COMMUNITY TRUST BANCORP INC /KY/ (CTBI) FY 2024 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Community Trust Bancorp, Inc., our
operations, and our present business environment.  The MD&A is provided as a supplement to—and should be read in conjunction with—our consolidated financial statements and the accompanying notes thereto contained in Item 8 of this annual
report.  The MD&A includes the following sections:

Our Business

Community Trust Bancorp, Inc. (“CTBI”) is a bank holding company headquartered in Pikeville, Kentucky.  Currently, we own one commercial bank, Community Trust Bank, Inc. (“CTB”) and one trust
company, Community Trust and Investment Company.  Through our subsidiaries, we have eighty-one banking locations in eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee, four trust
offices across Kentucky, and one trust office in northeastern Tennessee.  At December 31, 2024, we had total consolidated assets of $6.2 billion and total consolidated deposits, including repurchase agreements, of $5.3 billion.  Total
shareholders’ equity at December 31, 2024 was $757.6 million.  Trust assets under management at December 31, 2024 were $3.7 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 this annual report.

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Financial Goals and Performance

The following table shows the primary measurements used by management to assess annual performance.  The goals in the table below should not be viewed as a forecast of our performance for
2025.  Rather, the goals represent a range of target performance for 2025.  There is no assurance that any or all of these goals will be achieved.  See “Cautionary Statement Regarding Forward Looking Statements.”

Results of Operations and Financial Condition

We reported earnings of $82.8 million, or $4.61 per basic share, for the year ended December 31, 2024 compared to $78.0 million, or $4.36 per basic share, for the year ended December 31, 2023.
Total revenue for 2024 was $17.8 million above prior year, as net interest revenue increased $12.9 million and noninterest income increased $4.9 million compared to prior year.  Our provision for credit losses for 2024 increased $4.1 million
over prior year, and our noninterest expense increased $5.5 million over prior year.  Noninterest expense and tax expense were impacted by an accounting method change (Accounting Standards Update (“ASU”) No. 2023-02), which is intended to
improve the accounting and disclosures for investments in tax credit structures.  Historically, the amortization expense related to our tax credits had been booked to noninterest expense.  Beginning in January 2024, the amortization expense is
now booked to tax expense.  We had a decrease in amortization expense, recognized in other direct expenses, that totaled $2.6 million for the year ended December 31, 2023.  The amortization expense included in income tax expense was $3.0
million for the year ended December 31, 2024.  The amount of income tax credits and other tax benefits recognized was $4.3 million for the year ended December 31, 2024.

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2024 Highlights

Income Statement Review

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

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Consolidated Average Balance Sheets and Taxable Equivalent Income/Expense and Yields/Rates

(1) Interest includes fees on loans of $1,998 and $1,770 in 2024 and 2023, respectively.

(2) Loan balances include deferred loan origination costs and principal balances on nonaccrual loans.

(3) Tax exempt income on securities and loans is reported on a fully taxable equivalent basis using a 24.95% rate.

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Net Interest Differential

The following table illustrates the approximate effect of volume and rate changes on net interest differentials between 2024 and 2023.

For purposes of the above table, changes which are due to both rate and volume are allocated based on a percentage basis, using the absolute values of rate and volume variance as a basis for
percentages.  Income is stated at a fully taxable equivalent basis, using a 24.95% tax rate.

Net interest income for the year ended December 31, 2024 of $186.0 million increased $12.9 million, or 7.4%, from prior year with an increase in average earning assets for the year 2024 of
$325.8 million, or 6.2%.  Our yield on average earning assets for the year 2024 increased 50 basis points from prior year, and our cost of interest bearing funds increased 58 basis points during the same time period.  Our net interest margin,
on a fully tax equivalent basis, for the year 2024 increased 4 basis points from the year ended December 31, 2023.  Average loans to deposits, including repurchase agreements, for the year ended December 31, 2024 were 84.3% compared to 81.5%
for the year ended December 31, 2023.

Provision for Credit Losses

Provision for credit losses for the year 2024 was $11.0 million compared to $6.8 million during the year 2023.  See below for discussion of our allowance
for credit losses.

