subsequently default, CTBI evaluates the
loan for possible further impairment. The allowance for loan and lease losses may be increased, adjustments may be made in the allocation of the allowance, or partial
charge-offs may be taken to further write-down the carrying value of the loan. Presented below, segregated by class of loans, are loans that were modified as troubled
debt restructurings within the past twelve months which have subsequently defaulted. CTBI considers a loan in default when it is 90 days or more past due or
transferred to nonaccrual.
(in thousands)
Commercial:
Commercial secured by real estate
Commercial other
Total defaulted restructured loans
(in thousands)
Commercial:
Commercial secured by real estate
Total defaulted restructured loans
Year Ended
December 31, 2016
Number of Loans
Recorded
Balance
1 $
1
2 $
67
12
79
Year Ended
December 31, 2015
Number of Loans
Recorded
Balance
3 $
3 $
114
114
5. Mortgage Banking and Servicing Rights
Mortgage banking activities primarily include residential mortgage originations and servicing. As discussed in note 1 above, mortgage servicing rights
(“MSRs”) are carried at fair market value. The fair value is determined quarterly based on an independent third-party valuation using a discounted cash flow analysis
and calculated using a computer pricing model. The system used in this evaluation, Compass Point, attempts to quantify loan level idiosyncratic risk by calculating a
risk derived value. As a result, each loan’s unique characteristics determine the valuation assumptions ascribed to that loan. Additionally, the computer valuation is
based on key economic assumptions including the prepayment speeds of the underlying loans generated using the Andrew Davidson Prepayment Model,
FHLMC/FNMA guidelines, the weighted average life of the loan, the discount rate, the weighted average coupon, and the weighted-average default rate, as
applicable. Along with the gains received from the sale of loans, fees are received for servicing loans. These fees include late fees, which are recorded in interest
income, and ancillary fees and monthly servicing fees, which are recorded in noninterest income. Costs of servicing loans are charged to expense as incurred.
Changes in fair market value of the MSRs are reported as an increase or decrease to mortgage banking income.
35
The following table presents the components of mortgage banking income:
(in thousands)
Year Ended December 31
Net gain on sale of loans held for sale
Net loan servicing income (expense)
Servicing fees
Late fees
Ancillary fees
Fair value adjustments
Net loan servicing income
Mortgage banking income
2016
2015
2014
$
1,831 $
1,978 $
1,239
78
322
(324)
1,315
3,146 $
1,197
88
212
(289)
1,208
3,186 $
$
1,468
1,129
112
149
(830)
560
2,028
Mortgage loans serviced for others are not included in the accompanying balance sheets. Loans serviced for the benefit of others (primarily FHLMC) totaled
$466 million, $458 million, and $441 million at December 31, 2016, 2015 and 2014, respectively. Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors, and processing foreclosures. Custodial escrow balances maintained in connection with the
foregoing loan servicing, and included in demand deposits, were approximately $1.0 million, $1.0 million, and $0.9 million at December 31, 2016, 2015, and 2014,
respectively.
Activity for capitalized mortgage servicing rights using the fair value method is as follows:
(in thousands)
Fair value of MSRs, beginning of period
New servicing assets created
Change in fair value during the period due to:
Time decay (1)
Payoffs (2)
Changes in valuation inputs or assumptions (3)
Fair value of MSRs, end of period
2016
2015
2014
3,236 $
521
(175)
(313)
164
3,433 $
2,968 $
557
(168)
(247)
126
3,236 $
3,424
374
(162)
(202)
(466)
2,968
$
$
(1) Represents decrease in value due to regularly scheduled loan principal payments and partial loan paydowns.
(2) Represents decrease in value due to loans that paid off during the period.
(3) Represents change in value resulting from market-driven changes in interest rates.
The fair values of capitalized mortgage servicing rights were $3.4 million, $3.2 million, and $3.0 million at December 31, 2016, 2015, and 2014, respectively.
Fair values for the years ended December 31, 2016, 2015, and 2014 were determined by third-party valuations with a resulting 10.1% average discount rate over the
last three years, respectively, and weighted average default rates of 3.02%, 2.64%, and 3.61%, respectively. Prepayment speeds generated using the Andrew
Davidson Prepayment Model averaged 9.5%, 10.0%, and 11.3% at December 31, 2016, 2015, and 2014, respectively. MSR values are very sensitive to movement in
interest rates as expected future net servicing income depends on the projected balance of the underlying loans, which can be greatly impacted by the level of
prepayments. CTBI does not currently hedge against changes in the fair value of its MSR portfolio.
6. Related Party Transactions
In the ordinary course of business, CTB has made extensions of credit and had transactions with certain directors and executive officers of CTBI or our
subsidiaries, including their associates (as defined by the Securities and Exchange Commission). We believe such extensions of credit and transactions were made on
substantially the same terms, including interest rate and collateral, as those prevailing at the same time for comparable transactions with other persons.
Activity for related party extensions of credit during 2016 and 2015 is as follows:
(in thousands)
Related party extensions of credit, beginning of period
New loans and advances on lines of credit
Repayments
Related party extensions of credit, end of period
2016
2015
$
$
29,224 $
2,456
(4,599)
27,081 $
37,473
867
(9,116)
29,224
The aggregate balances of related party deposits at December 31, 2016 and 2015 were $15.5 million and $12.5 million, respectively.
A director of CTBI is a shareholder in a law firm that provided services to CTBI and its subsidiaries during the years 2016, 2015, and 2014. Approximately
$1.0 million in legal fees and $0.1 million in expenses paid on behalf of CTBI, $1.1 million total, were paid to this law firm during 2016. Approximately $1.2 million in
legal fees and $0.1 million in expenses, $1.3 million total, were paid during 2015, and approximately $1.0 million in legal fees and $0.1 million in expenses, $1.1 million in
total, were paid during 2014.
36
7. Allowance for Loan and Lease Losses
The following tables present the balance in the allowance for loan and lease losses (“ALLL”) and the recorded investment in loans based on portfolio segment
and impairment method as of December 31, 2016, 2015, and 2014:
2016
(in thousands)
ALLL
Balance, beginning of year
Provision charged to expense
Losses charged off
Recoveries
Balance, end of year
Commercial
Construction
Commercial
Secured by
Real Estate
Equipment
Lease
Financing
Commercial
Other
Real Estate
Construction
Real
Estate
Mortgage
Home
Equity
Consumer
Direct
Consumer
Indirect
Total
$
$
2,199 $
(1,035)
(316)
36
884 $
14,434 $
1,220
(1,641)
178
14,191 $
79 $
(37)
0
0
42 $
4,225 $
2,128
(2,136)
439
4,656 $
550 $
264
(192)
7
629 $
6,678 $
291
(1,043)
101
6,027 $
839 $
(20)
(54)
9
774 $
1,594 $
912
(1,236)
615
1,885 $
5,496 $
4,149
(5,050)
2,250
6,845 $
36,094
7,872
(11,668)
3,635
35,933
Ending balance:
Individually evaluated for impairment $
Collectively evaluated for impairment $
Loans
Ending balance:
Individually evaluated for impairment $
Collectively evaluated for impairment $
213 $
671 $
1,035 $
13,156 $
0 $
42 $
65 $
4,591 $
0 $
629 $
0 $
6,027 $
0 $
774 $
0 $
1,885 $
0 $
6,845 $
1,313
34,620
5,609 $
33,756 $
61,389 $ 1,051,672 $
0 $
5,512 $
11,354 $
338,805 $
0 $
1,483 $
57,966 $ 701,486 $
0 $
52,202
91,511 $ 133,093 $ 444,735 $ 2,886,169
0 $
0 $
2015
(in thousands)
ALLL
Balance, beginning of year
Provision charged to expense
Losses charged off
Recoveries
Balance, end of year
Commercial
Construction
Commercial
Secured by
Real Estate
Equipment
Lease
Financing
Commercial
Other
Real Estate
Construction
Real
Estate
Mortgage
Home
Equity
Consumer
Direct
Consumer
Indirect
Total
$
$
2,896 $
(707)
(3)
13
2,199 $
13,618 $
2,135
(1,379)
60
14,434 $
119 $
(40)
0
0
79 $
4,263 $
1,338
(1,961)
585
4,225 $
534 $
147
(135)
4
550 $
6,094 $
1,888
(1,421)
117
6,678 $
756 $
158
(129)
54
839 $
1,574 $
891
(1,306)
435
1,594 $
4,593 $
2,840
(3,536)
1,599
5,496 $
34,447
8,650
(9,870)
2,867
36,094
Ending balance:
Individually evaluated for impairment $
Collectively evaluated for impairment $
Loans
Ending balance:
Individually evaluated for impairment $
Collectively evaluated for impairment $
831 $
1,368 $
1,227 $
13,207 $
0 $
79 $
403 $
3,822 $
0 $
550 $
0 $
6,678 $
0 $
839 $
0 $
1,594 $
0 $
5,496 $
2,461
33,633
6,263 $
33,421 $
71,757 $ 1,019,498 $
0 $
8,514 $
8,460 $
350,438 $
0 $
1,744 $
61,750 $ 706,130 $
0 $
49,888
89,450 $ 126,406 $ 390,130 $ 2,824,073
0 $
0 $
2014
(in thousands)
ALLL
Balance, beginning of year
Provision charged to expense
Losses charged off
Recoveries
Balance, end of year
Commercial
Construction
Commercial
Secured by
Real Estate
Equipment
Lease
Financing
Commercial
Other
Real Estate
Construction
Real
Estate
Mortgage
Home
Equity
Consumer
Direct
Consumer
Indirect
Total
$
$
3,396 $
(513)
(15)
28
2,896 $
14,535 $
941
(2,163)
305
13,618 $
121 $
(2)
0
0
119 $
5,238 $
1,545
(3,141)
621
4,263 $
397 $
258
(123)
2
534 $
4,939 $
2,173
(1,058)
40
6,094 $
601 $
265
(115)
5
756 $
1,127 $
1,207
(1,326)
566
1,574 $
3,654 $
2,881
(3,495)
1,553
4,593 $
34,008
8,755
(11,436)
3,120
34,447
Ending balance:
Individually evaluated for impairment $
Collectively evaluated for impairment $
Loans
Ending balance:
Individually evaluated for impairment $
Collectively evaluated for impairment $
734 $
2,162 $
827 $
12,791 $
0 $
119 $
181 $
4,082 $
0 $
534 $
0 $
6,094 $
0 $
756 $
0 $
1,574 $
0 $
4,593 $
1,742
32,705
9,627 $
112,315 $
34,357 $
914,269 $
0 $
10,344 $
13,807 $
338,241 $
0 $
1,277 $
62,412 $ 711,188 $
0 $
59,068
88,335 $ 122,136 $ 315,516 $ 2,674,756
0 $
0 $
37
8. Premises and Equipment
Premises and equipment are summarized as follows:
(in thousands)
December 31
Land and buildings
Leasehold improvements
Furniture, fixtures, and equipment
Construction in progress
Total premises and equipment
Less accumulated depreciation and amortization
Premises and equipment, net
2016
2015
$
$
78,086 $
4,886
36,831
769
120,572
(72,632)
47,940 $
76,709
4,793
35,382
196
117,080
(68,892)
48,188
Depreciation and amortization of premises and equipment for 2016, 2015, and 2014 was $3.7 million, $3.7 million, and $4.1 million, respectively.
9. Other Real Estate Owned
Activity for other real estate owned was as follows:
(in thousands)
Beginning balance of other real estate owned
New assets acquired
Capitalized costs
Fair value adjustments
Sale of assets
Ending balance of other real estate owned
2016
2015
40,674 $
5,900
0
(1,214)
(9,504)
35,856 $
36,776
18,850
85
(1,656)
(13,381)
40,674
$
$
Carrying costs and fair value adjustments associated with foreclosed properties were $2.9 million, $3.5 million, and $3.9 million for 2016, 2015, and 2014,
respectively. See note 1 for a description of our accounting policies relative to foreclosed properties and other real estate owned.
The major classifications of foreclosed properties are shown in the following table:
(in thousands)
December 31
1-4 family
Agricultural/farmland
Construction/land development/other
Multifamily
Non-farm/non-residential
Total foreclosed properties
10. Deposits
Major classifications of deposits are categorized as follows:
(in thousands)
December 31
Noninterest bearing deposits
NOW accounts
Money market deposits
Savings
Certificates of deposit and other time deposits of $100,000 or more
Certificates of deposit and other time deposits less than $100,000
Total deposits
2016
2015
6,210 $
93
20,778
270
8,505
35,856 $
7,493
116
22,570
833
9,662
40,674
2016
2015
767,918 $
45,872
649,917
404,558
651,882
561,161
3,081,308 $
749,975
44,567
614,911
382,131
606,859
582,339
2,980,782
$
$
$
$
Certificates of deposit and other time deposits of $250,000 or more at December 31, 2016 and 2015 were $228.6 million and $190.6 million, respectively.
Maturities of certificates of deposits and other time deposits are presented below:
(in thousands)
Certificates of deposit and
other time deposits of
$100,000 or more
Certificates of deposit and
other time deposits less than
$100,000
Total maturities
Total
Within 1 Year
Maturities by Period at December 31, 2016
3 Years
4 Years
2 Years
5 Years
After 5 Years
$
651,882 $
516,384 $
56,494 $
23,180 $
24,074 $
31,750 $
$
561,161
1,213,043 $
471,912
988,296 $
38,109
94,603 $
17,628
40,808 $
13,354
37,428 $
19,830
51,580 $
0
328
328
38
11. Borrowings
Short-term debt is categorized as follows:
(in thousands)
December 31
Repurchase agreements
Federal funds purchased
Total short-term debt
2016
2015
$
$
251,065 $
4,816
255,881 $
251,225
3,596
254,821
All federal funds purchased mature and reprice daily. See note 12 for information regarding the maturities of our repurchase agreements. The average rates
paid for federal funds purchased and repurchase agreements on December 31, 2016 were 0.54% and 0.51%, respectively.
The maximum balance for repurchase agreements at any month-end during 2016 occurred at October 31, 2016, with a month-end balance of $264.5 million.
The average balance of repurchase agreements for the year was $256.6 million.
On October 5, 2016, Community Trust Bancorp, Inc. entered into a revolving credit promissory note for a line of credit in the amount of $12 million at a floating
interest rate of 2.00% in excess of the one-month LIBOR Rate, with an unused commitment fee of 0.15%. Currently, all $12 million remain available for general
corporate purposes. The agreement, which was effective October 5, 2016, replaced the agreement dated November 2, 2015, and will mature on October 31, 2017.
Long-term debt is categorized as follows:
(in thousands)
December 31
Junior subordinated debentures, 2.52%, due 6/1/37
2016
2015
$
61,341 $
61,341
On March 31, 2007, CTBI issued $61.3 million in junior subordinated debentures to a newly formed unconsolidated Delaware statutory trust subsidiary which in
turn issued $59.5 million of capital securities in a private placement to institutional investors. The debentures, which mature in 30 years but are redeemable at par at
CTBI’s option after five years, were issued at a rate of 6.52% until June 1, 2012, and thereafter at a floating rate based on the three-month LIBOR plus 1.59%. The
underlying capital securities were issued at the equivalent rates and terms. The proceeds of the debentures were used to fund the redemption on April 2, 2007 of all
CTBI’s outstanding 9.0% and 8.25% junior subordinated debentures in the total amount of $61.3 million.
