Note 1 - Summary of Significant Accounting Policies

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

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

New Accounting Standards –

➢ Facilitation of the Effects of Reference Rate Reform on Financial Reporting – In December 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extends the period of time preparers can utilize the reference rate reform relief guidance. The amendments in ASU No. 2022-06 are effective for all entities upon issuance. In 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (“LIBOR”) would cease being published. The amendments in ASU No. 2020-04 provide optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting and provide optional expedients and exceptions for applying generally accepted accounting principles (“GAAP”) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This ASU applies only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. In 2021, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023. To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, ASU No. 2022-06 defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. At this time, we do not anticipate any material adverse impact to our business operation or financial results during the period of transition.

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

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

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

➢ FASB Issues Disclosure Improvements in Response to the SEC’s Disclosure Update and Simplification Initiative – In October 2023, the FASB issued ASU No. 2023-06, Disclosure Improvements:Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative, which incorporates certain U.S. Securities and Exchange Commission (SEC) disclosure requirements into the FASB Accounting Standards Codification™. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosure requirements with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements, such as CTBI, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules.This ASU has no impact on our consolidated financial statements as we have already incorporated the disclosure requirements as required by the SEC.

Significant Accounting Policies –

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our consolidated financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to our consolidated financial statements.

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

We have identified the following significant accounting policies:

➢ Investments – Management determines the classification of securities at purchase. We classify debt securities into held-to-maturity, trading, or available-for-sale categories. Held-to-maturity (“HTM”) securities are those which we have the positive intent and ability to hold to maturity and are reported at amortized cost. In accordance with FASB Accounting Standards Codification (“ASC”) 320, Investments – Debt Securities, investments in debt securities that are not classified as held-to-maturity shall be classified in one of the following categories and measured at fair value in the statement of financial position:

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.

Available-for-sale securities. Investments not classified as trading securities (nor as HTM securities) shall be classified as available-for-sale (“AFS”) securities.

We do not have any securities that are classified as trading securities. AFS securities are reported at fair value, with unrealized gains and losses included as a separate component of shareholders’ equity, net of tax. If declines in fair value are other than temporary, the carrying value of the securities is written down to fair value as a realized loss with a charge to income for the portion attributable to credit losses and a charge to other comprehensive income for the portion that is not credit related.

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

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

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

Gains or losses on disposition of debt securities are computed by specific identification for those securities. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings.

HTM securities are subject to an allowance for lifetime expected credit losses, determined by adjusting historical loss information for current conditions and reasonable and supportable forecasts. The forward-looking evaluation of lifetime expected losses will be performed on a pooled basis for debt securities that share similar risk characteristics. These allowances for expected losses must be made by the holder of the HTM debt security when the security is purchased. At September 30, 2023 and 2022, CTBI held no securities designated as HTM.

CTBI accounts for equity securities in accordance with ASC 321, Investments – Equity Securities. ASC 321 requires equity investments (except those accounted for under the equity method and those that result in the consolidation of the investee) to be measured at fair value, with changes in fair values recognized in net income.

Equity securities with a readily determinable fair value are required to be measured at fair value, with changes in fair value recognized in net income. Equity securities without a readily determinable fair value are carried at cost, less any impairment, if any, plus or minus changes resulting from observable price changes for identical or similar investments. As permitted by ASC 321-10-35-2, CTBI can make an irrevocable election to subsequently measure an equity security without a readily determinable fair value, and all identical or similar investments of the same issuer, including future purchases of identical or similar investments of the same issuer, at fair value. CTBI has made this election for our Visa Class B equity securities. The fair value of these securities was determined by a third party service provider using Level 3 inputs as defined in ASC 820, Fair Value Measurement, and changes in fair value are recognized in income.

➢ Loans – Loans with the ability and the intent to be held until maturity and/or payoff are reported at the carrying value of unpaid principal reduced by unearned interest, an allowance for credit losses, and unamortized deferred fees or costs and premiums. Income is recorded on the level yield basis. Interest accrual is discontinued when management believes, after considering economic and business conditions, collateral value, and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. Any loan greater than 90 days past due must be well secured and in the process of collection to continue accruing interest. Cash payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured. Loans are not reclassified as accruing until principal and interest payments remain current for a period of time, generally six months, and future payments appear reasonably certain. With the implementation of ASU 2022-02 described above in the New Accountings Standards, TDRs have been eliminated while enhanced disclosure requirements have been implemented for certain loan modifications when a borrower is experiencing financial difficulty.

Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized over the estimated life of the related loans, or commitments as a yield adjustment.

➢ Allowance for Credit Losses – CTBI accounts for the allowance for credit losses under ASC 326. CTBI measures expected credit losses of financial assets on a collective (pool) basis using loss-rate methods when the financial assets share similar risk characteristics. Loans that do not share risk characteristics are evaluated on an individual basis. Regardless of an initial measurement method, once it is determined that foreclosure is probable, the allowance for credit losses is measured based on the fair value of the collateral as of the measurement date. As a practical expedient, the fair value of the collateral may be used for a loan when determining the allowance for credit losses for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty. The fair value shall be adjusted for selling costs when foreclosure is probable. For collateral-dependent financial assets, the credit loss expected may be zero if the fair value less costs to sell exceed the amortized cost of the loan. Loans shall not be included in both collective assessments and individual assessments.

In the event that collection of principal becomes uncertain, CTBI has policies in place to reverse accrued interest in a timely manner. Therefore, CTBI elected ASU 2019-04 which allows that accrued interest would continue to be presented separately and not part of the amortized cost of the loan. The methodology used by CTBI is developed using the current loan balance, which is then compared to amortized cost balances to analyze the impact. The difference in amortized cost basis versus consideration of loan balances impacts the allowance for credit losses calculation by 1 basis point and is considered immaterial. The primary difference is for indirect lending premiums.

We maintain an ACL at a level that is appropriate to cover estimated credit losses on individually evaluated loans, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. Credit losses are charged and recoveries are credited to the ACL.

We utilize an internal risk grading system for commercial credits. Those credits that meet the following criteria are subject to individual evaluation: the loan has an outstanding bank share balance of $1 million or greater and has a criticized risk rating and meets one of the following criteria: (i) is in nonaccrual status, (ii) the borrower is experiencing financial difficulty with significant payment delay, or (iii) is 90 days or more past due. The borrower’s cash flow, adequacy of collateral coverage, and other options available to CTBI, including legal remedies, are evaluated. We evaluate the collectability of both principal and interest when assessing the need for loss provision. Historical loss rates are analyzed and applied to other commercial loan segments not subject to individual evaluation.

Homogenous loans, such as consumer installment, residential mortgages, and home equity lines are not individually risk graded. The associated ACL for these loans is measured in pools with similar risk characteristics under ASC 326.

When any secured commercial loan is considered uncollectable, whether past due or not, a current assessment of the value of the underlying collateral is made. If the balance of the loan exceeds the fair value of the collateral, the loan is placed on nonaccrual and the loan is charged down to the value of the collateral less estimated cost to sell. For commercial loans greater than $1 million that are categorized as individually evaluated based on the criteria listed above, a specific reserve is established if a loss is determined to be possible and then charged-off once it is probable. When the foreclosed collateral has been legally assigned to CTBI, the estimated fair value of the collateral less costs to sell is then transferred to other real estate owned or other repossessed assets, and a charge-off is taken for any remaining balance. When any unsecured commercial loan is considered uncollectable the loan is charged off no later than at 90 days past due.

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 (five monthly payments) delinquent. If a loan is considered uncollectable, it is charged off earlier than 120 days delinquent. For conventional 1-4 family residential loans and installment and revolving loans secured by real estate, when a loan is 90 days past due, a current assessment of the value of the real estate is made. If the balance of the loan exceeds the fair value of the property, the loan is placed on nonaccrual. Foreclosure proceedings are normally initiated after 120 days. When the foreclosed property has been legally assigned to CTBI, the fair value less estimated costs to sell is transferred to other real estate owned and the remaining balance is taken as a charge-off.

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

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

➢ Goodwill and Core Deposit Intangible – We evaluate total goodwill and core deposit intangible for impairment, based upon ASC 350, Intangibles-Goodwill and Other, using fair value techniques including multiples of price/equity. Goodwill and core deposit intangible are evaluated for impairment on an annual basis or as other events may warrant.

The balance of goodwill, at $65.5 million, has not changed since January 1, 2015.

➢ Income Taxes – Income tax expense is based on the taxes due on the consolidated tax return plus deferred taxes based on the expected future tax benefits and consequences of temporary differences between carrying amounts and tax bases of assets and liabilities, using enacted tax rates. Any interest and penalties incurred in connection with income taxes are recorded as a component of income tax expense in our consolidated financial statements. During the nine months ended September 30, 2023 and 2022, CTBI has not recognized a significant amount of interest expense or penalties in connection with income taxes.

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

Note 4 – Loans

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

(in thousands)	September 30 2023		December 31 2022
Hotel/motel	$	386,067	$	343,640
Commercial real estate residential		404,779		372,914
Commercial real estate nonresidential		788,287		762,349
Dealer floorplans		61,920		77,533
Commercial other		315,529		312,422
Commercial loans		1,956,582		1,868,858

Real estate mortgage		916,580		824,996
Home equity lines		139,085		120,540
Residential loans		1,055,665		945,536

Consumer direct		160,712		157,504
Consumer indirect		812,060		737,392
Consumer loans		972,772		894,896

Loans and lease financing	$	3,985,019	$	3,709,290

The loan portfolios presented above are net of unearned fees and unamortized premiums. Unearned fees included above totaled $1.0 million as of September 30, 2023 and as of December 31, 2022, while the unamortized premiums on the indirect lending portfolio totaled $31.1 million as of September 30, 2023 and $28.5 million as of December 31, 2022.

CTBI has segregated and evaluates our loan portfolio through nine portfolio segments with similar risk characteristics. CTBI serves customers in small and mid-sized communities in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. Therefore, CTBI’s exposure to credit risk is significantly affected by changes in these communities.

Commercial real estate residential loans are commercial purpose construction and permanent financed loans for commercial purpose 1-4 family/multi-family properties. These loans are originated based on the borrower’s ability to service the debt and secondarily based on the fair value of the underlying collateral.

Commercial real estate nonresidential loans are secured by nonfarm, nonresidential properties, farmland, and other commercial real estate. These loans are originated based on the borrower’s ability to service the debt and secondarily based on the fair value of the underlying collateral. Construction for commercial real estate nonresidential loans are also included in this segment as these loans are generally one loan for construction to permanent financing.

Dealer floorplans consist of loans to dealerships to finance inventory and are collateralized under a blanket security agreement and without specific liens on individual units. This risk is mitigated by the use of periodic inventory audits. These audits are performed monthly and follow up is required on any out of compliance items identified. These audits are subject to increasing frequency when fact patterns suggest more scrutiny is required.

Commercial other loans consist of agricultural loans, receivable financing, loans to financial institutions, loans for purchasing or carrying securities, and other commercial purpose loans. Commercial loans are underwritten based on the borrower’s ability to service debt from the business’s underlying cash flows. As a general practice, we obtain collateral such as equipment, or other assets, although such loans may be uncollateralized but guaranteed.

Residential real estate loans are a mixture of fixed rate and adjustable rate first and second lien residential mortgage loans and also include real estate construction loans which are typically for owner-occupied properties. The terms of the real estate construction loans are generally short-term with permanent financing upon completion. As a policy, CTBI holds adjustable rate loans and sells the majority of our fixed rate first lien mortgage loans into the secondary market. Changes in interest rates or market conditions may impact a borrower’s ability to meet contractual principal and interest payments. Residential real estate loans are secured by real property.

Home equity lines are primarily revolving adjustable rate credit lines secured by real property.

Consumer direct loans are a mixture of fixed rate and adjustable rate products comprised of unsecured loans, consumer revolving credit lines, deposit secured loans, and all other consumer purpose loans.

Consumer indirect loans are primarily fixed rate consumer loans secured by automobiles, trucks, vans, and recreational vehicles originated at the selling dealership underwritten and purchased by CTBI’s indirect lending department. Both new and used products are financed. Only dealers who have executed dealer agreements with CTBI participate in the indirect lending program.

Not included in the loan balances above were loans held for sale in the amount of $0.1 million at December 31, 2022. There were no loans held for sale at September 30, 2023.

For periods ended September 30, 2022 and December 31, 2022, CTBI derived our ACL balance by using vintage modeling for the consumer and residential portfolios. Static pool models incorporating losses by credit risk rating were developed to determine credit loss balances for the commercial loan segments. Qualitative loss factors were based on CTBI’s judgment of delinquency trends, level of nonperforming loans, trend in loan losses, supervision and administration, quality control exceptions, and reasonable and supportable forecasts based on unemployment rates and industry concentrations. CTBI determined that twelve months represented a reasonable and supportable forecast period and reverted back to a historical loss rate immediately. CTBI leveraged economic projections from a reputable and independent third party to form its loss driver forecasts over the twelve-month forecast period. Other internal and external indicators of economic forecasts were also considered by CTBI when developing the forecast metrics. CTBI also had an inherent model risk allocation included in our ACL calculation to allow for certain known model limitations as well as other potential risks not quantified elsewhere. One limitation was the inability to completely identify revolving line of credit within the commercial other segment.