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Noninterest Income

Noninterest income for the year 2024 was $62.6 million compared to $57.7 million for the year 2023.  Noninterest income was impacted year over year by a
$1.2 million increase in loan related fees, a $1.9 million increase in trust revenue, and a $1.7 million increase in bank owned life insurance revenue.

Noninterest Expense

Noninterest expense for the year 2024 was $130.9 million compared to $125.4 million for the year 2023.  Noninterest expense was primarily impacted year over year
by a $5.7 million increase in personnel expense and a $1.4 million increase in data processing expense, partially offset by the positive impact to other direct expenses of the accounting method change related to investments in tax
credit structures (ASU No. 2023-02).  The increase in personnel expense included a $1.4 million increase in salaries, a $2.2 million increase in bonuses, and a $2.4 million increase in the cost of group medical and life insurance.

* Please refer to our annual report on Form 10-K for the year ended December 31, 2023 for detailed income discussion related to the year 2022.

Balance Sheet Review

CTBI’s total assets at $6.2 billion increased $423.5 million, or 7.3%, from December 31, 2023.  Loans outstanding at December 31, 2024 were $4.5 billion, increasing $435.7 million, or 10.8%,
year over year.  The increase in loans from prior year included a $288.9 million increase in the commercial loan portfolio, a $126.3 million increase in the residential loan portfolio, and a $26.8 million increase in the indirect loan
portfolio, partially offset by a $6.3 million decrease in the consumer direct loan portfolio.  CTBI’s investment portfolio decreased $107.4 million, or 9.2%, from December 31, 2023.  Deposits in other banks increased $83.9 million from December
31, 2023.  Deposits, including repurchase agreements, at $5.3 billion increased $360.5 million, or 7.3%, from December 31, 2023.

Shareholders’ equity at December 31, 2024 of $757.6 million was a $55.4 million, or 7.9%, increase from the $702.2 million at December 31, 2023.  Net unrealized losses on securities, net of
tax, were $98.4 million at December 31, 2024, compared to $103.3 million at December 31, 2023.  Management has the ability and intent to hold these securities to recovery or maturity.  CTBI’s annualized dividend yield to shareholders as of
December 31, 2024 was 3.55%.

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Loans

Total Deposits and Repurchase Agreements

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Average Deposits and Other Borrowed Funds

The maximum balance for federal funds purchased and repurchase agreements at any month-end during 2024 occurred at December 31, 2024, with a month-end balance of $240.7 million.  The maximum
balance for federal funds purchased and repurchase agreements at any month-end during 2023 occurred at October 31, 2023, with a month-end balance of $235.0 million.

Asset Quality

CTBI’s total nonperforming loans were $26.7 million, or 0.59% of total loans, at December 31, 2024 compared to $14.0 million, or 0.34% of total loans, at December 31, 2023.  Accruing loans 90+
days past due increased $0.4 million from December 31, 2023, while nonaccrual loans increased $12.3 million from December 31, 2023.  Accruing loans 30-89 days past due at $16.8 million increased $1.5 million from December 31, 2023.  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, loan modifications for borrowers experiencing financial difficulty, nonaccrual status, and adequate loan loss reserves.  The Loan Review
Department has annually reviewed on average 97% of the outstanding commercial loan portfolio for the past three years.  The average annual review percentage of the consumer and residential loan portfolio for the past three years was 81% based
on the loan production during the number of months included in the review scope.  The review scope is generally four to six months of production.  CTBI generally does not offer high risk loans such as option ARM products, high loan to value
ratio mortgages, interest-only loans, loans with initial teaser rates, or loans with negative amortizations, and therefore, CTBI would have no significant exposure to these products.

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

Net loan charge-offs were $5.5 million, 0.13% of average loans, for the year ended December 31, 2024, compared to $3.2 million, 0.08% of average loans, for the year ended December 31, 2023.