On November 29, 2016, the coupon rate was set at 2.52% for the March 1, 2017 distribution date, which was based on the three-month LIBOR rate as of
November 29, 2016 of 0.93% plus 1.59%.
12. Repurchase Agreements
We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and provide additional funding to our balance sheet.
Repurchase agreements are transactions whereby we offer to sell to a counterparty an undivided interest in an eligible security at an agreed upon purchase price, and
which obligates CTBI to repurchase the security on an agreed upon date at an agreed upon repurchase price plus interest at an agreed upon rate. Securities sold under
agreements to repurchase are recorded at the amount of cash received in connection with the transaction and are reflected in the accompanying consolidated balance
sheets.
We monitor collateral levels on a continuous basis and maintain records of each transaction specifically describing the applicable security and the
counterparty’s fractional interest in that security, and we segregate the security from its general assets in accordance with regulations governing custodial holdings of
securities. The primary risk with our repurchase agreements is market risk associated with the securities securing the transactions, as we may be required to provide
additional collateral based on fair value changes of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our
safekeeping agents. The carrying value of investment securities available for sale pledged as collateral under repurchase agreements totaled $302.3 million and $288.1
million at December 31, 2016 and December 31, 2015, respectively.
The remaining contractual maturity of the securities sold under agreements to repurchase by class of collateral pledged included in the accompanying
consolidated balance sheets as of December 31, 2016 and December 31, 2015 is presented in the following tables:
(in thousands)
Repurchase agreements and
repurchase-to-maturity transactions:
December 31, 2016
Remaining Contractual Maturity of the Agreements
Overnight and
Continuous
Up to 30 days
30-90 days
Greater Than
90 days
Total
U.S. Treasury and government agencies
State and political subdivisions
U.S. government sponsored agency mortgage-backed securities
Total
$
$
17,249 $
55,354
23,386
95,989 $
0 $
0
0
0 $
14,349 $
1,998
8,003
24,350 $
73,076 $
10,272
47,378
130,726 $
104,674
67,624
78,767
251,065
39
(in thousands)
Repurchase agreements and
repurchase-to-maturity transactions:
December 31, 2015
Remaining Contractual Maturity of the Agreements
Overnight and
Continuous
Up to 30 days
30-90 days
Greater Than
90 days
Total
U.S. Treasury and government agencies
State and political subdivisions
U.S. government sponsored agency mortgage-backed securities
Total
$
$
19,184
58,676
27,810
105,670
$
$
0
494
6
500
$
$
10,401
1,656
12,278
24,335
$
$
48,695
9,159
62,866
120,720
$
$
78,280
69,985
102,960
251,225
13. Advances from Federal Home Loan Bank
Federal Home Loan Bank advances consisted of the following monthly amortizing and term borrowings at December 31:
(in thousands)
Monthly amortizing
Term
Total FHLB advances
The advances from the FHLB that require monthly principal payments were due for repayment as follows:
Total
Within 1 Year
Principal Payments Due by Period at December 31, 2016
3 Years
4 Years
2 Years
2016
2015
944
0
944
$
$
1,056
100,000
101,056
$
$
5 Years
After 5 Years
(in thousands)
Outstanding advances,
weighted average interest
rate – 1.33%
$
944
$
106 $
404 $
20 $
20 $
20
$
374
At December 31, 2015, CTBI had monthly amortizing FHLB advances totaling $1.1 million at a weighted average interest rate of 1.53%.
CTBI utilizes the FHLB cash management advance to facilitate any short-term funding needs. These short-term advances typically have a two-week maturity
and require the total payment to be made at maturity. At December 31, 2016, there were no short-term advances. At December 31, 2015, CTBI had a $100.0 million
term advance with a fixed interest rate of 0.34% and a maturity date of January 6, 2016.
Advances totaling $0.9 million at December 31, 2016 were collateralized by FHLB stock of $17.9 million and a blanket lien on qualifying 1-4 family first
mortgage loans. As of December 31, 2016, CTBI had a $522.8 million FHLB borrowing capacity with $0.9 million in advances and $226.1 million in letters of credit
used for public fund pledging leaving $295.8 million available for additional advances. The advances had fixed interest rates ranging from 0.00% to 6.03% with a
weighted average rate of 1.33%. The advances are subject to restrictions or penalties in the event of prepayment.
14. Income Taxes
The components of the provision for income taxes, exclusive of tax effect of unrealized securities gains and losses, are as follows:
(in thousands)
Current income tax expense
Deferred income tax expense (benefit)
Total income tax expense
2016
2015
2014
$
$
18,417
701
19,118
$
$
18,416
115
18,531
$
$
20,194
(1,048)
19,146
A reconciliation of income tax expense at the statutory rate to our actual income tax expense is shown below:
(in thousands)
Computed at the statutory rate
Adjustments resulting from:
Tax-exempt interest
Housing and new markets credits
Dividends received deduction
Bank owned life insurance
ESOP dividend deduction
Other, net
Total
2016
2015
2014
$
23,262
35.00% $
22,737
35.00% $
21,839
(1,289)
(2,680)
(136)
(518)
(313)
792
19,118
$
(1.94)
(4.03)
(0.20)
(0.78)
(0.47)
1.18
28.76% $
(1,275)
(2,692)
(128)
(549)
(298)
736
18,531
(1.96)
(4.14)
(0.20)
(0.84)
(0.46)
1.13
28.53% $
(1,204)
(1,076)
(178)
(503)
(284)
552
19,146
35.00%
(1.93)
(1.72)
(0.29)
(0.81)
(0.46)
0.89
30.68%
40 The components of the net deferred tax liability as of December 31 are as follows:
(in thousands)
Deferred tax assets:
Allowance for loan and lease losses
Interest on nonperforming loans
Accrued expenses
Allowance for other real estate owned
Unrealized losses on available-for-sale securities
Other
Total deferred tax assets
Deferred tax liabilities:
Depreciation and amortization
FHLB stock dividends
Loan fee income
Mortgage servicing rights
Capitalized lease obligations
Unrealized gains on AFS securities
Limited partnership investments
Other
Total deferred tax liabilities
Net deferred tax liability
$
2016
2015
12,577 $
806
1,883
1,898
1,241
282
18,687
(20,287)
(3,460)
(536)
(1,202)
(65)
0
(411)
(562)
(26,523)
12,633
806
2,087
2,185
0
665
18,376
(20,150)
(3,460)
(552)
(1,133)
(211)
(544)
(650)
(596)
(27,296)
$
(7,836) $
(8,920)
CTBI accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results
in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying
the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. CTBI determines deferred income taxes using the liability (or
balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of
assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in
deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more
likely than not that some portion or all of a deferred tax asset will not be realized.
Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon
examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related
appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest
amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant
information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and
information available at the reporting date and is subject to management’s judgment.
With a few exceptions, CTBI is no longer subject to U.S. federal tax examinations by tax authorities for years before 2013, and state and local income tax
examinations by tax authorities for years before 2012. For federal tax purposes, CTBI recognizes interest and penalties on income taxes as a component of income tax
expense.
CTBI files consolidated income tax returns with its subsidiaries.
15. Employee Benefits
CTBI maintains two separate retirement savings plans, a 401(k) Plan and an Employee Stock Ownership Plan ("ESOP").
The 401(k) Plan is available to all employees (age 21 and over) with one year of service and who work at least 1,000 hours per year. Participants in the plan
have the option to contribute from 1% to 20% of their annual compensation. CTBI matches 50% of participant contributions up to 4% of gross pay. CTBI may at its
discretion, contribute an additional percentage of covered employees' compensation. CTBI's matching contributions were $1.0 million for the years ended December
31, 2016, 2015, and 2014. The 401(k) Plan owned 482,426, 515,062, and 503,082 shares of CTBI's common stock at December 31, 2016, 2015, and 2014, respectively.
Substantially all shares owned by the 401(k) were allocated to employee accounts on those dates. The market price of the shares at the date of allocation is essentially
the same as the market price at the date of purchase.
The ESOP Plan has the same entrance requirements as the 401(k) Plan above. CTBI currently contributes 4% of covered employees' gross compensation to
the ESOP. The ESOP uses the contributions to acquire shares of CTBI's common stock. CTBI's contributions to the ESOP were $1.5 million for the years ended
December 31, 2016, 2015, and 2014. The ESOP owned 788,308, 765,630, and 752,710 shares of CTBI's common stock at December 31, 2016, 2015, and 2014,
respectively. Substantially all shares owned by the ESOP were allocated to employee accounts on those dates. The market price of the shares at the date of
allocation is essentially the same as the market price at the date of purchase.
41
Stock-Based Compensation:
As of December 31, 2016, CTBI maintained one active and two inactive incentive stock ownership plans covering key employees. The 2015 Stock Ownership
Incentive Plan (“2015 Plan”) was approved by the Board of Directors and the Shareholders in 2015. The 2006 Stock Ownership Incentive Plan (“2006 Plan”) was
approved by the Board of Directors and the Shareholders in 2006. The 2006 Plan was rendered inactive as of April 28, 2015. The 1998 Stock Option Plan (“1998
Plan”) was approved by the Board of Directors and the Shareholders in 1998. The 1998 Plan was rendered inactive as of April 26, 2006. The 2015 Plan has 550,000
shares authorized, 540,131 of which were available at December 31, 2016. Shares issuable pursuant to awards which were granted under the prior plans on or before
their respective expiration or termination dates will be issued from the remaining shares reserved for issuance under the prior plans. The shares of common stock
reserved for issuance under the prior plans in excess of the number of shares as to which options or other benefits are awarded thereunder, and any shares as to which
options or other benefits granted under the prior plans may lapse, expire, terminate or be canceled, will not be reserved and available for issuance or reissuance under
the 2015 Plan. In January 2016, 18,069 shares were issued under the terms of the 2015 Plan pursuant to awards granted and earned under the 2006 Plan.
Accordingly, this issuance did not reduce the shares available under the 2015 Plan. Additional shares will not be issued under the 2015 Plan pursuant to awards
granted under the 2006 Plan. The following table provides detail of the number of shares to be issued upon exercise of outstanding stock-based awards and remaining
shares available for future issuance under all of CTBI's equity compensation plans as of December 31, 2016:
Plan Category (shares in thousands)
Equity compensation plans approved by shareholders:
Stock options
Restricted stock
Performance units
Stock appreciation rights (“SARs”)
Total
Number of
Shares to Be
Issued Upon
Exercise
Weighted
Average Price
Shares Available
for Future
Issuance
71 $
(c)
(d)
(e)
30.36
(b)
(b)
(b)
540(a)
(a)
(a)
(a)
540
(a)
(b)
(c)
(d)
Under the 2015 Plan, 550,000 shares are authorized for issuance; 10,000 have been issued as of December 31, 2016. In January of 2016, 18,069 restricted stock shares were issued under the
terms of the 2015 Plan pursuant to awards granted under the 2006 Plan. Additional shares will not be issued pursuant to awards granted from prior plans.
Not applicable
The maximum number of shares of restricted stock that may be granted is 550,000 shares, and the maximum that may be granted to a participant during any calendar year is 75,000 shares.
No performance units payable in stock had been issued as of December 31, 2016. The maximum payment that can be made pursuant to performance units granted to any one participant in any
calendar year shall be $1,000,000.
(e)
No SARS have been issued. The maximum number of shares with respect to which SARs may be granted to a participant during any calendar year shall be 100,000 shares.
The following table details the shares available for future issuance under the 2015 Plan at December 31, 2016.
Plan Category
Shares available at January 1, 2016
Stock option issuances
Restricted stock issuances
Forfeitures
Shares available for future issuance
Shares Available for Future
Issuance
550,000
(10,000)
0
131
540,131
CTBI uses a Black-Scholes option pricing model with the following weighted average assumptions, which are evaluated and revised as necessary, in estimating
the grant-date fair value of each option grant for the year end:
Expected option life (in years)
Expected volatility
Expected dividend yield
Risk-free interest rate
2016
7.5
34.34%
3.70%
1.45%
2015
7.5
43.11%
3.72%
1.54%
2014
7.5
43.32%
3.40%
2.01%
The expected option life is derived from the “safe-harbor” rules for estimating option life in ASC 718, Share-Based Payment. The expected volatility is based
on historical volatility of the stock using a historical look back that approximates the expected life of the option grant. The interest rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. CTBI's stock-based compensation expense for the years
2016, 2015, and 2014 was $0.5 million, $0.8 million, and $0.9 million, respectively. Included in stock-based compensation expense were dividends paid on restricted
stock shares in the amount of $37 thousand, $80 thousand, and $121 thousand, respectively, for the same periods.
42
The 2015 Plan:
CTBI’s stock option activity for the 2015 Plan for the year ended December 31, 2016 is summarized as follows:
December 31
Outstanding at beginning of year
Granted
Exercised
Forfeited/expired
Outstanding at end of year
Exercisable at end of year
2016
Weighted
Average Exercise
Price
Options
0
10,000
0
0
10,000
0
$
$
$
--
33.55
--
--
33.55
--
A summary of the status of CTBI’s 2015 Plan for nonvested options as of December 31, 2016, and changes during the year ended December 31, 2016, is
presented as follows:
Nonvested Options
Nonvested at January 1, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2016
Weighted
Average Grant
Date Fair Value
--
$
6.82
--
--
6.82
$
Options
0
10,000
0
0
10,000
The weighted average remaining contractual term in years of the options outstanding at December 31, 2016 was 9.1 years.
The weighted-average fair value of options granted from the 2015 Plan during the year 2016 was $0.07 million, or $6.82 per share.
The following table shows the intrinsic values of options exercised, exercisable, and outstanding for the 2015 Plan for the years ended December 31, 2016:
(in thousands)
Options exercised
Options exercisable
Outstanding options
The following table shows restricted stock activity for the 2015 Plan for the year ended December 31, 2016:
December 31
Outstanding at beginning of year
Granted*
Vested
Forfeited
Outstanding at end of year
2016
$
--
--
161
2016
Weighted
Average Fair
Value at Grant
Grants
0
18,069
(442)
(131)
17,496
$
$
--
33.55
33.55
33.55
33.55
* Issued under the terms of the 2015 Plan pursuant to awards granted and earned under the 2006 Plan.
The 2006 Plan:
CTBI’s stock option activity for the 2006 Plan for the years ended December 31, 2016, 2015, and 2014 is summarized as follows:
December 31
2016
2015
2014
Outstanding at beginning of year
Granted
Exercised
Forfeited/expired
Outstanding at end of year
Exercisable at end of year
Options
Weighted
Average Exercise
Price
Options
Weighted
Average Exercise
Price
Options
Weighted
Average Exercise
Price
118,574
0
(57,423)
(110)
61,041
30,629
$
$
$
32.36
--
35.02
35.41
29.84
26.64
$
98,821
20,000
(247)
0
$
118,574
87,749
$
32.35
32.27
24.12
--
32.36
32.12
97,047
10,000
(5,757)
(2,469)
98,821
86,264
$
$
$
32.29
34.75
34.62
34.29
32.35
32.25
43 A summary of the status of CTBI’s 2006 Plan for nonvested options as of December 31, 2016, and changes during the year ended December 31, 2016, is
presented as follows:
Nonvested Options
Nonvested at January 1, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2016
Options
Weighted
Average Grant
Date Fair Value
7.02
--
8.23
--
7.00
30,825 $
0
(413)
0
30,412 $
The weighted average remaining contractual term in years of the options outstanding at December 31, 2016 was 4.6 years.