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

(in thousands)	ACL Software June 30, 2023		CTBI Internal ACL Model June 30, 2023		Change in Allocation

Hotel/motel	$	5,192	$	6,038	$	(846	)
Commercial real estate residential		3,749		4,669		(920	)
Commercial real estate nonresidential		7,797		8,794		(997	)
Dealer floorplans		1,157		1,719		(562	)
Commercial other		6,176		4,547		1,629
Commercial loans reserve allocation		24,071		25,767		(1,696	)

Real estate mortgage		7,884		8,443		(559	)
Home equity lines		1,108		1,065		43
Residential loans reserve allocation		8,992		9,508		(516	)

Consumer direct		2,563		1,673		890
Consumer indirect		12,392		10,959		1,433
Consumer loans reserve allocation		14,955		12,632		2,323

Loans and lease financing allowance for credit loss	$	48,018		47,907	$	111

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

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

	Three Months Ended September 30, 2023
(in thousands)	Beginning Balance		Provision Charged to Expense			Losses Charged Off			Recoveries		Ending Balance
ACL
Hotel/motel	$	5,192	$	611		$	0		$	0	$	5,803
Commercial real estate residential		3,749		66			0			9		3,824
Commercial real estate nonresidential		7,797		181			0			39		8,017
Dealer floorplans		1,157		(314	)		0			0		843
Commercial other		6,176		(595	)		(195	)		159		5,545
Real estate mortgage		7,884		439			(4	)		17		8,336
Home equity		1,108		59			(10	)		1		1,158
Consumer direct		2,563		157			(148	)		41		2,613
Consumer indirect		12,392		1,267			(1,655	)		576		12,580
Total	$	48,018	$	1,871		$	(2,012	)	$	842	$	48,719

	Nine Months Ended September 30, 2023
(in thousands)	Beginning Balance		Provision Charged to Expense			Losses Charged Off			Recoveries		Ending Balance
ACL
Hotel/motel	$	5,171	$	632		$	0		$	0	$	5,803
Commercial real estate residential		4,894		(1,132	)		(28	)		90		3,824
Commercial real estate nonresidential		9,419		(1,765	)		(9	)		372		8,017
Dealer floorplans		1,776		(933	)		0			0		843
Commercial other		5,285		1,376			(1,455	)		339		5,545
Real estate mortgage		7,932		470			(99	)		33		8,336
Home equity		1,106		71			(23	)		4		1,158
Consumer direct		1,694		1,069			(386	)		236		2,613
Consumer indirect		8,704		5,208			(3,730	)		2,398		12,580
Total	$	45,981	$	4,996		$	(5,730	)	$	3,472	$	48,719

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

	Three Months Ended September 30, 2022
(in thousands)	Beginning Balance		Provision Charged to Expense			Losses Charged Off			Recoveries		Ending Balance
ACL
Hotel/motel	$	4,844	$	39		$	0		$	0	$	4,883
Commercial real estate residential		4,200		651			0			25		4,876
Commercial real estate nonresidential		8,968		617			0			10		9,595
Dealer floorplans		1,477		61			0			0		1,538
Commercial other		4,473		886			(307	)		145		5,197
Real estate mortgage		8,179		(338	)		(11	)		5		7,835
Home equity		887		41			0			12		940
Consumer direct		1,621		(71	)		(81	)		205		1,674
Consumer indirect		7,695		528			(804	)		476		7,895
Total	$	42,344	$	2,414		$	(1,203	)	$	878	$	44,433

	Nine Months Ended September 30, 2022
(in thousands)	Beginning Balance		Provision Charged to Expense			Losses Charged Off			Recoveries		Ending Balance
ACL
Hotel/motel	$	5,080	$	19		$	(216	)	$	0	$	4,883
Commercial real estate residential		3,986		885			(31	)		36		4,876
Commercial real estate nonresidential		8,884		568			0			143		9,595
Dealer floorplans		1,436		102			0			0		1,538
Commercial other		4,422		1,079			(651	)		347		5,197
Real estate mortgage		7,637		345			(188	)		41		7,835
Home equity		866		79			(24	)		19		940
Consumer direct		1,951		(316	)		(426	)		465		1,674
Consumer indirect		7,494		605			(1,815	)		1,611		7,895
Total	$	41,756	$	3,366		$	(3,351	)	$	2,662	$	44,433

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

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

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

•

Changes in delinquency trends by loan segment

•

Changes in international, national, regional, and local conditions

•

The effect of other external factors (i.e. competition, legal and regulatory requirements) on the level of estimated credit losses

•

The existence and effect of any concentrations of credit and changes in the levels of such concentrations

•

A supervision and administration allocation based on CTBI’s loan review process

•

Exceptions in lending policies and procedures as measured by quarterly loan portfolio exceptions reports

•

Changes in the nature and volume of the portfolio and terms of loans

•

Changes in the experience, depth, and ability of lending management

Reserve requirements remained at 1.22% this quarter. Management continues to note the continued impact of global uncertainty, the current rate of inflation, the significant rising rate environment, and the fact that there is no immediate end foreseen, and these conditions are now part of qualitative factors noted above. As in previous quarters an allocation was made for delinquency trends, industry concentrations, supervisory and administration, loan exceptions, and collateral values.

Our provision for credit losses for the quarter increased $0.1 million from prior quarter and $0.5 million from prior year same quarter. Our reserve coverage (allowance for credit losses to nonperforming loans) at September 30, 2023 was 375.2%, compared to 408.9% at June 30, 2023 and 324.5% at September 30, 2022. Our credit loss reserve as a percentage of total loans outstanding at September 30, 2023 remained unchanged at 1.22% compared to June 30, 2023 and September 30, 2022.

Refer to Note 1 to the condensed consolidated financial statements for further information regarding our nonaccrual policy. Nonaccrual loans and loans 90 days past due and still accruing segregated by class of loans for both September 30, 2023 and December 31, 2022 were as follows:

	September 30, 2023
(in thousands)	Nonaccrual Loans with No ACL		Nonaccrual Loans with ACL		90+ and Still Accruing		Total Nonperforming Loans

Hotel/motel	$	0	$	0	$	0	$	0
Commercial real estate residential		0		514		313		827
Commercial real estate nonresidential		0		970		1,163		2,133
Commercial other		0		561		379		940
Total commercial loans		0		2,045		1,855		3,900

Real estate mortgage		0		2,678		5,159		7,837
Home equity lines		0		193		468		661
Total residential loans		0		2,871		5,627		8,498

Consumer direct		0		0		29		29
Consumer indirect		0		0		558		558
Total consumer loans		0		0		587		587

Loans and lease financing	$	0	$	4,916	$	8,069	$	12,985

	December 31, 2022
(in thousands)	Nonaccrual Loans with No ACL		Nonaccrual Loans with ACL		90+ and Still Accruing		Total Nonperforming Loans

Hotel/motel	$	0	$	0	$	0	$	0
Commercial real estate residential		0		355		258		613
Commercial real estate nonresidential		0		1,116		1,947		3,063
Commercial other		0		982		369		1,351
Total commercial loans		0		2,453		2,574		5,027

Real estate mortgage		0		4,069		4,929		8,998
Home equity lines		0		291		487		778
Total residential loans		0		4,360		5,416		9,776

Consumer direct		0		0		41		41
Consumer indirect		0		0		465		465
Total consumer loans		0		0		506		506

Loans and lease financing	$	0	$	6,813	$	8,496	$	15,309

Discussion of the Nonaccrual Policy

The accrual of interest income on loans is discontinued when management believes, after considering economic and business conditions, collateral value, and collection efforts, that the borrower’s financial condition is such that the collection of interest is doubtful. Cash payments received on nonaccrual loans generally are applied against principal, and interest income is only recorded once principal recovery is reasonably assured. Any loans greater than 90 days past due must be well secured and in the process of collection to continue accruing interest. See Note 1 to the condensed consolidated financial statements for further discussion on our nonaccrual policy.

The following tables present CTBI’s loan portfolio aging analysis, segregated by class, as of September 30, 2023 and December 31, 2022 (includes loans 90 days past due and still accruing as well):

	September 30, 2023
(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans
Hotel/motel	$	0	$	0	$	0	$	0	$	386,067	$	386,067
Commercial real estate residential		342		737		827		1,906		402,873		404,779
Commercial real estate nonresidential		380		486		1,798		2,664		785,623		788,287
Dealer floorplans		0		0		0		0		61,920		61,920
Commercial other		970		192		698		1,860		313,669		315,529
Total commercial loans		1,692		1,415		3,323		6,430		1,950,152		1,956,582

Real estate mortgage		1,017		3,008		5,976		10,001		906,579		916,580
Home equity lines		635		417		498		1,550		137,535		139,085
Total residential loans		1,652		3,425		6,474		11,551		1,044,114		1,055,665

Consumer direct		537		135		29		701		160,011		160,712
Consumer indirect		3,474		751		558		4,783		807,277		812,060
Total consumer loans		4,011		886		587		5,484		967,288		972,772

Loans and lease financing	$	7,355	$	5,726	$	10,384	$	23,465	$	3,961,554	$	3,985,019

	December 31, 2022
(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans
Hotel/motel	$	0	$	0	$	0	$	0	$	343,640	$	343,640
Commercial real estate residential		602		225		574		1,401		371,513		372,914
Commercial real estate nonresidential		2,549		395		2,611		5,555		756,794		762,349
Dealer floorplans		0		0		0		0		77,533		77,533
Commercial other		1,029		850		496		2,375		310,047		312,422
Total commercial loans		4,180		1,470		3,681		9,331		1,859,527		1,868,858

Real estate mortgage		869		3,402		7,067		11,338		813,658		824,996
Home equity lines		786		44		740		1,570		118,970		120,540
Total residential loans		1,655		3,446		7,807		12,908		932,628		945,536

Consumer direct		555		126		41		722		156,782		157,504
Consumer indirect		4,407		764		465		5,636		731,756		737,392
Total consumer loans		4,962		890		506		6,358		888,538		894,896

Loans and lease financing	$	10,797	$	5,806	$	11,994	$	28,597	$	3,680,693	$	3,709,290

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

Hotel/motel loans are a significant concentration for CTBI, representing approximately 9.7% of total loans. This industry has unique risk characteristics as it is highly susceptible to changes in the domestic and global economic environments, which can cause the industry to experience substantial volatility. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Hotel/motel lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Management monitors and evaluates all commercial real estate loans based on collateral and risk grade criteria. Commercial construction loans generally are made to customers for the purpose of building income-producing properties, and any hotel/motel construction loan would be included in this segment. Personal guarantees of the principals are generally required. Such loans are made on a projected cash flow basis and are secured by the project being constructed. Construction loan draw procedures are included in each specific loan agreement, including required documentation items and inspection requirements. Construction loans may convert to term loans at the end of the construction period, or may be repaid by the take-out commitment from another financing source. If the loan is to convert to a term loan, the repayment ability is based on the borrower’s projected cash flow. Risk is mitigated during the construction phase by requiring proper documentation and inspections whenever a draw is requested.

Commercial real estate residential loans are commercial purpose construction and permanent financed loans for commercial purpose 1-4 family/multi-family properties. All commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Management monitors and evaluates all commercial real estate loans based on collateral and risk grade criteria. Commercial residential construction loans generally are made to customers for the purpose of building income-producing properties. Personal guarantees of the principals are generally required. Such loans are made on a projected cash flow basis and are secured by the project being constructed. Construction loan draw procedures are included in each specific loan agreement, including required documentation items and inspection requirements. Construction loans may convert to term loans at the end of the construction period, or may be repaid by the take-out commitment from another financing source. If the loan is to convert to a term loan, the repayment ability is based on the borrower’s projected cash flow. Risk is mitigated during the construction phase by requiring proper documentation and inspections whenever a draw is requested.

Commercial real estate nonresidential loans are secured by nonfarm, nonresidential properties, farmland, and other commercial real estate. Construction for commercial real estate nonresidential loans are also included in this segment as these loans are generally one loan for construction to permanent financing. All commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Management monitors and evaluates all commercial real estate loans based on collateral and risk grade criteria. Commercial nonresidential construction loans generally are made to customers for the purpose of building income-producing properties. Personal guarantees of the principals are generally required. Such loans are made on a projected cash flow basis and are secured by the project being constructed. Construction loan draw procedures are included in each specific loan agreement, including required documentation items and inspection requirements. Construction loans may convert to term loans at the end of the construction period, or may be repaid by the take-out commitment from another financing source. If the loan is to convert to a term loan, the repayment ability is based on the borrower’s projected cash flow. Risk is mitigated during the construction phase by requiring proper documentation and inspections whenever a draw is requested.

Dealer floorplans are segmented separately as they are a unique product with unique risk factors. CTBI maintains strict processing procedures over our floorplan product with any exceptions requested by a loan officer approved by the appropriate loan committee and the floorplan manager.

Commercial other loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from our customers. As we underwrite our equipment lease financing in a manner similar to our commercial loan portfolio described below, the risk characteristics for this portfolio mirror that of the commercial loan portfolio.

With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, CTBI generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences. Residential construction loans are handled through the home mortgage area of the bank. The repayment ability of the borrower and the maximum loan-to-value ratio are calculated using the normal mortgage lending criteria. Draws are processed based on percentage of completion stages including normal inspection procedures. Such loans generally convert to term loans after the completion of construction.

Consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Our determination of a borrower’s ability to repay these loans is primarily dependent on the personal income and credit rating of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

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

Credit Quality Indicators:

CTBI categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. CTBI also considers the fair value of the underlying collateral and the strength and willingness of the guarantor(s). CTBI analyzes commercial loans individually by classifying the loans as to credit risk. Loans classified as loss, doubtful, substandard, or special mention are reviewed quarterly by CTBI for further deterioration or improvement to determine if appropriately classified and valued if deemed impaired. All other commercial loan reviews are completed every 12 to 18 months. In addition, during the renewal process of any loan, as well as if a loan becomes past due or if other information becomes available, CTBI will evaluate the loan grade. CTBI uses the following definitions for risk ratings:

➢

Pass grades include investment grade, low risk, moderate risk, and acceptable risk loans. The loans range from loans that have no chance of resulting in a loss to loans that have a limited chance of resulting in a loss. Customers in this grade have excellent to fair credit ratings. The cash flows are adequate to meet required debt repayments.