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Allowance for Credit Losses

Our reserve coverage (allowance for credit losses to nonperforming loans) at December 31, 2024 was 206.0% compared to 354.7% at December 31, 2023.  Nonaccrual loans to total loans at December
31, 2024 was 0.36% compared to 0.10% at December 31, 2023.  Our allowance for credit losses to nonaccrual loans at December 31, 2024 was 335.8% compared to 1,223.9% at December 31, 2023.  Our credit loss reserve as a percentage of total loans
outstanding at December 31, 2024 was 1.23%, an increase from the 1.22% at December 31, 2023.

Liquidity and Market Risk

The objective of CTBI’s Asset/Liability management function is to maintain consistent growth in net interest income within our policy limits. This objective is accomplished through management
of our consolidated balance sheet composition, liquidity, and interest rate risk exposures arising from changing economic conditions, interest rates, and customer preferences. The goal of liquidity management is to provide adequate funds to
meet changes in loan and lease demand or deposit withdrawals. This is accomplished by maintaining liquid assets in the form of cash and cash equivalents and investment securities, sufficient unused borrowing capacity, and growth in core
deposits.  As of December 31, 2024, we had approximately $369.5 million in cash and cash equivalents and approximately $170.6 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 $271.4 million and $157.5 million at December 31, 2023.  Additional asset-driven liquidity is provided by the remainder of the securities portfolio and the repayment of loans.  In addition to
core deposit funding, we also have a variety of other short-term and long-term funding sources available.  We also rely on Federal Home Loan Bank advances for both liquidity and management of our asset/liability position.  Federal Home Loan
Bank advances were $0.3 million at December 31, 2024 and December 31, 2023.  As of December 31, 2024, we had a $485.0 million available borrowing position with the Federal Home Loan Bank, compared to $476.2 million at December 31, 2023.  We
generally rely upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash for our investing activities.  As is typical of many financial institutions, significant financing
activities include deposit gathering, use of short-term borrowing facilities such as repurchase agreements and federal funds purchased, and issuance of long-term debt.  At December 31, 2024 and December 31, 2023, we had $50 million in lines of
credit with various correspondent banks available to meet any future cash needs.  Our primary investing activities include purchases of securities and loan originations.  We do not rely on any one source of liquidity and manage availability in
response to changing consolidated balance sheet needs.  Included in our cash and cash equivalents at December 31, 2024 were deposits with the Federal Reserve of $289.4 million, compared to $207.6 million at December 31, 2023.  Additionally, we
project cash flows from our investment portfolio to generate additional liquidity over the next 90 days.

The investment portfolio consists of investment grade short-term issues suitable for bank investments.  The majority of the investment portfolio is in U.S. government and government sponsored
agency issuances.  At December 31, 2024, available-for-sale (“AFS”) securities comprised all of the total investment portfolio, and the AFS portfolio was approximately 139% of

equity capital.  Eighty-five percent of the pledge-eligible portfolio was pledged.

Contractual Commitments

Our significant contractual obligations and commitments as of December 31, 2024 include debt, lease, and purchase obligations.  As disclosed in the notes to the consolidated financial
statements, we have certain obligations and commitments to make future payments under contracts.

As of December 31, 2024, our outstanding balance on long-term debt was $64.0 million, which includes junior subordinated debentures of $57.8 million and loan related borrowings of $6.2
million.  The interest payments on long-term debt due in one year or less is $3.7 million, and interest payments on long-term debt due in more than one year is $33.2 million.  The interest on $57.8 million in junior subordinated debentures is
calculated based on the three-month CME Term SOFR plus a tenor spread adjustment of 0.26161% plus 1.59% until its maturity of June 1, 2037.  The three-month CME Term SOFR rate is projected using the most likely rate forecast from assumptions
incorporated in the interest rate risk model and is determined two business days prior to the interest payment date.  The interest on the $6.2 million in loan related borrowings is based on a fixed rate of 3.25%.  Repayment of the liability
will be provided by the loan payments made by the loan customer.  This principal amount is also guaranteed by the United States Department of Agriculture (the “USDA”).  Interest on long-term debt assumes the liability will not be prepaid and
interest is calculated to maturity.  These assumptions are uncertain, and as a result, the actual payments will differ from the projection due to changes in economic conditions. Refer to note 10 to the consolidated financial statements
contained herein for additional information regarding long-term debt.