There were no options granted from the 2006 Plan for the year 2016. The weighted-average fair value of options granted from the 2006 Plan during the years
2015 and 2014 were $0.13 million or $6.60 per share and $0.08 million or $7.76 per share; respectively.
The following table shows the intrinsic values of options exercised, exercisable, and outstanding for the 2006 Plan for the years ended December 31, 2016,
2015, and 2014:
(in thousands)
Options exercised
Options exercisable
Outstanding options
2016
2015
2014
$
139 $
703
1,206
3 $
275
334
11
376
421
The following table shows restricted stock activity for the years ended December 31, 2016, 2015, and 2014:
December 31
2016
2015
2014
Grants
Weighted
Average Fair
Value at Grant
Grants
Weighted
Average Fair
Value at Grant
Grants
Outstanding at beginning of year
Granted
Vested
Forfeited
Outstanding at end of year
The 1998 Plan:
64,735 $
0
(52,521)
(225)
11,989 $
28.92
--
28.01
32.52
32.85
101,309 $
10,582
(46,482)
(674)
64,735 $
26.19
32.27
23.66
33.31
28.92
Weighted
Average Fair
Value at Grant
25.91
37.85
28.35
28.38
26.19
107,511 $
4,561
(8,949)
(1,814)
101,309 $
CTBI’s stock option activity for the 1998 Plan for the years ended December 31, 2016, 2015, and 2014 is summarized as follows:
December 31
2016
2015
2014
Options
Weighted
Average Exercise
Price
Options
Weighted
Average Exercise
Price
Options
Weighted
Average Exercise
Price
Outstanding at beginning of year
Granted
Exercised
Forfeited/expired
Outstanding at end of year
2,980 $
0
(2,980)
0
0 $
29.49
--
29.49
--
--
43,960 $
0
(40,980)
0
2,980 $
29.43
--
29.42
--
29.49
78,066 $
0
(34,106)
0
43,960 $
Exercisable at end of year
0 $
--
2,980 $
29.49
43,960 $
28.91
--
28.25
--
29.43
29.43
There were no options outstanding in the 1998 Plan at December 31, 2016.
The following table shows the intrinsic values of options exercised, exercisable, and outstanding for the 1998 Plan for the years ended December 31, 2016,
2015, and 2014:
(in thousands)
Options exercised
Options exercisable
Outstanding options
$
2016
2015
2014
13 $
0
0
241 $
16
16
270
316
316
There were no nonvested options in the 1998 Plan for the years December 31, 2016, 2015, and 2014.
44
The following table shows the unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans at
December 31, 2016, 2015, and 2014 and the total grant-date fair value of shares vested, cash received from option exercises under all share-based payment
arrangements, and the actual tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements for the years ended December
31, 2016, 2015, and 2014.
(in thousands)
Unrecognized compensation cost of unvested share-based compensation arrangements granted under the plan at
year-end
Grant date fair value of shares vested for the year
Cash received from option exercises under all share-based payment arrangements for the year
Tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements for the
year
$
2016
2015
2014
835 $
1,490
2,099
3
495 $
1,111
1,212
82
861
343
1,163
93
The unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans at December 31, 2016 is expected
to be recognized over a weighted-average period of 2.9 years.
16. Operating Leases
Certain premises and equipment are leased under operating leases. Additionally, certain premises are leased or subleased to third parties. These leases
generally contain renewal options and require CTBI to pay all executory costs, such as taxes, maintenance fees, and insurance. Minimum non-cancellable rental
payments and rental receipts are as follows:
(in thousands)
2017
2018
2019
2020
2021
Thereafter
Total
Payments
Receipts
$
$
2,010 $
1,501
943
725
610
3,089
8,878 $
561
350
261
227
147
81
1,627
Rental expense net of rental income under operating leases was $1.3 million for 2016, $1.3 million for 2015, and $1.3 million for 2014.
17. Fair Market Value of Financial Assets and Liabilities
Fair Value Measurements
ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and
expands disclosures about fair value measurements. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but
does not expand the use of fair value in any new circumstances. Fair value measurements must maximize the use of observable inputs and minimize the use of
unobservable inputs. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing
the asset or liability. In support of this principle, ASC 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair
value hierarchy is as follows:
Level 1 Inputs – Quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted
prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield
curves that are observable at commonly quoted intervals.
Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market
participants would use in pricing the assets or liabilities.
Recurring Measurements
The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis
as of December 31, 2016 and December 31, 2015 and indicate the level within the fair value hierarchy of the valuation techniques.
(in thousands)
Assets measured – recurring basis
Available-for-sale securities:
U.S. Treasury and government agencies
State and political subdivisions
U.S. government sponsored agency mortgage-backed securities
CRA investment funds
Mortgage servicing rights
Fair Value Measurements at
December 31, 2016 Using
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$
222,464 $
133,516
225,056
24,358
3,433
44,934 $
0
0
24,358
0
177,530 $
133,516
225,056
0
0
0
0
0
0
3,433
45
(in thousands)
Assets measured – recurring basis
Available-for-sale securities:
U.S. Treasury and government agencies
State and political subdivisions
U.S. government sponsored agency mortgage-backed securities
CRA investment funds
Mortgage servicing rights
Fair Value Measurements at
December 31, 2015 Using
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$
239,394 $
129,215
201,576
24,751
3,236
44,702 $
0
0
24,751
0
194,692 $
129,215
201,576
0
0
0
0
0
0
3,236
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the
accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. These valuation methodologies were applied to
all of CTBI’s financial assets carried at fair value. CTBI had no liabilities measured and recorded at fair value as of December 31, 2016 and December 31, 2015.
There have been no significant changes in the valuation techniques during the year ended December 31, 2016. For assets classified within Level 3 of the fair value
hierarchy, the process used to develop the reported fair value is described below.
Available-for-Sale Securities
Securities classified as available-for-sale are reported at fair value on a recurring basis. U.S. Treasury and government agencies and CTBI’s CRA investment
funds are classified as Level 1 of the valuation hierarchy where quoted market prices are available in the active market on which the individual securities are traded.
If quoted market prices are not available, CTBI obtains fair value measurements from an independent pricing service, such as Interactive Data, which utilizes
pricing models to determine fair value measurement. CTBI reviews the pricing quarterly to verify the reasonableness of the pricing. The fair value measurements
consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market
consensus prepayment speeds, credit information and the bond’s terms and conditions, among other factors. U.S. Treasury and government agencies, state and
political subdivisions, and U.S. government sponsored agency mortgage-backed securities are classified as Level 2 inputs.
In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair value determinations for Level
3 measurements are estimated on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards
generally accepted in the United States. As of December 31, 2016, CTBI does not own any securities valued using Level 3 inputs.
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active, open market with readily observable prices. CTBI reports mortgage servicing rights at fair value on a
recurring basis with subsequent remeasurement of MSRs based on change in fair value.
In determining fair value, CTBI utilizes the expertise of an independent third party. Accordingly, fair value is determined by the independent third party by
utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends and industry demand. Due to the
nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements of mortgage
servicing rights are tested for impairment on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting
standards generally accepted in the United States. See the table below for inputs and valuation techniques used for Level 3 mortgage servicing rights.
Transfers between Levels
There were no transfers between Levels 1, 2, and 3 as of December 31, 2016.
Level 3 Reconciliation
Following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using
significant unobservable (Level 3) inputs:
Mortgage Servicing Rights
(in thousands)
Beginning balance
Total recognized gains (losses)
Included in net income
Issues
Settlements
Ending balance
2016
2015
$
3,236 $
164
521
(488)
3,433 $
$
2,968
126
557
(415)
3,236
Total gains (losses) for the period included in net income attributable to the change in unrealized gains or losses related to assets still held
at the reporting date
$
164 $
126
46
Realized and unrealized gains and losses for items reflected in the table above are included in net income in the consolidated statements of income as follows:
Noninterest Income
(in thousands)
Total losses
Nonrecurring Measurements
2016
2015
$
(324) $
(289)
The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a nonrecurring
basis as of December 31, 2016 and December 31, 2015 and indicate the level within the fair value hierarchy of the valuation techniques.
(in thousands)
Assets measured – nonrecurring basis
Impaired loans (collateral dependent)
Other real estate/assets owned
(in thousands)
Assets measured – nonrecurring basis
Impaired loans (collateral dependent)
Other real estate/assets owned
Fair Value Measurements at
December 31, 2016 Using
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$
5,506 $
4,388
0 $
0
0 $
0
5,506
4,388
Fair Value Measurements at
December 31, 2015 Using
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$
3,192 $
6,798
0 $
0
0 $
0
3,192
6,798
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the
accompanying balance sheet, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair
value hierarchy, the process used to develop the reported fair value is described below.
Impaired Loans (Collateral Dependent)
The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-
dependent impaired loans are classified within Level 3 of the fair value hierarchy.
CTBI considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that
may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and
subsequently as deemed necessary by the Chief Credit Officer. Appraisals are reviewed for accuracy and consistency by the Chief Credit Officer. Appraisers are
selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and
estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the Chief
Credit Officer by comparison to historical results.
Loans considered impaired under ASC 310-35, Impairment of a Loan, are loans for which, based on current information and events, it is probable that the
creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are subject to nonrecurring fair value
adjustments to reflect subsequent (i) partial write-downs that are based on the observable market price or current appraised value of the collateral or (ii) the full
charge-off of the loan carrying value. Fair value adjustments on impaired loans disclosed above were $0.6 million and $1.8 million for the years ended December 31,
2016 and December 31, 2015, respectively.
Other Real Estate Owned
In accordance with the provisions of ASC 360, Property, Plant, and Equipment, other real estate owned (OREO) is carried at the lower of fair value at
acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of OREO is based on appraisals or
evaluations. OREO is classified within Level 3 of the fair value hierarchy. Long-lived assets are subject to nonrecurring fair value adjustments to reflect subsequent
partial write-downs that are based on the observable market price or current appraised value of the collateral. Fair value adjustments on other real estate/assets owned
were $1.2 million and $1.7 million for the years ended December 31, 2016 and December 31, 2015, respectively.
Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market
fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months. Appraisers are selected from the list of approved
appraisers maintained by management.
47
Unobservable (Level 3) Inputs
The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at
December 31, 2016 and December 31, 2015.
(in thousands)
Quantitative Information about Level 3 Fair Value Measurements
Fair Value at
December 31,
2016
Valuation Technique(s)
Unobservable Input
3,433
Discount cash flows, computer pricing model
Constant prepayment rate
Mortgage servicing rights
Impaired loans (collateral-dependent)
Other real estate owned
(in thousands)
Mortgage servicing rights
Impaired loans (collateral-dependent)
Other real estate owned
$
$
$
$
$
$
5,506
4,388
Fair Value at
December 31,
2015
Probability of default
Discount rate
Market comparable properties
Marketability discount
Market comparable properties
Comparability adjustments
10.0% - 100.0%
(14.9%)
Quantitative Information about Level 3 Fair Value Measurements
Valuation Technique(s)
Unobservable Input
3,236
Discount cash flows, computer pricing model
Constant prepayment rate
Probability of default
Discount rate
3,192
6,798
Market comparable properties
Marketability discount
Market comparable properties
Comparability adjustments
Range
(Weighted
Average)
7.0% - 27.0%
(9.5%)
0.0% - 100.0%
(3.0%)
10.0% - 11.5%
(10.1%)
0.0% - 100.0%
(33.7%)
Range
(Weighted
Average)
6.1% - 22.4%
(10.0%)
0.0% - 100.0%
(2.6%)
10.0% - 11.5%
(10.1%)
0.0% - 76.7%
(26.8%)
5.0% - 51.8%
(11.7%)
Sensitivity of Significant Unobservable Inputs
The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used
in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.
Mortgage Servicing Rights
Market value for mortgage servicing rights is derived based on unobservable inputs, such as prepayment speeds of the underlying loans generated using the
Andrew Davidson Prepayment Model, FHLMC/FNMA guidelines, the weighted-average life of the loan, the discount rate, the weighted average coupon, and the
weighted average default rate. Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value
measurement. Generally, a change in the assumption used for prepayment speeds is accompanied by a directionally opposite change in the assumption for interest
rates.
48 Fair Value of Financial Instruments
The following table presents estimated fair value of CTBI’s financial instruments as of December 31, 2016 and indicates the level within the fair value
hierarchy of the valuation techniques.
(in thousands)
Financial assets:
Cash and cash equivalents
Certificates of deposit in other banks
Securities available-for-sale
Securities held-to-maturity
Loans held for sale
Loans, net
Federal Home Loan Bank stock
Federal Reserve Bank stock
Accrued interest receivable
Mortgage servicing rights
Financial liabilities:
Deposits
Repurchase agreements
Federal funds purchased
Advances from Federal Home Loan Bank
Long-term debt
Accrued interest payable
Unrecognized financial instruments:
Letters of credit
Commitments to extend credit
Forward sale commitments
Fair Value Measurements
at December 31, 2016 Using
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying Amount
$
$
$
144,716 $
980
605,394
866
1,244
2,902,438
17,927
4,887
11,922
3,433
3,081,308 $
251,065
4,816
944
61,341
1,200
0 $
0
0
144,716 $
0
69,292
0
1,260
0
0
0
0
0
767,918 $
0
0
0
0
0
0 $
0
0
0 $
982
536,102
867
0
0
17,927
4,887
11,922
0
2,321,690 $
0
4,816
1,009
0
1,200
0 $
0
0
0
0
0
0
0
2,882,348
0
0
0
3,433
0
250,820
0
0
49,073
0
0
0
0
The following table presents estimated fair value of CTBI’s financial instruments as of December 31, 2015 and indicates the level within the fair value
hierarchy of the valuation techniques.
(in thousands)
Financial assets:
Cash and cash equivalents
Certificates of deposit in other banks
Securities available-for-sale
Securities held-to-maturity
Loans held for sale
Loans, net
Federal Home Loan Bank stock
Federal Reserve Bank stock
Accrued interest receivable
Mortgage servicing rights
Financial liabilities:
Deposits
Repurchase agreements
Federal funds purchased
Advances from Federal Home Loan Bank
Long-term debt
Accrued interest payable
Unrecognized financial instruments:
Letters of credit
Commitments to extend credit
Forward sale commitments
Fair Value Measurements
at December 31, 2015 Using
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying Amount
$
$
$
187,611 $
3,832
594,936
1,661
1,172
2,837,867
17,927
4,887
12,194
3,236
2,980,782 $
251,225
3,596
101,056
61,341
1,071
0 $
0
0
187,611 $
0
69,453
0
1,196
0
0
0
0
0
749,975 $
0
0
0
0
0
0 $
0
0
0 $
3,836
525,483
1,651
0
0
17,927
4,887
12,194
0
2,208,120 $
0
3,596
100,905
0
1,071
0 $
0
0
0
0
0
0
0
2,833,267
0
0
0
3,236
0
250,873
0
0
49,073
0
0
0
0
49
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents – The carrying amount approximates fair value.