➢

Watch graded loans are loans that warrant extra management attention but are not currently criticized. Loans on the watch list may be potential troubled credits or may warrant “watch” status for a reason not directly related to the asset quality of the credit. The watch grade is a management tool to identify credits which may be candidates for future classification or may temporarily warrant extra management monitoring.

➢

Other assets especially mentioned (OAEM) reflects loans that are currently protected but are potentially weak. These loans constitute an undue and unwarranted credit risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an unwarranted risk in light of circumstances surrounding a specific asset. Loans in this grade display potential weaknesses which may, if unchecked or uncorrected, inadequately protect CTBI’s credit position at some future date. The loans may be adversely affected by economic or market conditions.

➢

Substandard grading indicates that the loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. These loans have a well-defined weakness or weaknesses that jeopardize the orderly liquidation of the debt with the distinct possibility that CTBI will sustain some loss if the deficiencies are not corrected.

➢

Doubtful graded loans have the weaknesses inherent in the substandard grading with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The probability of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to CTBI’s advantage or strengthen the asset(s), its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.

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

September 30, 2023	Term Loans Amortized Cost Basis by Origination Year
(in thousands)	2023			2022			2021			2020			2019			Prior			Revolving Loans		Total
Hotel/motel
Risk rating:
Pass	$	60,331		$	148,174		$	28,235		$	17,829		$	45,797		$	42,572		$	4,043	$	346,981
Watch		2,910			6,873			8,798			4,651			3,387			3,677			0		30,296
OAEM		0			0			6,899			0			0			0			0		6,899
Substandard		0			0			0			0			0			1,130			0		1,130
Doubtful		0			0			0			0			0			761			0		761
Total hotel/motel		63,241			155,047			43,932			22,480			49,184			48,140			4,043		386,067

Commercial real estate residential
Risk rating:
Pass		80,388			98,714			102,817			31,746			12,506			39,286			14,935		380,392
Watch		821			1,895			361			1,717			733			6,548			105		12,180
OAEM		0			0			0			0			0			64			0		64
Substandard		480			601			4,701			830			288			5,243			0		12,143
Doubtful		0			0			0			0			0			0			0		0
Total commercial real estate residential		81,689			101,210			107,879			34,293			13,527			51,141			15,040		404,779

Commercial real estate residential current period gross charge-offs		0			0			(28	)		0			0			0			0		(28	)

Commercial real estate nonresidential
Risk rating:
Pass		119,199			143,457			149,481			77,786			63,228			148,356			26,884		728,391
Watch		517			3,870			6,452			9,662			7,541			6,525			487		35,054
OAEM		2,375			19			0			0			0			68			0		2,462
Substandard		1,389			1,435			2,516			4,500			3,121			9,404			0		22,365
Doubtful		0			0			0			0			0			15			0		15
Total commercial real estate nonresidential		123,480			148,781			158,449			91,948			73,890			164,368			27,371		788,287

Commercial real estate nonresidential current period gross charge-offs		0			0			0			(9	)		0			0			0		(9	)

Dealer floorplans
Risk rating:
Pass		0			0			0			0			0			0			61,920		61,920
Watch		0			0			0			0			0			0			0		0
OAEM		0			0			0			0			0			0			0		0
Substandard		0			0			0			0			0			0			0		0
Doubtful		0			0			0			0			0			0			0		0
Total dealer floorplans		0			0			0			0			0			0			61,920		61,920

Commercial other
Risk rating:
Pass		59,794			50,682			42,666			30,987			5,456			23,384			80,933		293,902
Watch		716			1,268			783			132			261			694			5,899		9,753
OAEM		0			30			0			0			0			0			30		60
Substandard		867			3,995			4,667			920			260			500			605		11,814
Doubtful		0			0			0			0			0			0			0		0
Total commercial other		61,377			55,975			48,116			32,039			5,977			24,578			87,467		315,529

Commercial other current period gross charge-offs		(516	)		(632	)		(154	)		(17	)		(90	)		(46	)		0		(1,455	)

Commercial loans
Risk rating:
Pass		319,712			441,027			323,199			158,348			126,987			253,598			188,715		1,811,586
Watch		4,964			13,906			16,394			16,162			11,922			17,444			6,491		87,283
OAEM		2,375			49			6,899			0			0			132			30		9,485
Substandard		2,736			6,031			11,884			6,250			3,669			16,277			605		47,452
Doubtful		0			0			0			0			0			776			0		776
Total commercial loans	$	329,787		$	461,013		$	358,376		$	180,760		$	142,578		$	288,227		$	195,841	$	1,956,582

Total commercial loans current period gross charge-offs	$	(516	)	$	(632	)	$	(182	)	$	(26	)	$	(90	)	$	(46	)	$	0	$	(1,492	)

December 31, 2022	Term Loans Amortized Cost Basis by Origination Year
(in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans		Total
Hotel/motel
Risk rating:
Pass	$	145,262	$	36,002	$	17,742	$	54,328	$	13,178	$	35,179	$	545	$	302,236
Watch		7,921		8,996		5,523		3,453		0		13,555		0		39,448
OAEM		0		0		0		0		0		1,956		0		1,956
Substandard		0		0		0		0		0		0		0		0
Doubtful		0		0		0		0		0		0		0		0
Total hotel/motel		153,183		44,998		23,265		57,781		13,178		50,690		545		343,640

Commercial real estate residential
Risk rating:
Pass		119,826		110,963		38,423		15,467		10,492		36,307		14,297		345,775
Watch		1,474		898		1,675		848		2,136		7,015		152		14,198
OAEM		0		0		0		39		0		0		29		68
Substandard		182		4,289		1,878		346		3,639		2,539		0		12,873
Doubtful		0		0		0		0		0		0		0		0
Total commercial real estate residential		121,482		116,150		41,976		16,700		16,267		45,861		14,478		372,914

Commercial real estate nonresidential
Risk rating:
Pass		175,220		171,311		80,932		70,848		44,099		137,575		23,166		703,151
Watch		3,331		5,765		10,090		2,178		1,962		10,022		1,550		34,898
OAEM		19		0		0		0		0		90		0		109
Substandard		1,939		2,537		4,877		3,135		508		10,865		25		23,886
Doubtful		0		0		0		0		0		305		0		305
Total commercial real estate nonresidential		180,509		179,613		95,899		76,161		46,569		158,857		24,741		762,349

Dealer floorplans
Risk rating:
Pass		0		0		0		0		0		0		77,153		77,153
Watch		0		0		0		0		0		0		380		380
OAEM		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		0		0		0
Doubtful		0		0		0		0		0		0		0		0
Total dealer floorplans		0		0		0		0		0		0		77,533		77,533

Commercial other
Risk rating:
Pass		78,846		60,550		34,841		8,922		2,333		23,961		77,355		286,808
Watch		1,622		393		604		217		159		780		6,402		10,177
OAEM		30		0		0		0		0		0		30		60
Substandard		6,090		5,489		885		356		143		758		952		14,673
Doubtful		466		129		0		109		0		0		0		704
Total commercial other		87,054		66,561		36,330		9,604		2,635		25,499		84,739		312,422

Commercial loans
Risk rating:
Pass		519,154		378,826		171,938		149,565		70,102		233,022		192,516		1,715,123
Watch		14,348		16,052		17,892		6,696		4,257		31,372		8,484		99,101
OAEM		49		0		0		39		0		2,046		59		2,193
Substandard		8,211		12,315		7,640		3,837		4,290		14,162		977		51,432
Doubtful		466		129		0		109		0		305		0		1,009
Total commercial loans	$	542,228	$	407,322	$	197,470	$	160,246	$	78,649	$	280,907	$	202,036	$	1,868,858

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:

September 30, 2023	Term Loans Amortized Cost Basis by Origination Year
(in thousands)	2023			2022			2021			2020			2019			Prior			Revolving Loans		Total
Home equity lines
Performing	$	0		$	0		$	0		$	0		$	0		$	8,194		$	130,230	$	138,424
Nonperforming		0			0			0			0			0			460			201		661
Total home equity lines		0			0			0			0			0			8,654			130,431		139,085

Home equity lines current period gross charge-offs																	(23	)		0		(23	)

Mortgage loans
Performing		154,430			169,909			164,008			122,622			57,895			239,879			0		908,743
Nonperforming		85			110			248			192			636			6,566			0		7,837
Total mortgage loans		154,515			170,019			164,256			122,814			58,531			246,445			0		916,580

Mortgage loans current period gross charge-offs		0			0			(47	)		0			(1	)		(51	)		0		(99	)

Residential loans
Performing		154,430			169,909			164,008			122,622			57,895			248,073			130,230		1,047,167
Nonperforming		85			110			248			192			636			7,026			201		8,498
Total residential loans		154,515			170,019			164,256			122,814			58,531			255,099			130,431		1,055,665

Total residential loans current period gross charge-offs	$	0		$	0		$	(47	)	$	0		$	(1	)	$	(74	)	$	0	$	(122	)

Consumer direct loans
Performing	$	52,926		$	40,153		$	28,867		$	17,302		$	8,126		$	13,309		$	0	$	160,683
Nonperforming		22			7			0			0			0			0			0		29
Total consumer direct loans		52,948			40,160			28,867			17,302			8,126			13,309			0		160,712

Total consumer direct loans current period gross charge-offs		(13	)		(229	)		(72	)		(33	)		(25	)		(14	)		0		(386	)

Consumer indirect loans
Performing		291,394			276,030			122,173			78,939			28,370			14,596			0		811,502
Nonperforming		64			280			163			27			6			18			0		558
Total consumer indirect loans		291,458			276,310			122,336			78,966			28,376			14,614			0		812,060

Total consumer indirect loans current period gross charge-offs		(213	)		(1,568	)		(1,375	)		(370	)		(94	)		(110	)		0		(3,730	)

Consumer loans
Performing		344,320			316,183			151,040			96,241			36,496			27,905			0		972,185
Nonperforming		86			287			163			27			6			18			0		587
Total consumer loans		344,406			316,470			151,203			96,268			36,502			27,923		$	0		972,772

Total consumer loans current period gross charge-offs	$	(226	)	$	(1,797	)	$	(1,447	)	$	(403	)	$	(119	)	$	(124	)	$	0	$	(4,116	)

December 31, 2022	Term Loans Amortized Cost Basis by Origination Year
(in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans		Total
Home equity lines
Performing	$	0	$	0	$	0	$	0	$	0	$	10,195	$	109,567	$	119,762
Nonperforming		0		0		0		0		0		502		276		778
Total home equity lines		0		0		0		0		0		10,697		109,843		120,540

Mortgage loans
Performing		176,736		177,469		132,795		62,415		30,473		236,110		0		815,998
Nonperforming		0		282		98		791		422		7,405		0		8,998
Total mortgage loans		176,736		177,751		132,893		63,206		30,895		243,515		0		824,996

Residential loans
Performing		176,736		177,469		132,795		62,415		30,473		246,305		109,567		935,760
Nonperforming		0		282		98		791		422		7,907		276		9,776
Total residential loans	$	176,736	$	177,751	$	132,893	$	63,206	$	30,895	$	254,212	$	109,843	$	945,536

Consumer direct loans
Performing	$	62,239	$	42,014	$	23,921	$	11,166	$	6,766	$	11,357	$	0	$	157,463
Nonperforming		25		11		5		0		0		0		0		41
Total consumer direct loans		62,264		42,025		23,926		11,166		6,766		11,357		0		157,504

Consumer indirect loans
Performing		371,079		168,513		116,267		45,748		26,247		9,073		0		736,927
Nonperforming		65		251		96		30		1		22		0		465
Total consumer indirect loans		371,144		168,764		116,363		45,778		26,248		9,095		0		737,392

Consumer loans
Performing		433,318		210,527		140,188		56,914		33,013		20,430		0		894,390
Nonperforming		90		262		101		30		1		22		0		506
Total consumer loans	$	433,408	$	210,789	$	140,289	$	56,944	$	33,014	$	20,452	$	0	$	894,896

* A loan is considered nonperforming if it is 90 days or more past due and/or on nonaccrual.

The total of consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings are in process was $2.8 million at September 30, 2023. The total of consumer mortgage loans secured by real estate properties for which formal foreclosure proceedings had resumed with restricted parameters was $3.3 million at December 31, 2022.

In accordance with ASC 326-20-30-2, if a loan does not share risk characteristics with other pooled loans in determining the allowance for credit losses, the loan shall be evaluated for expected credit losses on an individual basis. Of the loans that CTBI has individually evaluated, the loans listed below by segment are those that are collateral dependent:

	September 30, 2023
(in thousands)	Number of Loans		Recorded Investment		Specific Reserve
Hotel/motel		2	$	8,029	$	0
Commercial real estate residential		2		5,116		0
Commercial real estate nonresidential		6		11,633		0
Commercial other		2		6,201		0
Total collateral dependent loans		12	$	30,979	$	0

	December 31, 2022
(in thousands)	Number of Loans		Recorded Investment		Specific Reserve
Hotel/motel		1	$	1,168	$	0
Commercial real estate residential		4		7,786		0
Commercial real estate nonresidential		8		14,718		200
Commercial other		2		8,926		1,000
Total collateral dependent loans		15	$	32,598	$	1,200

	September 30, 2022
(in thousands)	Number of Loans		Recorded Investment		Specific Reserve
Hotel/motel		1	$	1,181	$	0
Commercial real estate residential		3		5,820		0
Commercial real estate nonresidential		9		16,720		350
Commercial other		2		9,185		1,000
Total collateral dependent loans		15	$	32,906	$	1,350

The hotel/motel, commercial real estate residential, and commercial real estate nonresidential segments are all collateralized with real estate. The two loans listed in the commercial other segment at September 30, 2023 are collateralized by inventory, equipment, and accounts receivable.