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On March 5, 2021, the London Interbank Offered Rate’s (“LIBOR”) administrator, ICE Benchmarks Administration, announced that LIBOR would no longer be provided (i) for the one-week and two-month
U.S. dollar settings after December 31, 2021 and (ii) for the remaining U.S. dollar settings after June 30, 2023. The U.S. federal banking agencies issued supervisory guidance encouraging banks to stop entering into new contracts that use LIBOR
as a reference rate after December 31, 2021.  In addition, on March 15, 2022, the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) was signed into law.  The LIBOR Act establishes a uniform national approach for replacing LIBOR in legacy
contracts that do not provide for the use of a clearly defined replacement benchmark rate.  As directed by the LIBOR Act, on December 16, 2022, the Federal Reserve Board issued a final rule setting forth regulations to implement the LIBOR Act,
including establishing benchmark replacements based on the Secured Overnight Funding Rate for contracts governed by U.S. law that reference certain tenors of U.S. dollar LIBOR (the overnight and one-, three-, six-, and twelve-month tenors) and
that do not have terms that provide for the use of a clearly defined and predictable replacement benchmark rate (“fallback provisions”) following the first London banking day after June 30, 2023.  We have analyzed our financial exposure related
to the discontinuation of LIBOR and consider our exposure to be insignificant.

As of December 31, 2024, our remaining contractual commitment for operating and finance leases due in one year or less was $1.9 million and operating leases due in more than one year was $19.7
million.  Refer to note 15 to the consolidated financial statements contained herein for additional information regarding leases.

Commitments to extend credit and standby letters of credit do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon.   As of
December 31, 2024, the commitments due in one year or less for other commitments was $671.8 million and commitments due in more than one year was $269.4 million.  Refer to note 17 to the consolidated financial statements contained herein for
additional information regarding other commitments.

Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business.  As of December 31, 2024, the value of our non-cancellable
unconditional purchase obligations was $9.3 million.

These contractual obligations impact our liquidity and capital resource needs.  We believe our liquidity sources as mentioned in the liquidity discussion are adequate to meet our future cash
requirements.

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Investment Maturities

The calculations of the weighted average yields for each maturity category are based upon yield weighted by the respective costs of the securities.  The weighted average rates on state and
political subdivisions are computed on a taxable equivalent basis using a 24.95% tax rate.

Loan Maturities

The following table shows the amounts of loans (excluding residential mortgages of 1-4 family residences, consumer loans, and lease financing) which, based on the remaining scheduled repayments
of principal are due in the periods indicated.  Also, the amounts are classified according to sensitivity to changes in interest rates (fixed, variable).

CTB has changed the origination process on commercial and residential construction loans to be almost exclusively construction to permanent financing with only one note.  This change is
resulting in a greater number of loans showing in the after five year maturity for construction loans, even though those loans will be converted from construction loans to permanent financing by a change in the internal coding on the loans
while the maturity date remains the same.

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Deposit Maturities

Maturities and/or repricing of time deposits of $100,000 or more outstanding at December 31, 2024 are summarized as follows:

Interest Rate Risk

We consider interest rate risk one of our most significant market risks.  Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates.
Consistency of our net interest revenue is largely dependent upon the effective management of interest rate risk.  We employ a variety of measurement techniques to identify and manage our interest rate risk, including the use of an earnings
simulation model to analyze net interest income sensitivity to changing interest rates.  The model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions
regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities.  Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also
incorporated into the model.  These assumptions are inherently uncertain, and as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income.  Actual
results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

CTBI’s Asset/Liability Management Committee (ALCO), which includes executive and senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk
within Board-approved policy limits.  Our current exposure to interest rate risks is determined by measuring the anticipated change in net interest income spread evenly over the twelve-month period.