Certificates of deposit in other banks – Fair values are based on quoted market prices or dealer quotes for similar instruments.
Securities held-to-maturity – Fair values are based on quoted market prices, if available. If a quoted price is not available, fair value is estimated using quoted
prices for similar securities. The fair value estimate is provided to management from a third party using modeling assumptions specific to each type of security that are
reviewed and approved by management. Quarterly sampling of fair values provided by additional third parties supplement the fair value review process.
Loans held for sale – The fair value is predetermined at origination based on sale price.
Loans (net of the allowance for loan and lease losses) – The fair value of fixed rate loans and variable rate mortgage loans is estimated by discounting the
future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. For other
variable rate loans, the carrying amount approximates fair value.
Federal Home Loan Bank stock – The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the
Federal Home Loan Bank.
Federal Reserve Bank stock – The carrying value of Federal Reserve Bank stock approximates fair value based on the redemption provisions of the Federal
Reserve Bank.
Accrued interest receivable – The carrying amount approximates fair value.
Deposits – The fair value of fixed maturity time deposits is estimated by discounting the future cash flows using the rates currently offered for deposits of
similar remaining maturities. For deposits including demand deposits, savings accounts, NOW accounts, and certain money market accounts, the carrying value
approximates fair value.
Repurchase agreements – The fair value is estimated by discounting future cash flows using current rates.
Federal funds purchased – The carrying amount approximates fair value.
Advances from Federal Home Loan Bank – The fair value of these fixed-maturity advances is estimated by discounting future cash flows using rates currently
offered for advances of similar remaining maturities.
Long-term debt – The fair value is estimated by discounting future cash flows using current rates.
Accrued interest payable – The carrying amount approximates fair value.
Commitments to originate loans, forward sale commitments, letters of credit, and lines of credit – The fair value of commitments to originate loans is estimated
using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair
value of forward sale commitments is estimated based on current market prices for loans of similar terms and credit quality. The fair values of letters of credit and
lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the
counterparties at the reporting date. The fair values of these commitments are not material.
18. Off-Balance Sheet Transactions and Guarantees
CTBI is a party to transactions with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial
instruments include standby letters of credit and commitments to extend credit in the form of unused lines of credit. CTBI uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet instruments.
At December 31, CTBI had the following off-balance sheet financial instruments, whose approximate contract amounts represent additional credit risk to
CTBI:
(in thousands)
Standby letters of credit
Commitments to extend credit
Total off-balance sheet financial instruments
2016
2015
$
$
29,917 $
570,467
600,384 $
28,143
455,273
483,416
Standby letters of credit represent conditional commitments to guarantee the performance of a third party. The credit risk involved is essentially the same as
the risk involved in making loans. At December 31, 2016, we maintained a credit loss reserve recorded in other liabilities of approximately $5 thousand relating to these
financial standby letters of credit. The reserve coverage calculation was determined using essentially the same methodology as used for the allowance for loan and
lease losses. Approximately 74% of the total standby letters of credit are secured, with $18.6 million of the total $29.9 million secured by cash. Collateral for the
remaining secured standby letters of credit varies but is comprised primarily of accounts receivable, inventory, property, equipment, and income-producing properties.
50
Commitments to extend credit are agreements to originate loans to customers as long as there is no violation of any condition of the contract. At December
31, 2016, a credit loss reserve recorded in other liabilities of $275 thousand was maintained relating to these commitments. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of
collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable,
inventory, property, plant and equipment, commercial real estate, and residential real estate. A portion of the commitments is to extend credit at fixed rates. Fixed rate
loan commitments at December 31, 2016 of $62.8 million had interest rates ranging predominantly from 3.00% to 5.00%, respectively, and terms predominantly two
years or less. These credit commitments were based on prevailing rates, terms, and conditions applicable to other loans being made at December 31, 2016.
Included in our commitments to extend credit are mortgage loans in the process of origination which are intended for sale to investors in the secondary market.
These forward sale commitments are on an individual loan basis that CTBI originates as part of its mortgage banking activities. CTBI commits to sell the loans at
specified prices in a future period, typically within 60 days. These commitments are acquired to reduce market risk on mortgage loans in the process of origination and
mortgage loans held for sale since CTBI is exposed to interest rate risk during the period between issuing a loan commitment and the sale of the loan into the
secondary market. Total mortgage loans in the process of origination amounted to $2.9 million and $3.2 million at December 31, 2016 and 2015, respectively, and
mortgage loans held for sale amounted to $1.2 million for the years ended December 31, 2016 and 2015, respectively.
19. Concentrations of Credit Risk
CTBI’s banking activities include granting commercial, residential, and consumer loans to customers primarily located in eastern, northeastern, central, and
south central Kentucky, southern West Virginia, and northeastern Tennessee. CTBI is continuing to manage all components of its portfolio mix in a manner to reduce
risk from changes in economic conditions. Concentrations of credit, as defined for regulatory purposes, are reviewed quarterly by management to ensure that internally
established limits based on Tier 1 Capital plus the allowance for loan and lease losses are not exceeded. At December 31, 2016 and 2015, our concentrations of lessors
of non-residential buildings credits were 45% and 44% of Tier 1 Capital plus the allowance for loan and lease losses, respectively. Lessors of residential buildings and
dwellings were 37% and 36%, respectively. Hotel/motel industry credits were 41% and 34%, respectively. These percentages are within our internally established
limits regarding concentrations of credit.
20. Commitments and Contingencies
CTBI and our subsidiaries, and from time to time, our officers, are named defendants in legal actions arising from ordinary business activities. Management,
after consultation with legal counsel, believes any pending actions at December 31, 2016 are without merit or that the ultimate liability, if any, will not materially affect
our consolidated financial position or results of operations.
Based on a recent discussion with a regulatory agency representative concerning the status of an ongoing review of two CTB deposit add-on products, CTBI
believes it is likely that it will be cited for two violations based on alleged unfair and deceptive practices with respect to such products. CTBI has evaluated the possible
violations and their potential financial impact. Based upon this analysis, management established an accrual in 2014, which was not considered material, for possible
customer reimbursements. We have not received a final written notice citing such violations and have not been informed as to the amount of, or relevant time period
for, related reimbursement. The actual amount of reimbursement may materially vary from the amount management has evaluated as most likely at December 31,
2016, but it is not currently expected to be material to the financial statements.
21. Regulatory Matters
CTBI’s principal source of funds is dividends received from our banking subsidiary, CTB. Regulations limit the amount of dividends that may be paid by CTB
without prior approval. During 2017, approximately $55.4 million plus any 2017 net profits can be paid by CTB without prior regulatory approval.
The Federal Reserve Bank adopted quantitative measures which assign risk weightings to assets and off-balance sheet items and also define and set minimum
regulatory capital requirements (risk based capital ratios). All banks are required to have a minimum Tier 1 (core capital) leverage ratio of 4% of adjusted quarterly
average assets, common equity Tier 1 capital ratio of at least 4.5% of risk-weighted assets, Tier 1 capital of at least 6% of risk-weighted assets, and total capital of at
least 8% of risk-weighted assets. Tier 1 capital consists principally of shareholders’ equity including capital-qualifying subordinated debt but excluding unrealized gains
and losses on securities available-for-sale, less goodwill and certain other intangibles. Total capital consists of Tier 1 capital plus certain debt instruments and the
reserve for credit losses, subject to limitation. Failure to meet certain capital requirements can initiate certain actions by regulators that, if undertaken, could have a
direct material effect on our consolidated financial statements. The regulations also define well-capitalized levels of Tier 1 leverage, common equity Tier 1 capital, Tier
1, and total capital as 5%, 6.5%, 8%, and 10%, respectively. We had Tier 1 leverage, common equity Tier 1 capital, Tier 1, and total capital ratios above the well-
capitalized levels at December 31, 2016 and 2015. We believe, as of December 31, 2016, CTBI meets all capital adequacy requirements for which it is subject to be
defined as well-capitalized under the regulatory framework for prompt corrective action.
Under the current Federal Reserve Board’s regulatory framework, certain capital securities offered by wholly owned unconsolidated trust preferred entities of
CTBI are included as Tier 1 regulatory capital. On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the continued limited inclusion of trust
preferred securities in the Tier 1 capital of bank holding companies (“BHCs”). Under the final rule, trust preferred securities and other restricted core capital elements
are subject to stricter quantitative limits. The Board’s final rule limits restricted core capital elements to 25 percent of all core capital elements, net of goodwill less any
associated deferred tax liability. Amounts of restricted core capital elements in excess of these limits generally may be included in Tier 2 capital. The final rule
provided a five-year transition period, which ended March 31, 2009, for application of the quantitative limits. The requirement for trust preferred securities to include a
call option has been eliminated, and standards for the junior subordinated debt underlying trust preferred securities eligible for Tier 1 capital treatment have been
clarified. The final rule addresses supervisory concerns, competitive equity considerations, and the accounting for trust preferred securities. The final rule also
strengthens the definition of regulatory capital by incorporating longstanding Board policies regarding the acceptable terms of capital instruments included in banking
organizations’ Tier 1 or Tier 2 capital. The final rule did not have a material impact on our regulatory ratios.
51
Consolidated Capital Ratios
(in thousands)
As of December 31, 2016:
Tier 1 capital (to average assets)
Common equity Tier 1 capital (to risk weighted assets)
Tier 1 capital (to risk weighted assets)
Total capital (to risk weighted assets)
As of December 31, 2015:
Tier 1 capital (to average assets)
Common equity Tier 1 capital (to risk weighted assets)
Tier 1 capital (to risk weighted assets)
Total capital (to risk weighted assets)
Community Trust Bank, Inc.’s Capital Ratios
Actual
Amount
Ratio
For Capital Adequacy Purposes
Amount
Ratio
$
$
496,432
436,932
496,432
532,332
468,304
408,804
468,304
503,296
12.75% $
15.18
17.25
18.50
12.40% $
14.58
16.70
17.95
155,743
129,525
172,672
230,198
151,066
126,194
168,253
224,310
4.00%
4.50
6.00
8.00
4.00%
4.50
6.00
8.00
(in thousands)
As of December 31, 2016:
Tier 1 capital (to average assets)
Common equity Tier 1 capital
(to risk weighted assets)
Tier 1 capital (to risk weighted assets)
Total capital (to risk weighted assets)
As of December 31, 2015:
Tier 1 capital (to average assets)
Common equity Tier 1 capital
(to risk weighted assets)
Tier 1 capital (to risk weighted assets)
Total capital (to risk weighted assets)
Actual
Amount
Ratio
For Capital Adequacy Purposes
Amount
Ratio
To Be Well-Capitalized Under Prompt
Corrective Action Provision
Ratio
Amount
$
$
472,615
472,615
472,615
508,515
445,107
445,107
445,107
480,099
12.19% $
16.46
16.46
17.71
11.84% $
15.91
15.91
17.16
155,083
129,208
172,278
229,708
150,374
125,895
167,859
223,822
4.00% $
4.50
6.00
8.00
4.00% $
4.50
6.00
8.00
193,854
186,634
229,704
287,134
187,967
181,848
223,812
279,778
5.00%
6.50
8.00
10.00
5.00%
6.50
8.00
10.00
On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to CTBI and CTB. The
FDIC subsequently approved these rules. The final rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.
The rules include new risk-based capital and leverage ratios, which are being phased in from 2015 to 2019, and refine the definition of what constitutes
“capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to CTBI and CTB under the final rules are: (i) a new
common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and
(iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital
requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer began to be phased in on January 1, 2016 at 0.625% of
risk-weighted assets and will increase by 0.625% annually until fully implemented in January 2019. An institution is subject to limitations on certain activities including
payment of dividends, share repurchases, and discretionary bonuses to executive officers if its capital level is below the capital conservation buffer amount.
The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity,
unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final
rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes CTBI) will be able to
permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until
they redeem such instruments or until the instruments mature.
The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions,
including the Bank, if their capital levels begin to show signs of weakness. These revisions took effect January 1, 2015. Under the prompt corrective action
requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following increased capital
level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%);
(iii) a total capital ratio of 10% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from previous rules).
The final rules set forth certain changes for the calculation of risk-weighted assets, which we were required to utilize beginning January 1, 2015. The
standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of
creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity
exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking
organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in
consolidated assets. We currently satisfy the well-capitalized and capital conservation buffer standards, and based on our current capital composition and levels, we
anticipate that our capital ratios, on a Basel III basis, will continue to exceed the well-capitalized minimum capital requirements and capital conservation buffer
standards.
52 22. Parent Company Financial Statements
Condensed Balance Sheets
(in thousands)
December 31
Assets:
Cash on deposit
Investment in and advances to subsidiaries
Goodwill
Premises and equipment, net
Other assets
Total assets
Liabilities and shareholders’ equity:
Long-term debt
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Condensed Statements of Income and Comprehensive Income
(in thousands)
Year Ended December 31
Income:
Dividends from subsidiary banks
Other income
Total income
Expenses:
Interest expense
Depreciation expense
Other expenses
Total expenses
Income before income taxes and equity in undistributed income of subsidiaries
Income tax benefit
Income before equity in undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
$
$
$
2016
2015
1,525 $
556,975
4,973
142
391
564,006 $
61,341 $
2,050
63,391
1,462
531,702
4,973
145
911
539,193
61,341
2,269
63,610
500,615
475,583
$
564,006 $
539,193
2016
2015
2014
$
20,708 $
459
21,167
19,808 $
414
20,222
1,417
107
2,256
3,780
17,387
(1,373)
18,760
28,586
1,170
130
2,465
3,765
16,457
(1,371)
17,828
28,604
19,534
196
19,730
1,131
153
2,550
3,834
15,896
(1,548)
17,444
25,807
Net income
$
47,346 $
46,432 $
43,251
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during the period
Less: Reclassification adjustments for realized gains (losses) included in net income
Tax expense (benefit)
Other comprehensive income (loss), net of tax
Comprehensive income
(4,578)
522
(1,785)
(3,315)
44,031 $
(342)
(106)
(83)
(153)
46,279 $
13,928
(211)
4,949
9,190
52,441
$
53
Condensed Statements of Cash Flows
(in thousands)
Year Ended December 31
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Equity in undistributed earnings of subsidiaries
Stock-based compensation
Excess tax benefits of stock-based compensation
Changes in:
Other assets
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of premises and equipment
Repayment of investments in and advances to subsidiaries
Net cash used in investing activities
Cash flows from financing activities:
Issuance of common stock
Repurchase of common stock
Excess tax benefits of stock-based compensation
Dividends paid
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
23. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Year Ended December 31
(in thousands except per share data)
Numerator:
Net income
Denominator:
Basic earnings per share:
Weighted average shares
Diluted earnings per share:
Dilutive effect of equity grants
Adjusted weighted average shares
Earnings per share:
Basic earnings per share
Diluted earnings per share
2016
2015
2014
$
47,346 $
46,432 $
43,251
107
(28,586)
458
100
519
(90)
19,854
(104)
0
(104)
2,985
(382)
(100)
(22,190)
(19,687)
63
1,462
1,525 $
130
(28,604)
783
104
240
968
20,053
(45)
0
(45)
2,082
(189)
(104)
(21,330)
(19,541)
467
995
1,462 $
153
(25,807)
838
760
(558)
563
19,200
(125)
(14)
(139)
1,992
0
(760)
(20,570)
(19,338)
(277)
1,272
995
$
2016
2015
2014
$
47,346 $
46,432 $
43,251
17,548
17,431
18
17,566
52
17,483
$
2.70 $
2.70
2.66 $
2.66
17,326
71
17,397
2.50
2.49
There were no options to purchase common shares that were excluded from the diluted calculations above for the year ended December 31, 2016. In addition
to in-the-money stock options, unvested restricted stock grants were also used in the calculation of diluted earnings per share based on the treasury method. Options to
purchase 58,063 common shares were excluded from the diluted calculations above for the year ended December 31, 2015, because the exercise prices on the options
were greater than the average market price for the period. There were no options to purchase common shares that were excluded from the diluted calculations above
for the year ended December 31, 2014.