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

	Interest Rate Reduction					Term Extension
(in thousands)	Amortized Cost at September 30, 2023		% of total			Amortized Cost at September 30, 2023		% of total
Hotel/motel	$	0		0.00	%	$	0		0.00	%
Commercial real estate residential		269		0.07			196		0.05
Commercial real estate nonresidential		0		0.00			1,883		0.24
Dealer floorplans		0		0.00			0		0.00
Commercial other		0		0.00			164		0.05
Commercial loans		269		0.01			2,243		0.11

Real estate mortgage		0		0.00			1,362		0.15
Home equity lines		0		0.00			224		0.16
Residential loans		0		0.00			1,586		0.15

Consumer direct		0		0.00			0		0.00
Consumer indirect		0		0.00			0		0.00
Consumer loans		0		0.00			0		0.00

Loans and lease financing	$	269		0.01	%	$	3,829		0.10	%

	Combination – Term Extension and Interest Rate Reduction					Payment Change
(in thousands)	Amortized Cost at September 30, 2023		% of total			Amortized Cost at September 30, 2023		% of total
Hotel/motel	$	0		0.00	%	$	0		0.00	%
Commercial real estate residential		0		0.00			0		0.00
Commercial real estate nonresidential		0		0.00			0		0.00
Dealer floorplans		0		0.00			0		0.00
Commercial other		0		0.00			81		0.03
Commercial loans		0		0.00			81		0.00

Real estate mortgage		661		0.07			0		0.00
Home equity lines		49		0.04			0		0.00
Residential loans		710		0.07			0		0.00

Consumer direct		0		0.00			0		0.00
Consumer indirect		0		0.00			0		0.00
Consumer loans		0		0.00			0		0.00

Loans and lease financing	$	710		0.02	%	$	81		0.00	%

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

Loan Type	Interest Rate Reduction Financial Impact	Term Extension Financial Impact

Hotel/motel

Commercial real estate residential	Reduced weighted-average contractual interest rate from 9.5% to 7.5%	Added a weighted-average 2 years to life of the loans

Commercial real estate nonresidential		Added a weighted-average 0.2 years to life of the loans

Dealer floorplans

Commercial other		Added a weighted-average 0.8 years to life of the loans

Real estate mortgage		Added a weighted-average 1 years to life of the loans

Home equity lines		Added a weighted-average 4.9 years to life of the loans

Consumer direct

Consumer indirect

Loan Type	Combination – Term Extension and Interest Rate Reduction Financial Impact	Payment Changes Financial Impact

Hotel/motel

Commercial real estate residential

Commercial real estate nonresidential

Dealer floorplans

Commercial other		Provided payment changes that will be added to the end of the original loan term

Real estate mortgage	Reduced weighted-average contractual interest rate from 5.8% to 5.7% and increased the weighted-average life by 13.1 years

Home equity lines	Reduced weighted-average contractual interest rate from 9.9% to 8.3% and increased the weighted-average life by 8.2 years

Consumer direct

Consumer indirect

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

	Interest Rate Reduction					Term Extension
(in thousands)	Amortized Cost at September 30, 2023		% of total			Amortized Cost at September 30, 2023		% of total
Hotel/motel	$	0		0.00	%	$	0		0.00	%
Commercial real estate residential		537		0.13			1,587		0.39
Commercial real estate nonresidential		4,542		0.58			5,297		0.67
Dealer floorplans		0		0.00			0		0.00
Commercial other		0		0.00			1,524		0.48
Commercial loans		5,079		0.26			8,408		0.43

Real estate mortgage		58		0.01			4,373		0.48
Home equity lines		0		0.00			250		0.18
Residential loans		58		0.01			4,623		0.44

Consumer direct		0		0.00			192		0.12
Consumer indirect		0		0.00			394		0.05
Consumer loans		0		0.00			586		0.06

Loans and lease financing	$	5,137		0.13	%	$	13,617		0.34	%

	Combination – Term Extension and Interest Rate Reduction					Payment Change
(in thousands)	Amortized Cost at September 30, 2023		% of total			Amortized Cost at September 30, 2023		% of total
Hotel/motel	$	0		0.00	%	$	0		0.00	%
Commercial real estate residential		44		0.01			0		0.00
Commercial real estate nonresidential		0		0.00			0		0.00
Dealer floorplans		0		0.00			0		0.00
Commercial other		0		0.00			130		0.04
Commercial loans		44		0.00			130		0.01

Real estate mortgage		1,085		0.12			0		0.00
Home equity lines		126		0.09			0		0.00
Residential loans		1,211		0.11			0		0.00

Consumer direct		0		0.00			19		0.01
Consumer indirect		0		0.00			0		0.00
Consumer loans		0		0.00			19		0.00

Loans and lease financing	$	1,255		0.03	%	$	149		0.00	%

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

Loan Type	Interest Rate Reduction Financial Impact	Term Extension Financial Impact
Hotel/motel

Commercial real estate residential	Reduced weighted-average contractual interest rate from 9.5% to 7.8%	Added a weighted-average 0.6 years to life of the loans

Commercial real estate nonresidential	Reduced weighted-average contractual interest rate from 9.5% to 7.5%	Added a weighted-average 0.1 years to life of the loans

Dealer floorplans

Commercial other		Added a weighted-average 1.4 years to life of the loans

Real estate mortgage	Resulted in no change of the weighted average contractual interest rate of 3.0%	Added a weighted-average 2.3 years to life of the loans

Home equity lines		Added a weighted-average 5.8 years to life of the loans

Consumer direct		Removed a weighted-average 0.7 years from life of the loans

Consumer indirect		Added a weighted-average 0.3 years to life of the loans

Loan Type	Combination – Term Extension and Interest Rate Reduction Financial Impact	Payment Changes Financial Impact
Hotel/motel

Commercial real estate residential	Reduced weighted-average contractual interest rate from 10.8% to 6.5% and increased the weighted-average life by 0.3 years

Commercial real estate nonresidential

Dealer floorplans

Commercial other		Provided payment changes that will be added to the end of the original loan term

Real estate mortgage	Reduced weighted-average contractual interest rate from 6.3% to 5.9% and increased the weighted-average life by 12.4 years

Home equity lines	Reduced weighted-average contractual interest rate from 9.4% to 8.1% and increased the weighted-average life by 9.4 years

Consumer direct		Provided payment changes that will be added to the end of the original loan term

Consumer indirect

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

	Three Months Ended September 30, 2022
	Pre-Modification Outstanding Balance
(in thousands)	Number of Loans		Term Modification		Combination		Total Modification
Commercial real estate residential		2	$	318	$	0	$	318
Commercial real estate nonresidential		1		190		0		190
Commercial other		1		5,222		0		5,222
Total commercial loans		4		5,730		0		5,730

Real estate mortgage		2		288		393		681
Total residential loans		2		288		393		681

Total troubled debt restructurings		6	$	6,018	$	393	$	6,411

	Three Months Ended September 30, 2022
	Post-Modification Outstanding Balance
(in thousands)	Number of Loans		Term Modification		Combination		Total Modification
Commercial real estate residential		2	$	318		0	$	318
Commercial real estate nonresidential		1		189		0		189
Commercial other		1		5,222		0		5,222
Total commercial loans		4		5,729		0		5,729

Real estate mortgage		2		288		393		681
Total residential loans		2		288		393		681

Total troubled debt restructurings		6	$	6,017	$	393	$	6,410

	Nine Months Ended September 30, 2022
	Pre-Modification Outstanding Balance
(in thousands)	Number of Loans		Term Modification		Combination		Total Modification
Commercial real estate residential		4	$	472	$	0	$	472
Commercial real estate nonresidential		3		435		0		435
Commercial other		10		11,748		0		11,748
Total commercial loans		17		12,655		0		12,655

Real estate mortgage		5		593		1,309		1,902
Total residential loans		5		593		1,309		1,902

Total troubled debt restructurings		22	$	13,248	$	1,309	$	14,557

	Nine Months Ended September 30, 2022
	Post-Modification Outstanding Balance
(in thousands)	Number of Loans		Term Modification		Combination		Total Modification
Commercial real estate residential		4	$	472	$	0	$	472
Commercial real estate nonresidential		3		433		0		433
Commercial other		10		11,747		0		11,747
Total commercial loans		17		12,652		0		12,652

Real estate mortgage		5		593		1,309		1,902
Total residential loans		5		593		1,309		1,902

Total troubled debt restructurings		22	$	13,245	$	1,309	$	14,554

	Year Ended December 31, 2022
	Pre-Modification Outstanding Balance
(in thousands)	Number of Loans		Term Modification		Combination		Other		Total Modification
Commercial real estate residential		6	$	659	$	0	$	66	$	725
Commercial real estate nonresidential		8		1,206		0		118		1,324
Hotel/motel		0		0		0		0		0
Commercial other		22		12,812		0		66		12,878
Total commercial loans		36		14,677		0		250		14,927

Real estate mortgage		5		593		1,309		0		1,902
Total residential loans		5		593		1,309		0		1,902

Total troubled debt restructurings		41	$	15,270	$	1,309	$	250	$	16,829

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

Real estate mortgage		5		593		1,309		0		1,902
Total residential loans		5		593		1,309		0		1,902

Total troubled debt restructurings		41	$	15,405	$	1,309	$	250	$	16,964

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

	Past Due Status (Amortized Cost Basis)
	Current			30-89 Days		90+ Days	Nonaccrual
Hotel/motel	$	0	$	0	$	0	$	0
Commercial real estate residential		2,122		44		0		0
Commercial real estate nonresidential		9,813		0		26		0
Dealer floorplans		0		0		0		0
Commercial other		1,060		320		345		264
Real estate mortgage		3,935		1,442		139		349
Home equity lines		519		100		0		22
Consumer direct		207		3		0		0
Consumer indirect		366		29		0		0
Total	$	18,022	$	1,938	$	510	$	635

The allowance for loan losses may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. There were five loans to borrowers experiencing financial difficulty that subsequently defaulted during the quarter ended September 30, 2023, and nine loans to borrowers experiencing financial difficulty that subsequently defaulted during the nine months ended September 30, 2023. CTBI considers a loan in default when it is 90 days or more past due or transferred to nonaccrual.

Financial instrument credit losses apply to off-balance sheet credit exposures such as unfunded loan commitments and standby letters of credit. A liability for expected credit losses for off-balance sheet exposures is recognized if the entity has a present contractual obligation to extend the credit and the obligation is not unconditionally cancellable by the entity. Changes in this allowance are reflected in other operating expenses within the non-interest expense category. As of September 30, 2023 and December 31, 2022, the total unfunded commitment off-balance sheet credit exposure was $1.5 million and $0.7 million, respectively.

Note 7 – Fair Value of Financial Assets and Liabilities

Fair Value Measurements

ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. In this standard, the FASB clarifies the principle that fair value should be based on the exit price when pricing the asset or liability. In support of this principle, ASC 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

Level 1 Inputs – Quoted prices in active markets for identical assets or liabilities.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in determining an exit price for the assets or liabilities.

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 September 30, 2023 and December 31, 2022 and indicate the level within the fair value hierarchy of the valuation techniques.

			Fair Value Measurements at September 30, 2023 Using
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets measured – recurring basis
Available-for-sale securities:
U.S. Treasury and government agencies	$	351,339	$	331,200	$	20,139	$	0
State and political subdivisions		244,478		0		244,478		0
U.S. government sponsored agency mortgage-backed securities		452,298		0		452,298		0
Asset-backed securities		87,763		0		87,763		0
Equity securities at fair value		2,900		0		0		2,900
Mortgage servicing rights		8,289		0		0		8,289

			Fair Value Measurements at December 31, 2022 Using
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets measured – recurring basis
Available-for-sale securities:
U.S. Treasury and government agencies	$	381,932	$	346,265	$	35,667	$	0
State and political subdivisions		265,102		0		265,102		0
U.S. government sponsored agency mortgage-backed securities		520,085		0		520,085		0
Asset-backed securities		89,107		0		89,107		0
Equity securities at fair value		2,166		0		0		2,166
Mortgage servicing rights		8,468		0		0		8,468

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. These valuation methodologies were applied to all of CTBI’s financial assets carried at fair value. CTBI had no liabilities measured and recorded at fair value as of September 30, 2023 and December 31, 2022. There have been no significant changes in the valuation techniques during the quarter ended September 30, 2023. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available-for-Sale Securities

Securities classified as AFS are reported at fair value on a recurring basis. U.S. Treasury and government agencies are classified as Level 1 of the valuation hierarchy where quoted market prices are available in the active market on which the individual securities are traded.

If quoted market prices are not available, CTBI obtains fair value measurements from an independent pricing service, such as Interactive Data, which utilizes pricing models to determine fair value measurement. CTBI reviews the pricing quarterly to verify the reasonableness of the pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other factors. U.S. Treasury and government agencies, state and political subdivisions, U.S. government sponsored agency mortgage-backed securities, and asset-backed securities are classified as Level 2 inputs.

In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements are estimated on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States.