The following table shows our estimated earnings sensitivity profile as of December 31, 2024:

The following table shows our estimated earnings sensitivity profile as of December 31, 2023:

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The simulation model used the yield curve spread evenly over a twelve-month period.  The measurement at December 31, 2024 estimates that our net interest income in an up-rate environment would
increase by 3.83% at a 400 basis point change, increase by 2.88% at a 300 basis point change, increase by 1.93% at a 200 basis point change, and increase by 0.98% at a 100 basis point change.  In a down-rate environment, net interest income
would decrease 1.34% at a 100 basis point change, decrease by 2.76% at a 200 basis point change, decrease by 4.07% at a 300 basis point change, and decrease by 5.32% at a 400 basis point change over one year.  We actively manage our balance
sheet and limit our exposure to long-term fixed rate financial instruments, including loans.  In order to reduce the exposure to interest rate fluctuations and to manage liquidity, we have developed sale procedures for several types of
interest-sensitive assets.  Primarily all long-term, fixed rate single family residential mortgage loans underwritten according to Federal Home Loan Mortgage Corporation guidelines are sold for cash upon origination or originated under terms
where they could be sold.  Periodically, additional assets such as commercial loans are also sold.  In 2024 and 2023, proceeds of $11.6 million and $15.2 million, respectively, were realized on the sale of fixed rate residential mortgages.  We
focus our efforts on consistent net interest revenue and net interest margin growth through each of the retail and wholesale business lines.  We do not currently engage in trading activities.

The preceding analysis was prepared using a rate ramp analysis which attempts to spread changes evenly over a specified time period as opposed to a rate shock which measures the impact of an
immediate change.  Had these measurements been prepared using the rate shock method, the results would vary.

Capital Resources

We continue to grow our shareholders’ equity while also providing an annual dividend yield for the year 2024 of 3.55% to shareholders.  Shareholders’ equity increased 7.9% from December 31,
2023 to $757.6 million at December 31, 2024.  Our primary source of capital growth is the retention of earnings.  Cash dividends were $1.86 per share for 2024 compared to $1.80 per share for 2023.  We retained 59.7% of our earnings in 2023
compared to 58.7% in 2023.

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.  Management elected to use the CBLR framework for CTBI and CTB.  CTBI’s CBLR ratio as of December 31, 2024 was 13.76%.  CTB’s CBLR ratio as of December 31, 2024 was
13.29%.

As of December 31, 2024, 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.

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Impact of Inflation, Changing Prices, and Economic Conditions

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

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

Stock Repurchase Program

CTBI’s stock repurchase program began in December 1998 with the authorization to acquire up to 500,000 shares and was increased by an additional 1,000,000 shares in each of July 2000, May 2003,
and March 2020.  As of December 31, 2024, a total of 2,465,294 shares have been repurchased through this program, leaving 1,034,706 shares remaining under our current repurchase authorization.  The following table shows Board authorizations and
repurchases made through the stock repurchase program for the years 1998 through 2024:

*Repurchased shares and average prices have been restated to reflect stock dividends that have occurred; however, board authorized shares have not been adjusted.

In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted.  Among other things, the IRA imposes a new 1% excise tax on the fair market value of stock repurchased after
December 31, 2022 by publicly traded U.S. corporations like CTBI.  With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements.

Critical Accounting Policies and Estimates

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

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

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

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

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

CTBI maintains the ACL to absorb the amount of credit losses that are expected to be incurred over the remaining contractual terms of the related loans.  Effective January 1, 2023, CTBI
implemented ASU 2022-02, Financial Instruments-Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures, an amendment to ASU 2016-13, Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The amendments in this ASU eliminate the accounting guidance for 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 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.

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

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

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

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

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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.  GAAP requires goodwill to be tested for impairment on an annual basis, which for CTBI is October 1, and more frequently if events or circumstances indicate that there may be impairment.  Refer to note 1 to the
consolidated financial statements contained herein for a discussion on the methodology used by CTBI to assess goodwill for impairment.

Impairment exists when a reporting unit’s carrying amount of goodwill exceeds its implied fair value.  In testing goodwill for impairment, 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.