24. Accumulated Other Comprehensive Income
Unrealized gains (losses) on AFS securities
Amounts reclassified from accumulated other comprehensive income (AOCI) and the affected line items in the statements of income during the years ended
December 31, 2016, 2015, and 2014 were:
Year Ended December 31
(in thousands)
Affected line item in the statements of income
Securities gains (losses)
Tax expense (benefit)
Total reclassifications out of AOCI
Amounts Reclassified from AOCI
2016
2015
2014
$
$
522 $
183
339 $
(106) $
(37)
(69) $
(211)
(74)
(137)
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee, Board of Directors
and Stockholders
Community Trust Bancorp, Inc.
Pikeville, Kentucky
We have audited the accompanying consolidated balance sheets of Community Trust Bancorp, Inc. (Company) as of December 31, 2016 and 2015, and the
related consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the
three-year period ended December 31, 2016. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016, in conformity
with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control
over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2017 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
BKD, LLP
Louisville, Kentucky
March 15, 2017
55 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee, Board of Directors
and Stockholders
Community Trust Bancorp, Inc.
Pikeville, Kentucky
We have audited Community Trust Bancorp, Inc.’s (Company) internal control over financial reporting as of December 31, 2016, based on criteria established
in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying management report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the Company, maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial
statements of the Company and our report dated March 15, 2017, expressed an unqualified opinion thereon.
BKD, LLP
Louisville, Kentucky
March 15, 2017
56
MANAGEMENT REPORT ON INTERNAL CONTROL
We, as management of Community Trust Bancorp, Inc. and its subsidiaries (“CTBI”), are responsible for establishing and maintaining adequate internal control
over financial reporting. Pursuant to the rules and regulations of the Securities and Exchange Commission, internal control over financial reporting is a process
designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
ö= Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
ö= Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and
ö= Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a
material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding
controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of
changes in conditions, the effectiveness of internal control may vary over time.
Because of the inherent limitations, any system of internal control over financial reporting, no matter how well designed, may not prevent or detect
misstatements due to the possibility that a control can be circumvented or overridden or that misstatements due to error or fraud may occur that are not detected. Also,
projections of the effectiveness to future periods are subject to the risk that the internal controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies and procedures included in such controls may deteriorate.
Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2016 based on the control criteria in the 2013
COSO Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, we have concluded that CTBI’s
internal control over financial reporting is effective as of December 31, 2016.
The effectiveness of CTBI’s internal control over financial reporting as of December 31, 2016 has been audited by BKD, LLP, an independent registered
public accounting firm that audited the CTBI’s consolidated financial statements included in this annual report.
March 15, 2017
Jean R. Hale
Chairman, President, and
Chief Executive Officer
Kevin J. Stumbo
Executive Vice President, Chief Financial Officer,
and Treasurer
57
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; 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.
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 this annual report. The MD&A includes the following sections:
Our Business
Financial Goals and Performance
Results of Operations and Financial Condition
Contractual Obligations and Commitments
Liquidity and Market Risk
Interest Rate Risk
Capital Resources
Impact of Inflation, Changing Prices, and Economic Conditions
Stock Repurchase Program
Critical Accounting Policies and Estimates
=
=
=
=
=
=
=
=
=
=
Our Business
Community Trust Bancorp, Inc. (“CTBI”) is a bank holding company headquartered in Pikeville, Kentucky. Currently, we own one commercial bank,
Community Trust Bank, Inc. (“CTB”) and one trust company, Community Trust and Investment Company. Through our subsidiaries, we have eighty 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, 2016, we had total consolidated assets of $3.9 billion and total consolidated deposits, including repurchase
agreements, of $3.3 billion. Total shareholders’ equity at December 31, 2016 was $500.6 million. Trust assets under management, which are excluded from CTBI’s
total consolidated assets, at December 31, 2016, were $2.1 billion. Trust assets under management include CTB’s investment portfolio totaling $0.6 billion.
Through its subsidiaries, CTBI engages in a wide range of commercial and personal banking and trust and wealth management activities, which include
accepting time and demand deposits; making secured and unsecured loans to corporations, individuals and others; providing cash management services to corporate and
individual customers; issuing letters of credit; renting safe deposit boxes; and providing funds transfer services. The lending activities of CTB include making
commercial, construction, mortgage, and personal loans. Lease-financing, lines of credit, revolving lines of credit, term loans, and other specialized loans, including
asset-based financing, are also available. Our corporate subsidiaries act as trustees of personal trusts, as executors of estates, as trustees for employee benefit trusts,
as paying agents for bond and stock issues, as investment agent, as depositories for securities, and as providers of full service brokerage and insurance services. For
further information, see Item 1 of our annual report on Form 10-K for the year ended December 31, 2016.
58
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 2017. Rather, the goals represent a range of target performance for 2017. There is no assurance that any or all of these goals
will be achieved. See “Cautionary Statement Regarding Forward Looking Statements.”
Earnings per share
Net income
ROAA
ROAE
Revenues
2016 Goals
$2.72 - $2.82
$48.0 - $49.2 million
1.22% - 1.28%
9.4% - 10.4%
2016 Performance
$2.70
$47.3 million
1.21%
9.58%
2017 Goals
$2.76 - $2.86
$49.0 - $50.2 million
1.19% - 1.25%
9.10% - 10.10%
$183.0 - $189.6 million
$181.5 million
$187.8 - $193.8 million
Noninterest revenue as of % of total revenue
26.0% - 26.5%
Assets
Loans
$3.8 - $4.2 billion
$2.9 - $3.1 billion
Deposits, including repurchase agreements
$3.2 - $3.4 billion
26.48%
$3.93 billion
$2.94 billion
$3.33 billion
25.00% - 25.80%
$3.90 - $4.40 billion
$3.00 - $3.20 billion
$3.30 - $3.50 billion
Shareholders’ equity
$485.0 - $520.0 million
$500.6 million
$510.0 - $550.0 million
Results of Operations and Financial Condition
We reported earnings of $47.3 million, or $2.70 per basic share, for the year ended December 31, 2016 compared to $46.4 million, or $2.66 per basic share, for
the year ended December 31, 2015 and $43.3 million, or $2.50 per basic share, for the year ended December 31, 2014.
2016 Highlights
=Our loan portfolio increased $64.4 million from December 31, 2015.
=Our investment portfolio increased $9.7 million from December 31, 2015.
=Deposits, including repurchase agreements, increased $100.4 million from December 31, 2015.
=Nonperforming loans at $27.5 million decreased $1.1 million from December 31, 2015. Nonperforming assets at $63.4 million decreased $6.0 million from
December 31, 2015.
=Net loan charge-offs for the year 2016 were $8.0 million, or 0.28% of average loans, compared to $7.0 million, or 0.25%, for the year 2015.
Income Statement Review
(dollars in thousands)
Year Ended December 31
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income taxes
Net income
Average earning assets
Yield on average earnings assets
Cost of interest bearing funds
Net interest margin
Net Interest Income
2016
2015
2014
Amount
Percent
Change 2016 vs. 2015
$
$
$
133,021 $
7,872
48,441
107,126
19,118
47,346 $
132,247 $
8,650
46,809
105,443
18,531
46,432 $
132,070 $
8,755
45,081
105,999
19,146
43,251 $
774
(778)
1,632
1,683
587
914
3,652,714 $
3,524,506 $
3,422,450 $
128,208
4.07%
0.52%
3.70%
4.14%
0.46%
3.81%
4.26%
0.46%
3.92%
(0.07)%
0.06 %
(0.11)%
0.6 %
(9.0)
3.5
1.6
3.2
2.0 %
3.6 %
(1.8)%
12.5 %
(2.9)%
Net interest income for the year ended December 31, 2016 of $133.0 million increased $0.8 million, or 0.6%, from prior year. Average earning assets
increased $128.2 million over prior year. Our yield on average earning assets decreased 7 basis points from prior year, while our cost of interest bearing funds
increased 6 basis points. Average loans to deposits, including repurchase agreements, for the year ended December 31, 2016 were 88.2% compared to 87.2% for the
year ended December 31, 2015.
59
Net interest income for the year ended December 31, 2015 increased $0.2 million, or 0.1%, from 2014. Our yield on average earning assets decreased 12
basis points from 2014 to 2015, while our cost of interest bearing funds remained flat. Average loans to deposits, including repurchase agreements, for the year ended
December 31, 2015 were 87.2% compared to 84.4% for the year ended December 31, 2014.
Provision for Loan Losses
The provision for loan losses added to the allowance for 2016 of $7.9 million was a $0.8 million decrease from prior year. This provision represented a charge
against current earnings in order to maintain the allowance at an appropriate level determined using the accounting estimates described in the Critical Accounting
Policies and Estimates section.
The provision for loan losses added to the allowance for 2015 of $8.7 million was a $0.1 million decrease from 2014.
Noninterest Income
Noninterest income for the year ended December 31, 2016 of $48.4 million was an increase of $1.6 million, or 3.5%, from 2015. The increase in noninterest
income year over year was primarily due to a $0.7 million increase in deposit services charges, a $0.3 million increase in trust revenue, a $0.3 million increase in loan
related fees, and a $0.6 million positive variance in securities gains (losses).
Noninterest income for the year ended December 31, 2015 increased $1.7 million, or 3.8%, from 2014 as a result of increases in gains on sales of loans ($0.5
million), deposit service charges ($0.4 million), trust revenue ($0.3 million), and loan related fees ($0.3 million) and decreased securities losses ($0.1 million). Loan
related fees were affected by a $0.5 million fluctuation in the fair value adjustments of our mortgage servicing rights from 2014 to 2015.
Noninterest Expense
Noninterest expense for the year ended December 31, 2016 of $107.1 million increased $1.7 million, or 1.6%, from prior year. The increase in noninterest
expense was primarily due to an increase in personnel expense, partially offset by decreased FDIC insurance expense. The increase in our personnel expense is a
result of changes in our group medical insurance expense caused by differences in our claims paid experience as a self-insured employer.
Noninterest expense for the year ended December 31, 2015 decreased $0.6 million, or 0.5%, from 2014, as a result of decreases in occupancy and equipment
expense ($0.6 million), data processing expense ($1.1 million), and repossession expense ($0.2 million), partially offset by a $1.7 million increase in amortization expense
related to tax credits.
Balance Sheet Review
CTBI’s total assets at $3.9 billion increased $28.2 million, or 0.7%, from December 31, 2015. Loans outstanding at December 31, 2016 were $2.9 billion,
increasing $64.4 million, or 2.2%, year over year. We experienced growth during the year of $9.7 million in the commercial loan portfolio, $54.6 million in the indirect
loan portfolio, and $6.7 million in the consumer direct loan portfolio, partially offset by a $6.6 million decrease in the residential loan portfolio. CTBI’s investment
portfolio increased $9.7 million, or 1.6%, from December 31, 2015. Deposits in other banks decreased $42.1 million from December 31, 2015. Deposits, including
repurchase agreements, at $3.3 billion increased $100.4 million, or 3.1%, from December 31, 2015.
Shareholders’ equity at December 31, 2016 was $500.6 million compared to $475.6 million at December 31, 2015. CTBI’s annualized dividend yield to
shareholders as of December 31, 2016 was 2.58%.
Loans
(in thousands)
Loan Category
Commercial:
Construction
Secured by real estate
Equipment lease financing
Other commercial
Total commercial
Residential:
Real estate construction
Real estate mortgage
Home equity
Total residential
Consumer:
Consumer direct
Consumer indirect
Total consumer
Total loans
Balance
Variance from
Prior Year
Net Charge-Offs Nonperforming
ALLL
December 31, 2016
$
66,998
1,085,428
5,512
350,159
1,508,097
57,966
702,969
91,511
852,446
133,093
444,735
577,828
(14.1)% $
3.1
(35.3)
(2.4)
0.7
(6.1)
(0.7)
2.3
(0.8)
5.3
14.0
11.9
280 $
1,463
0
1,697
3,440
185
942
45
1,172
621
2,800
3,421
1,940 $
9,341
0
1,700
12,981
163
12,555
1,022
13,740
68
681
749
884
14,191
42
4,656
19,773
629
6,027
774
7,430
1,885
6,845
8,730
$
2,938,371
2.2% $
8,033 $
27,470 $
35,933
60
Asset Quality
CTBI’s total nonperforming loans were $27.5 million at December 31, 2016, a 4.0% decrease from the $28.6 million at December 31, 2015. The decrease for
the year included a $1.2 million decrease in loans 90+ days past due partially offset by a $0.1 million increase in nonaccrual loans. Loans 30-89 days past due and
accruing interest at $16.4 million was an increase of $2.0 million from December 31, 2015. 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. We also have a Loan Review Department that reviews every market within CTB annually and performs extensive testing of the loan portfolio to
assure the accuracy of loan grades and classifications for delinquency, troubled debt restructuring, impaired status, impairment, nonaccrual status, and adequate loan
loss reserves. The Loan Review Department has annually reviewed on average 95% 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 85% based on the loan production during the number of
months included in the review scope. The review scope is generally four to six months of production.
Impaired loans, loans not expected to meet contractual principal and interest payments, at December 31, 2016 totaled $52.2 million compared to $49.9 million at
December 31, 2015. Included in certain loan categories of impaired loans are troubled debt restructurings that were classified as impaired. At December 31, 2016,
CTBI had $28.8 million in commercial loans secured by real estate, $5.3 million in commercial real estate construction loans, $10.8 million in commercial other loans,
and $1.5 million in real estate mortgage loans that were modified in troubled debt restructurings and impaired. Management evaluates all impaired loans for impairment
and records a direct charge-off or provides specific reserves when necessary.
For further information regarding nonperforming and impaired loans, see note 4 to the consolidated financial statements.
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.
Our level of foreclosed properties at $35.9 million at December 31, 2016 was a $4.8 million decrease from $40.7 million at December 31, 2015. Sales of
foreclosed properties for the year ended December 31, 2016 totaled $9.5 million while new foreclosed properties totaled $5.9 million. At December 31, 2016, the book
value of properties under contracts to sell was $1.9 million; however, the closings had not occurred at year-end.
When foreclosed properties are acquired, appraisals are obtained and the properties are booked at the current market value less expected sales costs.