Equity Securities at Fair Value

As of September 30, 2023 and December 31, 2022, the only securities owned by CTBI that were valued using Level 3 criteria are Visa Class B Stock (included in equity securities at fair value). Fair value for Visa Class B Stock is determined by an independent third party utilizing assumptions about factors such as quarterly common stock dividend payments, the conversion of the securities to the relevant Class A Stock shares subject to the prevailing conversion rate, and conversion date. We have concluded the third party assumptions, processes, and conclusions to be reasonable and appropriate in determining the fair value of this asset. See the table below for inputs and valuation techniques used for Level 3 equity securities.

Mortgage Servicing Rights

Mortgage servicing rights (“MSRs”) do not trade in an active, open market with readily observable prices. CTBI reports MSRs at fair value on a recurring basis with subsequent remeasurement of MSRs based on change in fair value.

In determining fair value, CTBI utilizes the expertise of an independent third party. Accordingly, fair value is determined by the independent third party by utilizing assumptions about factors such as mortgage interest rates, discount rates, mortgage loan prepayment speeds, market trends, and industry demand. Due to the nature of the valuation inputs, MSRs are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements of MSRs are tested for impairment on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States. We have reviewed the assumptions, processes, and conclusions of the third party provider. We have determined these assumptions, processes, and conclusions to be reasonable and appropriate in determining the fair value of this asset. See the table below for inputs and valuation techniques used for Level 3 MSRs.

Level 3 Reconciliation

Following is a reconciliation of the beginning and ending balances of recurring fair value measurements, for the periods indicated, using significant unobservable (Level 3) inputs:

	Three Months Ended September 30, 2023					Three Months Ended September 30, 2022
(in thousands)	Equity Securities at Fair Value		Mortgage Servicing Rights			Equity Securities at Fair Value			Mortgage Servicing Rights
Beginning balance	$	2,545	$	8,230		$	2,128		$	8,220
Total unrealized gains (losses)
Included in net income		355		155			(159	)		504
Issues		0		45			0			103
Settlements		0		(141	)		0			(251	)
Ending balance	$	2,900	$	8,289		$	1,969		$	8,576

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	$	355	$	155		$	(159	)	$	504

	Nine Months Ended September 30, 2023					Nine Months Ended September 30, 2022
(in thousands)	Equity Securities at Fair Value		Mortgage Servicing Rights			Equity Securities at Fair Value			Mortgage Servicing Rights
Beginning balance	$	2,166	$	8,468		$	2,253		$	6,774
Total unrealized gains (losses)
Included in net income		734		21			(284	)		1,955
Issues		0		141			0			555
Settlements		0		(341	)		0			(708	)
Ending balance	$	2,900	$	8,289		$	1,969		$	8,576

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	$	734	$	21		$	(284	)	$	1,955

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

Noninterest Income
	Three Months Ended				Nine Months Ended
	September 30				September 30
(in thousands)	2023		2022		2023		2022
Total gains	$	369	$	94	$	414	$	963

Nonrecurring Measurements

The following tables present the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a nonrecurring basis as of September 30, 2023 and December 31, 2022 and indicate the level within the fair value hierarchy of the valuation techniques.

			Fair Value Measurements at September 30, 2023 Using
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets measured – nonrecurring basis
Other real estate owned	$	623	$	0	$	0	$	623

			Fair Value Measurements at December 31, 2022 Using
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets measured – nonrecurring basis
Collateral dependent loans	$	2,703	$	0	$	0	$	2,703
Other real estate owned		570		0		0		570

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheet, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Collateral Dependent Loans

The estimated fair value of collateral-dependent loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent loans are classified within Level 3 of the fair value hierarchy.

CTBI considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Chief Credit Officer. Appraisals are reviewed for accuracy and consistency by the Chief Credit Officer. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the Chief Credit Officer by comparison to historical results.

Loans considered collateral dependent are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty in accordance with ASC 326-20-35-5. There were no collateral dependent loans as of September 30, 2023.

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 OREO disclosed above were $124 thousand for the quarter ended September 30, 2023, $188 thousand for the nine months ended September 30, 2023, and $152 thousand for the year ended December 31, 2022.

Our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months. Appraisers are selected from the list of approved appraisers maintained by management.

Unobservable (Level 3) Inputs

The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at September 30, 2023 and December 31, 2022.

	Quantitative Information about Level 3 Fair Value Measurements
(in thousands)	Fair Value at September 30, 2023		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Equity securities at fair value	$	2,900	Discount cash flows, computer pricing model	Discount rate	15.0% - 25.0% (20.0%)
				Conversion date	Dec 2028 - Dec 2032 (Dec 2030)

Mortgage servicing rights	$	8,289	Discount cash flows, computer pricing model	Constant prepayment rate	0.0% - 77.6% (7.2%)
				Probability of default	0.0% - 66.7% (0.8%)
				Discount rate	9.5% - 12.0% (10.0%)

Other real estate owned	$	623	Market comparable properties	Comparability adjustments	10.0% - 27.3% (14.0%)

	Quantitative Information about Level 3 Fair Value Measurements
(in thousands)	Fair Value at December 31, 2022		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Equity securities at fair value	$	2,166	Discount cash flows, computer pricing model	Discount rate	8.0% - 12.0% (10.0%)
				Conversion date	Dec 2025 - Dec 2029 (Dec 2027)

Mortgage servicing rights	$	8,468	Discount cash flows, computer pricing model	Constant prepayment rate	6.5% - 28.0% (7.1%)
				Probability of default	0.0% - 100.0% (1.2%)
				Discount rate	9.5% - 12.0% (10.0%)

Collateral-dependent loans	$	2,703	Market comparable properties	Marketability discount	52.0% - 52.0% (52.0%)

Other real estate owned	$	570	Market comparable properties	Comparability adjustments	10.0% - 30.6% (10.9%)

Uncertainty of Fair Value Measurements

The following is a discussion of the uncertainty of fair value measurements, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement, and how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

Equity Securities at Fair Value

Fair value for equity securities is derived based on unobservable inputs, such as the discount rate, quarterly dividends payable to the Visa Class B common stock, and the prevailing conversion rate at the conversion date. The most recent conversion rate of 1.5875 and the most recent dividend rate of 0.7144 were used to derive the fair value estimate. Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for discount rate is accompanied by a directionally opposite change in the fair value estimate.

Mortgage Servicing Rights

Fair value for MSRs is derived based on unobservable inputs, such as prepayment speeds of the underlying loans generated using the Andrew Davidson Prepayment Model, FHLMC/FNMA guidelines, the weighted average life of the loan, the discount rate, the weighted average coupon, and the weighted average default rate. Significant increases (decreases) in either of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for prepayment speeds is accompanied by a directionally opposite change in the assumption for interest rates.

Fair Value of Financial Instruments

The following table presents estimated fair value of CTBI’s financial instruments as of September 30, 2023 and indicates the level within the fair value hierarchy of the valuation techniques. In accordance with the adoption of ASU 2016-01, the fair values as of September 30, 2023 were measured using an exit price notion.

			Fair Value Measurements at September 30, 2023 Using
(in thousands)	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	219,258	$	219,258	$	0	$	0
Certificates of deposit in other banks		245		0		245		0
Debt securities available-for-sale		1,135,878		331,200		804,678		0
Equity securities at fair value		2,900		0		0		2,900
Loans held for sale		0		0		0		0
Loans, net		3,936,300		0		0		3,753,898
Federal Home Loan Bank stock		7,670		0		7,670		0
Federal Reserve Bank stock		4,887		0		4,887		0
Accrued interest receivable		21,467		0		21,467		0

Financial liabilities:
Deposits	$	4,627,892	$	1,314,189	$	3,325,940	$	0
Repurchase agreements		232,577		0		0		232,627
Federal funds purchased		500		0		500		0
Advances from Federal Home Loan Bank		340		0		354		0
Long-term debt		64,296		0		0		52,150
Accrued interest payable		8,210		0		8,210		0

Unrecognized financial instruments:
Letters of credit	$	0	$	0	$	0	$	0
Commitments to extend credit		0		0		0		0
Forward sale commitments		0		0		0		0

The following table presents estimated fair value of CTBI’s financial instruments as of December 31, 2022 and indicates the level within the fair value hierarchy of the valuation techniques.

			Fair Value Measurements at December 31, 2022 Using
(in thousands)	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	128,686	$	128,686	$	0	$	0
Certificates of deposit in other banks		245		0		245		0
Debt securities available-for-sale		1,256,226		346,265		909,961		0
Equity securities at fair value		2,166		0		0		2,166
Loans held for sale		109		112		0		0
Loans, net		3,663,309		0		0		3,511,810
Federal Home Loan Bank stock		6,676		0		6,676		0
Federal Reserve Bank stock		4,887		0		4,887		0
Accrued interest receivable		19,592		0		19,592		0

Financial liabilities:
Deposits	$	4,426,143	$	1,394,915	$	3,050,144	$	0
Repurchase agreements		215,431		0		0		215,542
Federal funds purchased		500		0		500		0
Advances from Federal Home Loan Bank		355		0		380		0
Long-term debt		57,841		0		0		55,860
Accrued interest payable		2,237		0		2,237		0

Unrecognized financial instruments:
Letters of credit	$	0	$	0	$	0	$	0
Commitments to extend credit		0		0		0		0
Forward sale commitments		0		0		0		0

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Community Trust Bancorp, Inc. (“CTBI”), our operations, and our present business environment. The MD&A is provided as a supplement to—and should be read in conjunction with—our condensed consolidated financial statements and the accompanying notes thereto contained in Part I, Item 1 of this quarterly report, as well as our consolidated financial statements, the accompanying notes thereto, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the year ended December, 31, 2022. The MD&A includes the following sections:

❖	Our Business

❖	Financial Goals and Performance

❖	Results of Operations and Financial Condition

❖	Liquidity and Market Risk

❖	Interest Rate Risk

❖	Capital Resources

❖	Impact of Inflation, Changing Prices, and Economic Conditions

❖	Stock Repurchase Program

❖	Critical Accounting Policies and Estimates

Our Business

Community Trust Bancorp, Inc. (“CTBI”) is a bank holding company headquartered in Pikeville, Kentucky. Currently, we own one commercial bank, Community Trust Bank, Inc. (“CTB”) and one trust company, Community Trust and Investment Company. Through our subsidiaries, we have seventy-nine banking locations in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee, four trust offices across Kentucky, and one trust office in northeastern Tennessee. At September 30, 2023, we had total consolidated assets of $5.6 billion and total consolidated deposits, including repurchase agreements, of $4.9 billion. Total shareholders’ equity at September 30, 2023 was $653.0 million. Trust assets under management at September 30, 2023 were $3.2 billion, including CTB’s investment portfolio totaling $1.1 billion.

Through our subsidiaries, CTBI engages in a wide range of commercial and personal banking and trust and wealth management activities, which include accepting time and demand deposits; making secured and unsecured loans to corporations, individuals, and others; providing cash management services to corporate and individual customers; issuing letters of credit; renting safe deposit boxes; and providing funds transfer services. The lending activities of CTB include making commercial, construction, mortgage, and personal loans. Lines of credit, revolving lines of credit, term loans, and other specialized loans, including asset-based financing, are also available. Our corporate subsidiaries act as trustees of personal trusts, as executors of estates, as trustees for employee benefit trusts, as paying agents for bond and stock issues, as investment agent, as depositories for securities, and as providers of full-service brokerage and insurance services. For further information, see Item 1 of our annual report on Form 10-K for the year ended December 31, 2022.

Results of Operations and Financial Condition

We reported earnings for the third quarter 2023 of $20.6 million, or $1.15 per basic share, compared to $19.4 million, or $1.09 per basic share, earned during the second quarter 2023 and $19.4 million, or $1.09 per basic share, earned during the third quarter 2022. Total revenue was $0.8 million above prior quarter and $0.4 million above prior year same quarter. Net interest revenue increased $0.1 million compared to prior quarter but decreased $0.4 million compared to prior year same quarter, and noninterest income increased $0.7 million compared to prior quarter and $0.8 million compared to prior year same quarter. Our provision for credit losses for the quarter decreased $0.1 million from prior quarter and $0.5 million from prior year third quarter. Noninterest expense decreased $0.2 million compared to prior quarter and $0.6 million compared to prior year same quarter. Earnings for the nine months ended September 30, 2023 were $59.3 million, or $3.32 per basic share, compared to $59.4 million, or $3.33 per basic share for the nine months ended September 30, 2022.

Quarterly Highlights

❖	Net interest income for the quarter of $43.1 million was $0.1 million above prior quarter but $0.4 million below prior year same quarter, as our net interest margin decreased 8 basis points from prior quarter and 9 basis points from prior year same quarter.

❖	Provision for credit losses at $1.9 million for the quarter decreased $0.1 million from prior quarter and $0.5 million from prior year same quarter.

❖	Our loan portfolio increased $55.3 million, an annualized 5.6%, from June 30, 2023 and $275.7 million, or an annualized 9.9%, from December 31, 2022.

❖	We had net loan charge-offs of $1.2 million, or 0.12% of average loans annualized, for the third quarter 2023 compared to $0.7 million, or 0.07% of average loans annualized, for the second quarter 2023 and $0.3 million, or 0.04% of average loans annualized, for the quarter ended September 30, 2022.

❖

Our total nonperforming loans increased to $13.0 million at September 30, 2023 from $11.7 million at June 30, 2023 but decreased $2.3 million from $15.3 million at December 31, 2022. Nonperforming assets at $15.2 million increased $1.4 million from June 30, 2023 but decreased $3.8 million from $19.0 million at December 31, 2022.

❖	Deposits, including repurchase agreements, at $4.9 billion increased $114.8 million, or an annualized 9.6%, from June 30, 2023 and $218.9 million, or an annualized 6.3%, from December 31, 2022.

❖	Shareholders’ equity at $653.0 million decreased $7.1 million, or an annualized 4.3%, during the quarter but increased $25.0 million, or an annualized 5.3%, from December 31, 2022.