Additionally, periodic updated appraisals are obtained on unsold foreclosed properties. When an updated appraisal reflects a market value below the current book
value, a charge is booked to current earnings to reduce the property to its new market value less expected sales costs. Charges to earnings in 2016 to reflect the
decrease in current market values of foreclosed properties totaled $1.2 million. There were 72 properties reappraised during 2016. Of these, 45 were written down by
a total of $0.9 million. Charges during the year ended December 31, 2015 were $1.7 million. Our policy for determining the frequency of periodic reviews is based
upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but
generally not more than 24 months. Approximately eighty-eight percent of our OREO properties have appraisals dated within the past 18 months. Management
anticipates that our foreclosed properties will remain elevated as we work through current market conditions.
The appraisal aging analysis of foreclosed properties, as well as the holding period, at December 31, 2016 is shown below:
(in thousands)
Up to 3 months
3 to 6 months
6 to 9 months
9 to 12 months
12 to 18 months
18 to 24 months
Over 24 months
Total
Appraisal Aging Analysis
Holding Period Analysis
Days Since Last Appraisal
Current Book
Value
Holding Period
Current Book
Value
$
$
2,783 Less than one year
3,739 1 to 2 years
1,317 2 to 3 years
3,493 3 to 4 years
20,289 4 to 5 years
4,195 Over 5 years*
40
35,856 Total
$
$
5,095
9,145
3,330
976
2,203
15,107
35,856
* Regulatory approval is required and has been obtained to hold these properties beyond the initial period of 5 years. Additional approval may be required to continue to
hold these properties should they not be liquidated during the extension period, which is typically one year.
Net loan charge-offs for the year were $8.0 million, or 0.28% of average loans annualized, an increase from prior year’s $7.0 million, or 0.25% of average
loans annualized. Of the total net charge-offs, $3.4 million were in commercial loans, $2.8 million were in indirect auto loans, $1.2 million were in residential real estate
mortgage loans, and $0.6 million were in direct consumer loans.
Our loan loss reserve as a percentage of total loans outstanding at December 31, 2016 decreased to 1.22% from the 1.26% at December 31, 2015. Our
reserve coverage (allowance for loan and lease loss reserve to nonperforming loans) improved to 130.8% at December 31, 2016 compared to 126.2% at December 31,
2015.
61
Contractual Obligations and Commitments
As disclosed in the notes to the consolidated financial statements, we have certain obligations and commitments to make future payments under contracts. At
December 31, 2016, the aggregate contractual obligations and commitments are:
Contractual Obligations:
(in thousands)
Deposits without stated maturity
Certificates of deposit and other time deposits
Repurchase agreements and federal funds purchased
Advances from Federal Home Loan Bank
Interest on advances from Federal Home Loan Bank*
Long-term debt
Interest on long-term debt*
Annual rental commitments under leases
Total contractual obligations
Payments Due by Period
Total
1 Year
1,868,265 $
1,213,043
255,881
944
21
61,341
57,842
8,878
3,466,215 $
1,868,265 $
988,296
255,881
106
12
0
1,842
2,010
3,116,412 $
$
$
2-5 Years
After 5 Years
0 $
224,419
0
464
9
0
10,280
3,779
238,951 $
0
328
0
374
0
61,341
45,720
3,089
110,852
*The amounts provided as interest on advances from Federal Home Loan Bank and interest on long-term debt assume the liabilities will not be prepaid and interest is
calculated to their individual maturities.
The interest on $61.3 million in long-term debt is calculated based on the three-month LIBOR plus 1.59% until its maturity of June 1, 2037. The three-month
LIBOR rate is projected using the most likely rate forecast from assumptions incorporated in the interest rate risk model and is determined two business days prior to
the interest payment date. These assumptions are uncertain, and as a result, the actual payments will differ from the projection due to changes in economic conditions.
Other Commitments:
(in thousands)
Standby letters of credit
Commitments to extend credit
Total other commitments
Amount of Commitment - Expiration by Period
Total
1 Year
2-5 Years
After 5 Years
$
$
29,917 $
570,467
600,384 $
19,829 $
436,984
456,813 $
10,088 $
121,080
131,168 $
0
12,403
12,403
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. Refer to note 18 to the consolidated financial statements for additional information regarding other commitments.
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, 2016, we had approximately $144.7 million in cash and cash equivalents and approximately $605.4 million in securities
valued at estimated fair value designated as available-for-sale and available to meet liquidity needs on a continuing basis compared to $187.6 million and $594.9 million
at December 31, 2015. 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 $0.9 million at December 31, 2016 compared to $101.1 million at December 31,
2015. As of December 31, 2016, we had a $295.8 million available borrowing position with the Federal Home Loan Bank compared to $218.3 million at December 31,
2015. 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, 2016, we had $57 million in lines of credit with various
correspondent banks available to meet any future cash needs compared to $44 million at December 31, 2015. 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, 2016 were federal funds sold of $0.5 million compared to $0.8 million at December 31, 2015, and deposits
with the Federal Reserve were $93.4 million at December 31, 2016 compared to $130.6 million at December 31, 2015. Additionally, we project cash flows from our
investment portfolio to generate additional liquidity over the next 90 days.
The investment portfolio consists primarily 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 the end of 2016, available-for-sale (“AFS”) securities comprised approximately 99.9% of the total
investment portfolio, and the AFS portfolio was approximately 120.9% of equity capital. Ninety-two percent of the pledge eligible portfolio was pledged.
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.
62
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, 2016:
Change in Interest Rates
(basis points)
+400
+300
+200
+100
-25
Percentage Change in Net Interest Income
(12 Months)
7.05%
5.10%
3.15%
1.30%
(0.21)%
The following table shows our estimated earnings sensitivity profile as of December 31, 2015:
Change in Interest Rates
(basis points)
+400
+300
+200
+100
-25
Percentage Change in Net Interest Income
(12 Months)
7.54%
5.46%
3.33%
1.35%
(0.30)%
The simulation model used the yield curve spread evenly over a twelve-month period. The measurement at December 31, 2016 estimates that our net interest
income in an up-rate environment would increase by 7.05% at a 400 basis point change, 5.10% increase at a 300 basis point change, 3.15% increase at a 200 basis
point change, and a 1.30% increase at a 100 basis point change. In a down-rate environment, a 25 basis point decrease in interest rates would decrease net interest
income by 0.21% over one year. 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 2016 and 2015, $81.4 million and $80.6 million, respectively, were realized on the sale of fixed rate residential mortgages. We focus our efforts on
consistent net interest revenue and net interest margin growth through each of the retail and wholesale business lines. We do not currently engage in trading activities.
The preceding analysis was prepared using a rate ramp analysis which attempts to spread changes evenly over a specified time period as opposed to a rate
shock which measures the impact of an immediate change. Had these measurements been prepared using the rate shock method, the results would vary.
Our Static Repricing GAP as of December 31, 2016 is presented below. In the 12 month repricing GAP, rate sensitive liabilities (“RSL”) exceeded rate
sensitive assets (“RSA”) by $158.7 million.
(dollars in thousands)
1-3
Months
4-6
Months
7-9
Months
10-12
Months
2-3
Years
4-5
Years
> 5
Years
Assets
$
1,435,324 $
227,194 $
193,639 $
215,660
$
756,883
$
469,905
$
633,565
Liabilities and
Equity
871,530
341,950
421,541
595,465
1,075,805
Repricing difference
563,794
(114,756)
(227,902)
(379,805)
(318,921)
92,109
377,795
Cumulative GAP
563,794
449,038
221,136
(158,669)
(477,590)
(99,795)
RSA/RSL
1.65x
0.66x
0.46x
0.36x
0.70x
5.10x
533,769
99,795
0
1.19x
Cumulative GAP to total
assets
Capital Resources
14.34%
11.42%
5.62%
(4.04)%
(12.15)%
(2.54)%
0.00%
We continue to grow our shareholders’ equity while also providing an annual dividend yield for the year 2016 of 2.54% to shareholders. Shareholders’ equity
increased 5.3% from December 31, 2015 to $500.6 million at December 31, 2016. Our primary source of capital growth is the retention of earnings. Cash dividends
were $1.260 per share for 2016 and $1.220 per share for 2015. We retained 53.3% of our earnings in 2016 compared to 54.1% in 2015.
Regulatory guidelines require bank holding companies, commercial banks, and savings banks to maintain certain minimum capital ratios and define companies
as “well-capitalized” that sufficiently exceed the minimum ratios. The banking regulators may alter minimum capital requirements as a result of revising their internal
policies and their ratings of individual institutions. To be “well-capitalized” banks and bank holding companies must maintain a Tier 1 leverage ratio of no less than 5%,
a common equity Tier 1 capital ratio of no less than 6.5%, a Tier 1 risk based ratio of no less than 8%, and a total risk based ratio of no less than 10%. Our ratios as of
December 31, 2016 were 12.75%, 15.18%, 17.25%, and 18.50%, respectively, all exceeding the threshold for meeting the definition of “well-capitalized.” See note 21
to the consolidated financial statements for further information.
As of December 31, 2016, 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. However, based on a recent discussion with a
regulatory agency representative concerning the status of an ongoing review of two CTB deposit add-on products, CTBI believes it is likely that it will be cited for two
violations based on alleged unfair and deceptive practices with respect to such products. CTBI has evaluated the possible violations and their potential financial
impact. Based upon this analysis, management established an accrual in 2014 for possible customer reimbursements. We have not received a final written notice
citing such violations and have not been informed as to the amount of, or relevant time period for, related reimbursement. The actual amount of reimbursement may
materially vary from the amount management has evaluated as most likely at December 31, 2016.
63
Basel III
On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to CTBI and CTB. The
FDIC subsequently approved these rules. The final rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.
The rules include new risk-based capital and leverage ratios, which are being phased in from 2015 to 2019, and refine the definition of what constitutes
“capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to CTBI and CTB under the final rules are: (i) a new
common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and
(iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital
requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer began to be phased in on January 1, 2016 at 0.625% of
risk-weighted assets and will increase by 0.625% annually until fully implemented in January 2019. An institution is subject to limitations on certain activities including
payment of dividends, share repurchases, and discretionary bonuses to executive officers if its capital level is below the capital conservation buffer amount.
The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity,
unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final
rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes CTBI) will be able to
permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until
they redeem such instruments or until the instruments mature.
The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions,
including the Bank, if their capital levels begin to show signs of weakness. These revisions took effect January 1, 2015. Under the prompt corrective action
requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following increased capital
level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%);
(iii) a total capital ratio of 10% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from previous rules).
The final rules set forth certain changes for the calculation of risk-weighted assets, which we were required to utilize beginning January 1, 2015. The
standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of
creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity
exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking
organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to banks with greater than $250 billion in
consolidated assets. We currently satisfy the well-capitalized and the capital conservation standards, and based on our current capital composition and levels, we
anticipate that our capital ratios, on a Basel III basis, will continue to exceed the well-capitalized minimum capital requirements and capital conservation buffer
standards.
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.
Beginning in 2008, the U.S. economy faced a severe economic crisis including a major recession from which it is recovering. Commerce and business growth
in certain regions in the U.S. remains reduced and local governments and many businesses continue to experience financial difficulty. In some areas of the U.S.,
including certain parts of our service area, unemployment levels remain elevated. There can be no assurance that these conditions will continue to improve and these
conditions could worsen. In addition, the level of U.S. debt, the Federal Open Market Committee’s plan for economic stabilization, potential volatility in oil prices,
potential U.S. tax law modifications, and the repeal of the Patient Protection and Affordable Care Act and the implementation of replacement healthcare legislation
may have a destabilizing effect on financial markets or a negative effect on the economy.
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. While unemployment rates have improved in many
areas of the United States, unemployment rates remain elevated in certain markets in which we operate. 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.
Overall, during recent years, the business environment has been adverse for many households and businesses in the United States and worldwide. While
economic conditions in the United States and worldwide have improved since the recession, there can be no assurance that this improvement will continue or that
another recession will not occur. Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in consumer
and business spending, borrowing, and savings habits. Such conditions could adversely affect the credit quality of our loans and our business, financial condition, and
results of operations.
64
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 July 2000 and in May 2003. We have not repurchased any shares of our common stock since February 2008. There are currently 67,371 shares
remaining under CTBI’s current repurchase authorization. As of December 31, 2016, a total of 2,432,629 shares have been repurchased through this program. The
following table shows Board authorizations and repurchases made through the stock repurchase program for the years 1998 through 2016:
Repurchases*
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Total
Board Authorizations
500,000
0
1,000,000
0
0
1,000,000
0
0
0
0
0
0
0
0
0
0
0
0
0
2,500,000
Average Price ($)
-
14.45
10.25
13.35
17.71
19.62
23.14
-
-
28.56
25.53
-
-
-
-
-
-
-
-
15.93
# of Shares
0
144,669
763,470
489,440
396,316
259,235
60,500
0
0
216,150
102,850
0
0
0
0
0
0
0
0
2,432,629
Shares Available for Repurchase
67,371
*Repurchased shares and average prices have been restated to reflect stock dividends that have occurred; however, board authorized shares have not been adjusted.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the
appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts
reported in our consolidated financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will
inevitably differ from our estimates. Such differences could be material to the consolidated financial statements.
We believe the application of accounting policies and the estimates required therein are reasonable. These accounting policies and estimates are constantly
reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be
appropriate, and actual results have not differed materially from those determined using necessary estimates.
Our accounting policies are described in note 1 to the consolidated financial statements. We have identified the following critical accounting policies:
Investments – Management determines the classification of securities at purchase. We classify securities into held-to-maturity, trading, or available-for-sale
categories. Held-to-maturity securities are those which we have the positive intent and ability to hold to maturity and are reported at amortized cost. In accordance
with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320, Investment Securities, investments in debt securities that are not
classified as held-to-maturity and equity securities that have readily determinable fair values shall be classified in one of the following categories and measured at fair
value in the statement of financial position:
a. Trading securities. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time)
shall be classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the
objective of generating profits on short-term differences in price.
b. Available-for-sale securities. Investments not classified as trading securities (nor as held-to-maturity securities) shall be classified as available-for-sale
securities.
We do not have any securities that are classified as trading securities. Available-for-sale securities are reported at fair value, with unrealized gains and losses included
as a separate component of shareholders’ equity, net of tax. If declines in fair value are other than temporary, the carrying value of the securities is written down to
fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not
credit related.
Gains or losses on disposition of securities are computed by specific identification for all securities except for shares in mutual funds, which are computed by
average cost. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings.
When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair market value is
below amortized cost, additional analysis is performed to determine whether an other than temporary impairment condition exists. Available-for-sale and held-to-
maturity securities are analyzed quarterly for possible other than temporary impairment. The analysis considers (i) whether we have the intent to sell our securities
prior to recovery and/or maturity and (ii) whether it is more likely than not that we will not have to sell our securities prior to recovery and/or maturity. Often, the
information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or
conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on
the CTBI’s results of operations and financial condition.
65
Loans – Loans with the ability and the intent to be held until maturity and/or payoff are reported at the carrying value of unpaid principal reduced by unearned
interest, an allowance for loan and lease losses, and unamortized deferred fees or costs. Income is recorded on the level yield basis. Interest accrual is discontinued
when management believes, after considering economic and business conditions, collateral value, and collection efforts, that the borrower’s financial condition is such
that collection of interest is doubtful. Any loan greater than 90 days past due must be well secured and in the process of collection to continue accruing interest. Cash
payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured.
Loans are not reclassified as accruing until principal and interest payments remain current for a period of time, generally six months, and future payments appear
reasonably certain. Included in certain loan categories of impaired loans are troubled debt restructurings that were classified as impaired. A restructuring of a debt
constitutes a troubled debt restructuring if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it
would not otherwise consider.
Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized over the estimated life of the related
loans, leases, or commitments as a yield adjustment.
Allowance for Loan and Lease Losses – We maintain an allowance for loan and lease losses (“ALLL”) at a level that is appropriate to cover estimated
credit losses on individually evaluated loans determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio.
Credit losses are charged and recoveries are credited to the ALLL.
We utilize an internal risk grading system for commercial credits. Those larger commercial credits that exhibit probable or observed credit weaknesses are
subject to individual review. The borrower’s cash flow, adequacy of collateral coverage, and other options available to CTBI, including legal remedies, are evaluated.
The review of individual loans includes those loans that are impaired as defined by ASC 310-10-35, Impairment of a Loan. We evaluate the collectability of both
principal and interest when assessing the need for loss provision. Historical loss rates are analyzed and applied to other commercial loans not subject to specific
allocations. The ALLL allocation for this pool of commercial loans is established based on the historical average, maximum, minimum, and median loss ratios.
A loan is considered impaired when, based on current information and events, it is probable that CTBI will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-
by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for
commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable
market price, or the fair value of the collateral if the loan is collateral dependent.
Homogenous loans, such as consumer installment, residential mortgages, and home equity lines are not individually risk graded. The associated ALLL for
these loans is measured under ASC 450, Contingencies.
When any secured commercial loan is considered uncollectable, whether past due or not, a current assessment of the value of the underlying collateral is
made. If the balance of the loan exceeds the fair value of the collateral, the loan is placed on nonaccrual and the loan is charged down to the value of the collateral
less estimated cost to sell or a specific reserve equal to the difference between book value of the loan and the fair value assigned to the collateral is created until such
time as the loan is foreclosed. When the foreclosed collateral has been legally assigned to CTBI, a charge off is taken, if necessary, in order that the remaining
balance reflects the fair value estimated less costs to sell of the collateral then transferred to other real estate owned or other repossessed assets. Any unsecured
commercial loan is charged off when it is considered uncollectable or no later than at 90 days past due.
All closed-end consumer loans (excluding conventional 1-4 family residential loans and installment and revolving loans secured by real estate) are charged off
no later than 120 days (5 monthly payments) delinquent. If a loan is considered uncollectable, it is charged off earlier than 120 days delinquent. For conventional 1-4
family residential loans and installment and revolving loans secured by real estate, when a loan is 90 days past due, a current assessment of the value of the real estate
is made. If the balance of the loan exceeds the fair value of the property, the loan is placed on nonaccrual. Foreclosure proceedings are normally initiated after 120
days. When the foreclosed property has been legally assigned to CTBI, the fair value less estimated costs to sell is transferred to other real estate owned and the
remaining balance is taken as a charge-off.
Historical loss rates for loans are adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss
recognition. We use twelve rolling quarters for our historical loss rate analysis. Factors that we consider include delinquency trends, current economic conditions and
trends, strength of supervision and administration of the loan portfolio, levels of underperforming loans, level of recoveries to prior year’s charge-offs, trends in loan
losses, industry concentrations and their relative strengths, amount of unsecured loans, and underwriting exceptions. Management continually reevaluates the other
subjective factors included in its ALLL analysis.
Other Real Estate Owned – When foreclosed properties are acquired, appraisals are obtained and the properties are booked at the current market value less
expected sales costs. Additionally, periodic updated appraisals are obtained on unsold foreclosed properties. When an updated appraisal reflects a market value below
the current book value, a charge is booked to current earnings to reduce the property to its new market value less expected sales costs. Our policy for determining the
frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is
typically between 12 and 18 months but generally not more than 24 months. All revenues and expenses related to the carrying of other real estate owned are
recognized through the income statement.
Income Taxes – Income tax expense is based on the taxes due on the consolidated tax return plus deferred taxes based on the expected future tax benefits
and consequences of temporary differences between carrying amounts and tax bases of assets and liabilities, using enacted tax rates. Any interest and penalties
incurred in connection with income taxes are recorded as a component of income tax expense in the consolidated financial statements. During the years ended
December 31, 2016, 2015, and 2014, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes.
66
SELECTED STATISTICAL INFORMATION
The following tables set forth certain statistical information relating to CTBI and subsidiaries on a consolidated basis and should be read together with our
consolidated financial statements.
Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates
(in thousands)
Average
Balances
2016
Interest
Average
Rate
Average
Balances
2015
Interest
Average
Rate
Average
Balances
2014
Interest
Average
Rate
$
Earning assets:
Loans (1)(2)(3)
Loans held for
sale
Securities:
U.S. Treasury
and agencies
Tax exempt
state and
political
subdivisions (3)
Other securities
Federal Reserve
Bank and
Federal Home
Loan Bank
stock
Federal funds
sold
Interest bearing
deposits
Other
investments
Investment in
unconsolidated
subsidiaries
Total earning
assets
Allowance for
loan and lease
losses
Nonearning
assets:
Cash and due
from banks
Premises and
equipment, net
Other assets
Total assets
$
2,916,031 $
134,455
4.61% $
2,791,871 $
131,304
4.70% $
2,642,231 $
128,929
728
101
13.87
1,075
95
8.84
943
74
4.88%
7.85
445,500
6,669
1.50
446,081
7,425
1.66
474,062
9,302
1.96
99,086
53,492
4,182
1,596
4.22
2.98
101,382
59,705
4,162
1,728
4.11
2.89
95,460
66,793
3,963
2,012
22,814
1,011
3,121
108,546
1,550
19
538
17
4.43
0.61
0.50
1.10
22,812
1,010
3,344
90,106
6,285
13
219
56
4.43
0.39
4,007
0.24
103,823
0.89
9,307
15
248
87
23,978
1,136
1,846
43
2.33
1,845
35
1.90
1,846
34
3,652,714 $
148,631
4.07%
3,524,506 $
146,047
4.14%
3,422,450 $
145,800
(36,681)
3,616,033
50,946
48,138
205,140
3,920,257
(35,735)
3,488,771
53,641
49,103
198,767
3,790,282
$
(34,544)
3,387,906
55,658
50,923
185,044
3,679,531
$
4.15
3.01
4.74
0.37
0.24
0.93
1.84
4.26%
67
Average
Balances
2016
Interest
Average
Rate
Average
Balances
2015
Interest
Average
Rate
Average
Balances
2014
Interest
Average
Rate
$
1,088,291 $
1,203,081
2,566
8,355
0.24% $
0.69
1,018,866 $
1,217,225
2,299
7,317
0.23% $
0.60
956,389 $
1,291,896
2,141
7,657
262,361
1,155
0.44
256,091
938
0.37
233,431
841
14,410
61,341
62
1,417
0.43
2.31
15,821
61,341
49
1,170
0.31
1.91
4,210
61,341
27
1,131
0.22%
0.59
0.36
0.64
1.84
2,629,484 $
13,555
0.52%
2,569,344 $
11,773
0.46%
2,547,267 $
11,797
0.46%
758,555
37,820
3,425,859
494,398
720,508
34,748
3,324,600
465,682
660,833
36,141
3,244,241
435,290
$
3,920,257
$
3,790,282
$
3,679,531
$
135,076
$
134,274
$
134,003
2,055
2,027
1,933
$
133,021
$
132,247
$
132,070
3.55%
0.15
3.70%
3.68%
0.13
3.81%
3.80%
0.12
3.92%
(in thousands)
Interest bearing
liabilities:
Deposits:
Savings and
demand
deposits
Time deposits
Repurchase
agreements and
federal funds
purchased
Advances from
Federal Home
Loan Bank
Long-term debt
Total interest
bearing
liabilities
Noninterest
bearing
liabilities:
Demand
deposits
Other liabilities
Total liabilities
Shareholders’
equity
Total liabilities
and
shareholders’
equity
Net interest
income, tax
equivalent
Less tax
equivalent
interest income
Net interest
income
Net interest
spread
Benefit of
interest free
funding
Net interest
margin
(1) Interest includes fees on loans of $1,717, $1,782, and $1,848 in 2016, 2015, and 2014, 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 35% rate.
68
Net Interest Differential
The following table illustrates the approximate effect of volume and rate changes on net interest differentials between 2016 and 2015 and also between 2015
$
and 2014.
(in thousands)
Interest income:
Loans
Loans held for sale
U.S. Treasury and agencies
Tax exempt state and political subdivisions
Other securities
Federal Reserve Bank and Federal Home Loan
Bank stock
Federal funds sold
Interest bearing deposits
Other investments
Investment in unconsolidated subsidiaries
Total interest income
Interest expense:
Savings and demand deposits
Time deposits
Repurchase agreements and federal funds
purchased
Advances from Federal Home Loan Bank
Long-term debt
Total interest expense
Total Change
2016/2015
Change Due to
Volume
Rate
Total Change
2015/2014
Change Due to
Volume
Rate
3,151 $
6
(756)
20
(132)
1
6
319
(39)
8
2,584
267
1,038
217
13
247
1,782
5,760 $
(24)
(10)
(93)
(176)
0
(1)
52
(35)
0
5,473
161
(84)
23
(4)
0
96
(2,609) $
30
(746)
113
44
1
7
267
(4)
8
(2,889)
106
1,122
194
17
247
1,686
2,375 $
21
(1,877)
199
(284)
(126)
(2)
(29)
(31)
1
247
158
(340)
97
22
39
(24)
7,141 $
11
(572)
244
(220)
(57)
(2)
(32)
(29)
0
6,484
141
(438)
83
42
0
(172)
(4,766)
10
(1,305)
(45)
(64)
(69)
0
3
(2)
1
(6,237)
17
98
14
(20)
39
148
Net interest income
$
802 $
5,377 $
(4,575) $
271 $
6,656 $
(6,385)
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, assuming a 35% tax rate.
Investment Portfolio
The maturity distribution and weighted average interest rates of securities at December 31, 2016 are as follows:
Available-for-sale
(in thousands)
U.S. Treasury,
government agencies,
and government
sponsored agency
mortgage-backed
securities
State and political
subdivisions
Other securities
Total
Within 1 Year
1-5 Years
5-10 Years
After 10 Years
Total Fair Value
Amortized
Cost
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Estimated Maturity at December 31, 2016
$ 101,616
0.79% $
95,908
1.66% $
85,877
1.71% $ 164,119
1.93% $ 447,520
1.57% $ 450,588
2,800
0
$ 104,416
44,225
2.99
0.00
0
0.85% $ 140,133
46,283
3.66
0.00
0
2.29% $ 132,160
40,208
4.33
0.00
24,358
2.63% $ 228,685
133,516
4.36
2.28
24,358
2.40% $ 605,394
133,351
4.09
2.28
25,000
2.15% $ 608,939
69
Held-to-maturity
(in thousands)
U.S. Treasury,
government agencies,
and government
sponsored agency
mortgage-backed
securities
State and political
subdivisions
Total
Total Securities
Within 1 Year
1-5 Years
5-10 Years
After 10 Years
Total
Amortized Cost
Fair
Value
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Estimated Maturity at December 31, 2016
$
$
0
0
0
0.00% $
0.00
0.00% $
0
0.00% $
866
866
4.30
4.30% $
0
0
0
0.00% $
0.00
0.00% $
0
0
0
0.00% $
0.00
0.00% $
0
0.00% $
866
866
4.30
4.30% $
0
867
867
Within 1 Year
1-5 Years
5-10 Years
After 10 Years
Total
Book Value
Fair
Value
(in thousands)
Total
Amount
$ 104,416
Yield
Amount
0.85% $ 140,999
Yield
Amount
2.30% $ 132,160
Yield
Amount
2.63% $ 228,685
Yield
Amount
2.40% $ 606,260
Yield
Amount
2.16% $ 606,261
Estimated Maturity at December 31, 2016
The calculations of the weighted average interest rates 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 35% tax rate.
Excluding those holdings of the investment portfolio in U.S. Treasury securities, government agencies, and government sponsored agency mortgage-backed
securities, there were no securities of any one issuer that exceeded 10% of our shareholders’ equity at December 31, 2016.
The book values of securities available-for-sale and securities held-to-maturity as of December 31, 2016 and 2015 are presented in note 3 to the consolidated
financial statements.
The book value of securities at December 31, 2014 is presented below:
(in thousands)
U.S. Treasury and government agencies
State and political subdivisions
U.S. government sponsored agency mortgage-backed securities
Total debt securities
CRA investment funds
Total securities
Available-for-
Sale
Held-to-
Maturity
$
$
190,563 $
133,951
288,881
613,395
25,000
638,395 $
480
1,182
0
1,662
0
1,662
70
Loan Portfolio
(in thousands)
Commercial:
Construction
Secured by real estate
Equipment lease financing
Commercial other
Total commercial
Residential:
Real estate construction
Real estate mortgage
Home equity
Total residential
Consumer:
Consumer direct
Consumer indirect
Total consumer
Total loans
Percent of total year-end loans
Commercial:
Construction
Secured by real estate
Equipment lease financing
Commercial other
Total commercial
Residential:
Real estate construction
Real estate mortgage
Home equity
Total residential
Consumer:
Consumer direct
Consumer indirect
Total consumer
Total loans
2016
2015
2014
2013
2012
$
66,998 $
1,085,428
5,512
350,159
1,508,097
78,020 $
1,052,919
8,514
358,898
1,498,351
121,942 $
948,626
10,344
352,048
1,432,960
110,779 $
872,542
8,840
374,881
1,367,042
57,966
702,969
91,511
852,446
133,093
444,735
577,828
61,750
707,874
89,450
859,074
126,406
390,130
516,536
62,412
712,465
88,335
863,212
122,136
315,516
437,652
56,075
697,601
84,880
838,556
122,215
287,541
409,756
119,447
807,213
9,246
376,348
1,312,254
55,041
696,928
82,292
834,261
122,581
281,477
404,058
$
2,938,371 $
2,873,961 $
2,733,824 $
2,615,354 $
2,550,573
2.28%
36.94
0.18
11.92
51.32
1.97
23.93
3.11
29.01
4.53
15.14
19.67
2.71%
36.64
0.30
12.49
52.14
2.15
24.63
3.11
29.89
4.40
13.57
17.97
4.46%
34.70
0.38
12.88
52.42
2.28
26.06
3.23
31.57
4.47
11.54
16.01
4.24%
33.36
0.34
14.33
52.27
2.15
26.67
3.25
32.07
4.67
10.99
15.66
4.68%
31.65
0.36
14.76
51.45
2.16
27.32
3.23
32.71
4.80
11.04
15.84
100.00%
100.00%
100.00%
100.00%
100.00%
The total loans above are net of deferred loan fees and costs.
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).