❖	Noninterest income for the quarter ended September 30, 2023 of $15.5 million was $0.7 million, or 5.0%, above prior quarter and $0.8 million, or 5.6%, above prior year same quarter.

❖	Noninterest expense for the quarter ended September 30, 2023 of $30.8 million was $0.2 million, or 0.6%, below prior quarter and $0.6 million, or 2.0%, below prior year same quarter.

Income Statement Review

Nine Months Ended September 30							Change 2023 vs. 2022
(dollars in thousands)	2023			2022			Amount			Percent
Net interest income	$	130,135		$	124,358		$	5,777			4.6	%
Provision for credit losses		4,996			3,366			1,630			48.4	%
Noninterest income		43,934			44,145			(211	)		(0.5	)%
Noninterest expense		93,762			90,812			2,950			3.2	%
Income taxes		15,966			14,954			1,012			6.8	%
Net income	$	59,345		$	59,371		$	(26	)		0.0	%

Average earning assets	$	5,199,072		$	5,146,251		$	52,821			1.0	%

Yield on average earnings assets, tax equivalent*		5.05	%		3.66	%		1.39	%		38.0	%
Cost of interest bearing funds		2.52	%		0.63	%		1.89	%		300.0	%

Net interest margin, tax equivalent*		3.37	%		3.25	%		0.12	%		3.7	%

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

Net Interest Income

										Percent Change
										3Q 2023 Compared to:
($ in thousands)	3Q 2023			2Q 2023			3Q 2022			2Q 2023			3Q 2022			YTD 2023			YTD 2022			Percent Change
Components of net interest income:
Income on earning assets	$	69,499		$	64,827		$	51,405			7.2	%		35.2	%	$	195,321		$	140,284			39.2	%
Expense on interest bearing liabilities		26,359			21,748			7,869			21.2	%		234.9	%		65,186			15,926			309.3	%
Net interest income	$	43,140		$	43,079		$	43,536			0.1	%		(0.9	)%	$	130,135		$	124,358			4.6	%
TEQ		298			298			240			0.0	%		24.1	%		894			707			26.4	%
Net interest income, tax equivalent	$	43,438		$	43,377		$	43,776			0.1	%		(0.8	)%	$	131,029		$	125,065			4.8	%

Average yield and rates paid:
Earning assets yield		5.25	%		5.03	%		3.97	%		4.3	%		32.3	%		5.05	%		3.66	%		37.8	%
Rate paid on interest bearing liabilities		2.93	%		2.54	%		0.93	%		15.4	%		215.4	%		2.52	%		0.63	%		298.1	%
Gross interest margin		2.32	%		2.49	%		3.04	%		(7.0	)%		(23.7	)%		2.53	%		3.03	%		(16.7	)%
Net interest margin		3.27	%		3.35	%		3.36	%		(2.5	)%		(2.9	)%		3.37	%		3.25	%		3.7	%

Average balances:
Investment securities	$	1,178,707		$	1,230,556		$	1,380,881			(4.2	)%		(14.6	)%	$	1,220,135		$	1,438,769			(15.2	)%
Loans	$	3,952,096		$	3,836,446		$	3,568,174			3.0	%		10.8	%	$	3,843,441		$	3,516,114			9.3	%
Earning assets	$	5,274,542		$	5,189,716		$	5,163,624			1.6	%		2.1	%	$	5,199,072		$	5,146,251			1.0	%
Interest-bearing liabilities	$	3,567,343		$	3,435,072		$	3,359,242			3.9	%		6.2	%	$	3,455,666		$	3,361,097			2.8	%

Net interest income for the quarter of $43.1 million was $0.1 million above prior quarter but $0.4 million below prior year same quarter. Our net interest margin, on a fully tax equivalent basis, at 3.27% decreased 8 basis points from prior quarter and 9 basis points from prior year same quarter. Our average earning assets increased $84.8 million from prior quarter and $110.9 million from prior year same quarter. Our yield on average earning assets increased 22 basis points from prior quarter and 128 basis points from prior year same quarter, and our cost of funds increased 39 basis points from prior quarter and 200 basis points from prior year same quarter. Our net interest income for the nine months ended September 30, 2023 was $130.1 million compared to $124.4 million for the nine months ended September 30, 2022.

Our ratio of average loans to deposits, including repurchase agreements, was 83.2% for the quarter ended September 30, 2023 compared to 81.2% for the quarter ended June 30, 2023 and 75.4% for the quarter ended September 30, 2022.

Provision for Credit Losses

Our provision for credit losses for the quarter decreased $0.1 million from prior quarter and $0.5 million from prior year same quarter. Year-to-date provision increased $1.6 million from prior year. Our reserve coverage (allowance for credit losses to nonperforming loans) at September 30, 2023 was 375.2% compared to 408.9% at June 30, 2023 and 324.5% at September 30, 2022. Our credit loss reserve as a percentage of total loans outstanding at September 30, 2023 remained at 1.22% from June 30, 2023 and September 30, 2022.

Noninterest Income

							Percent Change
							3Q 2023 Compared to:
($ in thousands)	3Q 2023		2Q 2023		3Q 2022		2Q 2023			3Q 2022			YTD 2023		YTD 2022		Percent Change
Deposit related fees	$	7,823	$	7,513	$	7,629		4.1	%		2.5	%	$	22,623	$	21,638		4.6	%
Trust revenue		3,277		3,351		2,989		(2.2	%)		9.6	%		9,707		9,435		2.9	%
Gains on sales of loans		105		115		235		(8.8	%)		(55.3	%)		341		1,351		(74.7	%)
Loan related fees		1,283		1,197		1,589		7.2	%		(19.3	%)		3,325		5,066		(34.4	%)
Bank owned life insurance revenue		1,108		735		743		50.7	%		49.1	%		2,701		2,136		26.5	%
Brokerage revenue		452		388		453		16.5	%		(0.2	%)		1,188		1,502		(20.9	%)
Other		1,448		1,457		1,041		(0.6	%)		39.1	%		4,049		3,017		34.2	%
Total noninterest income	$	15,496	$	14,756	$	14,679		5.0	%		5.6	%	$	43,934	$	44,145		(0.5	%)

Noninterest income for the quarter ended September 30, 2023 of $15.5 million was $0.7 million, or 5.0%, above prior quarter and $0.8 million, or 5.6%, above prior year same quarter. The quarter over quarter increase included a $0.3 million increase in deposit related fees, a $0.2 million increase in securities gains, and a $0.4 million increase in bank owned life insurance. The year over year increase included a $0.2 million increase in deposit related fees, a $0.3 million increase in trust revenue, a $0.5 million increase in securities gains, and a $0.4 million increase in bank owned life insurance partially offset by a $0.1 million decline in gains on sales of loans and a $0.3 million decline in loan related fees resulting from the fluctuation in the fair market value of our mortgage servicing rights. Noninterest income for the first nine months of 2023 was $43.9 million compared to $44.1 million for the nine months ended September 30, 2022.

Noninterest Expense

							Percent Change
							3Q 2023Compared to:
($ in thousands)	3Q 2023		2Q 2023		3Q 2022		2Q 2023			3Q 2022			YTD 2023		YTD 2022		Percent Change
Salaries	$	12,755	$	12,732	$	12,537		0.2	%		1.7	%	$	38,120	$	36,495		4.5	%
Employee benefits		5,298		5,573		6,009		(4.9	%)		(11.8	%)		17,146		18,123		(5.4	%)
Net occupancy and equipment		2,875		2,895		2,897		(0.7	%)		(0.8	%)		8,798		8,507		3.4	%
Data processing		2,410		2,383		2,270		1.1	%		6.2	%		7,096		6,566		8.1	%
Legal and professional fees		722		912		752		(20.8	%)		(3.9	%)		2,450		2,503		(2.1	%)
Advertising and marketing		767		704		768		9.0	%		(0.1	%)		2,291		2,180		5.1	%
Taxes other than property and payroll		420		433		422		(3.1	%)		(0.4	%)		1,285		1,274		0.9	%
Net other real estate owned expense		165		61		42		169.9	%		292.9	%		345		438		(21.2	%)
Other		5,435		5,332		5,778		1.9	%		(5.9	%)		16,231		14,726		10.2	%
Total noninterest expense	$	30,847	$	31,025	$	31,475		(0.6	%)		(2.0	%)	$	93,762	$	90,812		3.2	%

Noninterest expense for the quarter ended September 30, 2023 of $30.8 million was $0.2 million, or 0.6%, below prior quarter and $0.6 million, or 2.0%, below prior year same quarter. The decrease in noninterest expense quarter over quarter included a $0.3 million decrease in personnel expense. The decrease in personnel expense included a $0.7 million decrease in group medical and life insurance partially offset by a $0.4 million increase in bonuses and incentives. The decrease year over year was primarily a decrease in personnel costs of $0.5 million which included a $0.6 million decrease in bonuses and incentives, and a $0.1 million decrease in group medical and life insurance, partially offset by a $0.2 million increase in salary expense. Noninterest expense for the first nine months of 2023 was $93.8 million compared to $90.8 million for the nine months ended September 30, 2022.

Balance Sheet Review

CTBI’s total assets at September 30, 2023 of $5.6 billion increased $114.1 million, or 8.2% annualized, from June 30, 2023 and $254.6 million, or an annualized 6.3%, from December 31, 2022. Loans outstanding at September 30, 2023 were $4.0 billion, an increase of $55.3 million, or an annualized 5.6%, from June 30, 2023 and $275.7 million, or an annualized 9.9%, from December 31, 2022. The increase in loans from prior quarter included a $6.0 million increase in the commercial loan portfolio, a $40.5 million increase in the residential loan portfolio, a $6.0 million increase in the indirect consumer loan portfolio, and a $2.8 million increase in the consumer direct loan portfolio. CTBI’s investment portfolio decreased $65.0 million, or an annualized 21.4%, from June 30, 2023 and $120.3 million, or an annualized 12.8%, from December 31, 2022. Deposits in other banks increased $92.3 million from prior quarter and $72.6 million from December 31, 2022. Deposits, including repurchase agreements, at $4.9 billion increased $114.8 million, or an annualized 9.6%, from June 30, 2023 and $218.9 million, or an annualized 6.3%, from December 31, 2022.

Shareholders’ equity at September 30, 2023 was $653.0 million, a $7.1 million, or an annualized 4.3%, decrease from the $660.1 million at June 30, 2023 but a $25.0 million, or an annualized 5.3%, increase from the $628.0 million at December 31, 2022, as unrealized losses on our securities portfolio continue to impact equity. Net unrealized losses on securities, net of deferred taxes, were $141.4 million at September 30, 2023, compared to $121.3 million at June 30, 2023 and $139.4 million at September 30, 2022. Management has evaluated the unrealized losses and determined that they were primarily driven by market rates. Management has the ability and intent to hold these securities to recovery or maturity. CTBI’s annualized dividend yield to shareholders as of September 30, 2023 was 5.37%.

Loans

(dollars in thousands)		September 30, 2023
Loan Category	Balance		Variance from December 31, 2022			Net (Charge-Offs)/ Recoveries			Nonperforming		ACL
Commercial:
Hotel/motel	$	386,067		12.3	%	$	0		$	0	$	5,803
Commercial real estate residential		404,779		8.5			62			827		3,824
Commercial real estate nonresidential		788,287		3.4			363			2,133		8,017
Dealer floorplans		61,920		(20.1	)		0			0		843
Commercial other		315,529		1.0			(1,116	)		940		5,545
Total commercial		1,956,582		4.7			(691	)		3,900		24,032

Residential:
Real estate mortgage		916,580		11.1			(66	)		7,837		8,336
Home equity		139,085		15.4			(19	)		661		1,158
Total residential		1,055,665		11.6			(85	)		8,498		9,494

Consumer:
Consumer direct		160,712		2.0			(150	)		29		2,613
Consumer indirect		812,060		10.1			(1,332	)		558		12,580
Total consumer		972,772		8.7			(1,482	)		587		15,193

Total loans	$	3,985,019		7.4	%	$	(2,258	)	$	12,985	$	48,719

Total Deposits and Repurchase Agreements

							Percent Change 3Q 2023 Compared to:
(dollars in thousands)	3Q 2023		2Q 2023		YE 2022		2Q 2023			YE 2022
Non-interest bearing deposits	$	1,314,189	$	1,361,078	$	1,394,915		(3.4	)%		(5.8	)%
Interest bearing deposits
Interest checking		125,107		142,542		112,265		(12.2	)%		11.4	%
Money market savings		1,412,679		1,389,081		1,348,809		1.7	%		4.7	%
Savings accounts		556,820		611,772		654,380		(9.0	)%		(14.9	)%
Time deposits		1,219,097		1,012,187		915,774		20.4	%		33.1	%
Repurchase agreements		232,577		229,020		215,431		1.6	%		8.0	%
Total interest bearing deposits and repurchase agreements		3,546,280		3,384,602		3,246,659		4.8	%		9.2	%
Total deposits and repurchase agreements	$	4,860,469	$	4,745,680	$	4,641,574		2.4	%		4.7	%

Asset Quality

Our total nonperforming loans increased to $13.0 million at September 30, 2023 from $11.7 million at June 30, 2023 but decreased $2.3 million from the $15.3 million at December 31, 2022. Prior year nonperforming loans, as previously reported, exclude troubled debt restructurings which have been eliminated in the current period due to implementation of Accounting Standard Update 2022-02. Accruing loans 90+ days past due at $8.1 million increased $1.7 million from prior quarter but decreased $0.4 million from December 31, 2022. Nonaccrual loans at $4.9 million decreased $0.4 million from prior quarter and $1.9 million from December 31, 2022. Accruing loans 30-89 days past due at $12.1 million decreased $0.1 million from prior quarter and $3.2 million from December 31, 2022. Our loan portfolio management processes focus on the immediate identification, management, and resolution of problem loans to maximize recovery and minimize loss. Our loan portfolio risk management processes include weekly delinquent loan review meetings at the market levels and monthly delinquent loan review meetings involving senior corporate management to review all nonaccrual loans and loans 30 days or more past due. Any activity regarding a criticized/classified loan (i.e. problem loan) must be approved by CTB’s Watch List Asset Committee (i.e. Problem Loan Committee). CTB’s Watch List Asset Committee also meets on a quarterly basis and reviews every criticized/classified loan of $100,000 or greater. CTB’s Loan Portfolio Risk Management Committee also meets quarterly focusing on the overall asset quality and risk metrics of the loan portfolio. We also have a Loan Review Department that reviews every market within CTB annually and performs extensive testing of the loan portfolio to assure the accuracy of loan grades and classifications for delinquency, if a borrower is experiencing financial difficulty with significant payment delay, nonaccrual status, and adequate loan loss reserves. The Loan Review Department has annually reviewed, on average, 96% of the outstanding commercial loan portfolio for the past three years. The average annual review percentage of the consumer and residential loan portfolio for the past three years was 83% based on the loan production during the number of months included in the review scope. The review scope is generally four to six months of production. CTBI generally does not offer high risk loans such as option ARM products, high loan to value ratio mortgages, interest-only loans, loans with initial teaser rates, or loans with negative amortizations, and therefore, CTBI would have no significant exposure to these products.

For further information regarding nonperforming loans, see Note 4 to the condensed consolidated financial statements contained herein.

Our level of foreclosed properties at $2.2 million at September 30, 2023 was a $0.2 million increase from the $2.0 million at June 30, 2023 and a $1.5 million decrease from the $3.7 million at December 31, 2022. Sales of foreclosed properties for the nine months ended September 30, 2023 totaled $1.8 million while new foreclosed properties totaled $0.5 million. At September 30, 2023, the book value of properties under contracts to sell was $0.8 million; however, the closings had not occurred at quarter-end.

We had net loan charge-offs of $1.2 million, or 0.12% of average loans annualized, for the third quarter 2023 compared to $674 thousand, or 0.07% of average loans annualized, for the second quarter 2023 and $325 thousand, or 0.04% of average loans annualized, for the quarter ended September 30, 2022. Net charge-offs for the nine months ended September 30, 2023 were $2.3 million, or 0.08% of average loans annualized, compared to $0.7 million, or 0.03% of average loans annualized, for the nine months ended September 30, 2022.

Dividends

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

Pay Date	Record Date	Amount Per Share
October 1, 2023	September 15, 2023	$	0.46
July 1, 2023	June 15, 2023	$	0.44
April 1, 2023	March 15, 2023	$	0.44
January 1, 2023	December 15, 2022	$	0.44
October 1, 2022	September 15, 2022	$	0.44
July 1, 2022	June 15, 2022	$	0.40

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 September 30, 2023, we had approximately $219.3 million in cash and cash equivalents and approximately $163.3 million in unpledged securities valued at estimated fair value designated as available-for-sale and available to meet liquidity needs on a continuing basis compared to $128.7 million and $309.2 million at December 31, 2022. Additional asset-driven liquidity is provided by the remainder of the securities portfolio and the repayment of loans. In addition to core deposit funding, we also have a variety of other short-term and long-term funding sources available. We also rely on Federal Home Loan Bank advances for both liquidity and management of our asset/liability position. Federal Home Loan Bank advances were $0.3 million at September 30, 2023 compared to $0.4 million at December 31, 2022. As of September 30, 2023, we had a $478.9 million available borrowing position with the Federal Home Loan Bank. We generally rely upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash for our investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, use of short-term borrowing facilities such as repurchase agreements and federal funds purchased, and issuance of long-term debt. At September 30, 2023 we had $50 million in lines of credit with various correspondent banks available to meet any future cash needs compared to $75 million at December 31, 2022. Our primary investing activities include purchases of securities and loan originations. We do not rely on any one source of liquidity and manage availability in response to changing consolidated balance sheet needs. Included in our cash and cash equivalents at September 30, 2023 were deposits with the Federal Reserve of $148.0 million, compared to $72.6 million at December 31, 2022. Additionally, we project cash flows from our investment portfolio to generate additional liquidity over the next 90 days.

The investment portfolio consists of investment grade short-term issues suitable for bank investments. The majority of the investment portfolio is in U.S. government and government sponsored agency issuances. At September 30, 2023, available-for-sale (“AFS”) securities comprised all of the total investment portfolio, and the AFS portfolio was approximately 174% of equity capital. Eighty-six 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.

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.

Capital Resources

We continue to offer a dividend to our shareholders, providing an annualized dividend yield for the quarter ended September 30, 2023 of 5.37%. Shareholders’ equity decreased $7.1 million, or an annualized 4.3%, during the quarter but increased $50.5 million, or 8.4%, from September 30, 2022, as unrealized losses on our securities portfolio continue to impact equity. Our primary source of capital growth is the retention of earnings. Cash dividends were $1.34 per share and $1.24 per share for the nine months ended September 30, 2023 and 2022, respectively. We retained 59.6% of our earnings for the first nine months of 2023 compared to 62.8% for the first nine months of 2022.

Insured depository institutions are required to meet certain capital level requirements. On October 29, 2019, federal banking regulators adopted a final rule to simplify the regulatory capital requirements for eligible community banks and holding companies that opt-in to the community bank leverage ratio framework (the “CBLR framework”), as required by Section 201 of the Economic Growth, Relief and Consumer Protection Act of 2018. Under the final rule, which became effective as of January 1, 2020, community banks and holding companies (which includes CTB and CTBI) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio (referred to as the “community bank leverage ratio”) of greater than 9%, were eligible to opt-in to the CBLR framework. The community bank leverage ratio is the ratio of a banking organization’s Tier 1 capital to its average total consolidated assets, both as reported on the banking organization’s applicable regulatory filings. Accordingly, a qualifying community banking organization that has a community bank leverage ratio greater than 9% will be considered to have met: (i) the risk-based and leverage capital requirements of the generally applicable capital rules; (ii) the capital ratio requirements in order to be considered well-capitalized under the prompt corrective action framework; and (iii) any other applicable capital or leverage requirements.

In April 2020, as directed by Section 4012 of the CARES Act, the regulatory agencies introduced temporary changes to the CBLR. These changes, which subsequently were adopted as a final rule, temporarily reduced the CBLR requirement to 8% through the end of calendar year 2020. Beginning in calendar year 2021, the CBLR requirement increased to 8.5% for the calendar year before returning to 9% in calendar year 2022. Management elected to use the CBLR framework for CTBI and CTB. CTBI’s CBLR ratio as of September 30, 2023 was 13.78%. CTB’s CBLR ratio as of September 30, 2023 was 13.32%.

As of September 30, 2023, we are not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material adverse impact on our liquidity, capital resources, or operations.

Impact of Inflation, Changing Prices, and Economic Conditions

The majority of our assets and liabilities are monetary in nature. Therefore, CTBI differs greatly from most commercial and industrial companies that have significant investment in nonmonetary assets, such as fixed assets and inventories. However, inflation does have an important impact on the growth of assets in the banking industry and on the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other expenses, which tend to rise during periods of general inflation.

We believe one of the most significant impacts on financial and operating results is our ability to react to changes in interest rates. We seek to maintain an essentially balanced position between interest rate sensitive assets and liabilities in order to protect against the effects of wide interest rate fluctuations.

Stock Repurchase Program

CTBI’s stock repurchase program began in December 1998 with the authorization to acquire up to 500,000 shares and was increased by an additional 1,000,000 shares in each of July 2000, May 2003, and March 2020. CTBI repurchased 32,664 shares of its common stock during the first quarter 2020, leaving 1,034,706 shares remaining under our current repurchase authorization. As of September 30, 2023, a total of 2,465,294 shares have been repurchased through this program.

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

Critical Accounting Policies and Estimates

Our accounting policies are described in Note 1 to the condensed consolidated financial statements contained herein. We have identified the following critical accounting policies:

Allowance for Credit Losses – CTBI accounts for the allowance for credit losses (“ACL”) and the reserve for unfunded commitments in accordance with Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and its related subsequent amendments, commonly known as CECL.

We disaggregate our portfolio loans into portfolio segments for purposes of determining the ACL. Our loan portfolio segments include commercial, residential mortgage, and consumer. We further disaggregate our portfolio segments into classes for purposes of monitoring and assessing credit quality based on certain risk characteristics. For an analysis of CTBI’s ACL by portfolio segment and credit quality information by class, refer to Note 4 to the condensed consolidated financial statements contained herein.

CTBI maintains the ACL to absorb the amount of credit losses that are expected to be incurred over the remaining contractual terms of the related loans. Effective January 1, 2023, CTBI implemented ASU 2022-02, Financial Instruments-Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures, an amendment to 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU eliminate the accounting guidance for troubled debt restructurings by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty along with requiring that disclosures be added by year of origination for gross charge-off information for financing receivables. Accrued interest receivable on loans is presented in the consolidated financial statements as a component of other assets. When accrued interest is deemed to be uncollectible (typically when a loan is placed on nonaccrual status), interest income is reversed. In the event that collection of principal becomes uncertain, CTBI has policies in place to reverse accrued interest in a timely manner. Therefore, CTBI elected ASU 2019-04 which allows that accrued interest would continue to be presented separately and not part of the amortized cost of the loan. For additional information on CTBI’s accounting policies related to nonaccrual loans, refer to Note 1 to the condensed consolidated financial statements contained herein.

Credit losses are charged and recoveries are credited to the ACL. The ACL is maintained at a level CTBI considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectability of loans, including historical credit loss experience, current and forecasted market and economic conditions, and consideration of various qualitative factors that, in management’s judgment, deserve consideration in estimating expected credit losses. Provisions for credit losses are recorded for the amounts necessary to adjust the ACL to CTBI’s current estimate of expected credit losses on portfolio loans. CTBI’s strategy for credit risk management includes a combination of conservative exposure limits significantly below legal lending limits and conservative underwriting, documentation, and collection standards. The strategy also emphasizes diversification on a geographic, industry, and customer level, regular credit examinations, and quarterly management reviews of large credit exposures and loans experiencing deterioration of credit quality.

CTBI’s methodology for determining the ACL requires significant management judgment and includes an estimate of expected credit losses on a collective basis for groups of loans with similar risk characteristics and specific allowances for loans which are individually evaluated.

Larger commercial loans with balances exceeding $1 million that exhibit probable or observed credit weaknesses and (i) have a criticized risk rating, (ii) are on nonaccrual status, (iii) have a borrower experiencing financial difficulty with significant payment delay, or (iv) are 90 days or more past due, are individually evaluated for an ACL. CTBI considers the current value of collateral, credit quality of any guarantees, the guarantor’s liquidity and willingness to cooperate, the loan structure and other factors when determining the amount of the ACL. Other factors may include the borrower’s susceptibility to risks presented by the forecasted macroeconomic environment, the industry and geographic region of the borrower, size and financial condition of the borrower, cash flow and leverage of the borrower, and our evaluation of the borrower’s management. Significant management judgment is required when evaluating which of these factors are most relevant in individual circumstances, and when estimating the amount of expected credit losses based on those factors. When loans are individually evaluated, allowances are determined based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral and other sources of cash flow, as well as an evaluation of legal options available to CTBI. Allowances for individually evaluated loans that are collateral-dependent are typically measured based on the fair value of the underlying collateral, less expected costs to sell where applicable. For collateral-dependent financial assets, the credit loss expected may be zero if the fair value less costs to sell exceeds the amortized cost of the loan. Loans shall not be included in both collective assessments and individual assessments. Individually evaluated loans that are not collateral-dependent are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. Specific allowances on individually evaluated commercial loans, including loans to borrowers experiencing financial difficulty, are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience. Regardless of an initial measurement method, once it is determined that foreclosure is probable, the ACL is measured based on the fair value of the collateral as of the measurement date. As a practical expedient, the fair value of the collateral may be used for a loan when determining the ACL for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty. The fair value shall be adjusted for selling costs when foreclosure is probable.

Expected credit losses are estimated on a collective basis for loans that are not individually evaluated. These include commercial loans that do not meet the criteria for individual evaluation as well as homogeneous loans in the residential mortgage and consumer portfolio segments. For collectively evaluated commercial loans prior to June 30, 2023, CTBI used a static pool methodology based on our risk rating system. Other homogenous loans such as the residential mortgage and consumer portfolio segments derive their ACL from vintage modeling. Vintage modeling was chosen primarily because these loans have fixed amortization schedules, and it allows CTBI to track loans from origination to completion, including repayments and prepayments, and captures net charge-offs by the different vintages providing historical loss rates. These are the two primary models utilized for ACL determination although there are additional models for specific processes in addition. CTBI’s expected credit loss models were developed based on historical credit loss experience and observations of migration patterns for various credit risk characteristics (such as internal credit risk grades, external credit ratings or scores, delinquency status, etc.) over time, with those observations evaluated in the context of concurrent macroeconomic conditions. CTBI developed our models from historical observations capturing a full economic cycle when possible.