(in thousands)
Commercial secured by real estate and commercial other
Commercial and real estate construction
Rate sensitivity:
Fixed rate
Adjustable rate
Within One Year
$
203,129 $
78,507
281,636 $
Maturity at December 31, 2016
After One but
Within Five
Years
After Five Years
Total
211,021 $
18,358
229,379 $
1,021,437 $
28,099
1,049,536 $
$
$
$
70,554 $
211,082
281,636 $
72,075 $
157,304
229,379 $
25,355 $
1,024,181
1,049,536 $
1,435,587
124,964
1,560,551
167,984
1,392,567
1,560,551
71
Nonperforming Assets
(in thousands)
Nonaccrual loans
90 days or more past due and still accruing interest
Total nonperforming loans
Other repossessed assets
Foreclosed properties
Total nonperforming assets
Nonperforming assets to total loans and foreclosed properties
Allowance to nonperforming loans
Nonaccrual and Past Due Loans
(in thousands)
December 31, 2016
Commercial construction
Commercial secured by real estate
Equipment lease financing
Commercial other
Real estate construction
Real estate mortgage
Home equity
Consumer direct
Consumer indirect
Total
December 31, 2015
Commercial construction
Commercial secured by real estate
Equipment lease financing
Commercial other
Real estate construction
Real estate mortgage
Home equity
Consumer direct
Consumer indirect
Total
Discussion of the Nonaccrual Policy
$
$
2016
2015
2014
2013
2012
16,623 $
10,847
27,470
103
35,856
63,429 $
2.13%
130.81%
16,563 $
12,046
28,609
183
40,674
69,466 $
2.38%
126.16%
20,971 $
17,985
38,956
90
36,776
75,822 $
2.74%
88.43%
19,958 $
23,599
43,557
0
39,188
82,745 $
3.12%
78.08%
16,791
19,215
36,006
5
46,986
82,997
3.20%
92.33%
Nonaccrual loans
As a % of Loan
Balances by
Category
Accruing Loans
Past Due 90 Days
or More
As a % of Loan
Balances by
Category
Balances
$
$
$
$
1,912
6,326
0
1,559
11
6,260
555
0
0
16,623
3,402
5,928
0
1,485
249
5,206
183
110
0
16,563
2.85% $
0.58
0.00
0.45
0.02
0.89
0.61
0.00
0.00
0.57% $
4.36% $
0.56
0.00
0.41
0.40
0.74
0.20
0.09
0.00
0.58% $
28
3,015
0
141
152
6,295
467
68
681
10,847
30
3,757
0
310
55
6,925
448
126
395
12,046
0.04% $
0.28
0.00
0.04
0.26
0.90
0.51
0.05
0.15
0.37% $
0.04% $
0.36
0.00
0.09
0.09
0.98
0.50
0.10
0.10
0.42% $
66,998
1,085,428
5,512
350,159
57,966
702,969
91,511
133,093
444,735
2,938,371
78,020
1,052,919
8,514
358,898
61,750
707,874
89,450
126,406
390,130
2,873,961
The accrual of interest income on loans is discontinued when management believes, after considering economic and business conditions, collateral value, and
collection efforts, that the borrower’s financial condition is such that the collection of interest is doubtful. Cash payments received on nonaccrual loans generally are
applied against principal, and interest income is only recorded once principal recovery is reasonably assured. Any loans greater than 90 days past due must be well
secured and in the process of collection to continue accruing interest. See note 1 for further discussion on our nonaccrual policy.
Potential Problem Loans
Interest accrual is discontinued when we believe, after considering economic and business conditions, collateral value, and collection efforts, that the
borrower’s financial condition is such that collection of interest is doubtful.
Foreign Outstandings
None
Loan Concentrations
We had no concentration of loans exceeding 10% of total loans at December 31, 2016. See note 19 to the consolidated financial statements for further
information.
72
Analysis of the Allowance for Loan and Lease Losses
(in thousands)
Allowance for loan and lease losses, beginning of year
Loans charged off:
Commercial construction
Commercial secured by real estate
Commercial other
Real estate construction
Real estate mortgage
Home equity
Consumer direct
Consumer indirect
Total charge-offs
Recoveries of loans previously charged off:
Commercial construction
Commercial secured by real estate
Commercial other
Real estate construction
Real estate mortgage
Home equity
Consumer direct
Consumer indirect
Total recoveries
Net charge-offs:
Commercial construction
Commercial secured by real estate
Commercial other
Real estate construction
Real estate mortgage
Home equity
Consumer direct
Consumer indirect
Total net charge-offs
Provisions charged against operations
Balance, end of year
Allocation of allowance, end of year:
Commercial construction
Commercial secured by real estate
Equipment lease financing
Commercial other
Real estate construction
Real estate mortgage
Home equity
Consumer direct
Consumer indirect
Balance, end of year
Average loans outstanding, net of deferred loan costs and fees
Loans outstanding at end of year, net of deferred loan costs and fees
Net charge-offs to average loan type:
Commercial construction
Commercial secured by real estate
Commercial other
Real estate construction
Real estate mortgage
Home equity
Consumer direct
Consumer indirect
Total
Other ratios:
Allowance to net loans, end of year
Provision for loan losses to average loans
2016
2015
2014
2013
2012
$
36,094 $
34,447
$
34,008
$
33,245 $
33,171
(316)
(1,641)
(2,136)
(192)
(1,043)
(54)
(1,236)
(5,050)
(11,668)
36
178
439
7
101
9
615
2,250
3,635
(280)
(1,463)
(1,697)
(185)
(942)
(45)
(621)
(2,800)
(8,033)
7,872
(3)
(1,379)
(1,961)
(135)
(1,421)
(129)
(1,306)
(3,536)
(9,870)
13
60
585
4
117
54
435
1,599
2,867
10
(1,319)
(1,376)
(131)
(1,304)
(75)
(871)
(1,937)
(7,003)
8,650
(15)
(2,163)
(3,141)
(123)
(1,058)
(115)
(1,326)
(3,495)
(11,436)
28
305
621
2
40
5
566
1,553
3,120
13
(1,858)
(2,520)
(121)
(1,018)
(110)
(760)
(1,942)
(8,316)
8,755
(1,135)
(1,607)
(2,265)
(89)
(744)
(241)
(1,166)
(3,802)
(11,049)
309
163
557
4
56
11
495
1,649
3,244
(826)
(1,444)
(1,708)
(85)
(688)
(230)
(671)
(2,153)
(7,805)
8,568
(1,034)
(2,035)
(3,233)
(189)
(1,123)
(248)
(1,245)
(3,483)
(12,590)
35
303
764
28
151
11
538
1,384
3,214
(999)
(1,732)
(2,469)
(161)
(972)
(237)
(707)
(2,099)
(9,376)
9,450
$
$
$
$
$
35,933 $
36,094
$
34,447
$
34,008 $
33,245
884 $
14,191
42
4,656
629
6,027
774
1,885
6,845
35,933 $
2,199
14,434
79
4,225
550
6,678
839
1,594
5,496
36,094
$
$
2,896
13,618
119
4,263
534
6,094
756
1,574
4,593
34,447
$
$
3,396 $
14,535
121
5,238
397
4,939
601
1,127
3,654
34,008 $
4,033
13,541
126
5,469
376
4,767
563
1,102
3,268
33,245
2,916,031 $
2,938,371 $
2,791,871
2,873,961
$
$
2,642,231
2,733,824
$
$
2,579,805 $
2,615,354 $
2,549,459
2,550,573
0.40%
0.14
0.47
0.32
0.13
0.05
0.48
0.67
0.28%
1.22%
0.27%
(0.01)%
0.13
0.39
0.21
0.18
0.08
0.71
0.55
0.25%
1.26%
0.31%
(0.01)%
0.21
0.70
0.20
0.15
0.13
0.63
0.67
0.31%
1.26%
0.33%
0.77%
0.17
0.46
0.16
0.10
0.28
0.55
0.75
0.30%
1.30%
0.33%
0.86%
0.21
0.64
0.30
0.15
0.28
0.57
0.67
0.37%
1.30%
0.37%
73
The allowance for loan and lease losses balance is maintained at a level considered adequate to cover anticipated probable losses based on past loss
experience, general economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and
estimates which are subject to change over time. This analysis is completed quarterly and forms the basis for allocation of the loan loss reserve and what charges to
the provision may be required. See notes 1, 4, and 7 to the consolidated financial statements for further information.
Average Deposits and Other Borrowed Funds
(in thousands)
Deposits:
Noninterest bearing deposits
NOW accounts
Money market accounts
Savings accounts
Certificates of deposit of $100,000 or more
Certificates of deposit < $100,000 and other time deposits
Total deposits
Other borrowed funds:
Repurchase agreements and federal funds purchased
Advances from Federal Home Loan Bank
Long-term debt
Total other borrowed funds
Total deposits and other borrowed funds
2016
2015
2014
$
$
758,555 $
49,037
640,297
398,957
578,669
624,412
3,049,927
262,361
14,410
61,341
338,112
3,388,039 $
720,508 $
36,227
613,804
368,835
571,660
645,565
2,956,599
256,091
15,821
61,341
333,253
3,289,852 $
660,833
31,208
585,467
339,714
598,684
693,212
2,909,118
233,431
4,210
61,341
298,982
3,208,100
The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2016 occurred at October 31, 2016, with a month-end
balance of $269.3 million. The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2015 occurred at September 30,
2015, with a month-end balance of $265.4 million. The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2014
occurred at November 30, 2014, with a month-end balance of $252.3 million.
Maturities and/or repricing of time deposits of $100,000 or more outstanding at December 31, 2016 are summarized as follows:
(in thousands)
Three months or less
Over three through six months
Over six through twelve months
Over twelve through sixty months
Over sixty months
Certificates of
Deposit
Other Time
Deposits
Total
$
$
119,653 $
118,173
244,562
116,444
0
598,832 $
7,982 $
10,105
15,909
19,054
0
53,050 $
127,635
128,278
260,471
135,498
0
651,882
74
Selected Financial Data 2012-2016
(in thousands except ratios, per share amounts and # of employees)
Year Ended December 31
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net income
Per common share:
Basic earnings per share
Diluted earnings per share
Cash dividends declared-
as a % of net income
Book value, end of year
Market price, end of year
Market to book value, end of year
Price/earnings ratio, end of year
Cash dividend yield, for the year
At year-end:
Total assets
Long-term debt
Shareholders’ equity
Averages:
Assets
Deposits, including repurchase agreements
Earning assets
Loans
Shareholders’ equity
Profitability ratios:
Return on average assets
Return on average equity
Capital ratios:
Equity to assets, end of year
Average equity to average assets
Risk based capital ratios:
Tier 1 leverage
Common equity Tier 1 capital
Tier 1 capital
Total capital
Other significant ratios:
Allowance to net loans, end of year
Allowance to nonperforming loans, end of year
Nonperforming assets to loans and foreclosed properties, end of year
Net interest margin
Efficiency ratio
Other statistics:
Average common shares outstanding
Number of full-time equivalent employees, end of year
$
$
$
$
$
$
$
$
$
2016
2015
2014
2013
2012
146,576 $
13,555
133,021
7,872
48,441
107,126
66,464
19,118
47,346 $
2.70 $
2.70 $
1.260 $
46.67%
28.40 $
49.60 $
1.75x
18.37x
2.54%
144,020 $
11,773
132,247
8,650
46,809
105,443
64,963
18,531
46,432 $
2.66 $
2.66 $
1.220 $
45.86%
27.12 $
34.96 $
1.29x
13.14x
3.49%
143,867 $
11,797
132,070
8,755
45,081
105,999
62,397
19,146
43,251 $
2.50 $
2.49 $
1.181 $
47.24%
25.64 $
36.61 $
1.43x
14.64x
3.23%
148,127 $
13,440
134,687
8,568
49,304
110,251
65,172
20,000
45,172 $
2.63 $
2.62 $
1.154 $
43.79%
23.70 $
41.05 $
1.73x
15.57x
2.81%
3,932,169 $
61,341
500,615
3,903,934 $
61,341
475,583
3,723,765 $
61,341
447,877
3,581,716 $
61,341
412,492
3,920,257 $
3,306,550
3,652,714
2,916,031
494,398
3,790,282 $
3,201,545
3,524,506
2,791,871
465,682
3,679,531 $
3,130,338
3,422,450
2,642,231
435,290
3,651,541 $
3,127,709
3,384,211
2,579,805
408,782
1.21%
9.58
12.73%
12.61
12.75%
15.18
17.25
18.50
1.22%
130.81
2.13
3.70
58.54
1.23%
9.97
12.18%
12.29
12.40%
14.58
16.70
17.95
1.26%
126.16
2.38
3.81
58.20
1.18%
9.94
12.03%
11.83
12.04%
--
16.51
17.76
1.26%
88.43
2.74
3.92
59.12
1.24%
11.05
11.52%
11.19
11.51%
--
16.15
17.40
1.30%
78.08
3.12
4.03
59.33
153,722
21,588
132,134
9,450
45,957
103,554
65,087
20,225
44,862
2.64
2.63
1.136
43.10%
23.31
29.80
1.28x
11.30x
3.81%
3,635,664
61,341
400,344
3,641,660
3,139,229
3,357,134
2,549,459
389,377
1.23%
11.52
11.01%
10.69
10.65%
--
15.23
16.49
1.30%
92.33
3.20
3.99
57.93
17,548
996
17,431
984
17,326
1,012
17,158
1,022
17,013
1,035
75
Quarterly Financial Data
(Unaudited)
(in thousands except ratios and per share amounts)
Three Months Ended
2016
Net interest income
Net interest income, taxable equivalent basis
Provision for loan losses
Noninterest income
Noninterest expense
Net income
Per common share:
Basic earnings per share
Diluted earnings per share
Dividends declared
Common stock price:
High
Low
Last trade
Selected ratios:
Return on average assets, annualized
Return on average common equity, annualized
Net interest margin, annualized
Three Months Ended
2015
Net interest income
Net interest income, taxable equivalent basis
Provision for loan losses
Noninterest income
Noninterest expense
Net income
Per common share:
Basic earnings per share
Diluted earnings per share
Dividends declared
Common stock price:
High
Low
Last trade
Selected ratios:
Return on average assets, annualized
Return on average common equity, annualized
Net interest margin, annualized
December 31
September 30
June 30
March 31
$
$
$
33,411 $
33,930
2,043
12,515
27,005
11,866
0.67 $
0.67
0.32
51.35 $
35.85
49.60
1.19%
9.41
3.66
33,227 $
33,726
2,191
13,186
26,687
12,312
0.70 $
0.70
0.32
37.49 $
33.71
37.11
1.25%
9.81
3.66
33,059 $
33,565
1,873
11,769
27,192
11,566
0.66 $
0.66
0.31
36.95 $
32.98
34.66
1.19%
9.46
3.71
33,324
33,855
1,765
10,971
26,242
11,602
0.66
0.66
0.31
36.00
30.89
35.32
1.20%
9.63
3.76
December 31
September 30
June 30
March 31
$
$
$
33,195 $
33,692
1,910
11,810
25,778
11,870
0.68 $
0.68
0.31
37.15 $
33.68
34.96
1.22%
9.91
3.74
32,965 $
33,467
2,520
12,035
27,534
11,222
0.64 $
0.64
0.31
37.63 $
33.62
35.51
1.18%
9.50
3.77
33,182 $
33,697
2,319
12,228
26,313
12,402
0.71 $
0.71
0.30
35.49 $
31.54
34.87
1.32%
10.78
3.85
32,905
33,418
1,901
10,736
25,818
10,938
0.63
0.63
0.30
36.47
31.53
33.16
1.18%
9.70
3.89
76