Beginning in the second quarter ended June 30, 2023, CTBI uses a third party ACL software to calculate reserve estimates. During the implementation process, discounted cash flow modeling was chosen for all loan segments. The primary reasons that contributed to this decision were: DCF models allow for the effective incorporation of a reasonable and supportable forecast in a directionally consistent and objective manner; the analysis aligns well with other calculations outside of the ACL estimation which will mitigate model risk in other areas; and peer data is available for certain inputs if first party data is not available or meaningful. Expected credit losses are estimated on a collective basis for loans that are not individually evaluated. These include commercial loans that do not meet the criteria for individual evaluation as well as homogeneous loans in the residential mortgage and consumer portfolio segments. See Note 4 to the condensed consolidated financial statements contained herein for information on CTBI’s risk rating system.

CTBI’s expected credit loss models consider historical credit loss experience, peer data, current market and economic conditions, and forecasted changes in market and economic conditions if such forecasts are considered reasonable and supportable. Generally, CTBI considers our forecasts to be reasonable and supportable for a period of up to one year from the estimation date. For periods beyond the reasonable and supportable forecast period, expected credit losses are estimated by reverting to historical loss information. CTBI evaluates the length of our reasonable and supportable forecast period, our reversion period, and reversion methodology at least annually, or more often if warranted by economic conditions or other circumstances.

Other qualitative factors are used by CTBI in determining the ACL. These considerations inherently require significant management judgment to determine the appropriate factors to be considered and the extent of their impact on the ACL estimate. Qualitative factors are used to capture characteristics in the portfolio that impact expected credit losses but that are not fully captured within CTBI’s expected credit loss models. These include adjustments for changes in policies or procedures in underwriting, monitoring or collections, lending and risk management personnel, and results of internal audit and quality control reviews. These may also include adjustments, when deemed necessary, for specific idiosyncratic risks such as geopolitical events, natural disasters and their effects on regional borrowers, and changes in product structures. Qualitative factors may also be used to address the impacts of unforeseen events on key inputs and assumptions within CTBI’s expected credit loss models, such as the reasonable and supportable forecast period, changes to historical loss information, or changes to the reversion period or methodology. When evaluating the adequacy of allowances, consideration is also given to regional geographic concentrations and the closely associated effect that changing economic conditions may have on CTBI’s customers.

Overall, the collective evaluation process requires significant management judgment when determining the estimation methodology and inputs into the models, as well as in evaluating the reasonableness of the modeled results and the appropriateness of qualitative adjustments. CTBI’s forecasts of market and economic conditions and the internal risk grades assigned to loans in the commercial portfolio segment are examples of inputs to the expected credit loss models that require significant management judgment. These inputs have the potential to drive significant variability in the resulting ACL.

The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated expected credit losses related to unfunded credit facilities and is included in other liabilities in the consolidated balance sheets. The determination of the adequacy of the reserve is based upon expected credit losses over the remaining contractual life of the commitments, taking into consideration the current funded balance and estimated exposure over the reasonable and supportable forecast period. This process takes into consideration the same risk elements that are analyzed in the determination of the adequacy of CTBI’s ACL, as previously discussed. Net adjustments to the reserve for unfunded commitments are included in other noninterest expense in the consolidated statements of income.

Goodwill – Business combinations entered into by CTBI typically include the recognition of goodwill. U.S. generally accepted accounting principles (“GAAP”) require goodwill to be tested for impairment on an annual basis, which for CTBI is October 1, and more frequently if events or circumstances indicate that there may be impairment. Refer to Note 1 to the condensed consolidated financial statements contained herein for a discussion on the methodology used by CTBI to assess goodwill for impairment.

Impairment exists when a reporting unit’s carrying amount of goodwill exceeds its implied fair value. In testing goodwill for impairment, U.S. GAAP permits companies to first assess qualitative factors to determine whether it is more likely than not that its fair value is less than its carrying amount. In this qualitative assessment, CTBI evaluates events and circumstances which may include, but are not limited to, the general economic environment, banking industry and market conditions, the overall financial performance of CTBI, and the performance of CTBI’s common stock, to determine if it is not more likely than not that the fair value is less than its carrying amount. If the quantitative impairment test is required or the decision to bypass the qualitative assessment is elected, CTBI performs the goodwill impairment test by comparing its fair value with its carrying amount, including goodwill. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill recorded. A recognized impairment loss cannot be reversed in future periods even if the fair value of the reporting unit subsequently recovers.

The fair value of CTBI is the price that would be received to sell the company as a whole in an orderly transaction between market participants at the measurement date. The determination of the fair value is a subjective process that involves the use of estimates and judgments, particularly related to cash flows, the appropriate discount rates and an applicable control premium. CTBI employs an income-based approach, utilizing forecasted cash flows and the estimated cost of equity as the discount rate. Significant management judgment is necessary in the preparation of the forecasted cash flows surrounding expectations for earnings projections, growth and credit loss expectations, and actual results may differ from forecasted results.

Income Taxes – Income tax liabilities or assets are established for the amount of taxes payable or refundable for the current year. Deferred tax liabilities (“DTLs”) and deferred tax assets (“DTAs”) are also established for the future tax consequences of events that have been recognized in CTBI’s financial statements or tax returns. A DTL or DTA is recognized for the estimated future tax effects attributable to temporary differences and deductions that can be carried forward (used) in future years. The valuation of current and deferred income tax liabilities and assets is considered critical, as it requires management to make estimates based on provisions of the enacted tax laws. The assessment of tax liabilities and assets involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and federal and state tax codes.

Fair Value Measurements – As a financial services company, the carrying value of certain financial assets and liabilities is impacted by the application of fair value measurements, either directly or indirectly. In certain cases, an asset or liability is measured and reported at fair value on a recurring basis, such as available-for-sale investment securities. In other cases, management must rely on estimates or judgments to determine if an asset or liability not measured at fair value warrants an impairment write-down or whether a valuation reserve should be established. Given the inherent volatility, the use of fair value measurements may have a significant impact on the carrying value of assets or liabilities or result in material changes to the consolidated financial statements from period to period. Detailed information regarding fair value measurements can be found in Note 7 to the condensed consolidated financial statements contained herein.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. CTBI uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. Given a 200 basis point increase to the yield curve used in the simulation model, it is estimated net interest income for CTBI would increase by 3.98% over one year and 9.60% over two years. A 200 basis point decrease in the yield curve would decrease net interest income by an estimated 2.74% over one year and 3.13% over two years. For further discussion of CTBI’s market risk, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Market Risk included in the annual report on Form 10-K for the year ended December 31, 2022.

Item 4. Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

CTBI’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. As of the end of the period covered by this report, an evaluation was carried out by CTBI’s management, with the participation of our Vice Chairman, President, and Chief Executive Officer and the Executive Vice President, Chief Financial Officer, and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, management concluded that disclosure controls and procedures as of September 30, 2023 were effective in ensuring material information required to be disclosed in this quarterly report on Form 10-Q was recorded, processed, summarized, and reported on a timely basis.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in CTBI’s internal control over financial reporting that occurred during the nine months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, CTBI’s internal control over financial reporting.

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2023
	Or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _____________ to _____________

Kentucky	61-0979818
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

346 North Mayo Trail P.O. Box 2947 Pikeville, Kentucky	41502
(Address of principal executive offices)	(Zip code)

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

Large Accelerated Filer ☐	Accelerated Filer ☑	Non-accelerated Filer ☐

Smaller Reporting Company ☐	Emerging Growth Company ☐

(dollars in thousands)	(unaudited) September 30 2023			December 31 2022
Assets:
Cash and due from banks	$	69,291		$	51,306
Interest bearing deposits		149,967			77,380
Cash and cash equivalents		219,258			128,686

Certificates of deposit in other banks		245			245
Debt securities available-for-sale at fair value (amortized cost of $1,324,139 and $1,430,605, respectively)		1,135,878			1,256,226
Equity securities at fair value		2,900			2,166
Loans held for sale		0			109

Loans		3,985,019			3,709,290
Allowance for credit losses		(48,719	)		(45,981	)
Net loans		3,936,300			3,663,309

Premises and equipment, net		44,962			42,633
Operating right-of-use assets		12,929			13,809
Finance right-of-use assets		3,171			3,262
Federal Home Loan Bank stock		7,670			6,676
Federal Reserve Bank stock		4,887			4,887
Goodwill		65,490			65,490
Bank owned life insurance		94,019			92,746
Mortgage servicing rights		8,289			8,468
Other real estate owned		2,175			3,671
Deferred tax asset		41,268			39,878
Accrued interest receivable		21,467			19,592
Other assets		34,024			28,463
Total assets	$	5,634,932		$	5,380,316

Liabilities and shareholders’ equity:
Deposits:
Noninterest bearing	$	1,314,189		$	1,394,915
Interest bearing		3,313,703			3,031,228
Total deposits		4,627,892			4,426,143

Repurchase agreements		232,577			215,431
Federal funds purchased		500			500
Advances from Federal Home Loan Bank		340			355
Long-term debt		64,296			57,841
Operating lease liability		13,323			14,160
Finance lease liability		3,478			3,468
Accrued interest payable		8,210			2,237
Other liabilities		31,282			32,134
Total liabilities		4,981,898			4,752,269

Shareholders’ equity:
Preferred stock, 300,000 shares authorized and unissued		-			-
Common stock, $5.00 par value, shares authorized 25,000,000; shares issued and outstanding 2023 – 17,991,419; 2022 – 17,918,280		89,956			89,591
Capital surplus		230,503			229,012
Retained earnings		473,976			438,596
Accumulated other comprehensive loss, net of tax		(141,401	)		(129,152	)
Total shareholders’ equity		653,034			628,047

Total liabilities and shareholders’ equity	$	5,634,932		$	5,380,316

(in thousands except per share and share amounts)	Common Shares			Common Stock			Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Tax			Total
Balance, June 30, 2023		17,983,700		$	89,918		$	229,943	$	461,578		$	(121,314	)	$	660,125
Net income										20,628						20,628
Other comprehensive loss													(20,087	)		(20,087	)
Cash dividends declared ($0.46 per share)										(8,230	)					(8,230	)
Issuance of common stock		7,751			38			241								279
Vesting of restricted stock		(32	)		(0	)		0								0
Stock-based compensation								319								319
Balance, September 30, 2023		17,991,419		$	89,956		$	230,503	$	473,976		$	(141,401	)	$	653,034

Supplemental disclosures:
Income taxes paid	$	17,628	$	12,260
Interest paid		59,213		14,441
Non-cash activities:
Loans to facilitate the sale of other real estate owned and repossessed assets		1,022		985
Common stock dividends accrued, paid in subsequent quarter		291		286
Real estate acquired in settlement of loans		500		478
Right-of-use assets obtained in exchange for new operating lease liabilities		364		405

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury and government agencies	$	387,012	$	135	$	(35,808	)	$	351,339
State and political subdivisions		313,867		1		(69,390	)		244,478
U.S. government sponsored agency mortgage-backed securities		534,442		0		(82,144	)		452,298
Asset-backed securities		88,818		0		(1,055	)		87,763
Total available-for-sale securities	$	1,324,139	$	136	$	(188,397	)	$	1,135,878

	Available-for-Sale
(in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	23,805	$	23,585
Due after one through five years		372,557		335,324
Due after five through ten years		129,061		106,680
Due after ten years		175,456		130,228
U.S. government sponsored agency mortgage-backed securities		534,442		452,298
Asset-backed securities		88,818		87,763
Total debt securities	$	1,324,139	$	1,135,878

	September 30, 2023
	Remaining Contractual Maturity of the Agreements
(in thousands)	Overnight and Continuous		Up to 30 days		30-90 days		Greater Than 90 days		Total
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and government agencies	$	20,374	$	0	$	39	$	24,256	$	44,669
State and political subdivisions		103,232		0		1,760		7,430		112,422
U.S. government sponsored agency mortgage-backed securities		21,527		0		559		51,865		73,951
Asset-backed securities		1,535		0		0		0		1,535
Total	$	146,668	$	0	$	2,358	$	83,551	$	232,577

	Amounts Reclassified from AOCI
(in thousands)	Three Months Ended September 30				Nine Months Ended September 30
(in thousands)	2023		2022		2023		2022
Affected line item in the statements of income
Securities gains (losses)	$	0	$	0	$	4	$	(1	)
Tax expense		0		0		1		0
Total reclassifications out of AOCI	$	0	$	0	$	3	$	(1	)

Item 1.	Legal Proceedings			None

Item 1A.	Risk Factors			None

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			None

Item 3.	Defaults Upon Senior Securities			None

Item 4.	Mine Safety Disclosure			Not applicable

Item 5.	Other Information:

	(a)	Information required to be disclosed in a report on Form 8-K		None

	(b)	Changes to director nomination procedures		None

	(c)	Insider trading arrangements

			During the three months ended September 30, 2023, no director or officer of CTBI adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

Item 6.	Exhibits:
	(1)	Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		Exhibit 31.1 Exhibit 31.2
	(2)	Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		Exhibit 32.1 Exhibit 32.2
	(3)	XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL		Exhibit 101.INS
	(4)	XBRL Taxonomy Extension Schema Document		Exhibit 101.SCH
	(5)	XBRL Taxonomy Extension Calculation Linkbase		Exhibit 101.CAL
	(6)	XBRL Taxonomy Extension Definition Linkbase		Exhibit 101.DEF
	(7)	XBRL Taxonomy Extension Label Linkbase		Exhibit 101.LAB
	(8)	XBRL Taxonomy Extension Presentation Linkbase		Exhibit 101.PRE
	(9)	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)		Exhibit 104

	COMMUNITY TRUST BANCORP, INC.

Date: November 8, 2023	By:

	/s/ Mark A. Gooch
	Mark A. Gooch
	Vice Chairman, President, and Chief Executive Officer

	/s/ Kevin J. Stumbo
	Kevin J. Stumbo
	Executive Vice President, Chief Financial Officer,
	and Treasurer